<PAGE> 1
SECURITIES AND EXCHANGE COMMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18450
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COLOR IMAGING, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3453420
---------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4350 PEACHTREE INDUSTRIAL BOULEVARD, SUITE 100
NORCROSS, GEORGIA 30071
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(Address of principal executive offices) (Zip code)
(770) 840-1090
---------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
As of October 24, 2000, there were 7,046,198 shares of Common Stock outstanding.
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COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
December 31, 1999 and September 30, 2000 (Unaudited).......................................3
Consolidated Condensed Statements of Operations (Unaudited)
for the Three Months and Nine Months ended September 30, 1999
and 2000...................................................................................4
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Nine Months ended September 30, 1999
and 2000...................................................................................5
Notes to Consolidated Condensed Financial Statements.........................................6
Item 2. Management's Discussion and Analysis or Plan of Operation...................................10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................19
Item 2. Changes in Securities.......................................................................19
Item 3. Defaults Upon Senior Securities.............................................................19
Item 4. Submission of Matters to a Vote of Security Holders.........................................19
Item 5. Other Information...........................................................................19
Item 6. Exhibits and Reports on Form 8-K............................................................19
Signatures..................................................................................20
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
ASSETS 30-Sept-00 31-Dec-99
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash $ 80,240 $ 1,096,512
Accounts receivable, net 4,610,051 1,404,160
Inventory 5,520,020 3,890,352
Deferred taxes 344,416 236,415
Other current assets 680,723 307,378
------------ ------------
TOTAL CURRENT ASSETS 11,235,450 6,934,817
------------ ------------
FIXED ASSETS
Furniture & fixtures 267,768 271,730
R&D equipment 726,489 688,467
Machinery & equipment 8,605,398 7,661,487
Leasehold improvements 752,726 586,178
Depreciation (4,032,208) (3,768,533)
------------ ------------
TOTAL FIXED ASSETS, NET 6,320,173 5,439,329
------------ ------------
OTHER ASSETS
Patent/intellectual property 583,596 0
Deferred income tax 232,800 232,800
Related party portion of IDR bond 873,296 952,528
Other assets 513,333 829,576
------------ ------------
OTHER ASSETS 2,203,025 2,014,904
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$ 19,758,648 $ 14,389,050
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,908,845 $ 2,728,979
Revolving credit lines 1,712,269 829,607
Current portion of long term debt 604,467 90,000
Other current liabilities 662,311 422,542
------------ ------------
TOTAL CURRENT LIABILITIES 9,887,892 4,071,128
------------ ------------
LONG TERM LIABILITIES
Notes payable 0 101,636
Bank loans 1,310,351 1,565,000
IDR bond 3,690,000 4,010,000
Other long term liabilities 134,383 37,685
------------ ------------
LONG TERM LIABILITIES 5,134,734 5,714,321
------------ ------------
TOTAL LIABILITIES 15,022,626 9,785,449
------------ ------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; 7,046,198 and 6,999,987 shares issued and
outstanding on September 30, 2000 and
December 31, 1999, respectively 70,462 70,000
Additional paid-in capital 12,125,100 12,016,211
Accumulated deficit (7,459,540) (7,482,610)
------------ ------------
4,736,022 4,603,601
------------ ------------
$ 19,758,648 $ 14,389,050
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
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COLOR IMAGING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
30-Sept-00 30-Sept-99 30-Sept-00 30-Sept-99
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 6,006,335 $ 2,559,951 $15,542,691 $ 7,846,931
C0ST OF SALES 5,115,834 1,940,170 13,002,584 5,487,483
----------- ----------- ----------- -----------
GROSS PROFIT 890,501 619,781 2,540,107 2,359,448
----------- ----------- ----------- -----------
OPERATING EXPENSES
Administrative 382,553 398,582 1,121,296 1,111,144
Research & development 230,724 340,917 584,643 909,400
Sales & marketing 197,630 305,019 608,182 822,854
----------- ----------- ----------- -----------
810,907 1,044,518 2,314,121 2,843,398
----------- ----------- ----------- -----------
OPERATING PROFIT (LOSS) 79,594 (424,737) 225,986 (483,950)
----------- ----------- ----------- -----------
OTHER INCOME
Disposal of assets (66,000) 0 161,481 0
Interest (14,761) 14,624 24,041 46,296
Miscellaneous 12,755 8,289 246,327 27,094
----------- ----------- ----------- -----------
(68,006) 22,913 431,849 73,390
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest & financing 123,486 132,477 380,762 138,326
Moving 10,360 15,341 243,002 15,341
----------- ----------- ----------- -----------
133,846 147,818 623,764 153,667
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES (122,258) (549,642) 34,071 (564,227)
PROVISION (BENEFIT) FOR TAXES (67,000) (169,400) 11,000 (188,000)
----------- ----------- ----------- -----------
NET PROFIT/(LOSS) $ (55,258) $ (380,242) $ 23,071 $ (376,227)
=========== =========== =========== ===========
INCOME (LOSS)
PER COMMON SHARE
Basic $ (.01) $ (.05) $ .00 $ (.05)
Diluted $ (.01) $ (.05) $ .00 $ (.05)
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
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COLOR IMAGING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
30-Sept-00 30-Sept-99
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 23,071 $ (376,227)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 600,667 595,649
Decrease (increase) in:
Accounts and other receivables (3,594,859) 144,137
Inventories (1,629,668) (527,706)
Prepaid expenses 495,954 (115,309)
Deferred income taxes (161,119) (153,600)
Cash surrender value of life insurance (16,898) 0
Deposits 51 (179,564)
Increase (decrease) in:
Accounts payable and accrued liabilities 4,270,719 (352,421)
Cash overdraft 0 1,091,357
Income taxes payable 148,916 73,801
----------- -----------
Net cash provided by (used in)
operating activities 136,834 200,117
----------- -----------
Cash flows from investing activities:
Capital expenditures (1,691,526) (2,268,242)
Patents and intellectual properties (583,596) 0
----------- -----------
Net cash provided by (used in)
investing activities (2,275,122) (2,268,242)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit 882,662 2,860,947
Proceeds from issuance of bonds or long-term debt 0 10,362
Proceeds from sale of stock 346,021 1,093,621
Principal payments of long-term debt (106,667) 0
----------- -----------
Net cash provided by (used in)
financing activities 1,122,016 3,964,930
----------- -----------
Net increase (decrease) in cash (1,016,272) 1,896,805
Cash at beginning of year 1,096,512 898,499
----------- -----------
Cash at end of period $ 80,240 $ 2,795,304
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
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COLOR IMAGING, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
NOTE 2. COMMON STOCK
On May 16, 2000, Color Imaging, Inc., formerly known as Advatex Associates, Inc.
("Advatex"), Logical Acquisition Corp. ("LAC"), Color Acquisition Corp. ("CAC"),
Logical Imaging Solutions, Inc. ("Imaging") and Color Image, Inc. ("Color")
entered into a Merger Agreement and Plan of Reorganization, as amended ("Merger
Agreement"), pursuant to which LAC merged with and into Imaging and CAC merged
with and into Color (the "Merger"). Pursuant to the Merger Agreement,
shareholders of Imaging and Color exchanged their shares for shares of common
stock of Advatex. A reverse stock split of one share of common stock for 6.0779
shares of common stock was simultaneously approved for the then existing Advatex
shares. Subsequently, the equity interests in Imaging have been converted by
virtue of the Logical Merger into approximately 3,000,000 newly issued shares of
the Color Imaging common stock, on the basis of 1.84843 Color Imaging Common
Shares for each one share of common stock of Imaging. The equity interests in
Color have been converted by virtue of the Color Merger into approximately
3,000,000 newly issued shares of the Color Imaging common stock on the basis of
15 Color Imaging common shares for each one share of common stock of Color.
Following the conversion of shares by Color and Imaging shareholders,
shareholders of Color and Imaging owned approximately 85 percent of the
outstanding shares of common stock of Advatex and shareholders of Advatex before
the Merger owned approximately 15 percent. At September 30, 2000, there were
7,046,198 shares of the common stock of Advatex issued and outstanding. The
Merger was accounted for as a reverse acquisition in a manner similar to a
pooling of interest.
On July 7, 2000, by a vote of the majority of shareholders, Advatex Associates,
Inc. ("Advatex"), changed its name to Color Imaging, Inc. (the "Company") and
approved the reverse stock split.
NOTE 3. STOCK OPTIONS
After the Merger, the Company granted options to acquire 500,000 shares of the
common stock of the Registrant to senior members of the Company's management.
The option price is $2.00 per share. The options will vest over a two to four
year period.
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NOTE 4. WARRANTS TO PURCHASE COMMON STOCK
As part of the Merger, the Company granted warrants (the "New Warrant") to
purchase up to 200,000 shares of the common stock of the Company to professional
advisors to the Merger. The New Warrant entitles the warrant holder to purchase,
at any time and for a five-year period, a share of common stock of the Company
for $2.00 per share. In addition, current shareholders own 226,000 similar
warrants (the "Old Warrant"). The Old Warrant entitles the warrant holder to
purchase, at any time until September 15, 2001, a share of common stock of the
Company for $2.70 per share. On August 29,2000, the Board of Directors approved
a warrant exercise price of $2.00 per share on the Old Warrant, provided the
exercise is completed by November 15, 2000.
NOTE 5. EARNINGS PER SHARE
Basic and diluted earnings per share have been computed in accordance with the
adoption of SFAS No. 128.
NOTE 6. INVENTORIES
Inventories consisted of the following components as of September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials .................. $ 1,388,249 $ 457,059
Work-in-process ................ 1,482,489 1,646,974
Finished goods ................. 2,857,630 1,994,667
Obsolescence allowance ......... (208,348) (208,348)
----------- -----------
Total .............................. $ 5,520,020 $ 3,890,352
=========== ===========
</TABLE>
NOTE 7. PATENT AND INTELLECTUAL PROPERTY
The Company has capitalized $584,000 of research and development expense through
September 30, 2000, in furthering its patented toner and digital color printing
systems technologies. The Company expects to begin amortizing patent and
intellectual property assets when sales of the color toning system commence.
NOTE 8. CHANGES TO BORROWING ARRANGEMENTS
As a condition of the Bank's consent to the merger, on August 30, 2000, the
Company entered into an amended and restated borrowing arrangement, granting to
the Bank a security interest in all of the Company's assets as security for the
payment of the obligations owed the Bank.
The Company has a $1.5 million revolving line of credit with an outstanding
balance as of September 30, 2000 of $1,212,000, which bears interest at the
Bank's prime interest rate less .25 percent. The revolving line of credit has a
June 30, 2001 expiration date. Under the line of credit, the Company is
permitted to borrow 85 percent of eligible accounts receivable and 50 percent of
eligible inventories (up to a maximum of $1.1 million).
7
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The Bank has made available an additional line of credit of $500,000. The
outstanding balance as of September 30, 2000 was $500,000. The additional line
of credit has an expiration date of June 30, 2001, and bears an interest
rate of the Bank's prime interest rate plus .5 percent.
The Bank agreement contains various covenants which the Company is required to
maintain; fixed charge and cash flow leverage ratios of not less than 1.70:1 and
not greater than 3.30:1, respectively. As of September 30, 2000, the Company was
not in compliance with these covenants and has received a waiver from the bank
as regards these requirements.
NOTE 9. EMPLOYMENT AGREEMENTS
On June 28, 2000, the Company entered into employment agreements with its Chief
Executive Officer, Michael W. Brennan, President, Dr. Sueling Wang, Executive
Vice President and Chief Financial Officer, Morris E. Van Asperen, and Vice
President of Marketing and Sales Charles R. Allison. All four of the employment
agreements have a 5 year term. The Company is obligated to pay Mr. Brennan and
Dr. Wang annual salaries of $150,000 with a guaranteed increase of 5% per annum
over the term of the agreement. The Company is obligated to pay Mr. Van Asperen
an annual salary of $144,000 with a guaranteed increase of 5% over the term of
his agreement. In addition to commissions earned under the Company's sales
incentive program, the Company is obligated to pay Mr. Allison an annual salary
of $89,250 with a guaranteed increase of 5% per annum over the term of his
agreement. Each employee may terminate the agreement upon 6 months notice to the
Company. The Company may terminate each employee upon 6 months notice to the
Company; provided, however, that the Company is obligated to pay to the employee
his annual base salary, commissions or bonuses earned, and benefits for a period
of 12 months after the date of such notice.
NOTE 10. INDUSTRIAL DEVELOPMENT REVENUE BOND
On June 1, 1999, the Development Authority of Gwinnett County (the "Authority"),
issued $4,100,000 of industrial development revenue bonds on behalf of the
Company and a Related Party. The 3.5% revenue bonds are payable in varying
annual principal and monthly interest payments through July 2019. The bond is
secured by all the assets of the Company and by real property owned by the
Related Party.
The majority of the proceeds, $3,125,872, from the bond issue were used by the
Company to purchase and install certain manufacturing equipment, while $974,128
was used by the Related Party to pay down the mortgage on the real property
leased to the Company. The Company and the Related Party are jointly obligated
to repay any outstanding debt. Under the Joint Debtor Agreement of June 26,2000,
between the Company and the Related Party, each has agreed to be responsible to
the other for their share of the bond obligations. The amount for which the
Related Party is responsible to the Company is reflected in current and other
assets of the Company. As of September 30, 2000, the bond principal outstanding
was $4,100,000 and the portion due from the Related Party was $974,128.
NOTE 11. SIGNIFICANT CUSTOMERS
In the three and nine month periods ended September 30, 2000, a reseller of
imaging supplies accounted for 67% and 59%, respectively, of net sales. The
Company does not have a written or oral contract with this customer. All sales
are made through purchase orders.
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NOTE 12. SIGNIFICANT SUPPLIERS
In the nine months ended September 30, 2000, the Company purchased 38% of its
raw materials, components and supplies from one supplier in connection with
sales to its largest customer. The Company also has an annually renewable
Original Equipment Manufacturer ("OEM") purchase agreement under which it
purchases, adds value and resells some its technology to the web press market.
The Company intends to design and manufacture the products it now obtains under
its OEM agreement. However, should the OEM agreement not be renewed before the
Company has completed its product development, the Company's ability to
manufacture and deliver these products to its web press customers could be
severely limited.
9
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
BACKGROUND
The Company, Color Imaging, Inc., formerly known as Advatex Associates, Inc.
("Advatex"), was originally incorporated in Delaware in 1987, and prior to the
Merger was a fully reporting public company, although inactive since 1993. As
described herein and pursuant to the Merger Agreement, Color Image, Inc.
("Color") and Logical Imaging Solutions, Inc. ("Imaging") became wholly owned
subsidiaries of the Company. On July 7, 2000, the Company, pursuant to a vote of
the stockholders, changed its name to Color Imaging, Inc. The Company is
committed to the continuation of the historical businesses of both Color and
Imaging.
COLOR
Color Image, Inc, ("Color"), a Georgia corporation formed in 1987, develops and
manufactures products used in electronic printing, and specializes as a provider
of toners and consumable products for data processing printers. Color designs,
manufactures and delivers black text toners, specialty toners, including color
and MICR (magnetic ink characters used on checks and other financial documents),
and also provides toner cartridges, cartridge components, photoreceptors and
imaging drums.
Color is continually expanding its development and manufacturing capabilities.
This program has led to the development of more than 130 different toner
formulations, including toners and imaging products for printers manufactured by
Brother, Canon, Delphax, HP, IBM, Lexmark, Oce', Sharp, Xerox and others.
Product enhancements include imaging supplies that enable standard laser
printers to print MICR lines, graphics, bar codes and forms. Color has also
developed toners and other consumable products for Imaging's printing systems;
including specialty MICR and full-color toners. Color's production, product
development and support are conducted from a new state-of-the-art, 150,000
square foot facility located in Norcross, Georgia.
IMAGING
Logical Imaging Solutions, Inc., ("Imaging") development efforts, since its
founding in California in 1993, have focused on creating a revolutionary digital
variable data printing process, and provides digital high-speed, color printing
systems for commercial applications. Imaging designs, manufactures and delivers
complete printing systems, including software, control units and print engines
to its customers. Currently, Imaging operates in the multi-billion dollar offset
press equipment market. Imaging intends to expand by offering similar digital,
high-speed, color printing solutions into the multi-billion dollar data
processing market.
Imaging's product line includes TONER150, COLORPRESS, CTS, CREATE!
COLORTONER150, and DIGITALCOLORPRESS which address the needs of commercial
printers that require digital processing and printing of variable data at
extremely high speeds. Imaging currently incorporates an Electron Beam Imaging
("EBI") printing technology, invented over 20-years ago, and has significantly
advanced that process with software, hardware and consumable product
enhancements. Imaging intends to expand its product line by offering these
improved EBI printers, capable of printing variable data in color at speeds
exceeding 250 pages-per-minute, as alternative products for all offset and data
processing high-speed printing
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applications. Imaging's digital printing solution, called the DIGITALCOLORPRESS,
includes a suite of software products, CREATE!, for document design, management
and production; a control unit for multiple printers; and to its belief the
fastest commercial printing technology available. Other products offered include
a full line of consumable products; black text, MICR and color toners, print
cartridges, erase rods and toner fusing assemblies. The system was developed as
a high-speed alternative to data processing and offset printing processes and
has printing capability in excess of several million pages per month.
Imaging expects to sell its products to production printing sites nationwide and
as upgrading alternatives to current users of EBI technology. Imaging intends to
grow by expanding and refining its product offerings in the web press market and
by entering the data processing and print-on-demand printing equipment and
systems markets.
OVERVIEW
Net sales, for the three and nine month periods that ended on September 30,
2000, were primarily generated from the sale of Color's black text, color and
MICR toners and related consumable products, including toner cartridges and the
re-filling of certain toner cartridges. Revenue is recognized from the sale of
products when the goods are shipped to the customer. In the three and nine month
periods ended September 30, 2000, a reseller of imaging supplies accounted for
67% and 59%, respectively, of net sales. The Company believes that this revenue
stream will have significant growth in the coming year. However, the Company
does not have a written or oral contract with this customer. All sales are made
through purchase orders.
Imaging's sales for printing systems and related software and consumable
products, for the three and nine month periods that ended on September 30, 2000,
represented only 3 percent and 4 percent of the Company's net revenue.
Cost of goods sold includes direct material and labor, warranty expenses,
license fees and manufacturing and service overhead. Inventories are stated at
the lower of cost (first-in, first-out) or market. Equipment is depreciated
using the straight-line method over the estimated useful lives of the equipment.
Improvements to leased property are amortized over the lesser of the life of the
lease or the life of the improvements.
Selling, general and administrative expenses include marketing and customer
support staff, other marketing expenses, management and administrative personnel
costs, professional services, legal and accounting fees and administrative
operating costs. Selling, general and administrative costs are expensed when the
costs are incurred.
Research and development expenses include costs associated with the development
of new products and significant enhancements of existing products, and consist
primarily of employee salaries, benefits, consulting expenses and depreciation
of laboratory equipment. With the exception of certain patented products that
are coming to market, all research and development costs are expensed as they
are incurred.
RECENT DEVELOPMENTS
During the three month period ended September 30, 2000, the Company initiated
production of an improved electron beam imaging ("EBI") print head for its
DigitalColorPress and as an upgrading replacement component for certain
installed EBI printing systems. Before production commenced, the Company filed a
patent application for the improved EBI print head technology.
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<PAGE> 12
The Company introduced several black text toners for Xerox and Lexmark printers
at World Expo 2000, held on September 20-22, 2000. As the result of the
Company's presence at World Expo 2000, several customers placed orders for the
Company's new toners.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain information
derived from the Company's consolidated statements of operations and expressed
as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
(PERCENTAGE OF NET SALES)
<S> <C> <C> <C> <C>
Net sales 100 100 100 100
Cost of goods sold 85 76 84 70
Gross profit 15 24 16 30
Administrative expense 6 16 7 14
Research and development 4 13 4 12
Sales and Marketing 3 12 4 10
Operating income 1 -17 1 -6
Interest and Bond expense 2 5 2 2
Depreciation and amortization 2 9 4 8
Income before taxes -2 -21 0 -7
Provision for taxes (credit) -1 -7 0 -2
Net Income (Loss) -1 -15 0 -5
</TABLE>
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES. The Company's net sales were $6.0 million for the three months ended
September 30, 2000, or an increase of 135% compared to $2.6 million for the
three month period ended September 30, 1999, with $5.8 million of net sales
attributable to imaging products manufactured by Color, inclusive of $3.9
million of a new product sold to Color's largest customer. This revenue increase
was offset by an approximate $500,000 decrease in sales of the Company's basic
imaging products attributable to the finalizing of the move into the Company's
new facility and related problems with the installation of certain production
equipment. The Company believes that sales of standard products will increase in
future periods as the Company has finished its move into the new factory and the
re-installed machinery begins operation during the fourth quarter of FY 2000.
The Company further believes that the completion of these tasks increase
manufacturing efficiencies and competitiveness.
Sales of $183,000 were attributable to Imaging's high speed printing systems,
software and related consumable products.
COST OF GOODS SOLD. Cost of goods sold increased by $3.2 million or 163% to $5.1
million in the three months ended September 30, 2000 from $1.9 million in the
three months ended September 30, 1999. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales increased
to 85% in the third quarter of 2000 from 76% in the third quarter of 1999. This
increase was due to the sale of $3.9 million of imaging products to a new
customer at a reduced profit margin.
GROSS PROFIT. As a result of the above factors, gross profit increased to
$891,000 in the three months ended September 30, 2000 from $620,000 in the three
months ended September 30, 1999. Gross profit as a percentage of net sales,
however, decreased to 15% in the third quarter of 2000 from 24% in the third
quarter of 1999. As stated above, this decrease was due to the sale of a
significant amount of new product to a new customer at a reduced profit margin,
the inefficiencies associated with the relocation to the new manufacturing
facility and the unavailability of certain production equipment.
GENERAL AND ADMINISTRATIVE, SELLING, AND R&D EXPENSES. General and
administrative, selling and R&D expenses decreased $234,000 or 22% to $811,000
in the three months ended September 30, 2000 from $1,045,000 in the three months
ended September 30, 1999. General and administrative, selling and R&D expenses
decreased, as a percentage of net sales, to 14% in the third quarter of 2000
from 41% in the third quarter of 1999. R&D expenses decreased by $110,000 or 32%
to $231,000 in the three months ended September 30, 2000 from $341,000 in the
three months ended September 30, 1999. Research and development expenses as a
percentage of net sales decreased to 4% in the third quarter of 2000, from 13%
in the third quarter of 1999, reflecting the significantly higher sales level
and the capitalization of $169,000 of R&D expenses in furthering the Company's
patented toner and digital color printing systems technologies.
OPERATING INCOME. As a result of the above factors the operating income
increased by $504,000, to a profit of $79,000 in the three months ended
September 30, 2000 from a loss of $425,000 in the three months ended September
30, 1999.
INTEREST AND FINANCE EXPENSE. Interest expense decreased $9,000 in the three
months ended September 30, 2000 from $132,000 in the three months ended
September 30, 1999.
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OTHER INCOME. Other income decreased by $91,000 in the three months ended
September 30, 2000 from $23,000 in the three months ended September 30, 1999.
This decrease was primarily the result of a cancelled sale of toner production
equipment being disposed of by the Company and the subsequent resale of the same
equipment to another party at a lower price.
INCOME TAXES. As the result of the Company's profitability in the current year,
income tax credits decreased to $67,000 in the three months ended September 30,
2000 from a tax credit of $169,000 for the comparable period in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
NET SALES. The Company's net sales were $15.5 million for the nine months ended
September 30, 2000, or an increase of 98% compared to $7.8 million for the nine
month period ended September 30, 1999, with $14.9 million of net sales
attributable to imaging products manufactured by Color, inclusive of $8.7
million, or 59% of net sales, sold to the Company's largest customer. This
increase was offset by an approximate $900,000 decrease in sales of the
Company's basic imaging products, partially attributable to the impact of the
extended move by the Company to its new facility and problems associated with
the installation of certain production machinery.
Sales of $623,000, or 4% of net sales, were attributable to Imaging's high speed
printing systems, software and related consumable products.
COST OF GOODS SOLD. Cost of goods sold increased by $7.5 million or 136% to
$13.0 million in the nine months ended September 30, 2000 from $5.5 million in
the nine months ended September 30, 1999. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales, however,
increased to 84% in the nine months ended September 30, 2000 from 70% in the
comparable nine month period of 1999. This increase in cost of sales is
primarily attributable to the $8.7 million of new business at a reduced profit
margin.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$181,000 to $2,540,000 in the nine months ended September 30, 2000 from
$2,359,000 in the nine months ended September 30, 1999. However, gross profit as
a percentage of net sales decreased to 16% for the first nine months of 2000,
from 30% for the similar period in 1999. This decrease in gross margin is
primarily due to the sale of a significant amount of product to a new customer
at a reduced profit margin, and the inefficiencies associated with the plant and
machinery relocation.
GENERAL AND ADMINISTRATIVE, SELLING, AND R&D EXPENSES. General and
administrative, selling and R&D expenses decreased $529,000 or 18% to $2.3
million in the nine months ended September 30, 2000 from $2.8 million in the
nine months ended September 30, 1999. General and administrative, selling and
R&D expenses decreased, as a percentage of net sales, to 15% in the first nine
months of 2000 from 36% in the similar nine month period of 1999. R&D expenses
decreased by $325,000 or 36% to $584,000 in the nine months ended September 30,
2000 from $909,000 in the nine months ended September 30, 1999. Reduced R&D
expenses is primarily due to the Company capitalizing $580,000 of research and
development expense through September 30, 2000 in furthering its patented toner
and digital color printing systems technologies.
OPERATING INCOME. As a result of the above factors, operating income increased
by
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$710,000 to a profit of $226,000 for the nine months ended September 30, 2000,
compared with a loss of $484,000 in the nine months ended September 30, 1999.
INTEREST AND FINANCE EXPENSE. Interest and finance expense increased by $243,000
to $381,000 in the nine months ended September 30, 2000 from $138,000 in the
nine months ended September 30, 1999. This increase was due to increased
borrowings under the Company's line of credit, term debt and bond financing.
OTHER INCOME. Other income increased by $359,000 to $432,000 in the nine months
ended September 30, 2000 from $73,000 in the comparable nine months ended
September 30, 1999. The primary components of other income were a gain on
disposal of equipment and a toner technology licensing fee from an unaffiliated
company.
INCOME TAXES. As the result of the Company's profitability in the current year,
the provision for income taxes increased by $199,000 to $11,000 for the nine
months ended September 30, 2000 from a tax benefit of $188,000 for the
comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's working capital was approximately
$1,348,000 and its current ratio was 1.1 to 1. At the year ended December 31,
1999, working capital was approximately $2,864,000 and its current ratio was 1.7
to 1. The decrease in the Company's liquidity was primarily due to over
$1,000,000 of cash flow used in investing activities which were provided by
operations, and the $4.8 million of current liabilities for inventory purchased
on extended terms from a supplier to support the increased business from the
new, large customer of the Company.
Cash flows provided by operating activities were $137,000 in the nine months
ended September 30, 2000, compared to $200,000 provided by operating activities
in the nine months ended September 30, 1999. The cash flows provided by
operating activities in the nine months ended September 30, 2000 were
comparatively lesser than in the nine months ended September 30, 1999 due
primarily to increases in accounts receivable and inventories, costs associated
with moving into the new manufacturing facilities and increased interest costs
associated with the acquisition of the new facility and capital equipment. The
receivable increase resulted primarily from higher sales in 2000. The increase
in inventories resulted primarily from increased purchasing levels to meet the
production requirements of the Company's largest customer.
Cash flows used in investing activities were $2.3 million in each of the nine
months ended September 30, 2000 and September 30, 1999. Included in cash flows
used in investing activities in the nine months ended September 30, 2000 was
$584,000 invested in furthering the Company's patented toner and digital color
printing systems technologies.
The Company has a $1.5 million revolving line of credit with an outstanding
balance as of September 30, 2000 of $1,212,000, and bears interest at the Bank's
prime interest rate less .25 percent. The revolving line of credit has a
June 30, 2001 expiration date. Under the line of credit, the Company is
permitted to borrow 85 percent of eligible accounts receivable and 50 percent of
eligible inventories (up to a maximum of $1.1 million). The Bank agreement
contains various covenants which the Company is required to maintain fixed
charge and cash flow leverage ratios of not less than 1.70:1 and not greater
than 3.30:1 respectively. As of September 30, 2000, the Company was not in
compliance with these covenants and has received a waiver from the bank as
regards these requirements.
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The Bank has made available an additional line of credit of $500,000. The
outstanding balance as of September 30, 2000 was $500,000. The additional line
of credit has an expiration date of June 30, 2001, and bears an interest
rate of the Bank's prime interest rate plus .5 percent. The Company has granted
the Bank a security interest in all of the Company's assets as security for the
payment of the lines of credit.
Cash flows provided by financing activities for the nine months ended September
30, 2000 and September 30, 1999 were $1,122,000 and $3,965,000 respectively, and
resulted primarily from borrowings under the Company's various credit facilities
and proceeds from the sale of common stock.
The Company believes that cash generated by operating activities and funds
available under credit facilities will be sufficient to finance its operating
activities for at least the next 12 months. To the extent that the funds
generated from these sources are insufficient to finance the operating
activities, the Company would need to raise additional funds through public or
private financing. There can be no assurance that additional financing will be
available on favorable terms, or at all. On August 29, 2000, the Board of
Directors authorized the raising of up to $3 million of additional capital on
terms and conditions acceptable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING FORWARD
-LOOKING STATEMENTS
Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments affecting the
Company will be those anticipated by management, and there are a number of
factors that could adversely affect the Company's future operating results or
cause the Company's actual results to differ materially from the estimates or
expectations reflected in such forward-looking statements, including without
limitation, the factors set forth below:
Limited Operating History. The Company has a limited operating history which
makes it difficult to evaluate the Company's future prospects. The Company's
prospects are subject to risks and uncertainties frequently encountered by new
companies. Many of these risks and uncertainties are unknown, but they include
the uncertainty of the acceptance in the marketplace of the Company's products
or services, including but not limited to its high speed color printer, if and
when available for sale.
Unproven Business Model. The Company's business model, particularly involving
its high speed color printer, is new and its ability to generate profits
therefrom is unproven. The Company cannot assure that its strategy will be
successful. Nevertheless, the success of the Company is dependent on market
acceptance of the Company's color printing system.
Ability to Obtain Additional Financing. The Company does not anticipate that its
revenues in the foreseeable future will be sufficient to fulfill its business
plan without the need for additional capital. Therefore, the Company needs to
raise additional funds to finance its operations, fund expansion and respond to
competitive pressures. There can be no assurance that the Company will be able
to obtain additional financing, if needed, on acceptable terms, or at all.
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Competitive and Rapidly Changing Marketplace. There is significant competition
in the toner and consumable products, and color printing systems industries in
which the Company conducts its business. In addition, the market for color
printers and related supplies is rapidly changing. Many of the Company's
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than the Company. These competitors may be able to devote
substantially more resources to developing their business than the Company. The
Company's ability to compete depends upon a number of factors within and outside
of the Company's control, including the success and timing of product
introductions by the Company and its competitors, selling prices, product
performance, product distribution, marketing ability and customer support.
Dependence on a Limited Number of Customers. In the three and nine month periods
ended September 30, 2000, a reseller of imaging supplies accounted for 67% and
59%, respectively, of net sales. In addition, the Company does not have a
written or oral contract with this customer and all sales are made through
purchase orders. The loss of this customer could have a substantial and material
adverse affect on the Company. The Company has in the past, and might in the
future, lose one or more of major customers. If the Company fails to continue to
sell to its major customers in the quantities anticipated, or if any major
customer terminates its relationship with the Company, the Company's reputation,
the perception of the Company's products and technology in the marketplace and
the growth of the business might be harmed.
Dependence on Suppliers. The Company is responsible for procuring raw materials
for its products. The Company's products incorporate technologies that are
available from limited sources of supply. For the nine month period ended
September 30, 2000, the Company purchased 38% of its raw materials, components
and supplies from one supplier. If the Company is unable to obtain its raw
materials and components from this one supplier, product shipments could be
prevented or delayed, which could result in a loss in sales. If the Company is
unable to meet existing orders or to enter into new orders because of a shortage
of raw materials and components, the Company will likely lose revenues and risk
losing customers and harming its reputation in the marketplace.
Short Product Life Cycles and Reductions in Unit Selling Prices. The markets in
which the Company competes are characterized by rapidly evolving technology,
frequent new product introductions and significant price competition.
Consequently, short product life cycles and reductions in unit selling prices
due to competitive pressures over the life of a product are common. The
Company's financial condition and results of operations could be adversely
affected if the Company is unable to manufacture new, competitive products in a
timely manner. The Company's future success will depend on its ability to
develop and manufacture technologically competitive products, price them
competitively, and achieve cost reductions for existing products. Advances in
technology will require increased investment to maintain or advance the
Company's market position.
Key Personnel. The Company's future success depends to a significant extent on
the continued services of senior management and other key personnel. The loss of
the services of any of the Company's executive officers or other key employees
could harm the Company's business. The Company's future success also depends on
the Company's ability to attract, retain and motivate highly skilled employees.
Competition for qualified employees in the industries in which the Company
engages is intense. If the Company fails to hire and retain a sufficient number
of qualified employees, the Company's business will be adversely affected.
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Integration of Color and Imaging. On June 30, 2000, by virtue of the Merger,
Color and Imaging became wholly owned subsidiaries of the Company. After the
Merger, the Company has had to integrate the two businesses: toners and
consumable products and color printing systems, respectively. Color has a
manufacturing facility in Norcross, Georgia and Imaging's facility is in Santa
Ana, California. The Company may fail to successfully operate both facilities or
to consolidate certain operations on time or on budget. Either situation would
have a material adverse effect on the Company's business, financial condition
and results of operations. The integration of the two businesses also carries
the following business risks: diversion of management time and attention;
failure to successfully operate multiple research and development facilities;
failure to retain employees; and transition of customer relationships. The
Company must properly manage the integration of Color's and Imaging's businesses
to control manufacturing costs and to ensure that manufacturing capacity can
meet product demand. Failure to do so could result in a reduction of revenues,
gross margins, working capital and more generally a negative impact on the
business, financial condition and results of operations.
Delays in Customer Purchases, Market Acceptance; Increase in Inventories. Delays
in or reductions to customer purchases of existing products in anticipation of
new product introductions by the Company or its competitors, market acceptance
of new products and pricing programs, the reaction of competitors to any such
new products or programs, the life cycles of the Company's products, as well as
delays in product development and manufacturing; (1) may cause a buildup in the
Company's inventories, (2) may make the transition from current products to new
products difficult and (3) could adversely affect the Company's future operating
results. The competitive pressure to develop technology and products also could
cause significant changes in the level of the Company's operating expenses.
Inventory Levels and Customer Demand. The Company's performance depends in part
upon its ability to manage inventory levels to support the demands of new
customers as well as its established customer base and to address production and
supply difficulties. The Company's future operating results and its ability to
effectively grow or maintain its market share may be adversely affected if it is
unable to address these issues on a timely basis.
Dependence on Intellectual Property. The Company's success depends in part on
its ability to obtain patents, copyrights and trademarks, maintain trade secret
protection and operate without infringing the proprietary rights of others.
Current or future claims of intellectual property infringement could prevent the
Company from obtaining technology of others and could otherwise adversely affect
its operating results, cash flows, financial position or business, as could
expenses incurred by the Company in enforcing its intellectual property rights
against others or defending against claims that the Company's products infringe
the intellectual property rights of others.
Factors unrelated to the Company's operating performance, including economic and
business conditions; the loss of significant customers or suppliers; the outcome
of future litigation, could also adversely affect the Company's operating
results. In addition, the Company's stock price, like that of other technology
companies, can be volatile. Trading activity in the Company's common stock,
particularly due to low trading volume and inter-day trading in the Company's
common stock, may affect the Company's common stock price.
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While the Company reassesses material trends and uncertainties affecting the
Company's financial condition and results of operations in connection with the
preparation of its quarterly and annual reports, the Company does not intend to
review or revise, in light of future events, any particular forward-looking
statement contained in this report.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of the
Company's public filings or press releases or in any oral statements made by the
Company or any of its officers or other persons acting on its behalf. The
important factors that could affect forward-looking statements are subject to
change, and the Company does not intend to update the foregoing list of certain
important factors. By means of this cautionary note, the Company intends to
avail itself of the safe harbor from liability with respect to forward-looking
statements that is provided by Section 27A and Section 21E referred to above.
PART II: OTHER INFORMATION
ITEM 1 -LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2 -CHANGES IN SECURITIES
From July 1, 2000 to September 30, 2000, previously issued Old Warrants were
exercised at a price of $2.00 per share resulting in the issuance of a total of
46,211 shares of common stock. The exercise of such stock warrants was exempt
from the registration provisions of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
ITEM 3 -DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 -OTHER INFORMATION
None.
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) FINANCIAL REPORTS
Exhibit 11 Computation of Earnings Per Common Share Exhibit 27 Financial Data
Schedule
(b) REPORTS ON FORM 8-K
1) On July 17, 2000, the Company filed a report on Form 8-K in connection with
the merger between Logical Acquisition Corp., Logical Imaging Solutions, Inc.
Color Acquisition Corp. and Color Image, Inc.
2) On August 25, 2000, the Company filed an amended report on Form 8-K which
contained the audited financial statements and proforma financial information
required by Item 7 relating to the merger.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLOR IMAGING, INC.
/s/ MICHAEL W. BRENNAN
------------------------------------
November 13, 2000 Michael W. Brennan
Chairman and Chief Executive Officer
/s/ MORRIS E. VAN ASPEREN
------------------------------------
Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
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