UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number: 0-18450
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COLOR IMAGING, INC.
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(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
---------------------------------------------- --------
(Address of principal executive offices) (Zip code)
(770) 840-1090 FAX (770) 242-3494
---------------------------------
(Registrant's telephone number, including area code)
As of October 30, 2002, there were 8,437,965
shares of Common Stock outstanding.
COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2002
(Unaudited) and December 31, 2001(Audited)..........................1
Condensed Statements of Operations (Unaudited)
for the Three and Nine Months ended September 30, 2002 and 2001.....2
Condensed Statements of Cash Flows (Unaudited)
for the Nine Months ended September 30, 2002 and 2001...............3
Notes to Interim Unaudited Condensed Financial
Statements .........................................................4
Item 2. Management's Discussion and Analysis or Plan of Operation ..........7
Item 3. Controls and Procedures ...........................................20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings .................................................20
Item 2. Changes in Securities..............................................20
Item 3. Defaults Upon Senior Securities....................................21
Item 4. Submission of Matters to a Vote of Security Holders................21
Item 5. Other information .................................................21
Item 6. Exhibits and Reports on Form 8-K...................................26
Signatures...................................................................29
Certifications...............................................................30
i
PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC.
CONDENSED BALANCE SHEETS
30-Sept-02 31-Dec-01
(Unaudited) (Audited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 113,539 $ 393,981
Accounts receivable, net 2,863,728 2,894,003
Inventory 5,296,787 5,604,975
Deferred income taxes 23,508 190,509
Related party portion of IDR bond 83,160 79,596
Other current assets 276,188 335,621
Net assets of discontinued subsidiary -- 2,264,117
------------ ------------
TOTAL CURRENT ASSETS 8,656,910 11,762,802
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 7,143,967 7,013,070
------------ ------------
OTHER ASSETS
Related party portion of IDR bond 735,340 818,500
Other assets 306,361 222,131
------------ ------------
TOTAL OTHER ASSETS 1,041,701 1,040,631
------------ ------------
$ 16,842,578 $ 19,816,503
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit lines $ 1,092,281 $ 1,462,416
Accounts payable 4,205,351 4,841,414
Current portion of notes payable 358,653 340,232
Current portion of bonds payable 350,000 335,000
Notes payable - related parties 279,203 --
Other current liabilities 472,186 432,043
------------ ------------
TOTAL CURRENT LIABILITIES 6,757,674 7,411,105
------------ ------------
LONG TERM LIABILITIES
Notes payable 1,082,521 1,352,893
Bonds payable 3,095,000 3,445,000
Notes payable - related parties 720,797 --
------------ ------------
LONG TERM LIABILITIES 4,898,318 4,797,893
------------ ------------
TOTAL LIABILITIES 11,655,992 12,208,998
------------ ------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; 8,437,965 and 10,099,175 shares issued and
outstanding on September 30, 2002 and
December 31, 2001, respectively 84,380 100,992
Additional paid-in capital 7,205,908 9,873,939
Stock subscription receivable -- (149,000)
Retained earnings (accumulated deficit) (2,103,702) (2,218,426)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,186,586 7,607,505
------------ ------------
$ 16,842,578 $ 19,816,503
============ ============
See accompanying notes
1
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
30-Sept-02 30-Sept-01 30-Sept-02 30-Sept-01
------------ ----------- ------------ ------------
SALES $ 6,654,366 $ 9,711,931 $22,285,989 $23,056,235
C0ST OF SALES 5,460,287 8,417,173 18,776,922 19,778,728
------------ ------------ ------------ ------------
GROSS PROFIT 1,194,079 1,294,758 3,509,067 3,277,507
------------ ------------ ------------ ------------
OPERATING EXPENSES
Administrative 304,491 372,061 999,106 1,114,161
Research & development 237,553 195,695 688,660 552,408
Sales & marketing 351,568 375,485 963,645 882,878
------------ ------------ ------------ ------------
893,612 943,241 2,651,411 2,549,447
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 300,467 351,517 857,656 728,060
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income (9,434) 15,230 19,771 26,216
Financing expenses (84,820) (90,152) (250,640) (311,065)
Non-recurring moving expense -- -- -- (9,570)
------------ ------------ ------------ ------------
(94,254) (74,922) (230,869) (294,419)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 206,213 276,595 626,787 433,641
PROVISION FOR INCOME TAXES 89,488 94,436 250,738 142,246
------------ ------------ ------------ ------------
NET INCOME FROM
CONTINUING OPERATIONS 116,725 182,159 376,049 291,395
DISCONTINUED OPERATIONS (Note 2)
(Loss) from operations of
subsidiary disposed of -
net of income taxes (98,244) (36,320) (261,326) (106,056)
------------ ------------ ------------ ------------
NET INCOME $ 18,481 $ 145,839 $ 114,723 $ 185,339
============ ============ ============ ============
INCOME (LOSS)
PER COMMON SHARE - BASIC
Continuing operations $ .01 $ .02 $ .04 $ .04
Discontinued operations $ (.01) $ .00 $ (.03) $ (.02)
------------ ------------ ------------ ------------
$ -- $ .02 $ .01 $ .02
============ ============ ============ ============
INCOME (LOSS)
PER COMMON SHARE - DILUTED
Continuing operations $ .01 $ .02 $ .04 $ .04
Discontinued operations $ (.01) $ .00 $ (.03) $ (.02)
------------ ------------ ------------ ------------
$ -- $ .02 $ .01 $ .02
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 10,122,283 8,070,136 10,107,156 7,774,391
Assumed conversion -- 203,281 -- 166,205
------------ ------------ ------------ ------------
10,122,283 8,273,417 10,107,156 7,940,596
============ ============ ============ ============
See accompanying notes
2
COLOR IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30
(UNAUDITED)
2002 2001
------------- -------------
Cash flows from operating activities:
Net income from continuing operations $ 376,049 $ 291,395
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 396,252 434,783
Deferred income taxes 167,001 136,144
Allowance for doubtful accounts 3,603 --
Decrease (increase) in:
Accounts receivable and other receivables 26,672 (161,292)
Inventories 308,188 (1,472,673)
Prepaid expenses and other assets (24,797) (33,732)
Due from related party - IDR bond 79,596 76,032
Increase (decrease) in:
Accounts payable and accrued liabilities (595,922) 1,090,175
------------- -------------
Net cash provided by
continuing operations 736,642 360,832
Net cash flows of discontinued operations (676,202) (216,815)
------------- -------------
Net cash provided by
operating activities 60,440 144,017
------------- -------------
Cash flows (used in) investing activities:
Capital expenditures (527,149) (188,610)
Other assets -- (125,449)
------------- -------------
Net cash (used in)
investing activities (527,149) (314,059)
------------- -------------
Cash flows from financing activities:
Net (payments) under line of credit (370,135) (166,806)
Net proceeds from sale of common stock 143,351 1,156,877
Net proceeds from related party borrowings 1,000,000 --
Principal payments of long-term debt (586,949) (539,353)
------------- -------------
Net cash provided by
financing activities 186,267 450,718
------------- -------------
Net (decrease) increase in cash (280,442) 280,676
Cash at beginning of year 393,981 338,463
------------- -------------
Cash at end of period $ 113,539 $ 619,139
============= =============
See accompanying notes
3
COLOR IMAGING, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted
in the United States of America 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 months and nine months ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002.
NOTE 2. DISCONTINUED OPERATIONS
On September 30, 2002, the Company completed a share exchange agreement with
Digital Color Print, Inc. and four of its former directors, whereby the Company
received 1.7 million shares of its common stock in exchange for all of the
shares of the common stock of its subsidiary, Logical Imaging Solutions, Inc.
Based upon guidance provided by APB 29 in connection with accounting for
nonmonetary transactions, the fair value of the 1.7 million shares of common
stock received was approximately $2,678,993; the fair value (approximating the
net book value) of Logical Imaging Solutions, Inc. plus the transaction costs
incurred.
Following is summary financial information for the Company's discontinued
Logical Imaging Solutions, Inc. subsidiary:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------------- ---------------- ----------------- ----------------
(Loss) from discontinued operations:
Before income taxes $(146,244) $ (51,030) $(406,570) $(150,266)
Income tax provision (benefit) (48,000) (14,710) (145,244) (44,210)
----------------- ---------------- ----------------- ----------------
Net (loss) from discontinued operations $( 98,244) $ (36,320) $(261,326) $(106,056)
================= ================ ================= ================
Pursuant to the share exchange agreement, the Company also received a warrant to
purchase approximately 15% of the then outstanding common stock of Digital Color
Print, Inc. or Logical Imaging Solutions, Inc. The warrant has not been assigned
any value, since it is not cashless, increases from $1.50 to $2.25 and then to
$3.25 per share each year over three years, expires after three years, is not
registered for resale and has no current market.
NOTE 3. COMMON STOCK
On September 30, 2002, the Company completed a share exchange agreement with
Digital Color Print, Inc. (see note 2 above), whereby the Company received 1.7
million shares of the Company's common stock in exchange for all of the shares
of the common stock of Logical Imaging Solutions, Inc. As of September 30, 2002,
the 1.7 million shares of the Company's common stock were cancelled and retired.
From January 1, 2002 to September 30, 2002, one holder of the Company's warrants
exercised 1,750 warrants on a cashless basis and was issued 705 shares of the
Company's common stock. During March 2002, the Company rescinded one transaction
entered into during 2001 for the sale of 25,000 shares of common stock and
warrants to purchase 25,000 shares of the common stock of the Company. This
transaction was retroactively reflected in the financial statements as of
December 31, 2001. As of March 2002, all notes receivable from sales of Company
securities have been fully paid by the investors.
During August 2002 the Company issued 38,085 shares of its common stock to
warrant holders who exercised, on a cashless basis, 157,116 warrants that were
issued to them in exchange for their warrants to purchase the common stock of
Logical Imaging Solutions, Inc. at the time of the merger in June 2000. On
September 15, 2002, warrants to purchase 12,939 shares of the Company's common
stock issued in exchange for warrants to purchase the common stock of Logical
Imaging Solutions, Inc. at the time of the merger in June 2000, expired.
4
NOTE 3. COMMON STOCK (CONTINUED)
On July 8, 2002, the Company granted options to purchase 100,000 shares of the
Company's common stock to James Telsey, vice president, sales and marketing, at
an exercise price of $2.00 with options to purchase 25,000 shares of the
Company's common stock vesting on the grant date and the remainder vesting
equally upon the next three anniversaries of the grant date. The grant of the
options was approved by the board of directors of the Company at its annual
meeting on June 10, 2002.
On October 30, 2001, the Company issued and sold 1,000,000 shares of its common
stock to one investor in exchange for $2 million. The purchase price was $2.00
per share, of which $10,000 was payable in cash and $1,990,000 was payable in
the form of a recourse promissory note. The Company also agreed to issue up to
500,000 warrants exercisable at $2.00 per share to purchase the Company's common
stock. In March 2002, the Company and the investor mutually rescinded this
transaction and the Company has retroactively reflected this rescission as of
December 31, 2001.
NOTE 4. INVENTORIES
Inventories of continuing operations consisted of the following components as of
September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 1,269,306 $ 723,480
Work-in-process 1,430,084 967,982
Finished goods 2,775,608 3,987,343
Obsolescence allowance (178,211) (73,830)
----------------- -----------------
Total $ 5,296,787 $ 5,604,975
================= =================
NOTE 5. CHANGES TO BORROWING ARRANGEMENTS
The Company has a $2.5 million revolving line of credit, as amended, with an
outstanding balance as of September 30, 2002 of $1,092,281. At the end of each
month for the following month, the Company has the interest rate option of
either the one month Libor interest rate in effect two business days before the
first day of the month plus 2.50% or the Bank's prime interest rate minus 0.25%.
As of September 30, 2002, the interest rate was the one-month Libor rate of
1.82% plus 2.50% (4.32%). This revolving line of credit has a June 30, 2003
expiration date.
Under the line of credit, the Company is permitted to borrow up to 85% of
eligible accounts receivable and 50 percent of eligible inventories (up to a
maximum of $1.1 million and not to exceed 60 percent of the total outstanding).
The Company has granted the Bank a security interest in all of the Company's
assets as security for the repayment of the line of credit. The Bank agreement
contains various covenants which the Company is required to maintain, and as of
September 30, 2002, the Company was in compliance with these covenant
requirements.
NOTE 6. SIGNIFICANT CUSTOMERS
In the nine month period ended September 30, 2002, two customers accounted for
51% and 19%, respectively, of net sales. The Company does not have a written or
oral contract with these customers. All sales are made through purchase orders.
Accounts receivable from these customers at September 30, 2002, were $933,129
and $292,176, respectively.
NOTE 7. SIGNIFICANT SUPPLIERS
In the nine months ended September 30, 2002, the Company purchased 47% of its
raw materials, components and supplies from one supplier in connection with
sales to its largest customers. At September 30, 2002, the accounts payable to
this supplier was $1,585,258.
5
NOTE 8. FINANCIAL REPORTING FOR BUSINESS SEGMENTS:
The Company believes that its operations are in a single industry segment
involving the development and manufacture of products used in electronic
printing. All of the Company's assets are domestic. The sales to unaffiliated
customers by geographic region from continuing operations for the nine-month
periods ended September 30 are as follows:
2002 2001
----------- -----------
Sales to Unaffiliated Customers:
United States $13,294,061 $17,832,052
Europe 4,500,420 3,750,509
Asia 986,666 523,174
All Other 3,504,842 950,500
----------- -----------
Total $22,285,989 $23,056,235
=========== ===========
6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussions should be read in conjunction with our consolidated
condensed financial statements and the related notes thereto.
BACKGROUND
On June 28, 2000, Color Imaging, Inc., formerly known as Advatex Associates,
Inc. merged with Logical Imaging Solutions, Inc. and Color Image, Inc. and
Logical Imaging Solutions and Color Image became wholly-owned subsidiaries of
Advatex. We previously accounted for the merger as a pooling-of-interests and
have since revised the accounting treatment for the merger to the purchase
method. The financial information contained in this report is in conformity with
the purchase method of accounting, and the historical financial statements are
those of Logical Imaging Solutions. The assets, liabilities and operating
results of Color Image are only included in the consolidated financial
statements of Color Imaging from the date of acquisition, June 28, 2000, or for
only the last six months of the year ended December 31, 2000 and for the full
year ended December 31, 2001. On December 31, 2000, Color Image was merged with
and into Color Imaging.
On September 30, 2002, we completed a share exchange agreement with Digital
Color Print, Inc., whereby we received 1.7 million shares of our common stock in
exchange for all of the common stock of our wholly owned subsidiary, Logical
Imaging Solutions, Inc. In addition, we received warrants to purchase up to 15%
of the common stock of Digital Color Print or Logical Imaging Solutions,
expiring in three years. As the result of our disposing of Logical Imaging
Solutions, Inc. we no longer offer printing systems to commercial printers nor
the support services and consumables related thereto.
Pro forma condensed financial statements, balance sheet and statement of
operations, eliminating the discontinued operations of Logical Imaging
Solutions, Inc., derived from the audited consolidated financial statements for
the fiscal years ended December 31, 2001 and December 31, 2000 are included in
Item 5, Other Information, later herein.
COLOR IMAGING, INC.
Since 1989, Color Imaging, Inc. has developed and manufactured products used in
electronic printing. Color Imaging, Inc. formulates and produces black text and
specialty toners, including color and magnetic character recognition toners for
numerous laser printers. Color Imaging, Inc.'s toners permit the printing of a
wide range of user-selected colors and also the full process color printing of
cyan, yellow, magenta and black. Magnetic character recognition toners enable
the printing of magnetic characters that are required for the high-speed
processing of checks and other financial documents. Color also supplies other
consumable products used in electronic printing, and photocopying, including
toner cartridges, cartridge components, photoreceptors and imaging drums.
Color Imaging, Inc. has continually expanded its product line and manufacturing
capabilities. This expansion has led to the creation of more than 130 different
black text, color, magnetic character recognition and specialty toner
formulations, including aftermarket toners and imaging products for printers and
facsimile machines manufactured by Brother(TM), Canon(TM), Delphax(TM), Hewlett
Packard(TM), IBM(TM), Lexmark(TM), Sharp(TM), Xerox(TM), Minolta(TM), Mita(TM),
Panafax(TM), Pentax(TM), Pitney Bowes(TM), Epson(TM), Fuji-Xerox(TM),
Toshiba(TM), Kyocera(TM), Okidata(TM), Panasonic(TM), and printing systems
developed by Logical Imaging Solutions, Inc. Color Imaging, Inc. also
manufacturers and or markets toners for use in Ricoh, Sharp(TM), Xerox(TM),
Canon(TM), Lanier(TM) and Toshiba(TM) copiers. Color Imaging, Inc. also offers
product enhancements, including imaging supplies that enable standard laser
printers to print magnetic character recognition data. Color Imaging, Inc.
markets branded products directly to OEMs and its aftermarket products worldwide
to distributors and remanufacturers of laser printer toner cartridges and to
dealers and distributors of copier products.
OVERVIEW
Net sales are primarily generated from the sale of our black text, color and
magnetic character recognition toners. We do not have a written or oral contract
with our customers, and all sales are made through purchase orders. Consistent
with the purchase orders and forecasts provided to us by our major customers, we
provide our major suppliers with purchase orders three months in advance and an
additional rolling forecast for two months. We communicate regularly and meet at
least twice annually with our major customers and suppliers to assess
developments in the industry and changes in the business expected from our
7
customers to maintain an efficient supply chain. In April 2001, we changed our
purchasing arrangement with our largest supplier to FOB origination from FOB
destination, and we adjusted our pricing to reflect the change to costs.
Net sales, for the three and nine months that ended on September 30, 2002, were
primarily generated from the sale of our black text, color and magnetic ink
character recognition printer and copier toners. Revenue is recognized from the
sale of products when the goods are shipped to the customer. In the nine months
ended September 30, 2002, two distributors of imaging supplies accounted for
approximately 51% and 19%, respectively, of net sales, with the latter being an
OEM for which we private label. Sales to these customers consist primarily of
analog copier products, and as a result are expected to decline over time unless
these declining sales to these customers are offset by the sale of digital
copier products. As of September 30, 2002, we no longer sell certain very low
margin copier products purchased for resale to our largest customer. As a
result, our sales will be less concentrated with our largest customer and our
gross profit margins are expected to improve. Our sales of this discontinued
very low margin product are expected to be approximately $4 million of our total
sales this year. During the fourth quarter of 2002, as the result of our largest
customer having lost business from one of its major customers that has been
using our product, we expect sales to our largest customer to further decline.
Sales to our largest customer during 2003 are expected to be about one-half of
the amount sold to them during 2002, or down some $8 million. We do not have a
written or oral contract with this customer. Our inventory for the discontinued
product has been sold, and inventory in connection with the other products no
longer sold by our largest customer to one its customers is still being sold to
our largest customer for sale to others. All sales are made through purchase
orders, and for sales related to copier products we endeavor to have only small
quantities on hand or on order that exceed that required to fill confirmed
purchase orders. Consistent with the purchase orders and forecasts provided to
us by our two major customers that account for 70% of our business, we provide
our major suppliers with purchase orders three months in advance and an
additional rolling forecast for two months. We communicate regularly and meet at
least twice annually with these customers and suppliers to assess developments
in the industry and expected changes in the business to maintain an efficient
supply chain. Net sales made outside of the United States increased to
$8,992,000, or 40% of total sales for the nine months ended September 30, 2002,
compared to $5,224,000, or 23% for the nine months ended September 30, 2001.
This 72% increase in international sales resulted primarily from the increase in
sales to our two largest customers. However, as a result of our no longer
selling the abovementioned copier products to our largest customer, both our
domestic and our international sales are expected to decrease in the fourth
quarter of 2002 and for all of 2003, while our gross margin is expected to be
higher throughout 2003 when compared to 2002.
ACCOUNTING PRINCIPLES
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our financial
statements. Our significant estimates and assumptions are reviewed and any
required adjustments are recorded on a quarterly basis.
Allowances for doubtful accounts are maintained based on estimated bad debts. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.
Lower of Cost or Market for Inventory. Our inventories are recorded at the lower
of standard cost or market. As with any manufacturer or wholesaler, economic
conditions, cyclical customer demand, product introductions or pricing changes
of our competitors and changes in purchasing or distribution can affect the
carrying value of inventory. As circumstances warrant, we record lower of cost
or market inventory adjustments. In some instances these adjustments can have a
material effect on the financial results of an annual or interim period. In
order to determine such adjustments, we evaluate the age, inventory turns,
estimated fair value and, in the case of toner products, whether or not they can
be reformulated and manufactured into other products, and record any adjustment
if estimated fair value is below cost. Through periodic review of each of our
inventory categories and by offering markdown or closeout pricing, we regularly
take steps to sell off slower moving inventory to eliminate or lessen the effect
of any lower of cost or market adjustment. If assumptions about future demand or
actual market conditions are less favorable than those projected by management,
write-downs of inventory could be required.
Carrying Value of Toner Manufacturing Equipment. We are nearing the completion
of the latest expansion of our toner manufacturing facility. We have
approximately $7.7 million invested in the equipment and leaseholds, with a
carrying value of $6.6 million, in connection with toner manufacturing that have
estimated lives of up to twenty years. Should competing technologies or offshore
competitors cause our manufacturing technology to be non-competitive, the
8
estimated life of these assets may need to be shortened and their carrying value
could be materially affected.
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. At this time the earnings process is complete and
the risks and rewards of ownership have transferred to the customer, which is
generally when the goods are shipped and all of our significant obligations have
been satisfied.
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. All research and development costs are expensed as they
are incurred.
RECENT DEVELOPMENTS
On June 10, 2002, the board of directors, to better focus executive management
energies on each of our operating units, reaffirmed Director Michael W. Brennan
as Chairman and Chief Executive Officer of our subsidiary Logical Imaging
Solutions, Inc., and elected Jui-Hung Wang Chairman of Color Imaging, Inc. Dr.
Sueling Wang continues to serve as Vice-Chairman and President of Color Imaging,
Inc. Mr. Brennan also resigned from the board of directors of Color Imaging
effective September 10, 2002, to dedicate himself to the furthering of the
business interests of Logical Imaging Solutions, including its reorganization as
a standalone company separate and apart from Color Imaging. The board of
directors and management realized that the difficulties surrounding the raising
of significant equity capital from non-affiliates for Color Imaging in this
market environment is such that a restructure of Logical Imaging Solutions had
to be considered. We did not, at that time, specifically allocate any of the
proceeds of our pending offering filed with the Securities and Exchange
Commission on Form SB-2 to the furthering of Logical Imaging Solutions'
technology, since we were considering the restructuring of Logical Imaging
Solutions.
Four of our directors, Messrs. Brennan, St. Amour, Langsam and Hollander
expressed concern over the potential restructure or reorganization of Logical
Imaging Solutions and the lack of the planned use of any proceeds from our
offering pending the Securities and Exchange Commission on Form SB-2 for the
further development of its technology, as they are of the opinion that Logical
Imaging Solutions' business prospects demanded a greater investment. After
informal discussion with Dr. Sueling Wang and Mr. Van Asperen this past July,
they submitted an informal proposal whereby a new company, Digital Color Print,
Inc., would acquire the capital stock of Logical Imaging Solutions in exchange
for 1.6 million of our shares and warrants to purchase shares of the common
stock of Logical Imaging Solutions and or Digital Color Print approximating up
to 15% of its then outstanding shares.
On August 23, 2002, the Board of Directors, by unanimous written consent,
authorized our entering into a definitive share exchange arrangement and
appointed a committee of disinterested directors, Mr. Van Asperen and Mr.
Allison, to conduct due diligence as appropriate and to engage, at their option,
an independent consultant to evaluate the fairness, from a financial point of
view, of the transaction. There were also several important conditions, such as
the consent of our bank and the release of the bank's security interest in the
assets of Logical Imaging Solutions, a recommendation by the committee of
disinterested directors with an opinion of an independent financial consultant
of the fairness from a financial point of view of the transaction, if obtained,
and the approval to close the transaction of not only a majority of the board of
directors but also of a majority of the disinterested members of board of
directors. On September 11, 2002, we signed the share exchange agreement. On
September 20, 2002, the share exchange agreement was amended and the number of
shares of our common stock to be exchanged for the capital stock of Logical
Imaging Solutions was increased from 1.6 million to 1.7 million and a
requirement was added that Logical Imaging Solutions was to have at least
$100,000 on hand at closing. In addition, the amendment to the share exchange
agreement also provided that Mr. Brennan's employment agreement was to be
terminated upon the closing of the transaction and his severance formerly
payable through June 10, 2003 will be terminated as of March 10, 2003. After
9
having met all of the conditions, the divestiture of Logical Imaging Solutions
and the share exchange was completed on September 30, 2002. Effective upon the
closing, Messrs. St. Amour, Langsam and Hollander resigned as directors of Color
Imaging. Mr. Brennan had previously resigned as a director of Color Imaging
effective September 10, 2002.
Now that the share exchange transaction has closed, Digital Color Print
intends to offer to exchange shares of its common stock for shares of common
stock held by our stockholders who are, per a press release of Digital Color
Print, holders of record as of October 1, 2003. We are not sponsoring,
encouraging, or responsible for the proposed offering by Digital Color Print.
Conditions of the share exchange agreement include that Digital Color Print
shall be solely responsible for such offering, including compliance with all
applicable laws, and it shall not accept the tender of more than an aggregate of
2,600,000 shares, inclusive of the 1,700,000 of our common shares that it
exchanged with us for all of the common stock of Logical Imaging Solutions.
Further, neither Logical Imaging Solutions nor Digital Color Print shall take
any action in connection with their offering that could have the effect of
reducing the number of our stockholders below 325. As of September 9, 2002, we
had 344 holders of record of our common stock.
Based upon guidance provided by APB 29 in connection with accounting for
nonmonetary transactions, the 1,700,000 million shares of our common stock
exchanged for all of the shares of common stock of Logical Imaging Solutions was
valued at approximately $2.68 million: the fair value (approximating the net
book value) of Logical Imaging Solutions plus the transaction costs incurred.
The warrants that we received for approximately 15% of Logical Imaging
Solutions, or Digital Color Print, have not been assigned any value, since they
are not cashless, increase from $1.50 to $2.25 and then to $3.25 per share each
year over three years, expire after three years, are not registered for resale
and have no current market.
As the result of the foregoing, Logical Imaging Solutions' operations and
research and development activities will remain in Santa Ana, California and are
not being consolidated with ours at our headquarters in Norcross, Georgia.
Color Imaging has completed the testing of recently installed toner
manufacturing equipment to complete our most recent factory expansion to again
double our capacity. This installation represents approximately a $1.44 million
investment to not only increase our business, but to also improve quality,
product consistency and to lower costs. Recently we placed orders for $100,000
of additional equipment to be installed before the end of this year to complete
our first dedicated color toner manufacturing system, a system for which we have
already invested some $300,000. In our offering filed with the Securities and
Exchange Commission on Form SB-2, we made provision for $1.5 million of new
capital equipment, most of which is planned for additional dedicated color toner
manufacturing systems for "business color" printing and copying systems being
introduced by OEMs. The remainder of the planned capital investment is to
further improve our toner research, development and quality control programs.
On July 8, 2002, Charles Allison was appointed Vice President, Technology, to
increase executive management involvement in laser printer and copier product
development, quality assurance and technical support. Mr. James Telsey was hired
as Vice President, Sales & Marketing, to replace Mr. Allison in that position.
During March 2002, we rescinded two transactions for the sale of our common
stock and warrants to purchase additional shares of our common stock totaling
1,025,000 and 525,000, respectively. The purchasers paid the par value in cash
for the shares issued to them, and the balance of the purchase price consisted
of recourse promissory notes. The sale of 1,000,000 shares of our common stock
and warrants to purchase an additional 500,000 shares of common stock was, per
agreement, subject to our registering the securities for resale. However, the
SEC staff took the position that these securities could not be registered for
resale in this registration statement and the transaction was rescinded, the
shares, warrant and promissory note were cancelled and we retained the $10,000
and accrued interest earned thereon in consideration of our expenses incurred in
connection with the transaction. The second transaction for 25,000 shares of our
common stock and warrants to purchase an additional 25,000 shares of our common
stock was rescinded when the parties believed the promissory note would not be
paid by the time this registration statement became effective. The shares,
warrant and promissory note were cancelled and the cash consideration was
refunded to the purchaser.
With the rescission of the two above-mentioned sales of our common stock
totaling $2,050,000, we anticipate that we will need to raise additional funds
from other sources to fund other planned investing and financing activities. We
intend to meet our operating requirements from funds generated by operations,
funds available under our line of credit agreement and funds we have borrowed
from affiliates. The other planned activities are dependent upon our raising
funds through the sale of our securities. We will allow our directors, officers
and affiliates to purchase up to $7 million of our shares of common stock in our
offering pending with the Securities and Exchange Commission on Form SB-2.
10
RESULTS OF OPERATIONS
The following table sets forth certain information derived from the Company's
unaudited interim statements of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, SEPT 30,
2002 2001 2002 2001
----- ----- ----- -----
(PERCENTAGE OF NET SALES)
Net sales 100 100 100 100
Cost of sales 82 87 84 86
Gross profit 18 13 16 14
Administrative expenses 5 4 4 5
Research and development 4 2 3 2
Sales and marketing 5 4 4 4
Operating income 4 4 4 3
Interest expense 1 1 1 1
Depreciation and amortization 1 1 2 2
Income before taxes 3 3 2 2
Provision for income taxes 1 1 1 1
Income from continuing operations 2 2 2 1
Loss from discontinued operations, net of
income taxes (2) 0 (1) 0
Net income 0 2 1 1
RESULTS OF DISCONTINUED OPERATIONS
The following table sets forth, for the periods indicated, selected information
relating to the discontinued operations of Logical Imaging Solutions that has
been derived from our audited and unaudited consolidated statements of
operations.
Twelve Months Ended Nine Months Ended
December 31, September 30,
--------------------------------------- -------------------
2000 2001 2002
----------------- ------------------ -------------------
Net revenue $ 723,063 $ 551,399 $ 464,628
Operating (loss) (350,999) (267,220) (406,570)
----------------- ------------------ -------------------
Net (loss) $ (271,799) $ (204,154) $ (261,326)
================= ================== ===================
Pro forma condensed financial statements, balance sheet and statement of
operations, eliminating the discontinued operations of Logical Imaging
Solutions, Inc., derived from the audited consolidated financial statements for
the fiscal years ended December 31, 2001 and December 31, 2000 are included in
Item 5, Other Information, later herein.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES. Our net sales decreased by $3 million, or 31%, to $6.7 million for
the three months ended September 30, 2002, from $9.7 million for the three
months ended September 30, 2001. Net sales made in the United States were $3.5
million, a decreased of $4 million, or 54%, from $7.5 million made in the
comparable period in 2001. Net sales made outside of the United States increased
by $1 million, or 45%, for the quarter compared to the same quarter of 2001. The
decrease in net sales for the quarter compared to that of a year ago resulted
from reduced domestic demand for all of our products, while the increase in
sales made outside of the United States was primarily the result of increased
11
sales to our two largest customers. Of the $6.7 million in net sales, $4.9
million, or 73%, were attributable to our copier products, the same percentage
as that of the comparable period in 2001. The revenue decrease from copier
products from 2001 to 2002 was 32%, while the decrease for the comparable period
experienced by laser products was 30%. Sales of our laser products for the three
months ended September 30, 2002 were $1.8 million compared to $2.6 million for
the same period of 2001. We believe that sales of both our copier and our laser
printing products will decrease in the quarter ending December 31, 2002, as the
result of less domestic demand and the reduced sales being made to our largest
customers.
COST OF GOODS SOLD. Cost of goods sold decreased by $2.9 million, or 35%, to
$5.5 million from $8.4 million for the three months ended September 30, 2002 and
for the comparable period in 2001, primarily as the result of the decrease in
net sales. Cost of goods sold as a percentage of net sales decreased by 5
percentage points from 87% for the three months ended September 30, 2001 to 82%
for the three months ended September 30, 2002, primarily as the result of
reduced sales derived from certain very loan margin products previously sold to
our largest customer that have been discontinued, a larger percentage of sales
being derived from sales of products with higher gross margins and the effects
of previous price increases on a few analog copier products. Having recently
placed more efficient manufacturing equipment in service, we expect our cost of
goods sold to further decrease as a percentage of net sales.
GROSS PROFIT. As a result of the above factors, gross profit decreased to $1.2
million in the three months ended September 30, 2002 from $1.3 million in the
three months ended September 30, 2001, or only $100,000, while net sales for the
same period decreased by $3 million. Gross profit as a percentage of net sales
increased by 5 percentage points from 13% to 18% for the three months ended
September 30, 2002, as compared to the corresponding period of the prior year.
The increase in the percentage of gross profit resulted primarily from reduced
sales derived from certain very loan margin products previously sold to our
largest customer that have been discontinued, a larger percentage of sales being
derived from sales of products with higher gross margins and the effects of
previous price increases on a few analog copier products. Having recently placed
more efficient manufacturing equipment in service, we expect our gross profit to
further increase as a percentage of net sales.
OPERATING EXPENSES. Operating expenses decreased $49,000, or 5%, to $894,000 in
the three months ended September 30, 2002 from $943,000 in the three months
ended September 30, 2001. General and administrative, selling and R&D expenses
increased, as a percentage of net sales, to 14% in the three months ended
September 30, 2002 from 10% in the three months ended September 30, 2001 as the
result of the decrease in net sales for the quarter. General and administrative
expenses decreased approximately 18%, or $68,000 to $304,000 for the three
months ended September 30, 2002 from the comparable period in 2001, largely
resulting from reduced payroll, other taxes, travel and professional investor
relations expenses. Selling expenses decreased by $24,000, or 6%, in the three
months ended September 30, 2002 compared to the three months ended September 30,
2001. Selling expenses decreased primarily as a result of decreased conference
and promotional expenses and fewer bad debts. Research and development expenses
increased by $42,000, or 21%, to $238,000 in the three months ended September
30, 2002, primarily as the result of increased expenditures overall to develop
new black text and color toner digital copier and laser products. We expect to
continue to increase research and development expenditures in an effort to
develop and bring to market more new products before our competition, while also
reformulating certain product formulas to manufacture a greater percentage of
our products on our more efficient production equipment.
OPERATING INCOME. As a result of the above factors, primarily the 31% decrease
in net sales, operating income decreased by $51,000, or 15%, to a profit of
$300,000 in the three months ended September 30, 2002 from $351,000 in the three
months ended September 30, 2001.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $5,000 in the three
months ended September 30, 2002 from the three months ended September 30, 2001.
The decrease was primarily the result of reduced interest bearing debt levels.
OTHER INCOME. Other income increased by $24,000 from income of $15,000 to a cost
of $9,000 in the three months ended September 30, 2002 from the three months
ended September 30, 2001, primarily as the result of Euro exchange losses.
INCOME TAXES. As the result of our profit from continuing operations in the
three months ended September 30, 2002, we recorded an income tax provision of
$89,000 for the period, while the income tax provisions were $94,000 for the
three months ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
NET SALES. Our net sales decreased by $0.8 million, or 3%, to $22.3 million for
the nine months ended September 30, 2002, from $23.1 million for the nine months
ended September 30, 2001. Net sales made in the United States were $13.3
million, a decreased of $4.5 million, or 25%, from $17.8 million made in the
comparable period in 2001. Net sales made outside of the United States increased
by $3.7 million, or 70%, to $9.0 million for the nine months ended September 30,
12
2002 compared to same nine months of 2001. The decrease in net sales for the
nine months ended September 30, 2002, compared to that of a year ago resulted
from reduced domestic demand for all of our products, while the increase in
sales made outside of the United States was primarily the result of increased
sales to our two largest customers. Of the $22.3 million in net sales, $15.8
million, or 71%, were attributable to our copier products. Of the $23.1 million
in net sales for the nine months ended September 30, 2001, 69% were derived from
copier products. The revenue decrease from copier and laser products from 2001
to 2002 was 1% and 10%, respectively. The greater decrease in laser products
result primarily from reduced demand in the United States, where most of these
products are sold. We believe that sales of both our copier and our laser
printing products will decrease in the quarter ending December 31, 2002, as the
result of less domestic demand and the reduced sales being made to our largest
customers.
COST OF GOODS SOLD. Cost of goods sold decreased by $1 million, or 5%, to $18.8
million from $19.8 million for the nine months ended September 30, 2002 and for
the comparable period in 2001. Cost of goods sold as a percentage of net sales
decreased by 2 percentage points from 86% for the nine months ended September
30, 2001 to 84% for the nine months ended September 30, 2002, primarily as the
result of reduced sales derived from certain very low margin products previously
sold to our largest customer that have been discontinued, a larger percentage of
sales being derived from sales of products with higher gross margins and the
effects of previous price increases on a few analog copier products. Having
recently placed more efficient manufacturing equipment in service, we expect our
cost of goods sold to further decrease as a percentage of net sales.
GROSS PROFIT. As a result of the above factors, gross profit increased to $3.5
million in the nine months ended September 30, 2002 from $3.3 million in the
nine months ended September 30, 2001, or $200,000 and 7%, while net sales for
the same period decreased by $800,000, or 3%. Gross profit as a percentage of
net sales increased by 2 percentage points from 14% to 16% for the nine months
ended September 30, 2002, as compared to the corresponding period of the prior
year. The increase in the percentage of gross profit resulted primarily from
reduced sales derived from certain very loan margin products previously sold to
our largest customer that have been discontinued, a larger percentage of sales
being derived from sales of products with higher gross margins and the effects
of previous price increases on a few analog copier products. Having recently
placed more efficient manufacturing equipment in service, we expect our gross
profit to further increase as a percentage of net sales.
OPERATING EXPENSES. Operating expenses increased $100,000 or 4% to $2.7 million
in the nine months ended September 30, 2002 from $2.6 million in the nine months
ended September 30, 2001. As a percentage of net sales general and
administrative, selling and R&D expenses, was 11% for the nine months ended
September 30, 2002 and 2001. The increase in operating expenses as a percentage
of net sales was largely the result of the decrease in net sales for the nine
months ended September 30, 2002. General and administrative expenses decreased
approximately 9%, or $100,000 to $1,000,000 for the nine months ended September
30, 2002 from the comparable period in 2001, largely resulting from decreased
payroll and consulting expenses. Selling expenses increased by $81,000, or 10%,
in the nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001. Selling expenses increased primarily as the result of
increased commissions and advertising expenses. Research and development
expenses increased by $137,000, or 25%, to $689,000 in the nine months ended
September 30, 2002, primarily as the result of increased expenditures overall to
develop new black text and color toner digital copier and laser products. We
expect to continue to increase research and development expenditures in an
effort to develop and bring to market more new products before our competition,
while also reformulating certain product formulas to manufacture a greater
percentage of our products on our more efficient production equipment.
OPERATING INCOME. As a result of the above factors, operating income increased
by $130,000, to a profit of $858,000 in the nine months ended September 30, 2002
from $728,000 in the nine months ended September 30, 2001.
INTEREST AND FINANCE EXPENSE. Interest expense decreased by $60,000 in the nine
months ended September 30, 2002 from the nine months ended September 30, 2001.
The decrease was primarily the result of reduced interest bearing debt levels.
OTHER INCOME. Other income decreased by $6,000 from income of $26,000 to income
of $20,000 in the nine months ended September 30, 2002 from the nine months
ended September 30, 2001.
INCOME TAXES. As the result of our increased profit from continuing operations
for the nine months ended September 30, 2002, our provision for taxes increased
from $124,000 in the nine months ended September 30, 2001 to $251,000 for the
period ended September 30, 2002.
13
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, and December 31, 2001, our working capital and current
ratio was approximately $1.9 million and $2.1 million and 1.28 to 1 and 1.28 to
1, respectively.
Cash flows provided by continuing operating activities were $737,000 in the nine
months ended September 30, 2002 compared to $361,000 provided by continuing
operations in the nine months ended September 30, 2001. The cash flows used by
continuing operating activities in the nine months ended September 30, 2002
increased primarily due to higher net income and the reduction made to
inventories. We continue to reduces SKUs, and we expect to further reduce SKUs
and inventories further during 2003.
Cash flows used in investing activities were $527,000 in the nine months ended
September 30, 2002, compared to $314,000 in the nine months ended September 30,
2001. The increase in cash used in investing activities in the nine months ended
September 30, 2002, was entirely attributable to increase capital expenditures
in connection with our most recent factory expansion.
We have a $2.5 million revolving line of credit with our bank that had an
outstanding balance as of September 30, 2002 of $1,092,000. At the end of each
month, for the following month, we have an interest rate option of either the
one-month Libor interest rate in effect two business days before the first day
of the month plus 2.50% or our bank's prime interest rate minus 0.25%. As of
September 30, 2002, the interest rate was the one-month Libor rate of 1.84% plus
2.50% (4.34%). This revolving line of credit has a June 30, 2003 expiration
date. Under the line of credit, we are permitted to borrow up to 85% of eligible
accounts receivable and 50 percent of eligible inventories (up to a maximum of
$1.1 million and not to exceed 60 percent of the total outstanding). We have
granted our bank a security interest in all of our assets as security for the
repayment of the lines of credit.
The Bank agreement contains various covenants which the Company is required to
maintain, and as of September 30, 2002, the Company was in compliance with these
covenant requirements.
Cash flows provided by financing activities for the six months ended September
30, 2002 was $186,000, resulting primarily from the $1,000,000 in loans we
received from three directors, compared to $451,000 provided by financing
activities for the comparable period of 2001. The cash flows provided by
financing activities for the nine months ended September 30, 2001 were derived
primarily from proceeds from the sale of our common stock.
Funds generated from operating activities and availability under credit
facilities is expected to be insufficient to finance certain of our planned
investing and financing plans for 2003. We anticipate that we will need to raise
an additional $2 million from other sources to payoff $1.4 million of
institutional debt and to acquire $600,000 of production and research and
development equipment. To meet the $2 million in planned financing and investing
requirements we intend to engage in sales of our securities and or obtaining
institutional financing. Should we not obtain these additional funds, these
financing and investing activities would have to be reduced or curtailed
entirely to meet our existing commitments. There can be no assurance that
proceeds from the sale of our securities or institutional borrowings will be
available to meet these planned financing and investing activities. We believe
that these planned investing and financing activities, if successfully
completed, will increase revenues and operating margins and reduce interest
expense.
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.
These forward-looking statements may be identified by the use of forward-looking
terms such as "believes," "expects," "may", "will," "should" or "anticipates" or
by discussions of strategy that involve risks and uncertainties. From time to
time, we have made or may make forward-looking statements, orally or in writing.
These forward-looking statements include statements regarding our ability to
borrow funds from financial institutions or affiliates, to engage in sales of
our securities, our intention to repay certain borrowings from future sales of
our securities or cash flow, the ability to expand capacity by placing in
service additional manufacturing equipment during 2002 and 2003, our expected
acquisition of business or technologies, our expectation that shipments to
international customers will continue to account for a material portion of net
sales, anticipated future revenues, sales, operations, demand, technology,
products, business ventures, major customers, major suppliers, retention of key
officers, management or employees, competition, capital expenditures, credit
arrangements and other statements regarding matters that are not historical
facts, involve predictions which are based upon a number of future conditions
that ultimately may prove to be inaccurate. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Forward-looking statements are made based
14
upon management's current expectations and beliefs concerning future
developments and their potential effects upon our business. We cannot predict
whether future developments affecting us will be those anticipated by
management, and there are a number of factors that could adversely affect our
future operating results or cause our actual results to differ materially from
the estimates or expectations reflected in such forward-looking statements,
including without limitation, those discussed in the sections titled "Color
Imaging" and "Management's Discussion and Analysis" and the factors set forth
below:
RISKS RELATED TO OUR BUSINESS:
Our business depends on a limited number of customers.
In the nine months ended September 30, 2002, two customers accounted for
approximately 70% of our net sales. We do not have contracts with these
customers and all of the sales to them are made through purchase orders. While
our products typically go through the customer's required qualification process,
which we believe gives us an advantage over other suppliers, this does not
guarantee that the customer will continue to purchase from us. The loss of
either of these customers, including through an acquisition, other business
combination or the loss by them of business from their customers could have a
substantial and adverse effect on our business. We have in the past, and may in
the future, lose one or more major customers or substantial portions of our
business with one or more of our major customers. If we do not sell products or
services to customers in the quantities anticipated, or if a major customer
reduces or terminates its relationship with us, market perception of our
products and technology, growth prospects, and financial condition and results
of operation could be harmed.
Approximately 51% of our business depends on a supplier approved by one of our
customers.
Some of our products incorporate technologies that are available from a
particular supplier that has been approved by one of our customers.
Approximately 51% of our sales for the nine months ended September 30, 2002 were
derived from products limited to a specific supplier. For the nine months ended
September 30, 2002, we purchased 47% of our raw materials, components and
supplies from that same supplier. We do not have a written agreement with this
or any other supplier. We rely on purchase orders. Should we be unable to obtain
the necessary materials from this supplier, product shipments could be prevented
or delayed, which could result in a loss of sales. If we are unable to fulfill
existing orders or accept new orders because of a shortage of materials, we may
lose revenues and risk losing customers.
Our success is dependent on our ability to utilize available manufacturing
capacity.
From 1999 through 2000, we expanded our manufacturing capacity by acquiring new
manufacturing equipment and moving to a larger location. We intend to continue
to expand capacity by placing in service additional manufacturing equipment
during 2002 and 2003. To fully utilize these new additions to the factory, new
formulations for toner have to be developed specifically for manufacture on this
new equipment or orders for larger quantities of existing toners must be
obtained. While we have been successful in developing formulas for new equipment
in the past and increasing sales of many of our existing toner products, our
continued success will be dependent on our ability to develop additional
formulations or increase our sales from existing formulations and manufacture
the toners with the new equipment to achieve a reduction in production costs. We
cannot assure you that we will be successful in developing all of the
formulations needed in the future or that we will be able to manufacture toner
at a lower production cost on a regular basis or that such products will achieve
market acceptance. If we are not successful in increasing the sales of our
manufactured products, or if our existing sales from manufactured products
declines, our business will be materially and adversely affected.
Our success is dependent on our ability to successfully develop, or acquire from
third parties, products that we can commercialize and that achieve market
acceptance.
The challenges we face in implementing our business model include establishing
market acceptance of existing products and services and successfully developing
or acquiring new product lines that achieve market acceptance. We must
successfully commercialize the products that are currently being developed, such
as our color and magnetic character recognition toner for printers and black
text and color toners for new digital copiers and continue to acquire from third
parties parts, materials and finished product that can be integrated into
finished products or sold as our products. While we have successfully developed
toners in the past and are in the late stages of developing and testing several
new toners, we have not commercialized many of the toners that are under
development. While we have in the past acquired from third parties materials and
products that we have been successful in selling, there can be no assurance that
15
parts, materials or products for new products will be available or will achieve
market acceptance. If we fail to successfully commercialize products we develop
or acquire from third parties, or if these products fail to achieve market
acceptance, our financial condition and results of operation would be seriously
harmed.
We anticipate that we will need to raise additional capital or obtain funding to
finance certain of our planned financing and investing activities over the next
twelve months.
Our failure to raise additional capital in the approximate amount of $2,000,000
may significantly limit our ability to prepay some of our debt and finance
certain planned investing activities over the next twelve months that we believe
will improve quality, generate additional revenues and reduce manufacturing and
operating costs. Specifically, we plan to raise additional funds to prepay
approximately $1,400,000 of debt and are considering the acquisition of an
additional planned $600,000 of capital equipment for use in research and
development, quality assurance and the manufacturing of our toner products. We
may not be able to raise the additional funds, and our failure to obtain
additional funds would significantly limit or eliminate our ability to conduct
the foregoing activities. We anticipate that we will seek additional funding
through the public or private sales of our securities and/or through commercial
or private financing arrangements, including borrowing from affiliates. Adequate
funds may not be available when needed or on terms acceptable to us, or at all.
In the event that we are not able to obtain additional funding on a timely
basis, we may be required to limit any proposed debt prepayment, quality
improvements, operational efficiencies, research and development or expansion.
Our success depends on our ability to develop or acquire intellectual property
rights.
Our success depends in part on our ability to develop proprietary toner formulas
and manufacturing processes, obtain 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 us from obtaining technology of others and could otherwise adversely
affect our operating results, cash flows, financial position or business, as
could expenses incurred enforcing intellectual property rights against others or
defending against claims that our products infringe the intellectual property
rights of others.
Our acquisition strategy may prove unsuccessful.
We intend to pursue acquisitions of businesses or technologies that management
believes complement or expand the existing business. Acquisitions of this type
involve a number of risks, including the possibility that the operations of any
businesses that are acquired will be unprofitable or that management attention
will be diverted from the day-to-day operation of the existing business. An
unsuccessful acquisition could reduce profit margins or otherwise harm our
financial condition, by, for example, impairing liquidity and causing
non-compliance with lending institution's financial covenants. In addition, any
acquisition could result in a dilutive issuance of equity securities, the
incurrence of debt or the loss of key employees. Certain benefits of any
acquisition may depend on the taking of one-time or recurring accounting charges
that may be material. We cannot predict whether any acquisition undertaken by us
will be successfully completed or, if one or more acquisitions are completed,
whether the acquired assets will generate sufficient revenue to offset the
associated costs or other adverse effects.
Our intellectual property protection is limited.
We do not rely on patents to protect our proprietary rights. We do rely on a
combination of laws such as trade secrets and contractual restrictions such as
confidentiality agreements to protect proprietary rights. Despite any
precautions we have taken:
o laws and contractual restrictions might not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies; and
o policing unauthorized use of our products is difficult, expensive and
time-consuming and we might not be able to determine the extent of this
unauthorized use.
Therefore, there can be no assurance that we can meaningfully protect our rights
in such unpatented proprietary technology or that others will not independently
develop substantially equivalent proprietary products or processes or otherwise
gain access to the proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technology could enable
third parties to benefit from our technology without paying us which could
significantly harm our business.
Acts of domestic terrorism and war have impacted general economic conditions and
may impact the industry and our ability to operate profitably.
16
On September 11, 2001, acts of terrorism occurred in New York City and
Washington, D.C. On October 7, 2001, the United States launched military attacks
on Afghanistan. As a result of those terrorist acts and acts of war, there has
been a disruption in general economic activity. The demand for printing products
and services may decline as layoffs in the transportation and other industries
affect the economy as a whole. There may be other consequences resulting from
those acts of terrorism, and any others which may occur in the future, including
civil disturbance, war, riot, epidemics, public demonstration, explosion,
freight embargoes, governmental action, governmental delay, restraint or
inaction, quarantine restrictions, unavailability of capital, equipment,
personnel, which we may not be able to anticipate. These terrorist acts and acts
of war may continue to cause a slowing of the economy, and in turn, reduce the
demand of printing products and services, which would harm our ability to make a
profit. We are unable to predict the long-term impact, if any, of these
incidents or of any acts of war or terrorism in the United States or worldwide
on the U.S. economy, on us or on the price of our common stock.
We depend on the efforts and abilities of certain officers and directors to
continue our operations and generate revenues.
Our success depends to a significant extent on the continued services of senior
management and other key personnel. While we do have employment, non-compete and
confidentiality agreements with executive officers and certain other key
individuals, employment agreements may be terminated by either party upon giving
the required notice. The loss of the services of any of our executive officers
or other key employees could harm our business. Our success also depends on our
ability to attract, retain and motivate highly skilled employees. Competition
for qualified employees in the industries in which we operate is intense. If we
fail to hire and retain a sufficient number of qualified employees, our business
will be adversely affected.
Compliance with government regulations may cause us to incur unforeseen
expenses.
Our black text, color and magnetic character toner supplies and manufacturing
operations are subject to domestic and international laws and regulations,
particularly relating to environmental matters that impose limitations on the
discharge of pollutants into the air, water and soil and establish standards for
treatment, storage and disposal of solid and hazardous wastes. In addition, we
are subject to regulations for storm water discharge, and as a requirement of
the State of Georgia have developed and implemented a Storm Water Pollution
Prevention Plan. We are also required to have a permit issued by the State of
Georgia in order to conduct various aspects of our business. Compliance with
these laws and regulations has not in the past had a material adverse affect on
our capital expenditures, earnings or competitive position. There can be no
assurance, however, that future changes in environmental laws or regulations, or
in the criteria required to obtain or maintain necessary permits, will not have
a material adverse affect on our operations.
We sell a significant portion of our products internationally, which exposes us
to currency fluctuations and collection and product recall risks.
We sell a significant amount of product to customers outside of the United
States. International sales accounted for 40% of net sales in the nine months
ended September 30, 2002 and 23% in the nine months ended September 30, 2001. We
expect that shipments to international customers will continue to account for a
material portion of net sales. Most products are priced in U.S. dollars, but
because we do sell products in Europe denominated in Euros, fluctuations in the
Euro could also cause our products there to become less affordable or less
competitive or we may sell some products at a loss to otherwise maintain
profitable business from a customer. Most of our products sold internationally,
those sold to our larger international customers, are on open account, giving
rise to the added costs of collection in the event of non-payment. Further,
should a product shipped overseas be defective, Color Imaging would experience
higher costs in connection with a product recall or return and replacement. We
cannot assure you that these factors will not have a material adverse effect on
our international sales and would, as the result, adversely impact our results
of operation and financial condition.
Our quarterly operating results fluctuate as a result of many factors.
Our quarterly operating results fluctuate due to various factors. Some of these
factors include the mix of products sold during the quarter, the availability
and costs of raw materials or components, the costs and benefits of new product
introductions, and customer order and shipment timing. Because of these factors,
our quarterly operating results are difficult to predict and are likely to vary
in the future.
17
RISKS RELATING TO OUR INDUSTRY:
We operate in a competitive and rapidly changing marketplace.
There is significant competition in the toner and consumable imaging products
industry in which we operate. In addition, the market for digital color printers
and copiers and related consumable products is subject to rapid change and the
OEM technologies are becoming increasingly difficult barriers to market entry.
Many competitors, both OEMs and other after market firms, have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. These competitors
may be able to devote substantially more resources to developing their business
than we can. Our ability to compete depends upon a number of factors, including
the success and timing of product introductions, marketing and distribution
capabilities and the quality of our customer support. Some of these factors are
beyond our control. In addition, competitive pressure to develop new products
and technologies could cause our operating expenses to increase substantially.
Our products have short life cycles and are subject to frequent price
reductions.
The markets in which we operate are characterized by rapidly evolving and
increasingly difficult technologies, frequent new product introductions and
significant price competition. Consequently, our products have short life
cycles, and we must frequently reduce prices in response to product competition.
Our financial condition and results of operations could be adversely affected if
we are unable to manufacture new and competitive products in a timely manner.
Our success depends on our ability to develop and manufacture technologically
advanced products, price them competitively, and achieve cost reductions for
existing products. Technological advances require sustained research and
development efforts, which may be costly and could cause our operating expenses
to increase substantially.
Our financial performance depends on our ability to successfully manage
inventory levels, which is affected by factors beyond our control.
Our financial performance depends in part on our ability to manage inventory
levels to support the needs of new and existing customers. Our ability to
maintain appropriate inventory levels depends on factors beyond our control,
including unforeseen increases or decreases in demand for our products and
production and supply difficulties. Demand for our products can be affected by
product introductions or price changes by competitors or by us, the life cycle
of our products, or delays in the development or manufacturing of our products.
Our operating results and ability to increase the market share of our products
may be adversely affected if we are unable to address inventory issues on a
timely basis.
RISKS RELATING TO OWNING OUR COMMON STOCK:
Our officers and directors own approximately 45.3% of the outstanding shares of
common stock and they and other affiliates will be allowed to purchase up to $7
million of our common stock in our offering pending with the SEC on Form SB-2,
allowing these stockholders to control matters requiring approval of the
stockholders.
As a result of such ownership, and potential increased ownership, our officers,
directors and principal stockholders, other investors will have limited control
over matters requiring approval by the stockholders, including the election of
directors. Such concentrated control may also make it difficult for the
stockholders to receive a premium for their shares of our common stock in the
event we enter into transactions that require stockholder approval. In addition,
certain provisions of Delaware law could have the effect of making it more
difficult or more expensive for a third party to acquire, or of discouraging a
third party from attempting to acquire control of us.
Exercise of warrants and options will dilute existing stockholders and could
decrease the market price of our common stock.
As of October 1, 2002, we had issued and outstanding 8,437,965 shares of common
stock and outstanding warrants and options to purchase 2,231,257 additional
shares of common stock. The existence of the remaining warrants and options may
adversely affect the market price of our common stock and the terms under which
we obtain additional equity capital.
Our ability to raise additional capital through the sale of our securities may
be harmed by competing resales of our common stock by our stockholders.
The price of our common stock could fall if stockholders sell substantial
amounts of our common stock. Such sales could make it more difficult for us to
sell securities at the time and price we deem appropriate. To the extent
stockholders, including the selling stockholders, offer and sell their shares of
18
common stock to investors for less than the price offered by us, our attempt to
sell our securities may be adversely affected as a result of the concurrent
offering by selling stockholders. Investors may negotiate prices lower than the
price we are offering our shares of common stock with selling stockholders.
Furthermore, potential investors may not be interested in purchasing shares of
our common stock on any terms if stockholders sell substantial amounts of our
common stock.
Effectiveness of our registration statement on Form SB-2 may result in the
dilution of existing stockholders and could decrease the market price of our
common stock.
Once our registration statement is declared effective, selling stockholders will
be able to sell up to approximately 4 million shares of our common stock and we
will be able to sell the equivalent of up to 7 million shares of our common
stock. The sale of common stock covered by the registration statement by us or
selling stockholders will dilute existing stockholders and may adversely affect
the market price of our common stock.
Digital Color Print, Inc.'s intended tender offer to exchange its shares for up
to 2.6 million of our common shares could result in as much as 900,000 of our
shares being sold in the market and may adversely affect the market price of our
common stock.
The intended tender offer to exchange Digital Color Print, Inc.'s shares for up
to 2.6 million of our common shares will result in Digital Color Print having up
to 900,000 shares of our common stock that it could sell to fund its and Logical
Imaging Solutions' operations and technology development activities. The sale of
our common stock by Digital Color Print may adversely affect the market price of
our common stock.
Our common stock is listed on the Over-The-Counter (OTC) Bulletin Board, which
may make it more difficult for stockholders to sell their shares and may cause
the market price of our common stock to decrease.
Because our common stock is listed on the OTC Bulletin Board, the liquidity of
our common stock is impaired, not only in the number of shares that are bought
and sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media, if any, of us. As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
Our stock price may be volatile and an investment in our common stock could
suffer a decline in value.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. These factors
include:
o progress of our products through development and marketing;
o announcements of technological innovations or new products by us or
our competitors;
o government regulatory action affecting our products or competitors'
products in both the United States and foreign countries;
o developments or disputes concerning patent or proprietary rights;
o actual or anticipated fluctuations in our operating results;
o the loss of key management or technical personnel;
o the loss of major customers or suppliers;
o the outcome of any future litigation;
o changes in our financial estimates by securities analysts;
o fluctuations in currency exchange rates;
o general market conditions for emerging growth and technology
companies;
19
o broad market fluctuations;
o recovery from natural disasters; and
o economic conditions in the United States or abroad.
Our charter documents and Delaware Law may have the effect of making it more
expensive or more difficult for a third party to acquire, or to acquire control,
of us.
Our certificate of incorporation makes it possible for our Board of Directors to
issue preferred stock with voting or other rights that could impede the success
of any attempt to change control of us. Our certificate of incorporation and
bylaws eliminate cumulative voting which may make it more difficult for a
minority stockholder to gain a seat on our Board of Directors and to influence
Board of Directors' decision regarding a takeover. Delaware Law prohibits a
publicly held Delaware corporation from engaging in certain business
combinations with certain persons, who acquire our securities with the intent of
engaging in a business combination, unless the proposed transaction is approved
in a prescribed manner. This provision has the effect of discouraging
transactions not approved by our Board of Directors as required by the statute
which may discourage third parties from attempting to acquire us or to acquire
control of us even if the attempt would result in a premium over market price
for the shares of common stock held by our stockholders.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of our
public filings or press releases or in any oral statements made by us or any of
our officers or other persons acting on our behalf. The important factors that
could affect forward-looking statements are subject to change, and we disclaim
any obligation or duty to update or modify these forward-looking statements.
ITEM 3. Controls and Procedures
a) On October 16, 2002, our President and principal executive officer and
Chief Financial Officer participated in a meeting during which there was an
evaluation of our disclosure controls and procedures. Based on such evaluation,
they believe such controls and procedures are effective.
b) Our President and principal executive officer and Chief Financial
Officer are involved in ongoing evaluations of internal controls. On October
17th and 30th, 2002, in anticipation of the filing of this Form 10-QSB, they (1)
reviewed the evaluation of our internal controls prepared by the Company and
reviewed by our independent auditors in connection with their audit of our
fiscal year ended December 31, 2001, and (2) and reviewed the evaluation of our
internal controls prepared by the Company in preparation for the audit to be
conducted by our independent auditors of our fiscal year ended December 31,
2002. Our President and principal executive officer and Chief Financial Officer
have determined, based on such reviews, that, since the date of the auditor's
evaluation, there have been no significant changes in our internal controls or
in other factors that would significantly affect our internal controls
subsequent to such evaluation.
PART II
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
On September 30, 2002, we completed a share exchange arrangement with Digital
Color Print, Inc., whereby we received 1.7 million shares of our common stock in
exchange for all of the shares of the common stock of Logical Imaging Solutions,
Inc. The 1.7 million shares of our common stock so received were cancelled and
retired as of September 30, 2002.
During August 2002, warrant holders who were issued warrants to purchase our
common stock in exchange for their warrants to purchase the common stock of our
subsidiary Logical Imaging Solutions, Inc. at the time of our merger in June
2000 exercised, on a cashless basis, warrants to purchase 157,116 shares of our
common stock and were issued 38,085 shares of our common stock. The issuance of
the shares upon exercise of the previously issued warrants was exempt from
registration provisions of the Act pursuant to Section 4(2) thereof.
On July 8, 2002, we granted options to purchase 100,000 shares of our common
stock to James Telsey, vice president, sales and marketing, at an exercise price
of $2.00 with options to purchase 25,000 shares of our common stock vesting on
20
the grant date and the remainder vesting equally upon the next three
anniversaries of the grant date. The grant of the options were approved by the
board of directors at its annual meeting on June 10, 2002.
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
Pro Forma Financial Information.
On September 30, 2002, we completed a share exchange agreement with Digital
Color Print, Inc., whereby we received 1.7 million shares of our common stock in
exchange for all of the shares of the common stock of our subsidiary, Logical
Imaging Solutions, Inc. The financial statements for the quarter ending
September 30, 2002, herein, reflect the divestiture of Logical Imaging
Solutions, Inc. Pro forma financial statements, balance sheet and statement of
operations, eliminating the discontinued operations of Logical Imaging
Solutions, Inc., derived from the audited financial statements for the fiscal
years ended December 31, 2001 and December 31, 2000 are included hereafter:
21
COLOR IMAGING, INC.
PRO FORMA CONDENSED BALANCE SHEETS
DECEMBER 31, 2001
(Unaudited)
CONSOLIDATED, PRO FORMA
AS PREVIOUSLY DISCONTINUED CONTINUING
REPORTED OPERATIONS OPERATIONS
------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 395,327 $ 1,346 $ 393,981
Accounts receivable, net 3,030,995 136,992 2,894,003
Inventory 6,056,042 451,067 5,604,975
Deferred income taxes 277,239 86,730 190,509
Related party portion of IDR bond 79,596 -- 79,596
Other current assets 339,141 3,520 335,621
------------ ------------ ------------
TOTAL CURRENT ASSETS 10,178,340 679,655 9,498,685
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 8,438,826 1,425,756 7,013,070
------------ ------------ ------------
OTHER ASSETS
Patent/intellectual property 5,000 5,000 --
Deferred income taxes 312,000 312,000 --
Related party portion of IDR bond 818,500 -- 818,500
Other assets 225,204 3,073 222,131
------------ ------------ ------------
TOTAL OTHER ASSETS 1,360,704 320,073 1,040,631
------------ ------------ ------------
TOTAL ASSETS $ 19,977,870 $ 2,425,484 $ 17,552,386
============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit lines $ 1,462,416 $ -- $ 1,462,416
Accounts payable 4,898,665 57,251 4,841,414
Current portion of notes payable 369,198 63,966 340,232
Current portion of bonds payable 335,000 -- 335,000
Other current liabilities 501,086 34,043 432,043
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 7,566,365 155,260 7,411,105
------------ ------------ ------------
LONG TERM LIABILITIES
Notes payable 1,359,000 6,107 1,352,893
Bonds payable 3,445,000 -- 3,445,000
------------ ------------ ------------
LONG TERM LIABILITIES 4,804,000 6,107 4,797,893
------------ ------------ ------------
TOTAL LIABILITIES 12,370,365 161,367 12,208,998
------------ ------------ ------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; 10,099,175 and 8,399,175 shares issued and
outstanding on December 31, 2001 and pro forma on
December 31, 2001, respectively 100,992 17,000 83,992
Additional paid-in capital 9,873,939 4,332,888 7,626,822
Stock subscription receivable (149,000) -- (149,000)
Accumulated deficit (2,218,426) (2,085,771) (2,218,426)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,607,505 2,264,117 5,343,388
------------ ------------ ------------
$ 19,977,870 $ 2,425,484 $ 17,552,386
============ ============ ============
22
COLOR IMAGING, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
(Unaudited)
CONSOLIDATED, PRO FORMA
AS PREVIOUSLY DISCONTINUED CONTINUING
REPORTED OPERATIONS OPERATIONS
------------- ------------ ------------
SALES $30,521,167 $ 551,399 $29,969,768
C0ST OF SALES 26,053,501 455,406 25,598,095
------------- ------------ ------------
GROSS PROFIT 4,467,666 95,993 4,371,673
------------- ------------ ------------
OPERATING EXPENSES
Administrative 1,698,836 243,723 1,455,113
Deferred charge write-off 215,371 -- 215,371
Research & development 883,115 91,617 791,498
Sales & marketing 1,196,458 27,873 1,168,585
------------- ------------ ------------
3,993,780 363,213 3,630,567
------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS 473,886 (267,220) 741,106
------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest and other (expense) 39,183 (599) 39,782
Financing expenses (417,107) (21,509) (395,598)
Non-recurring moving expense (9,570) -- (9,570)
------------- ------------ ------------
(387,494) (22,108) (365,386)
------------- ------------ ------------
INCOME (LOSS) BEFORE TAXES 86,392 (289,328) 375,720
PROVISION (CREDIT) FOR INCOME TAXES 36,616 (85,174) 121,790
------------- ------------ ------------
NET INCOME (LOSS) $ 49,776 $ (204,154) $ 253,930
============= ============ ============
INCOME PER COMMON SHARE
Basic $ .01 $ .04
Diluted $ .01 $ .04
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,985,071 6,285,071
Assumed conversion 575,298 575,298
------------ ------------
8,560,369 6,860,369
------------ ------------
23
COLOR IMAGING, INC.
PRO FORMA CONDENSED BALANCE SHEETS
DECEMBER 31, 2000
(Unaudited)
CONSOLIDATED, PRO FORMA
AS PREVIOUSLY DISCONTINUED CONTINUING
REPORTED OPERATIONS OPERATIONS
------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 339,348 $ 885 $ 338,463
Accounts receivable, net 3,562,120 118,219 3,443,901
Inventory 5,181,248 438,360 4,742,888
Deferred income taxes 155,526 -- 155,526
Related party portion of IDR bond 76,032 -- 76,032
Other current assets 401,143 418 400,725
------------ ------------ ------------
TOTAL CURRENT ASSETS 9,715,417 557,882 9,157,535
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 8,256,430 928,259 7,328,171
------------ ------------ ------------
OTHER ASSETS
Patent/intellectual property 5,000 5,000 --
Deferred income taxes 467,984 312,000 155,984
Related party portion of IDR bond 898,096 -- 898,096
Other assets 269,626 7,566 262,060
------------ ------------ ------------
TOTAL OTHER ASSETS 1,640,706 324,566 1,316,140
------------ ------------ ------------
TOTAL ASSETS $ 19,612,553 $ 1,810,707 $ 17,801,846
============ ============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit lines $ 1,399,000 $ -- $ 1,399,000
Accounts payable 6,665,322 199,636 6,465,686
Current portion of notes payable 349,408 44,285 305,123
Current portion of bonds payable 320,000 -- 320,000
Other current liabilities 364,765 41,097 323,668
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 9,098,495 285,018 8,813,477
------------ ------------ ------------
LONG TERM LIABILITIES
Notes payable 1,698,058 32,266 1,665,792
Bonds payable 3,780,000 -- 3,780,000
------------ ------------ ------------
LONG TERM LIABILITIES 5,478,058 32,266 5,445,792
------------ ------------ ------------
TOTAL LIABILITIES 14,576,553 317,284 14,259,269
------------ ------------ ------------
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; 7,490,848 and 5,790,848 shares issued and
outstanding on December 31, 2000 and pro forma on
December 31, 2000, respectively 74,909 17,000 57,909
Additional paid-in capital 7,229,293 3,358,040 5,752,870
Accumulated deficit (2,268,202) (1,881,617) (2,268,202)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,036,000 1,493,423 3,542,577
------------ ------------ ------------
$ 19,612,553 $ 1,810,707 $ 17,801,846
============ ============ ============
24
COLOR IMAGING, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
(Unaudited)
CONSOLIDATED, PRO FORMA
AS PREVIOUSLY DISCONTINUED CONTINUING
REPORTED OPERATIONS OPERATIONS
------------- ------------ ------------
SALES $12,108,132 $ 723,063 $11,385,069
C0ST OF SALES 10,329,418 447,329 9,882,089
------------ ------------ ------------
GROSS PROFIT 1,778,714 275,734 1,502,980
------------ ------------ ------------
OPERATING EXPENSES
Administrative 889,742 372,210 517,532
Research & development 764,286 213,259 551,027
Sales & marketing 470,625 -- 470,625
------------ ------------ ------------
2,124,653 585,469 1,539,184
------------ ------------ ------------
LOSS FROM OPERATIONS (345,939) (309,735) (36,204)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income (expense) (7,147) (21,531) 14,384
Financing expenses (241,037) (19,733) (221,304)
Loss on disposal of fixed assets (140,841) -- (140,841)
Non-recurring moving expense (256,212) -- (256,212)
------------ ------------ ------------
(645,237) (41,264) (603,973)
------------ ------------ ------------
(LOSS) BEFORE TAXES (991,176) (350,999) (640,177)
PROVISION (CREDIT) FOR INCOME TAXES (332,792) (79,200) (253,592)
------------ ------------ ------------
NET (LOSS) $ (658,384) $ (271,799) $ (386,585)
============ ============ ============
(LOSS) PER COMMON SHARE
Basic and diluted $ (.09) $ (.07)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 7,064,042 5,364,042
25
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
No. Description
------- -----------
2.1 Merger Agreement and Plan of Reorganization dated May 16, 2000, by and
between Advatex Associates, Inc., Logical Imaging Solutions
Acquisition Corp., Color Imaging Acquisition Corp., Logical Imaging
Solutions, Inc., and Color Image,Inc., incorporated by reference to
the Registrant's Form 8-K filed on July 17, 2000.
2.2 Amendment No. 1 to the Merger Agreement and Plan of Reorganization
dated June 15, 2000, incorporated by reference to the Registrant's
Form 8-K filed on July 17, 2000
2.3 Amendment No. 2 to the Merger Agreement and Plan of Reorganization
dated June 26, 2000, incorporated by reference to the Registrant's
Form 8-K filed on July 17, 2000
2.4 Share Exchange Agreement dated as of September 11, 2002 between Color
Imaging, Inc., Logical Imaging Solutions, Inc., Digital Color Print,
Inc., and the shareholders of Digital Color Print, Inc., incorporated
by reference to Exhibit 2.1 to the Registrant's Form 8-K filed
September 26, 2002.
2.5 Amendment No. 1 to Share Exchange Agreement dated as of September 20,
2002 between Color Imaging, Inc., Logical Imaging Solutions, Inc.,
Digital Color Print, Inc., and the shareholders of Digital Color
Print, Inc., incorporated by reference to Exhibit 2.2 to the
Registrant's Form 8-K filed September 26, 2002.
3.1 Certificate of Incorporation, incorporated by reference to the
Registrant's Amendment No. 5 to Form SB-2 filed on July 15, 2002.
3.2 Bylaws, incorporated by reference to the Registrant's Form 10-QSB for
the quarter ended March 31, 2002.
4.1 Stock Purchase Agreement between the Company and Wall Street
Consulting Corp. dated October 30, 2001, incorporated by reference to
the Registrant's Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.2 Promissory Note of Wall Street Consulting Corp. dated October 30,
2001, incorporated by reference to the Registrant's Amendment No. 4 to
Form SB-2 filed on May 31, 2002.
4.3 Form of Warrant issued to Selling Stockholders, incorporated by
reference to the Registrant's Form SB-2 filed on December 28, 2001.
4.4 Loan and Security Agreement between Color Imaging and Southtrust Bank
dated May 5, 2000, incorporated by reference to the Registrant's
Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.5 Amendment of Loan Documents between Color Imaging and SouthTrust Bank
dated August 30, 2000, incorporated by reference to the Registrant's
Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.6 Second Amendment of Loan Documents between Color Imaging and
SouthTrust Bank dated November 30, 2000, incorporated by reference to
the Registrant's Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.7 Third Amendment of Loan Documents between Color Imaging and SouthTrust
Bank dated June 30, 2001, incorporated by reference to the
Registrant's Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.8 Fourth Amendment of Loan Documents between Color Imaging and
SouthTrust Bank dated November 1, 2001, incorporated by reference to
the Registrant's Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.9 Fifth Amendment of Loan Documents between Color Imaging and SouthTrust
Bank dated December 31, 2001, incorporated by reference to the
Registrant's Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.10 Sixth Amendment of Loan Documents between Color Imaging and Southtrust
Bank dated February 7, 2002, incorporated by reference to the
Registrant's Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.11 $500,000 Line of Credit Promissory Note issued to Southtrust Bank
dated May 5, 2000, incorporated by reference to the Registrant's
Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.12 $500,000 Amended and Restated Line of Credit Promissory Note issued to
Southtrust Bank dated August 30, 2000, incorporated by reference to
the Registrant's Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.13 $500,000 Revolving Note Modification Agreement dated November 30,
2000, incorporated by reference to the Registrant's Form SB-2 filed on
December 28, 2001.
4.14 $500,000 Second Revolving Note Modification Agreement dated July 5,
2001, incorporated by reference to the Registrant's Amendment No. 4 to
Form SB-2 filed on May 31, 2002.
4.15 $1,500,000 Revolving Note between Color Imaging and SouthTrust Bank
dated June 24, 1999, incorporated by reference to the Registrant's
Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.16 $1,500,000 Revolving Note Modification Agreement between Color Imaging
and SouthTrust Bank dated May 5, 2000, incorporated by reference to
the Registrant's Form SB-2 filed on December 28, 2001.
4.17 $1,500,000 Second Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated August 30, 2000, incorporated by
reference to the Registrant's Amendment No. 4 to Form SB-2 filed on
May 31, 2002.
26
Exhibit
No. Description
------- -----------
4.18 $1,500,000 Third Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated November 30, 2000, incorporated by
reference to the Registrant's Amendment No. 4 to Form SB-2 filed on
May 31, 2002.
4.19 $1,500,000 Fourth Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated July 5, 2001, incorporated by
reference to the Registrant's Amendment No. 4 to Form SB-2 filed on
May 31, 2002.
4.20 $2,500,000 Fifth Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank dated December 31, 2001, incorporated by
reference to the Registrant's Amendment No. 4 to Form SB-2 filed on
May 31, 2002.
4.21 $1,752,000 Installment Note between Color Imaging and SouthTrust Bank
dated June 24, 1999, incorporated by reference to the Registrant's
Amendment No. 4 to Form SB-2 filed on May 31, 2002.
4.22 $1,752,000 Term Loan Documents Modification Agreement between Color
Imaging and SouthTrust Bank dated August 30, 2000, incorporated by
reference to the Registrant's Amendment No. 4 to Form SB-2 filed on
May 31, 2002.
4.23 SouthTrust Bank waiver letter dated March 26, 2001, incorporated by
reference to the Registrant's Amendment No. 1 to Form SB-2 filed on
February 11, 2002.
4.24 SouthTrust Bank waiver letter dated May 8, 2001, incorporated by
reference to the Registrant's Amendment No. 1 to Form SB-2 filed on
February 11, 2002.
4.25 SouthTrust Bank waiver letter dated August 13, 2001, incorporated by
reference to the Registrant's Amendment No. 1 to Form SB-2 filed on
February 11, 2002.
4.26 SouthTrust Bank waiver letter dated October 31, 2001, incorporated by
reference to the Registrant's Amendment No. 1 to Form SB-2 filed on
February 11, 2002.
4.27 Development Authority of Gwinnett County, Georgia Industrial
Development Trust Indenture dated June 1, 1999, incorporated by
reference to the Registrant's Amendment No. 4 to Form SB-2 filed on
May 31, 2002.
4.28 Loan Agreement between the Company, Kings Brothers LLC and the
Development Authority of Gwinnett County, Georgia dated June 1, 1999,
incorporated by reference to the Registrant's Amendment No. 4 to Form
SB-2 filed on May 31, 2002.
4.29 Joint Debtor Agreement dated June 28, 2000 by and among Color Image,
Inc., Kings Brothers, LLC, Dr. Sueling Wang, Jui-Chi Wang, Jui-Kung
Wang, and Jui-Hung Wang, incorporated by reference to the Registrant's
Amendment No. 1 to Form SB-2 filed on February 11, 2002.
4.30 First Amendment to Joint Debtor Agreement dated January 1, 2001 by and
among Color Imaging, Kings Brothers, LLC, Dr. Sueling Wang, Jui-Chi
Wang, Jui-Kung Wang, and Jui-Hung Wang, incorporated by reference to
the Registrant's Amendment No. 1 to Form SB-2 filed on February 11,
2002.
4.31 Master Security Agreement between Color Imaging and General Electric
Capital Corporation dated November 30, 2000, incorporated by reference
to the Registrant's Form SB-2 filed on December 28, 2001.
4.32 Promissory Note issued to General Electric Capital Corporation dated
November 30, 2000, incorporated by reference to the Registrant's Form
SB-2 filed on December 28, 2001.
4.33 $200,000 Promissory Note between Color Imaging and Kings Brothers LLC
dated November 19, 2001, incorporated by reference to the Registrant's
Amendment No. 1 to Form SB-2 filed on February 11, 2002.
4.34 $500,000 Promissory Note between Color Imaging and Sueling Wang dated
March 14, 2002, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.35 $240,000 Promissory Note between Color Imaging and Kings Brothers LLC
dated July 6, 2000, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.36 $50,000 Promissory Note between the Company and Daniel Wang dated
October 23, 1998, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.37 $112,000 Promissory Note between Color Imaging and Daniel Wang dated
October 16, 1998, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.38 $90,000 Promissory Note between Color Imaging and Michael Wang dated
June 4, 1999, incorporated by reference to the Registrant's Amendment
No. 3 to Form SB-2 filed on April 11, 2002.
4.39 $150,000 Promissory Note between Color Imaging and AccuRec LLC dated
February 3, 2000, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.40 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
March 7, 2000, incorporated by reference to the Registrant's Amendment
No. 3 to Form SB-2 filed on April 11, 2002.
27
Exhibit
No. Description
------- -----------
4.41 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
April 10, 2000, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.42 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
May 2, 2000, incorporated by reference to the Registrant's Amendment
No. 3 to Form SB-2 filed on April 11, 2002.
4.43 $500,000 Promissory Note between Color Imaging and AccuRec LLC dated
July 5, 2000, incorporated by reference to the Registrant's Amendment
No. 3 to Form SB-2 filed on April 11, 2002.
4.44 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
September 14, 2000, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.45 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
October 4, 2000, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.46 $200,000 Promissory Note between Color Imaging and AccuRec LLC dated
November 3, 2000, incorporated by reference to the Registrant's
Amendment No. 3 to Form SB-2 filed on April 11, 2002.
4.47 Seventh Amendment of Loan Documents between Color Imaging and
SouthTrust Bank dated June 28, 2002, incorporated by reference to the
Registrant's Amendment No. 5 to Form SB-2 filed on July 15, 2002.
4.48 $2,500,000 Sixth Revolving Note Modification Agreement between Color
Imaging and SouthTrust Bank, incorporated by reference to the
Registrant's Amendment No. 5 to Form SB-2 filed on July 15, 2002.
4.49 Partial Loan Liability Release Agreement between Color Imaging, Inc.
and SouthTrust Bank dated September 24, 2002, incorporated by
reference to the Registrant's Amendment No. 6 to Form SB-2 filed on
October 2, 2002.
4.50 500,000 Promissory Note between Color Imaging and Jui Hung Wang dated
August 21, 2002, incorporated by reference to the Registrant's
Amendment No. 6 to Form SB-2 filed on October 2, 2002.
4.51 100,000 Promissory Note between Color Imaging and Jui Chi Wang dated
August 21, 2002, incorporated by reference to the Registrant's
Amendment No. 6 to Form SB-2 filed on October 2, 2002.
4.52 First Note Modification Agreement between Sueling Wang and Color
Imaging dated August 27, 2002, incorporated by reference to the
Registrant's Amendment No. 6 to Form SB-2 filed on October 2, 2002.
10.1 Employment Agreement between Color Imaging and Michael W. Brennan
dated June 28, 2000, incorporated by reference to the Registrant's
Form SB-2 filed on December 28, 2001.
10.2 Employment Agreement between Color Imaging and Dr. Sueling Wang dated
June 28, 2000, incorporated by reference to the Registrant's Form SB-2
filed on December 28, 2001.
10.3 Employment Agreement between the Company and Morris E. Van Asperen
dated June 28, 2000, incorporated by reference to the Registrant's
Form SB-2 filed on December 28, 2001.
10.4 Employment Agreement between Color Imaging and Charles R. Allison
dated June 30, 2000, incorporated by reference to the Registrant's
Form SB-2 filed on December 28, 2001.
10.5 Lease Agreement between Color Imaging and Kings Brothers LLC dated
April 1, 1999, incorporated by reference to the Registrant's Form SB-2
filed on December 28, 2001.
10.6 Amendment No. 1 to Lease Agreement between the Company and Kings
Brothers LLC dated April 1, 1999, incorporated by reference to the
Registrant's Form SB-2 filed on December 28, 2001.
10.7 Form of Subscription Agreement (Incorporated by reference to Exhibit A
to the Registrant's Registration Statement on Form SB-2 filed on
October 2, 2002).
10.8 Letter of Agreement to Employment Agreement between Color Imaging and
Michael W. Brennan dated June 10, 2002 (incorporated by reference to
Exhibit 10.7 to Registrant's Form 10-QSB filed for the quarter ended
June 30, 2002)
10.9 Termination Agreement between Michael W. Brennan and Color Imaging
dated September 30, 2002, incorporated by reference to the
Registrant's Amendment No. 6 to Form SB-2 filed on October 2, 2002.
99.1 Certification of principal executive officer
99.2 Certification of principal financial officer
(b) REPORTS ON FORM 8-K
On October 2, 2002, the Registrant filed a Form 8-K announcing the completion of
the share exchange with Digital Color Print, Inc. in accordance with Item 5 of
Form 8-K.
On September 26, 2002, the Registrant filed a Form 8-K outlining the terms of
the Share Exchange Agreement with Digital Color Print, Inc. in accordance with
Item 5 of Form 8-K.
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COLOR IMAGING, INC.
/S/ SUELING WANG
--------------------------------------
November 1, 2002 Sueling Wang, PhD
President (principal executive officer)
/S/ MORRIS E. VAN ASPEREN
--------------------------------------
Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
29
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sueling Wang, president and principal executive officer of registrant,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Color Imaging,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidating subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
COLOR IMAGING, INC.
/S/ SUELING WANG
---------------------------------------
November 1, 2002 Sueling Wang, PhD
President (principal executive officer)
30
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Morris E. Van Asperen, executive vice president and chief financial
officer of registrant, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Color Imaging,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidating subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
COLOR IMAGING, INC.
/S/ MORRIS E. VAN ASPEREN
------------------------------------
November 1, 2002 Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer