UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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// TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18450
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COLOR IMAGING, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3453420
------------------ ----------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4350 PEACHTREE INDUSTRIAL BOULEVARD, SUITE 100
NORCROSS, GEORGIA 30071
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
(770) 840-1090
--------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
As of September 30, 2000, there were 7,046,211 shares of Common Stock
outstanding.
EXPLANATORY NOTE
The accompanying financial statements for the nine months ended September
30, 2000, have been restated to reflect the business combination with Image (see
Note 2 below) under the purchase method of accounting as opposed to the pooling
of interests method, as previously reported.
COLOR IMAGING, INC.
QUARTERLY REPORT ON FORM 10-QSB/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999.................3
Consolidated Statements of Operations (Unaudited)
for the Three Months and Nine Months ended September 30, 2000
and 1999.............................................................4
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months ended September 30, 2000
and 1999.............................................................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
Signatures....................................................................14
PART I: FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
COLOR IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
30-Sept-00 31-Dec-99
(Unaudited) (Audited)
CURRENT ASSETS As restated As restated
----------- -----------
Cash $ 80,240 $ 1,183,874
Accounts receivable 4,610,051 157,622
Refundable income taxes 163,135 --
Inventory 5,520,020 329,227
Deferred taxes 344,416 23,200
Related party portion of bonds - current 79,232 --
Other current assets 416,756 256,648
------------ ---------------
TOTAL CURRENT ASSETS 11,213,850 1,950,571
============ ===============
FIXED ASSETS
Furniture & fixtures 125,685 49,686
R&D equipment 401,186 --
Machinery & equipment 5,833,314 --
Leasehold improvements 716,726 --
Accumulated depreciation (178,142) (23,960)
------------ ---------------
TOTAL FIXED ASSETS, NET 6,898,769 25,726
============ ===============
OTHER ASSETS
Patent/intellectual property 5,000 --
Deferred income tax 232,800 232,800
Related party portion of bonds 894,896 --
Other assets 513,333 3,124
------------ ---------------
OTHER ASSETS 1,646,029 235,924
------------ ---------------
$19,758,648 $ 2,212,221
============ ===============
CURRENT LIABILITIES
Revolving credit lines $ 1,712,269 $ --
Accounts payable 6,908,845 238,336
Current portion notes payable 284,467 --
Current portion bonds payable 320,000 --
Other current liabilities 513,395 105,739
Current income taxes payable 148,916 --
------------ ---------------
TOTAL CURRENT LIABILITIES 9,887,892 344,075
============ ===============
LONG TERM LIABILITIES
Notes payable 1,310,351 94,534
Bonds payable 3,690,000 --
Other long term liabilities 134,383 --
------------ ---------------
LONG TERM LIABILITIES 5,134,734 94,534
------------ ---------------
TOTAL LIABILITIES 15,022,626 438,609
============ ===============
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized
20,000,000 shares; 7,046,211 and 4,000,000 70,462 40,000
shares issued on September 30, 2000 and
December 31, 1999, respectively.
Additional paid-in capital 6,392,757 3,343,430
Accumulated deficit (1,727,197) (1,609,818)
------------ ---------------
4,736,022 1,773,612
------------ ---------------
$19,758,648 $ 2,212,221
============ ===============
See Notes to Consolidated Financial Statements
3
COLOR IMAGING, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
30-Sept-00 30-Sept-99 30-Sept-00 30-Sept-99
As restated As restated As restated As restated
------------- -------------- ------------- -------------
SALES $ 6,006,335 $ 141,800 $ 6,446,388 $ 340,320
C0ST OF SALES 5,115,834 93,132 5,385,398 223,517
------------- -------------- ------------- -------------
GROSS PROFIT 890,501 48,668 1,060,990 116,803
------------- -------------- ------------- -------------
OPERATING EXPENSES
Administrative 382,553 51,749 532,963 124,197
Research & development 230,724 103,669 345,365 248,805
Sales & marketing 197,630 51,749 197,630 124,197
------------- -------------- ------------- -------------
810,907 207,167 1,075,958 497,199
------------- -------------- ------------- -------------
OPERATING PROFIT (LOSS) 79,594 (158,499) (14,968) (380,396)
------------- -------------- ------------- -------------
OTHER INCOME AND (EXPENSE)
Other income and (expense) (68,006) 2,624 (67,200) 6,296
Financing expenses (123,486) (4,178) (132,852) (10,027)
Non-recurring moving expense (10,360) -- (10,360) --
------------- -------------- ------------- -------------
(201,852) (1,554) (210,412) (3,731)
------------- -------------- ------------- -------------
(LOSS) BEFORE TAXES (122,258) (160,053) (225,380) (384,127)
(BENEFIT) FOR INCOME TAXES (67,000) (64,000) (108,000) (153,600)
------------- -------------- ------------- -------------
NET (LOSS) $ (55,258) $ (96,053) $ (117,380) $ (230,527)
============= ============== ============= =============
INCOME (LOSS)
PER COMMON SHARE
Basic $ (.01) $ (.02) $ (.02) $ (.06)
Diluted $ (.01) $ (.02) $ (.02) $ (.06)
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic 7,007,534 4,000,000 6,415,819 4,000,000
Assumed conversion * -- -- -- --
------------- -------------- ------------- -------------
7,007,534 4,000,000 6,415,819 4,000,000
------------- -------------- ------------- -------------
* Antidilutive
See Notes to Consolidated Financial Statements
4
COLOR IMAGING, INC. AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NINE MONTHS ENDED
30-Sept-00 30-Sept-99
As restated As restated
----------------- ------------------
Cash flows from operating activities:
Net income (loss) $ (117,380) $ (230,527)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 154,182 5,004
Deferred income taxes (108,000) (153,600)
Decrease (increase) in:
Accounts and other receivables (879,307) (43,855)
Inventories 344,411 (57,336)
Prepaid and other assets (52,406) (16,002)
Cash surrender value of life insurance (5,756) --
Deposits 86,200 --
Increase (decrease) in:
Accounts payable and accrued liabilities 598,603 (280,550)
Income taxes payable 13,760 --
----------------- ------------------
Net cash provided by (used in)
operating activities 34,307 (776,866)
----------------- ------------------
Cash flows from investing activities:
Capital expenditures (737,359) (3,756)
Patents and intellectual properties (5,000) --
----------------- ------------------
Net cash (used in)
investing activities (742,359) (3,756)
----------------- ------------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit (330,866) --
Proceeds from issuance of bonds or long-term debt -- 10,362
Proceeds from sale of stock -- 1,093,621
Principal payments of long-term debt (64,716) --
----------------- ------------------
Net cash provided by (used in)
financing activities (395,582) 1,103,983
----------------- ------------------
Net (decrease) increase in cash (1,103,634) 323,361
Cash at beginning of year 1,183,874 12,862
----------------- ------------------
Cash at end of period $ 80,240 $ 336,223
================= ==================
See Notes to Consolidated Financial Statements
5
COLOR IMAGING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 30, 2000 (see Note 7 - Restatement) are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000.
NOTE 2. DESCRIPTION OF COMPANY
On May 16, 2000, Color Imaging, Inc., formerly known as Advatex Associates, Inc.
(Advatex), Logical Acquisition Corp. (LAC), Color Acquisition Corp. (CAC),
Logical Imaging Solutions, Inc. (Logical) and Color Image, Inc. (Image) entered
into a Merger Agreement and Plan of Reorganization, as amended (Merger
Agreement), pursuant to which LAC merged with and into Logical and CAC merged
with and into Image (the Merger) and Logical and Image became wholly-owned
subsidiaries of Advatex. Pursuant to the Merger Agreement, stockholders of
Logical and Image exchanged their common stock for shares of common stock of
Advatex. A reverse stock split of one share of common stock for 6.0779 shares of
common stock was simultaneously approved for the then existing Advatex common
stock. Subsequently, the equity interests in Logical were converted by virtue of
the Logical Merger into approximately 3,000,000 newly issued shares of Advatex
common stock, on the basis of 1.84843 Advatex Common Shares for each one share
of common stock of Logical. The equity interests in Image were converted by
virtue of the Image Merger into approximately 3,000,000 newly issued shares of
Advatex common stock on the basis of 15 Advatex common shares for each one share
of common stock of Image. The above transactions were consummated on June 28,
2000.
Prior to the completion of the above referenced transaction, Advatex was a
non-operating, fully reporting, public shell, and both Logical and Image were
privately owned operating enterprises. By the terms of the Merger Agreement and
Plan of Reorganization, the combination was contingent upon the agreement of all
of the enterprises, and it was, therefore considered a single business
combination.
Image and Logical each received the same number of shares and both the board of
directors and executive officers of the Company were equally divided between the
managements of Logical and Image. However, since the majority of the voting
stock was held by directors coming from Logical or including former Logical
directors, Logical was determined to be the accounting acquirer in the reverse
merger with Advatex, based upon guidance provided by Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) Topic 2A and APB 16, regarding
Business Combinations.
The fair market value of the shares being issued in the reverse acquisition
transaction could not be determined and accordingly, the transaction was valued
at the fair market value of the issuer's net assets, which approximated their
carrying value. As a result, and consistent with treatment of a merger between a
non-operating public shell and privately held entity, no goodwill was
recognized.
6
NOTE 2. DESCRIPTION OF COMPANY (CONTINUED)
Concurrently with the above transaction, Advatex, the legal acquirer, issued
3,000,000 shares of common stock (with a per share value of $1.00 as determined
in the aforementioned reverse acquisition by Logical of Advatex) in exchange for
the outstanding shares of Image. This transaction was accounted for under the
purchase method of accounting (see Note 7 -- Restatement). The fair value of
Image's assets was reviewed to determine the allocation of the cost of the
purchase to tangible and intangible assets, including goodwill. Management
determined that no adjustment to the financial statements of Image was
necessary, and that the fair value of the tangible and intangible assets of
Image was equivalent to their respective book values and no goodwill was
recognized in this transaction. The historical financial statements are those of
Logical, and the assets, liabilities and operating results of Image are only
included in the consolidated financial statements of the Company from the date
of acquisition, June 28, 2000.
The following unaudited pro forma results of operations were developed assuming
the acquisition had occurred at the beginning of the earliest period presented.
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
---------------------------------------- --------------------------------------
SEPT 30, 2000 SEPT 30, 1999 SEPT 30, 2000 SEPT 30, 1999
------------- ------------- ------------- -------------
(Unaudited Proforma Data)
Net sales $ 6,006,335 $ 2,559,951 $ 15,542,691 $ 7,856,931
Net income $ (55,258) $ (380,242) $ 23,070 $ (376,227)
Income per share $ (.01) $ (.05) $ -- $ (.05)
On July 7, 2000, by a vote of the majority of stockholders, Advatex Associates,
Inc. (Advatex), changed its name to Color Imaging, Inc. (the Company or Color)
and approved the reverse stock split.
Color develops, manufactures and markets products used in electronic printing
and photocopying. Color designs, manufactures and delivers black text toners,
specialty toners, including color and MICR (magnetic ink characters used on
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.
Logical's development efforts have focused on creating a digital variable
printing process that provides high-speed, color printing systems for commercial
applications. Logical designs, manufactures and delivers complete printing
systems, including software, control units and print engines to its customers.
NOTE 3. STOCK OPTIONS
Prior to the Merger, the Company granted options to acquire 500,000 shares of
the common stock of the Company to senior members of the Company's management.
The option price is $2.00 per share. The options will vest over a two to four
year period.
NOTE 4. WARRANTS TO PURCHASE COMMON STOCK
As part of the Merger, the Company granted warrants (the "New Warrant") to
purchase up to 100,000 shares of the common stock of the Company to professional
advisors to the Merger. The New Warrant entitles the warrant holder to purchase,
at any time and for a five-year period, a share of common stock of the
Registrant for $2.00 per share. In addition, current shareholders own 272,000
similar warrants (the "Old Warrant"). The Old Warrant entitles the warrant
holder to purchase, at any time until September 15, 2001, a share of common
stock of the Registrant for $2.70 per share.
NOTE 5. EARNINGS PER SHARE
Basic and diluted earnings per share have been computed in accordance with the
adoption of SFAS No. 128.
7
NOTE 6. INVENTORIES
Inventories consisted of the following components as of September 30, 2000 and
December 31, 1999:
September 30, 2000 December 31, 1999
------------------ -----------------
(As restated)
Raw materials ................................. $ 1,388,249 $ --
Work-in-process................................ 1,482,489 --
Finished goods................................. 2,857,630 329,227
Obsolescence allowance......................... (208,348) --
------------------ -----------------
Total ............................................ $ 5,520,020 $ 329,227
================== =================
NOTE 7. RESTATEMENT OF NINE MONTHS YEAR 2000 FINANCIAL STATEMENTS:
The accompanying financial statements for the nine months ended September 30,
2000, have been restated to reflect the business combination with Image (see
Note 2 under the purchase method of accounting as opposed to the pooling of
interests method, as previously reported. Accordingly, Image's financial
statements are only consolidated beginning with the date of acquisition, June
28, 2000. In addition, the Company reclassified certain tangible assets that
were erroneously classified as Patent/Intellectual Property. The following
tables present the impact of the restatement.
As Previously
Reported As Restated
------------------ -----------------
As of September 30, 2000:
Balance Sheet:
Related party portion bonds current $ 100,832 $ 79,232
Property, plant and equipment, net 6,320,193 6,898,769
Patent/intellectual property 583,596 5,000
Related party portion bonds, non-current 873,296 894,896
Additional paid-in capital 12,125,100 6,392,757
Accumulated deficit (7,459,540) (1,727,197)
As Previously
Reported As Restated
------------------ -----------------
Nine Months Ended September 30, 2000:
Statement of Operations:
Sales $ 15,542,691 $ 6,446,388
Cost of sales 13,002,584 5,385,398
Administrative expenses 1,121,296 532,963
Research and development 584,643 345,365
Sales and marketing 608,182 197,630
Interest and other income (expense) 431,849 (67,200)
Interest and financing costs 380,762 132,852
Non-recurring moving expenses 243,002 10,360
Provision (benefit) for income taxes 11,000 (108,000)
Net income (loss) 23,071 (117,380)
Basic income (loss) per share .00 (.02)
Diluted income (loss) per share $ .00 $ (.02)
See also Note 2 -- Unaudited Proforma Data
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our Consolidated Condensed Financial Statements and related Notes included in
this report.
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 and/or engage in sales of
our securities, our intention to repay certain borrowings from future sales of
our securities, the ability to expand capacity by placing in service additional
manufacturing equipment, the ability to commercialize our electron beam imaging
technologies and products, 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, 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 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 "The Company" and "Management's
Discussion and Analysis."
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.
BACKGROUND
Color Imaging, Inc., formerly known as Advatex Associates, Inc., was
incorporated in Delaware in 1987. On May 16, 2000, Advatex, Logical Acquisition
Corp., Color Acquisition Corp., Logical Imaging Solutions, Inc. ("Logical") and
Color Image, Inc. ("Image") entered into a Merger Agreement and Plan of
Reorganization, as amended ("Merger Agreement") pursuant to which Logical
Acquisition Corp. merged with and into Logical and Color Acquisition Corp.
merged with and into Image (the "Merger"), whereby Logical and Image became our
wholly-owned subsidiaries. Pursuant to the Merger Agreement, shareholders of
Logical and Image exchanged their shares for shares of common stock of Advatex.
Logical shareholders converted their shares into shares of common stock of
Advatex at the ratio of 1.84843 shares of common stock of Advatex for each one
share of Logical. Image shareholders converted their shares into shares of
common stock of Advatex at the ratio of 15 shares of common stock of Advatex for
each one share of Image. Following the conversion of shares by Logical and Image
shareholders, shareholders of Logical and Image owned approximately 85% of the
outstanding shares of common stock of Advatex and shareholders of Advatex before
the Merger owned approximately 15%.
The purpose of the Merger was to combine Image's toner and consumable
expertise and manufacturing plant with Logical's advanced printing system
capabilities to offer a wider product range and ensure product supply for
Logical's print system. On July 7, 2000, pursuant to a vote of our stockholders,
we changed our name from Advatex Associates, Inc. to Color Imaging, Inc, and on
December 31, 2000, Color Image, Inc. was merged with and into Color Imaging,
Inc.
9
OVERVIEW
The Company, Color Imaging, Inc. (OTCBB: CIMG), develops, manufactures and
markets products used in electronic printing, analog and digital copiers and
high-speed digital printing. These high-speed digital printing systems print in
real-time directly on offset presses. Offset presses are presses that utilize
plates and ink to print on paper and other materials. We conduct our business
through two separate operating units, Color Image, Inc. ("Image") and Logical
Imaging Solutions, Inc. ("Logical"). Image develops, purchases from others and
markets electronic printing products, including black text, color, magnetic ink
character recognition and specialty toners, and provides other parts and
accessories for laser printers and analog and digital copiers. Logical designs,
manufactures and integrates components made by third parties into a complete
printing system and offers technical support and supplies in connection
therewith. Logical's printing system allows commercial printers to digitally
process and print data that may change from page to page, also known as variable
data, and images at very high speeds directly on commercial offset web presses.
This capability saves time and money for both the printer and its customer.
Image
Since 1989, Image has developed, manufactured and marketed products used in
electronic printing and photocopying. Image formulates and produces black text
and specialty toners, including color and magnetic character recognition toners
for numerous laser printers and a number of facsimile machines and photocopiers.
Image'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. Image also supplies other consumable products used in electronic
printing and photocopying, including toner cartridges, cartridge components,
photoreceptors and imaging drums.
Image 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 ink 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. Image also manufacturers and or markets toners for use in
Ricoh(TM), Sharp(TM), Xerox(TM), Canon(TM), Lanier(TM) and Toshiba(TM) copiers.
Image also offers product enhancements, including imaging supplies, that enable
standard laser printers to print magnetic character recognition data. Image
markets branded products directly to OEMs and aftermarket products worldwide to
distributors. In addition, aftermarket products for laser printers and digital
and analog copiers are also marketed to remanufacturers and to dealers,
respectively.
Logical
Logical designs, assembles and markets a complete printing system,
SOLUTION2000, to commercial printers. When installed directly on an offset
printing press, the SOLUTION2000 expands printing capabilities to include the
printing of variable data and images, including bar codes, magnetic ink
character recognition and unlimited alphanumeric sequencing. These functions
allow commercial printers to digitally process and print variable data at
extremely high speeds where previously they were able to only print fixed images
from printing plates or cylinders installed on their offset printing presses.
Since its founding in 1993, Logical's development efforts have focused on
creating a high-speed digital variable data printing system for commercial
printing applications that combines software, hardware and consumable products.
Logical also offers a full line of consumable products, including toners, print
cartridges and toner fusing assemblies. Logical's strategy is to continually
build an installed base of printer systems that will generate a recurring demand
for these consumable products.
Logical is developing the DigitalColorPress, a Solution series of printing
systems incorporating color printing capabilities. The DigitalColorPress will
print variable data in color at rates exceeding 250 pages-per-minute. This is in
contrast to other products that do not print directly on the press and print at
speeds of approximately 85 pages per minute. Logical believes that this
represents an attractive alternative for high-speed offset printing applications
because it reduces steps and labor in the print process. Logical intends to
market the DigitalColorPress color printing system as an enhancement to existing
Solution series installations and as an upgrade for other printing systems.
10
OVERVIEW (RESTATEMENT OF FINANCIAL STATEMENTS)
The Company has revised its accounting treatment for the merger completed
in June 2000 from a pooling-of-interests to the purchase method in accordance
with guidance provided by the Securities and Exchange Commission Staff
Accounting Bulletin Topic 2A and APB 16, regarding business combinations. The
financial information contained in this amended report is in conformity with the
purchase method of accounting for the merger. Accordingly, the accompanying
financial statements for the nine months ended September 30, 2000, have been
restated to reflect the business combination with Image under the purchase
method of accounting as opposed to the pooling of interests method, as
previously reported. As a result, Image's financial statements are only
consolidated beginning with the date of acquisition, June 28, 2000.
Net sales, for the three and nine month periods that ended on September 30,
2000, were primarily generated from the sale of consumable products, including
toner. Revenue is recognized from the sale of products when the goods are
shipped to the customer. In the three and nine month periods ended September 30,
2000, net sales increased $5,865,000 and $6,106,000, respectively. The large
increase in net revenues for both the three and nine month periods ended
September 30, 2000 compared to the same period of 1999 was primarily the result
of consolidation of Image's financial statements.
Cost of goods sold includes direct material and labor 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 life 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 staffs, 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from the Company's consolidated statements of operations and
expressed as a percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(Percentage of Net Sales)
Net sales ...............................................100 100 100 100
Cost of goods sold .......................................85 66 84 66
Gross Profit .............................................15 34 16 34
Administrative expenses....................................7 37 8 36
Research and Development...................................4 73 5 73
Sales and Marketing........................................3 36 3 36
Operating income...........................................1 -112 0 -111
Interest expense...........................................2 3 2 3
Depreciation and Amortization..............................2 2 2 1
Income before income taxes................................-2 -113 -3 -113
Provision for income taxes (credit) ......................-1 -45 -1 -45
Net income (Loss) ........................................-1 -68 -2 -68
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
11
NET SALES. Net sales were $6,006,000 for the three months ended September 30,
2000, or an increase of $5,864,000, or 4130% compared to $142,000 for the three
month period ended September 30, 1999. The large increase in net sales during
the three month period ended September 30, 2000 compared to the same period of
1999 was primarily the result of consolidation of Image's financial statements
for the third quarter 2000.
COST OF GOODS SOLD. Cost of goods sold increased by $5,023,000 or 5401% to
$5,116,000 in the three months ended September 30, 2000 from $93,000 in the
three months ended September 30, 1999. This increase was primarily due to
increased net sales. Cost of goods sold as a percentage of net sales increased
to 85% in the third quarter of 2000 from 66% in the third quarter of 1999. This
increase was due to the higher level of sales at lower profit margins.
GROSS PROFIT. As a result of the above factors, gross profit increased to
$891,000 in the three months ended September 30, 2000 from $49,000 in the three
months ended September 30, 1999. Gross profit as a percentage of net sales
decreased to 15% in the second quarter of 2000 from 34% in the second quarter of
1999. This decrease was also due to the higher level of sales at lower margins.
GENERAL AND ADMINISTRATIVE, R&D AND SELLING EXPENSES. General and
administrative, selling and R&D expenses increased $604,000 or 291% to $811,000
in the three months ended September 30, 2000 from $207,000 in the three months
ended September 30, 1999. General and administrative, R&D and selling expenses
decreased, as a percentage of net sales, to 14% in the third quarter of 2000
from 146% in the third quarter of 1999. General and administrative expenses
increased by $331,000 or 637% to $383,000 in the three months ended September
30, 2000 from $52,000 in the three months ended September 30, 1999. R&D expenses
increased by $127,000 or 122% to $231,000 in the three months ended September
30, 2000 from $104,000 in the three months ended September 30, 1999. Selling
expenses increased by $146,000 or 282% to $198,000 in the three months ended
September 30, 2000 compared to selling expenses of $52,000 for the three months
ended September 30, 1999. The large increase in operating expenses for the three
month period ended September 30, 2000 compared to the same period of 1999 was
primarily the result of consolidation of Image's financial statements for the
third quarter 2000.
OPERATING INCOME. As a result of the above factors the operating loss decreased
by $238,000 to a profit of $80,000 in the three months ended September 30, 2000
from a loss of $158,000 in the three months ended September 30, 1999.
INTEREST EXPENSE. Interest expense was $123,000 in the three months ended
September 30, 2000 compared to $4,000 for the three months ended September 30,
1999.
OTHER INCOME. A decrease in interest income and an adjustment to the sale price
of assets disposed of in prior periods resulted in other income decreasing to an
expense of $68,000 from income of $3,000 for the three months ended September
30, 2000 compared to the same period of 1999.
INCOME TAXES. Income tax benefits increased to $67,000 in the three months ended
September 30, 2000 from a tax benefit of $64,000 for the comparable period in
1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
NET SALES. Net sales were $6,446,000 for the nine months ended September 30,
2000, or an increase of 1796% compared to $340,000 for the nine month period
ended September 30, 1999, with the increase primarily attributable to toner and
consumable sales. The large increase in net revenues for both the nine month
period ended September 30, 2000 compared to the same period of 1999 was
primarily the result of consolidation of Image's financial statements for the
third quarter 2000.
COST OF GOODS SOLD. Cost of goods sold increased by $5,161,000 or 2304% to
$5,385,000 in the nine months ended September 30, 2000 from $224,000 in the nine
months ended September 30, 1999. This increase was primarily due to increased
net sales. Cost of goods sold as a percentage of net sales increased to 84% in
the nine months ended September 30, 2000 from 66% in the first nine month period
of 1999. This increase in cost of sales is attributable to toner sales at a
lower profit margin.
GROSS PROFIT. As a result of the above factors, gross profit increased by
$944,000 to $1,061,000 in the nine months ended September 30, 2000 from $117,000
in the nine months ended September 30, 1999. Gross profit as a percentage of net
sales decreased to 16% for the nine months of 2000, from 34% for the similar
period in 1999. This decrease in gross margin is primarily due to the toner
sales at lower profit margins.
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GENERAL AND ADMINISTRATIVE, SELLING, AND R&D EXPENSES. General and
administrative, R&D and selling expenses increased $579,000 or 116% to
$1,075,000 in the nine months ended September 30, 2000 from $497,000 in the nine
months ended September 30, 1999. General and administrative, R&D and selling
expenses decreased, as a percentage of net sales, to 17% in the first nine
months of 2000 from 146% in the similar nine month period of 1999. This change
was the result of increased sales and operations of the merged companies.
General and administrative expenses increased by $409,000, or 330%, to $533,000
from $124,000 in the nine month period ended September 30, 2000 compared to the
nine month period ended September 30, 1999. R&D expenses increased by $96,000 or
39% to $345,000 in the nine months ended September 30, 2000 from $249,000 in the
nine months ended September 30, 1999. Selling expenses increased by $74,000 to
$198,000 in the nine months ended September 30, 2000 compared to $124,000 of
selling expenses for the nine month period ended September 30, 1999. The large
increase in operating expenses the nine month period ended September 30, 2000
compared to the same period of 1999 was primarily the result of consolidation of
Image's financial statements for the third quarter 2000.
OPERATING INCOME. As a result of the above factors, operating income increased
by $365,000 to a loss of $15,000 for the nine months ended September 30, 2000,
compared with a loss of $381,000 in the nine months ended September 30, 1999.
INTEREST EXPENSE. Interest expense increased by $123,000 to $133,000 in the nine
months ended September 30, 2000 from $10,000 in the nine months ended September
30, 1999.
OTHER INCOME. As the result of less interest income and an adjustment to the
sale price of assets disposed of in prior periods, other income decreased to an
expense of $67,000 in the nine months ended September 30, 2000 from $6,000 in
the comparable nine months ended September 30, 1999.
INCOME TAXES. As the result of the smaller loss for the nine months ended
September 30, 2000 compared to the same period in 1999, the tax benefit
decreased to $108,000 for the nine months ended September 30, 2000 compared to
$154,000 for the comparable period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $34,000 in the nine months
ended September 30, 2000, compared to $777,000 used by operating activities in
the nine months ended September 30, 1999. The cash flows provided by operating
activities in the nine months ended September 30, 2000 were comparatively
greater than in the nine months ended September 30, 1999 due primarily to
increases in accounts payable. The payable increase resulted primarily from
higher sales and purchasing in 2000.
Cash flows used in investing activities were $742,000 in the nine months
ended September 30, 2000 compared to $4,000 in the nine months ended September
30, 1999. Included in cash flows used in investing activities in the nine months
ended September 30, 2000 was $584,000 invested in test equipment for furthering
the Company's patented toner and digital color printing systems technologies.
The Company has a $1.5 million revolving line of credit with an outstanding
balance as of September 30, 2000 of $1,212,000, and bears interest at the Bank's
prime interest rate less .25 percent. The revolving line of credit has a
November 15, 2000 expiration date. Under the line of credit, the Company is
permitted to borrow 85 percent of eligible accounts receivable and 50 percent of
eligible inventories (up to a maximum of $1.1 million).
The Bank has made available an additional line of credit of $500,000. The
outstanding balance as of September 30, 2000 was $500,000. The additional line
of credit has an expiration date of November 15, 2000, and bears an interest
rate of the Bank's prime interest rate plus .5 percent. The Company has granted
the Bank a security interest in all of the Company's assets as security for the
payment of the lines of credit.
The Company believes that cash generated by operating activities, the net
proceeds of $950,000 from the recent Merger and funds available under credit
facilities will be insufficient to finance its operating and investing
activities for the next 12 months after September 30, 2000. To the extent that
the funds generated from these sources were insufficient to finance the
operating activities, the Company raised additional funds through public or
private financing. On August 29, 2000, the Board of Directors authorized the
raising of up to $3 million of additional capital on terms and conditions
acceptable to the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLOR IMAGING, INC.
/s/ MICHAEL W. BRENNAN
----------------------
May 17 2002 Michael W. Brennan
Chairman and Chief Executive Officer
/s/ MORRIS E. VAN ASPEREN
-------------------------
Morris E. Van Asperen
Executive Vice President and
Chief Financial Officer
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