ARNALL GOLDEN GREGORY LLP
171 17TH STREET, NW
SUITE 2100
ATLANTA, GA 30363
Direct phone: 404-873-8706
Direct fax: 404-873-8707
E-mail: Robert.Dow@agg.com
www.agg.com
August 4, 2005
VIA FACSIMILE, FEDERAL EXPRESS AND EDGAR
Mr. Daniel F. Duchovny
Attorney-Advisor
Office of Mergers & Acquisitions
U.S. Securities and Exchange Commission
Mail Stop 362
100 "F" Street, N.E.
Washington, D.C. 20549-3628
RE: COLOR IMAGING, INC.
AMENDMENT NO. 2 TO PRELIMINARY SCHEDULE 14A
FILED JULY 22, 2005
FILE NO. 000-16450
AMENDMENT NO. 2 TO SCHEDULE 13E-3
FILED JULY 22, 2005
FILE NO. 005-59249
Dear Mr. Duchovny:
On behalf of Color Imaging, Inc. ("Color Imaging" or the "Company"), we
transmit for filing Color Imaging's responses to the Staff's letter of comment
dated July 28, 2005. For your convenience, the comments contained in that letter
are reprinted below in italics. Unless otherwise indicated, all page references
are to the Schedule 14A (file no. 0-16450). If you concur with our approach to
the comments, we will promptly file an amendment to the Schedule 14A.
PRELIMINARY SCHEDULE 14A
Discounted Cash Flow Method, page 37
1. Please tell us why you listed a ratio of 500,000:1 below the table at the
top of page 38. Since this ratio is not being proposed, it appears that it
should be deleted.
Mr. Daniel F. Duchovny
August 4, 2005
Page 2
RESPONSE:
We will remove this ratio from the table at page 38.
2. We reissue comment 15 in our July 12 letter and comment 43 from our June 6
letter. Revise this section to show, for example, how CVG used the data in
the table on page 38 to estimate that the indicated range of the equity
value per share in the stand-alone discounted cash flow analysis ranges
from $0.89 to $1.56 per share. Obtain the figures how the information
included in the financial projections tables resulted in the values already
disclosed.
Initial comment 15 from the Staff's letter of July 12, 2005: We reissue
comment 43. Revise this section to show how the information included in the
financial projections tables resulted in the values already disclosed.
Initial comment 43 from the Staff's letter of June 6, 2005: Please revise
to disclose the data underlying the results described in each analysis and
to show how that information resulted in the values already disclosed.
Please apply this comment to every CVG analysis disclosed.
RESPONSE:
Attached are two tables to illustrate the calculation of the equity values
using the 14% weighted average cost of capital (one table for stand-alone
basis and one for the reverse stock split basis). We propose to add the
tables, one to the "Discounted Cash flow Analysis - Stand-Alone Basis"
section at page 39 and the other to the "Discounted Cash Flow - Reverse
Stock Split Basis" section at page 40. The new table would be placed before
the table that now appears showing all the equity values. (The attached
tables are in excel spreadsheets and would be re-formatted slightly to fit
neatly into the proxy statement document.) There would be a lead in
paragraph for each table as follows:
The table below illustrates how CVG calculated the equity value per
share using the estimated cash flows shown above at "Discounted Cash
Flow Method" and the estimated weighted average cost of capital of
14%. (CVG used a similar methodology to calculate the equity value per
share using estimated weighted average cost of capital for 15%, 16%,
17% and 21%.)
In addition, the "Discounted Cash Flow - Reverse Stock Split Basis" section
would have the following explanation:
This table illustrates the calculation assumes a reverse split ratio
of 1-for-1500. CVG reperformed the calculations using additional
ratios of one for 2500, 5000, and 500,000, and considered all of these
results in its evaluation of the equity values.
3. We reissue comment 16. We note that disclosure added in response to that
comment does not include the substance of your response to comment 44 in
our June 6 letter.
Mr. Daniel F. Duchovny
August 4, 2005
Page 3
Initial comment 16 from the Staff's letter of June 6, 2005:
Please disclose the substance of your response to comment 44.
RESPONSE:
The proxy statement as filed already contains at page 40 the following
sentence from our prior response: "CVG prepared the resulting range of
values in order to gain insight into the sensitivity of the analysis to
estimates of the market based cost of capital and the estimates[d] terminal
value multiples[,] and [the analysis] does not represent a statistical
sample of value estimates." We propose to make the corrections indicated in
the foregoing brackets and to add the following language thereto in the
proxy statement at page 40:
CVG considered a range of cost of capital estimates and exit multiple
estimates in its discounted cash flow analysis as a means of
illustrating a range of possible values. CVG did not consider any
single method or result in reaching its opinion but instead considered
many factors and other methods that when taken together supported its
opinion. With respect to the results of the discounted cash flow
approach CVG considered the Company's historic performance compared to
budget/forecast and the risk inherent in management's projections,
particularly the significant reliance on color toner products yet to
be perfected or developed, when considering the results of the
discounted cash flow method.
Please review these proposed changes at your earliest convenience and
contact me to let me know if they address your concerns. You may contact me at
(404) 873-8706.
Very truly yours,
ARNALL GOLDEN GREGORY LLP
/s/ Robert F. Dow
Robert F. Dow
cc: Christina Chalk, Esq. (Mail Stop 03-09)
Morris E. Van Asperen, Color Imaging
T. Clark Fitzgerald III, Esq.
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COLOR IMAGING, INC.
DISCOUNTED CASH FLOW METHOD - 14% WACC - STAND ALONE
- ------------------------------------------------------------------------------------------------------------------------------------
Interim Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW $ 155,968 $ 493,902 $ 721,050 $ 1,091,147 $1,445,339
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005 142,294
EBITDA
MVIC/EBITDA Capitalization Multiple
Terminal Value
Discount Rate 14.0%
Years to Discount 0.46 1.41 2.41 3.41 4.41
Discount Factor 0.9415 0.8313 0.7292 0.6397 0.5611
- ----------------------------------------------------------------------------------------------------------------------------
Present Values 133,970 410,581 525,790 698,007 810,980
Sum of Present Values of Interim Cash Flows 2,579,327 2,579,327 2,579,327
Present Value of Terminal Value 12,813,370 15,376,044 17,938,718
Plus: Adjustments 2,097,428 2,097,428 2,097,428
- ------------------------------------------------------------------------------------------------------------------------------------
Business Enterprise Value 17,490,125 20,052,799 22,615,473
Minus: Capitalization Financing (Term Debt) 2,804,325 2,804,325 2,804,325
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Value 14,685,800 17,248,474 19,811,148
Rounded Equity Value $ 14,700,000 $ 17,200,000 $ 19,800,000
====================================================================================================================================
Assumed Shares Outstanding 12,690,305 12,690,305 12,690,305
Per Share Value $ 1.16 $ 1.36 $ 1.56
Terminal Value
- -------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months
Ending Ending Ending
12/31/09 12/31/09 12/31/09
- -------------------------------------------------------------------------------------------------
NET CASH FLOW
- -------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005
EBITDA $ 4,567,232 $ 4,567,232 $ 4,567,232
MVIC/EBITDA Capitalization Multiple 5.0 6.0 7.0
Terminal Value $ 22,836,161 $ 27,403,393 $ 31,970,625
Discount Rate
Years to Discount 4.41 4.41 4.41
Discount Factor 0.5611 0.5611 0.5611
- -------------------------------------------------------------------------------------------------
Present Values 12,813,370 15,376,044 17,938,718
- ------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT E-2
COLOR IMAGING, INC.
DISCOUNTED CASH FLOW METHOD - 14% WACC - PRIVATE Reverse Split 1500-1
- ------------------------------------------------------------------------------------------------------------------------------------
Interim Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW $ 155,968 $ 574,602 $ 801,750 $ 1,171,847 $ 1,526,039
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005 142,294
EBITDA
MVIC/EBITDA Capitalization Multiple
- ------------------------------------------------------------------------------------------------------------------------------------
Terminal Value
Discount Rate 14.0%
Years to Discount 0.46 1.41 2.41 3.41 4.41
Discount Factor 0.9415 0.8313 0.7292 0.6397 0.5611
- ------------------------------------------------------------------------------------------------------------------------------------
Present Values 133,970 477,667 584,636 749,631 856,260
Sum of Present Values of Interim Cash Flows 2,802,164 2,802,164 2,802,164
Present Value of Terminal Value 13,190,710 15,828,852 18,466,994
Plus: Adjustments 1,769,350 1,769,350 1,769,350
- ------------------------------------------------------------------------------------------------------------------------------------
Business Enterprise Value 17,762,223 20,400,365 23,038,507
Minus: Capitalization Financing (Term Debt) 2,804,325 2,804,325 2,804,325
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Value 14,957,898 17,596,040 20,234,182
Rounded Equity Value $ 15,000,000$ 17,600,000 $ 20,200,000
====================================================================================================================================
Assumed Shares Outstanding 12,614,201 12,614,201 12,614,201
Per Share Value $ 1.19 $ 1.40 $ 1.60
Terminal Value
- ----------------------------------------------------------------------------------------
NET CASH FLOW
- ----------------------------------------------------------------------------------------
Adjusted Partial Period Debt-Free Cash Flow
For Period Beginning: February 02, 2005
EBITDA $ 4,701,732 $ 4,701,732 $ 4,701,732
MVIC/EBITDA Capitalization Multiple 5.0 6.0 7.0
- ----------------------------------------------------------------------------------------
Terminal Value $ 23,508,661$ 28,210,393 $ 32,912,125
Discount Rate
Years to Discount 4.41 4.41 4.41
Discount Factor 0.5611 0.5611 0.5611
- ----------------------------------------------------------------------------------------
Present Values 13,190,710 15,828,852 18,466,994