-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DoiEpzK3q50/djej3p6IQL6zyJ2HHtSyh2BOHywPs1X53UhoO/IkrmcnQKE7TJe3 QyHH4vUC56goLaUp8vUA7A== 0000914062-03-000560.txt : 20030731 0000914062-03-000560.hdr.sgml : 20030731 20030731161832 ACCESSION NUMBER: 0000914062-03-000560 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLOR IMAGING INC CENTRAL INDEX KEY: 0000820906 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 133453420 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16450 FILM NUMBER: 03814834 BUSINESS ADDRESS: STREET 1: 4350 PEACHTREE BLVD STREET 2: SUITE 100 CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7708401090 MAIL ADDRESS: STREET 1: 4350 PEACHTREE BLVD STREET 2: SUITE 100 CITY: NORCROSS STATE: GA ZIP: 30071 FORMER COMPANY: FORMER CONFORMED NAME: ADVATEX ASSOCIATES INC DATE OF NAME CHANGE: 19920703 10-Q 1 colorimaging10q63003.txt FORM 10-Q 1639953.rtf UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2003 or [ ] 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 ------------------------- SECURITIES AND EXCHANGE COMMISSION COLOR IMAGING, INC. (Exact name of registrant as specified in its charter)
Delaware 13-3453420 - -------------------------------------------------------------- -------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 4350 Peachtree Industrial Blvd, Suite 100 Norcross, GA 30071 ----------------------------------------- ------------- (Address of principal executive offices) (Zip Code)
(770) 840-1090 ------------------------------------------------------------- Registrant's telephone number, including area code Not Applicable ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No x --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of July 28, 2003, there were 12,925,005 shares outstanding of Common Stock. COLOR IMAGING, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 INDEX PART I: FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets at June 30, 2003 (Unaudited) and December 31, 2002(Audited)...........................3 Condensed Statements of Operations (Unaudited) for the Three and Six Months ended June 30, 2003 and 2002............4 Condensed Statements of Cash Flows (Unaudited) for the Six Months ended June 30, 2003 and 2002......................5 Notes to Interim Unaudited Condensed Financial Statements ..........................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................10 Item 3. Quantitative and Qualitative Disclosures about Market Risks.........24 Item 4. Controls and Procedures.............................................24 PART II: OTHER INFORMATION Item 1. Legal Proceedings ..................................................25 Item 2. Changes in Securities and Use of Proceeds...........................25 Item 3. Defaults Upon Senior Securities.....................................26 Item 4. Submission of Matters to a Vote of Security Holders.................26 Item 5. Other information ..................................................27 Item 6. Exhibits and Reports on Form 8-K....................................27 Signatures....................................................................30 2 PART I: FINANCIAL INFORMATION ITEM 1 -FINANCIAL STATEMENTS COLOR IMAGING, INC. CONDENSED BALANCE SHEETS ASSETS
30 Jun-03 31-Dec-02 (Unaudited) (Audited) ------------ ------------ CURRENT ASSETS Cash $ 2,551,178 $ 128,501 Accounts receivable, net 1,968,875 2,390,019 Inventories 6,325,787 5,080,237 Related party portion of IDR bond 83,160 83,160 Other current assets 359,104 304,672 ------------ ------------ TOTAL CURRENT ASSETS 11,288,104 7,986,589 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT - NET 6,895,429 7,038,111 ------------ ------------ OTHER ASSETS Related party portion of IDR bond 735,340 735,340 Deferred offering costs -- 121,924 Other assets 224,481 231,571 ------------ ------------ TOTAL OTHER ASSETS 959,821 1,088,835 ------------ ------------ $ 19,143,354 $ 16,113,535 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Revolving credit lines $ -- $ 1,022,470 Accounts payable 2,812,690 3,543,680 Current portion of notes payable 5,396 363,789 Current portion of bonds payable 350,000 350,000 Notes payable - related parties 336,191 401,937 Other current liabilities 613,827 507,782 ------------ ------------ TOTAL CURRENT LIABILITIES 4,118,104 6,189,658 ------------ ------------ LONG TERM LIABILITIES Notes payable 14,836 989,667 Bonds payable 3,095,000 3,095,000 Notes payable - related parties 318,820 598,063 Deferred tax liability 248,534 -- ------------ ------------ LONG TERM LIABILITIES 3,677,190 4,682,730 ------------ ------------ TOTAL LIABILITIES 7,795,294 10,872,388 ------------ ------------ COMMITMENTS & CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value, authorized 20,000,000 shares; 12,925,005 and 8,437,965 shares issued and outstanding on June 30, 2003 and December 31, 2002, respectively 129,250 84,380 Additional paid-in capital 13,035,258 7,205,909 Accumulated deficit (1,683,108) (2,049,142) Treasury stock, at cost, 66,670 shares ( 133,340) -- ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 11,348,060 5,241,147 ------------ ------------ $ 19,143,354 $ 16,113,535 ============ ============ See accompanying notes
3 COLOR IMAGING, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED ------------------------- -------------------------- 30-JUN-03 30-JUN-02 30-JUN-03 30-JUN-02 ------------ ----------- ------------ ------------ SALES $ 5,058,589 $ 7,970,300 $10,687,994 $15,631,623 C0ST OF SALES 3,519,174 6,878,347 7,829,329 13,316,635 ------------ ------------ ------------ ------------ GROSS PROFIT 1,539,415 1,091,953 2,858,665 2,314,988 ------------ ------------ ------------ ------------ OPERATING EXPENSES Administrative 426,144 329,140 892,791 694,615 Research & development 325,514 239,623 597,481 451,107 Sales & marketing 388,346 335,825 755,620 612,077 ------------ ------------ ------------ ----------- 1,140,004 904,588 2,245,892 1,757,799 ------------ ------------ ------------ ----------- INCOME FROM OPERATIONS 399,411 187,365 612,773 557,189 ------------ ------------ ------------ ----------- OTHER INCOME (EXPENSE) Other income 60,379 22,328 108,525 29,205 Financing expenses (34,298) (90,866) (110,264) (165,820) ------------ ------------ ------------ ----------- 26,081 (68,538) ( 1,739) (136,615) ------------ ------------ ------------ ----------- INCOME BEFORE TAXES 425,492 118,827 611,034 420,574 PROVISION FOR INCOME TAXES 171,000 46,000 245,000 161,250 ------------ ------------ ------------ ----------- INCOME FROM CONTINUING OPERATIONS 254,492 72,827 366,034 259,324 DISCONTINUED OPERATIONS (Note 2) (Loss) from operations of subsidiary disposed of - net of income taxes -- (92,824) -- (163,082) ------------ ------------ ------------ ----------- NET INCOME (LOSS) $ 254,492 $ (19,997) $ 366,034 $ 96,242 ============ ============ ============ =========== INCOME (LOSS) PER COMMON SHARE - BASIC Continuing operations $ .02 $ .01 $ .03 $ .03 Discontinued operations -- (.01) -- (.02) ----------- ---------- ----------- ---------- $ .02 $ -- $ .03 $ .01 ============ ============ ============ =========== INCOME (LOSS) PER COMMON SHARE - DILUTED Continuing operations $ .02 $ .01 $ .03 $ .03 Discontinued operations -- (.01) -- (.02) ----------- ---------- ----------- ---------- $ .02 $ -- $ .03 $ .01 ============ ============ ============ =========== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 12,887,408 10,099,880 11,134,003 10,099,724 Assumed conversion -- -- -- -- ------------ ------------ ------------ ----------- 12,887,408 10,099,880 11,134,003 10,099,724 ============ ============ ============ =========== See accompanying notes
4 COLOR IMAGING, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30 (UNAUDITED)
2003 2002 ----------- ----------- Cash flows from operating activities: Net income from continuing operations $ 366,034 $ 259,324 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 289,500 263,123 Deferred income taxes 248,534 79,001 (Increase) decrease in: Accounts receivable and other receivables 421,144 (1,122,760) Inventories (1,245,550) 1,141,646 Prepaid expenses and other assets 74,583 2,520 (Decrease) in: Accounts payable and accrued liabilities (624,945) (595,161) ------------- ------------- Net cash (used in) provided by continuing operations (470,700) 27,693 Net cash flows of discontinued operations -- (174,671) ------------- ------------- Net cash (used by) operating activities (470,700) (146,978) ------------- ------------- Cash flows (used in) investing activities: Capital expenditures (146,819) (331,311) ------------- ------------- Net cash (used in) investing activities (146,819) (331,311) ------------- ------------- Cash flows from financing activities: Net (payments) under line of credit (1,022,470) (190,334) Net proceeds from sale of common stock 5,917,086 143,351 Repurchase of common shares and warrants (176,207) -- Net proceeds from related party borrowings -- 500,000 Principal payments on related party borrowings (344,989) -- Principal payments of long-term debt (1,333,224) (166,636) ------------- ------------- Net cash provided by financing activities 3,040,196 286,381 ------------- ------------- Net increase (decrease) in cash 2,422,677 (191,908) Cash at beginning of year 128,501 393,981 ------------- ------------- Cash at end of period $ 2,551,178 $ 202,073 ============= ============= See accompanying notes
5 COLOR IMAGING, INC. NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS June 30, 2003 (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-Q. 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 and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. 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 Six Months Ended June 30, June 30, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ------------ ----------- (Loss) from discontinued operations: Before income taxes $ -- $(154,824) $ -- $(260,326) Income tax provision (benefit) -- (62,000) -- ( 97,244) ----------- ----------- ------------ ----------- Net (loss) from discontinued operations $ -- $ (92,824) $ -- $(163,082) =========== =========== ============ ===========
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 February 27, 2003, the Company entered into an agreement with a stockholder to repurchase 150,000 shares of common stock and warrants to purchase 300,000 shares of the Company's common stock for an aggregate cost of $300,000. Under the agreement, the stockholder has a one-time right to cancel the sale of the common stock and warrants not yet paid for by the Company upon written notice to the Company. Upon receipt of such notice, the Company is not obligated to purchase the remaining common stock and warrants. The agreement provides that the Company is to pay $2.00 for each common share and warrant to purchase two common shares of the Company's common stock. The shares and warrants are to be repurchased in approximately equal installments over nine months, beginning in March and ending in November 2003. From March 24, 2003 through June 30, 2003, the Company repurchased 66,670 of the Company's common shares and warrants to purchased 133,340 common shares, paying $133,340. The shares and warrants repurchased by the Company are held in escrow, pending the completion of the repurchase in November 2003, or its earlier cancellation, at which time they will be cancelled. 6 NOTE 3. COMMON STOCK (CONTINUED) On March 4, 2003, the Company completed the repurchase from a stockholder of 12,939 shares of the Company's common stock together with warrants to purchase 25,878 shares of the Company's common stock at an aggregate cost of $25,878. The shares and warrants were originally sold in the Company's private placement that was completed in December 2001, and the shares and warrants repurchased by the Company were cancelled. On March 13, 2003, the Company completed the public sale of 4,500,000 shares of the Company's common stock at a price of $1.35 per share (see note 10), whereby the Company received $5,917,086 in net proceeds. On April 18, 2003, the Company granted options to two directors to purchase 25,000 shares of the Company's common stock at an exercise price of $.45 per share. The options vest at the rate of 5,000 per year beginning on the first anniversary date of the grant and continuing annually thereafter and expire three years from their respective date of vesting. On June 2, 2003, the Company granted options to an officer 100,000 shares of the Company's common stock at an exercise price of $.77 per share. The options vest at the rate of 25,000 per year beginning on the date of the grant and continuing annually thereafter and expire five years from their respective date of vesting. The following is a summary of total outstanding options and stock warrants at June 30, 2003:
Options and Warrants Outstanding Options and Warrants Exercisable Weighted- Weighted-Average Range of Average Remaining Weighted-Average Exercise Prices Number Exercise Price Contractual Life Number Exercise Price - --------------- ------------ --------------- ---------------- ------------- ---------------- Options $0.45-$2.75 1,070,000 $2.11 4.10 years 793,750 $2.24 Warrants $2.00 801,997 $2.00 0.62 years 801,997 $2.00 ------------ ------------- Options and warrants 1,871,997 $2.06 2.61 years 1,595,747 $2.12 ============ =============
The warrants reflected in the above table exclude the warrants to purchase 133,340 shares of the Company's common stock that are held in escrow, pending cancellation, as of June 30, 2003. NOTE 4. INVENTORIES Inventories consisted of the following components as of June 30, 2003 and December 31, 2002:
June 30, 2003 December 31, 2002 ------------------ ----------------- Raw materials $ 917,567 $ 427,752 Work-in-process 1,797,276 1,021,496 Finished goods 3,662,229 3,665,953 Obsolescence allowance ( 51,285) (34,964) ----------------- ----------------- Total $ 6,325,787 $ 5,080,237 ================= =================
NOTE 5. CHANGES TO BORROWING ARRANGEMENTS The Company has a $1.5 million revolving line of credit, as amended, with an outstanding balance of $0 as of June 30, 2003, bearing interest at the one-month Libor interest rate in effect two business days before the first day of the month plus 2.50%. As of June 30, 2003, the interest rate was the one-month Libor rate of 1.12% plus 2.50% (3.62%). This revolving line of credit has a June 30, 2004 expiration date. Under the line of credit, the Company is permitted to borrow up to 75% of eligible accounts receivable and 50% of eligible inventories (up to a maximum of $750,000 and not to exceed 50% 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 June 30, 2003, the Company was in compliance with these covenant requirements. 7 NOTE 6. EMPLOYMENT AGREEMENTS: On June 27, 2003, the Vice President of Marketing and Sales retired, and the Employment Agreement between he and the Company was cancelled. On July 14, 2003, subsequent to the balance sheet date, the Employment Agreement between the Company and its Executive Vice President and Chief Financial Officer was amended, making the officer responsible for marketing and sales while remaining chief financial officer for an indefinite period, reducing the annual salary from $151,200 to $78,000, eliminating the five percent (5%) annual increase and supplemental life insurance retirement plan and providing for a one-half of one percent (0.5%) commission on certain of the net sales of the Company. NOTE 7. SIGNIFICANT CUSTOMERS In the three and six month periods ended June 30, 2003, two customers accounted for 28% and 17% and 31% and 18%, 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 June 30, 2003, were $562,605 and $295,194, respectively. NOTE 8. SIGNIFICANT SUPPLIERS In the three and six month periods ended June 30, 2003, the Company purchased 28% and 39% of its raw materials, components and supplies from one supplier in connection with sales to its largest customers. At June 30, 2003, the accounts payable to this supplier was $787,919. NOTE 9. 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 six-month periods ended June 30 are as follows:
2003 2002 ----------- ----------- Sales to Unaffiliated Customers: United States $ 6,347,513 $10,005,967 Europe/Eastern Europe 2,348,586 3,222,774 Mexico 1,252,150 1,349,501 Asia/Southeast Asia 360,481 547,502 South America 250,310 254,930 Others 128,954 250,949 ----------- ----------- Total $10,687,994 $15,631,623 =========== ===========
NOTE 10. RELATED PARTY TRANSACTIONS: The Company purchased from an affiliate for the three and six month periods ended June 30, 2003, $671,666 and 1,124,190, respectively, of all-in-one imaging, toner and drum cartridges and injection molded cartridges and accessories for copiers and laser printers. Accounts payable to the affiliate at June 30, 2003, was $407,802. On January 23, 2003 the Company's registration statement on Form SB-2 offering of up to 7 million shares of its common stock was declared effective by the Securities and Exchange Commission. On March 6, 2003, the Company received subscription gross proceeds from an affiliate of $6,075,000 for the public sale of 4,500,000 shares of its common stock from an affiliate, and on March 13, 2003, the Company accepted the investment in accordance with the offering procedures. On March 14, 2002, the Company borrowed $500,000 from its President on an unsecured basis. The interest rate on the loan was 12% per annum, matured on March 14, 2003 and was evidenced in writing. On September 2, 2002, the Company entered into a modification agreement with its President to change the terms of the note, extending the term to March 1, 2005, providing for a $100,000 principal payment, decreasing the interest rate to 6% per annum, providing for interest only payments through February 28, 2003, and providing for 24 monthly payments of principal and interest beginning on April 1, 2003, in the amount of $17,735.67. The Company borrowed the $500,000 amount to meet a supplier commitment for product. From January 1 through June 30, 2003, interest accrued and paid on the note was $10,543 and as of June 30, 2003, the outstanding principal balance was $150,000. 8 NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED): On August 21, 2002, the Company borrowed $100,000 from a director on an unsecured basis. The loan bears interest at the rate of 6% per annum, matures on March 1, 2005 and is evidenced in writing. The Company borrowed this amount in order to repay $100,000 borrowed from director Sueling Wang on March 14, 2002. The note is interest only through February 28, 2003, and then is fully amortizing over 24 months with principal and interest payments payable monthly beginning April 1, 2003 in the amount of $4,434. From January 1 through June 30, 2003, the interest accrued and paid on the note was $2,874, and as of June 30, 2003, the outstanding principal balance was $84,169. On August 21 and September 2, 2002, the Company borrowed $200,000 and $300,000, respectively, from another director on an unsecured basis. The loan bears interest at the rate of 6% per annum, matures on March 1, 2005 and is evidenced in writing. The Company borrowed this amount in order to make a principal payment due on our industrial development bond in the approximate amount of $255,000, for the acquisition of capital equipment in the approximate amount of $125,000 and for general corporate purposes. The note is interest only through February 28, 2003, and then is fully amortizing over 24 months with principal and interest payments payable monthly beginning April 1, 2003 in the amount of $22,169.60. From January 1 through June 30, 2003, interest accrued and paid on the note was $14,370, and as of June 30, 2003, the outstanding principal balance was $420,843. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussions should be read in conjunction with our condensed financial statements and the related notes thereto. BACKGROUND On June 28, 2000, Color Imaging, 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 Assocates. The financial information contained in this report is in conformity with the purchase method of accounting. On December 31, 2000, Color Image was merged with and into Color Imaging. On September 30, 2002, we divested Logical Imaging Solutions in exchange for 1.7 million shares of our common stock and warrants to purchase up to 15% of the common stock of Digital Color Print or Logical Imaging Solutions. As a 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. As a further result of Color Imaging's divestiture of Logical Imaging Solutions, our investments in the furthering of Logical Imaging Solutions' technologies and carrying its operations have ceased. Significantly, since the merger on June 28, 2000, Color Imaging had invested approximately $2.35 million in the operations of Logical Imaging Solutions and the development of its technologies. The disposal of Logical Imaging Solutions eliminates the capital needed to support those operations. COLOR IMAGING, INC. Color Imaging, Inc. has developed and manufactured products used in electronic printing and copying. We formulate and produce black text and specialty toners, including color and magnetic character recognition toners for numerous laser printers. Our 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. We also supply other consumable products used in electronic printing, and photocopying, including toner cartridges, cartridge components, photoreceptors, imaging drums and parts. Color Imaging, Inc. has continually expanded its product line and manufacturing capabilities. This expansion has led to the creation of 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 manufactures and or markets toners for use in Ricoh, Sharp(TM), Xerox(TM), Canon(TM), Lanier(TM), Toshiba(TM), Savin(TM) and Gestetner(TM) copiers. We also offer product enhancements, including imaging supplies that enable standard laser printers to print magnetic character recognition data. We market branded products directly to OEMs and our aftermarket products worldwide to distributors and remanufacturers of laser printer toner cartridges and to dealers and distributors of copier products. During the second quarter of 2003 we commenced the sale of all-in-one imaging, toner and drum cartridges for use in Xerox(TM) and Canon(TM) personal copiers and a Hewlett Packard(TM) laser printer. In addition to selling these all-in-one products to the abovementioned customers, we are selling them to a multi-state retail chain store and are offering them to catalog companies. Our strategy for growing revenue and operating profit is to expand, including through strategic acquisition(s), our printer and copier products business. The key elements of our strategy are (1) increasing vertical integration by supplying complete toner and cartridge devices, (2) capitalizing on our research and development expertise of producing specialty, color and digital copier and or multifunctional device toners, (3) exploiting the efficiencies associated with the investment made in manufacturing facilities, (4) expanding our sources for products from strategic suppliers that we can add value to or resell that complement our product lines and (5) expanding into new geographic markets, and broadening our sales channels, including selling certain products directly to retailers. 10 RECENT DEVELOPMENTS During the second quarter of 2003 we commenced the sale of all-in-one imaging, toner and drum cartridges for use two personal copiers and a laser printer. During the third quarter 2003 we will further expand our product offerings for copiers, including adding toners and parts for several Minolta(TM) and Konica(TM) copiers and introducing additional digital toners for Ricoh(TM), Canon(TM) and Toshiba copiers(TM). During the third quarter 2003, we will open a sales office in southern California to increase our customer base on the west coast, and we are considering the addition of a warehouse for finished products to improve delivery to existing and prospective west coast customers. Additionally, during July 2003 we announced the closeout of most of our laser parts stock, discontinuing the sale of approximately 80% of all laser parts previously offered by the Company, and we are in the process of discontinuing laser printer products for older machines that currently comprise more than 50% of all our laser printer toner products. OVERVIEW Net sales are primarily generated from the sale of our black text, color and magnetic character recognition toners, and we believe net sales of all-in-one imaging, toner and drum cartridges will become a significant portion of our total sale in the next few years. Net sales decreased to $10.7 million for the six months ended June 30, 2003, compared to $15.6 million for the six months ended June 30, 2002. This 32% decrease in net sales resulted primarily from the decrease in sales to our two largest customers. In the six months ended June 30, 2003, our two largest customers, distributors of imaging supplies for whom we private label, accounted for approximately 31% and 18%, respectively, of net sales, with the latter being an OEM. Sales to these customers consist primarily of analog copier products, and as a result are expected to decline over time. Further, both of these customers either have, or will, manufacture themselves, or with another, certain products that we formerly supplied to them. For the year ended December 31, 2003, we expect the sales to our largest customer to be less than one-half of their 2002 sales of approximately $13.2 million, and sales to our second largest customer are expected to be approximately 60% of the 2002 sales of $5.5 million. As a result, our sales will be less concentrated with our largest customers, sales overall during 2003 will be less than those of 2002, and we expect our gross profit margins to improve. Our inventory for product discontinued by our largest customers has either been sold or is being sold to other customers. Net sales made outside of the United States decreased to $4.3 million, or 41% of total sales for the six months ended June 30, 2003, compared to $5.6 million, or 36% for the six months ended June 30, 2002. This 23% decrease in international sales resulted primarily from the decrease in sales to our two largest customers. The revenue decrease for the six months ended June 30, 2003 compared to the same period in 2002 for finished products and bulk toners and parts for use in copiers and laser printers from 2002 to 2003 was 28% and 40%, respectively, reflecting our decreased sales to our two largest customers and our continuing transition to the sale of more finished products and less bulk toner. All sales are made through purchase orders. Revenue is recognized from the sale of products when the goods are shipped to the customer. 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 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. 11 The following table reflects the consolidated new orders, net of cancellations, revenues and backlog as of the beginning and end of the three and six months ended June 30, 2003, as well as for Color Imaging's two general product lines.
Backlog Backlog at start at end of New Net of Period Orders Revenue Period -------- -------- -------- -------- (IN THOUSANDS OF DOLLARS) Three Months June 30, 2003: Copier Products $ 2,109 $ 2,633 $ 3,040 $ 1,702 Printer Products 457 2,368 2,018 807 -------- -------- -------- -------- Total 2,566 5,001 5,058 2,509 ======== ======== ======== ======== (IN THOUSANDS OF DOLLARS) Six Months June 30, 2003: Copier Products $ 2,718 $ 5,586 $ 6,602 $ 1,702 Printer Products 473 4,419 4,085 807 -------- -------- -------- -------- Total 3,191 10,005 10,687 2,509 ======== ======== ======== ========
CRITICAL ACCOUNTING ESTIMATES "Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation allowances for inventory and accounts receivable, warranty and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant estimates and assumptions are reviewed and any required adjustments are recorded on a quarterly basis. A critical accounting policy is one that is both important to the portrayal of Color Imaging's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of its financial statements. VALUATION ALLOWANCE FOR ACCOUNTS RECEIVABLE. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on historical experience, credit evaluations and specific customer collection issues we have identified. Since our accounts receivable are often concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results. INVENTORY VALUATION. Our inventories are recorded at the lower of standard cost or the current estimated market value. 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. Demand for our products has fluctuated significantly and may do so in the future, which could result in an increase in the cost of inventory or an increase in excess inventory quantities on hand. 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. 12 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, and there can be no assurance that future developments will not necessitate further write-downs. VALUATION OF LONG-LIVED ASSETS. We periodically evaluate whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of our long-lived assets, such as our investment in our toner manufacturing equipment. We have approximately $7.8 million invested in such equipment and plant improvements, with a carrying value of $6.5 million, that have estimated lives of up to twenty years. Should competing technologies or offshore competitors cause our manufacturing technology to be non-competitive, or should other events or circumstances indicate that the carrying amount of these assets would not be recoverable, the estimated life of these assets may need to be shortened and their carrying value could be materially affected. If the sum of the undiscounted expected cash flows from an asset to be held and used in operations is less than the carrying value of the asset, an impairment loss is recognized. WARRANTY. We provide a limited warranty, generally ninety (90) days, to all purchasers of our products. Accordingly, we do not make a provision for the estimated cost of providing warranty coverage, and instead we expense these costs as they are incurred. On occasion, we have been required and may be required in the future to provide additional warranty coverage to ensure that our products are ultimately accepted or to maintain customer goodwill. While our warranty costs have historically not been significant, we cannot guarantee that we will continue to experience a similar level of predictability with regard to warranty costs as we have in the past. In addition, the introduction of more expensive finished products, technological changes or previously unknown defects in raw materials or components may result in more extensive and frequent warranty claims than anticipated, which could have a material adverse impact on our operating results for the periods in which such additional costs materialize. RESULTS OF OPERATIONS Color Imaging's net sales were $5.1 million and $10.7 million for the three and six months ended June 30, 2003, a decrease of approximately 37% and 32% from the three and six months ended June 30, 2002. The net sales by product category were as follows:
% Increase (Dollars in thousands) 2003 % (Decrease) 2002 % ---------- ---- ---------- --------- ---- Three Months ------------ Product Category: Cartridges and bottles Copier finished products $ 2,842 56% (37%) $ 4,478 56% Printer finished products 857 17% ( 5%) 898 11% ---------- ---------- --------- 3,699 73% (31%) 5,376 67% Bulk toner and parts 1,360 27% (48%) 2,594 33% ---------- ---------- --------- Total net revenue $ 5,059 100% (37%) $ 7,970 100% ========== ========== ========= Six Months ---------- Product Category: Cartridges and bottles Copier finished products $ 5,893 55% (33%) $ 8,818 56% Printer finished products 1,823 17% ( 3%) 1,876 12% ---------- ---------- --------- 7,716 72% (28%) 10,694 68% Bulk toner and parts 2,972 28% (40%) 4,938 32% ---------- ---------- --------- Total net revenue $10,688 100% (32%) $15,632 100% ========== ========== =========
13 The following table sets forth certain information derived from the Company's unaudited interim statements of operations:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2003 2002 2003 2002 ----- ----- ----- ----- (PERCENTAGE OF NET SALES) Net sales 100 100 100 100 Cost of sales 70 86 73 85 Gross profit 30 14 27 15 Administrative expenses 8 4 8 4 Research and development 6 3 6 3 Sales and marketing 8 4 7 4 Operating income 8 2 6 4 Interest expense 1 1 0 1 Depreciation and amortization 6 2 4 2 Income before taxes 8 1 6 3 Provision for income taxes 3 1 2 1 Income from continuing operations 5 1 3 2 Loss from discontinued operations, net of income taxes 0 -1 0 -1 Net income 5 0 3 1
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 NET SALES. Our net sales decreased by $2.9 million, or 37%, to $5.1 million for the three months ended June 30, 2003, from $8.0 million for the three months ended June 30, 2002. Net sales made in the United States were $3.0 million, a decrease of $2.0 million, or 39%, from $5.0 million made in the comparable period in 2002. Net sales made outside of the United States decreased by $0.9 million, or 31%, for the quarter compared to the same quarter of 2002. The decrease in net sales for the quarter compared to that of a year ago made both inside and outside of the United States was primarily the result of decreased sales to our two largest customers. Of the $5.1 million in net sales, $3.7 million, or 73%, were attributable to our copier and printer finished products, compared to 67% for the comparable period in 2002, while the net sales of bulk toner and parts declined from 33% of net sales for the three months ended June 30, 2002 compared to 27% for the comparable period in 2003. Net sales to our two largest customers decreased as a percentage of our total sales to 45% for the three months ended June 30, 2003, from 52% for the comparable period in 2002. COST OF GOODS SOLD. Cost of goods sold decreased by $3.3 million, or 49%, to $3.5 million from $6.9 million for the three months ended June 30, 2003 for the comparable period in 2002, primarily as the result of the decrease in net sales and secondarily from reduced costs of manufacturing. Cost of goods sold as a percentage of net sales decreased by 16 percentage points from 86% for the three months ended June 30, 2002 to 70% for the three months ended June 30, 2003, primarily as the result of reduced sales derived from certain very low margin products previously sold to our largest customer that have been discontinued and a larger percentage of sales being derived from sales of products with higher gross margins. GROSS PROFIT. As a result of the above factors, gross profit increased to $1.5 million in the three months ended June 30, 2003 from $1.1 million in the three months ended June 30, 2002, or by $447,000, while net sales for the same period decreased by $2.9 million. Gross profit as a percentage of net sales increased by 16 percentage points from 14% to 30% for the three months ended June 30, 2003, 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 low margin products previously sold to our largest customer that have been discontinued and a larger percentage of sales being derived from sales of products with higher gross margins. OPERATING EXPENSES. Operating expenses decreased $235,000, or 26%, to $1,140,000 in the three months ended June 30, 2003 from $905,000 in the three months ended June 30, 2002. General and administrative, selling and R&D expenses increased, as a percentage of net sales, to 22% in the three months ended June 30, 2003 from 11% in the three months ended June 30, 2002 as the result of the decrease in net sales for the quarter and higher expenditures in all categories. General 14 and administrative expenses increased approximately 29%, or $97,000 to $426,000 for the three months ended June 30, 2003 from the comparable period in 2002, largely resulting from increased professional fees in connection with complying with the change in SEC reporting requirements from Regulation SB to S-K and increased state franchise taxes. Selling expenses increased by $52,000, or 15%, in the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Selling expenses increased primarily as a result of increased advertising and manufacturer's representative expenses. Research and development expenses increased by $86,000, or 36%, to $325,000 in the three months ended June 30, 2003, primarily as the result of increased expenditures for testing and qualifying toner products and the recruitment and relocation of our vice president of technology. 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 41% increase in gross profit, operating income increased by $212,000, or 113%, to a profit of $399,000 in the three months ended June 30, 2003 from $187,000 in the three months ended June 30, 2002. INTEREST AND FINANCE EXPENSE. Interest expense decreased by $57,000 in the three months ended June 30, 2003 from the three months ended June 30, 2002. The decrease was primarily the result of reduced interest bearing debt levels. OTHER INCOME. Other income increased by $38,000 from income of $22,000 to income of $60,000 in the three months ended June 30, 2003 from the three months ended June 30, 2002, primarily as the result of Euro exchange gains. INCOME TAXES. As the result of our profit from continuing operations in the three months ended June 30, 2003, we recorded an income tax provision of $171,000 for the period, while the income tax provisions were $46,000 for the three months ended June 30, 2002. SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 NET SALES. Our net sales decreased by $4.9 million, or 32%, to $10.7 million for the six months ended June 30, 2003, from $15.6 million for the six months ended June 30, 2002. Net sales made in the United States were $6.3 million, a decrease of $3.7 million, or 37%, from $10.0 million made in the comparable period in 2002. Net sales made outside of the United States decreased by $1.4 million, or 25%, to $4.3 million for the six months ended June 30, 2003 compared to the same six months of 2002. The decrease in net sales for the six months ended June 30, 2003, compared to that of a year ago resulted primarily from reduced sales to our two largest customers. Of the $10.7 million in net sales, $7.7 million, or 72%, were attributable to our finished products for use in copiers and printers, while $3.0 million, or 28%, were derived from the sale of bulk toners and parts. Of the $15.6 million in net sales for the six months ended June 30, 2002, 68% were derived from finished products for use in copiers and printers, while $4.9 million, or 32%, were derived from the sale of bulk toners and parts. The revenue decrease for the six months ended June 30, 2003 compared to the same period in 2002 for finished products and bulk toners and parts for use in copiers and laser printers from 2002 to 2003 was 28% and 40%, respectively, reflecting the decreased sales from our two largest customers and our continuing transition to the sale of more finished products. COST OF GOODS SOLD. Cost of goods sold decreased by $5.5 million, or 41%, to $7.8 million from $13.3 million for the six months ended June 30, 2003 from the comparable period in 2002. Cost of goods sold as a percentage of net sales decreased by 12 percentage points from 85% for the six months ended June 30, 2002 to 73% for the six months ended June 30, 2003, primarily as the result of reduced sales derived from certain very low margin products previously sold to our largest customer that have been discontinued and larger percentage of sales being derived from sales of products with higher gross margins. GROSS PROFIT. As a result of the above factors, gross profit increased to $2.9 million in the six months ended June 30, 2003 from $2.3 million in the six months ended June 30, 2002, or $544,000 and 23%, while net sales for the same period decreased by $4.9 million, or 32%. Gross profit as a percentage of net sales increased by 12 percentage points from 15% to 27% for the six months ended June 30, 2003, 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 low margin products previously sold to our largest customer that have been discontinued and a larger percentage of sales being derived from sales of products with higher gross margins. OPERATING EXPENSES. Operating expenses increased $488,000 or 28% to $2.2 million in the six months ended June 30, 2003 from $1.8 million in the six months ended June 30, 2002. As a percentage of net sales general and administrative, selling and R&D expenses, was 21% and 11%, respectively, for the six months ended June 15 30, 2003 and 2002. The increase in operating expenses as a percentage of net sales was largely the result of the decrease in net sales for the six months ended June 30, 2003, and increased expenses in each operating expense category in support of the changes being made in the operations of the Company. General and administrative expenses increased approximately 28%, or $198,000 to $893,000 for the six months ended June 30, 2003 from the comparable period in 2002, largely resulting from increased professional expenses for compliance with changing from SEC regulation SB to S-K reporting and the repurchase of securities issued in our private placement completed in 2001, the provision of $78,000 for a bonus program and payroll for a staff addition. Selling expenses increased by $144,000, or 24%, in the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Selling expenses increased primarily as the result of increased advertising, product samples given to customers and payroll for sales and customer support staff increases. Research and development expenses increased by $146,000, or 32%, to $597,000 in the six months ended June 30, 2003, primarily as the result of increased expenditures for product testing and qualification and expenses in connection with the hiring and relocation of our vice president of technology. We expect to continue to increase research and development expenditures in an effort to develop and bring to market more new, rigorously tested, 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 $156,000, to a profit of $613,000 in the six months ended June 30, 2003 from $557,000 in the six months ended June 30, 2002. INTEREST AND FINANCE EXPENSE. Interest expense decreased by $56,000 in the six months ended June 30, 2003 from the six months ended June 30, 2002. The decrease was primarily the result of reduced interest bearing debt levels. OTHER INCOME. Other income increased by $80,000 from income of $29,000 to income of $109,000 in the six months ended June 30, 2003 from the six months ended June 30, 2002. INCOME TAXES. As the result of our increased profit from continuing operations for the six months ended June 30, 2003, our provision for taxes increased from $161,000 in the six months ended June 30, 2002 to $245,000 for the period ended June 30, 2003. 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 unaudited consolidated statements of operations.
For the Three Months Ended For the Six Months Ended June 30, June 30, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (Loss) from discontinued operations: Before income taxes $ -- $(154,824) $ -- $(260,326) Income tax provision (benefit) -- (62,000) -- ( 97,244) ----------- ----------- ----------- ----------- Net (loss) from discontinued operations $ -- $ (92,824) $ -- $(163,082) =========== =========== =========== ===========
LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, and December 31, 2002, our working capital and current ratio was approximately $7.2 million and $1.8 million and 2.74 to 1 and 1.29 to 1, respectively. The substantial increase in our working capital and current ratio at June 30, 2003, compared to December 31, 2002, was primarily due to the net proceeds we received for the public sale on Form SB-2 of our common stock. Cash flows used by continuing operating activities were $470,700 in the six months ended June 30, 2003 compared to $27,693 provided by continuing operations in the six months ended June 30, 2002. The cash flows used by continuing operating activities in the six months ended June 30, 2003 increased primarily due to the reduction made to accounts payable and increased inventory net of a reduction in accounts receivable. Cash flows used in investing activities were $146,819 in the six months ended June 30, 2003, compared to $331,311 in the six months ended June 30, 2002. The decrease in cash used in investing activities in the six months ended June 30, 2003, was entirely attributable to decreased capital expenditures in connection with our most recent factory expansion. 16 We have a $1.5 million revolving line of credit, as amended, with our bank with an outstanding balance as of June 30, 2003 of $0, bearing interest at the one-month Libor interest rate in effect two business days before the first day of the month plus 2.50%. As of June 30, 2003, the interest rate was the one-month Libor rate of 1.12% plus 2.50% (3.62%). This revolving line of credit has a June 30, 2004 expiration date. Under the line of credit, we are permitted to borrow up to 75% of eligible accounts receivable and 50 percent of eligible inventories (up to a maximum of $750,000 and not to exceed 50 percent of the total outstanding). We have granted the bank a security interest in all of our assets as security for the repayment of the line of credit. The bank agreement contains various covenants which we are required to maintain, and as of June 30, 2003, we were in compliance with these covenant requirements. Cash flows provided by financing activities, after the repayment of $1,678,213 of debt and $1,022,470 reduction to the line of credit for the six months ended June 30, 2003 were $3,040,196, resulting primarily from the $5,917,000 in net proceeds received for the public sale of our common stock to an affiliate. Cash flows provided by financing activities for the same six month period ended June 30, 2003, were $286,381, derived primarily from $500,000 in proceeds from related party borrowings. On April 18, 2003, Color Imaging established a stock repurchase program under which Color Imaging's common stock, with an aggregate market value up to the lesser of $1 million or 1 million shares, may be acquired in the open market or through private or other transactions. In July 2003, Color Imaging has repurchased some 9,500 shares our common stock which have yet to be certificated and cancelled. We believe that existing cash balances, cash generated by operating activities, and funds available under our credit facility will be sufficient to finance our operating and investing activities for at least the next 12 months, which will include expenditures of approximately $500,000 for manufacturing and research and development equipment, approximately $100,000 for a significant upgrade to our accounting and manufacturing computer system and the repurchase of our stock under the stock repurchase program of up to the lesser of $1,000,000 or 1,000,000 shares of our common stock. FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS RISK FACTORS RISKS RELATED TO OUR BUSINESS: OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CUSTOMERS. For the six months ended June 30, 2003, two customers accounted for approximately 48% 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. OUR RELIANCE ON SALES TO A FEW MAJOR CUSTOMERS AND GRANTING CREDIT TO THOSE CUSTOMERS PLACES US AT FINANCIAL RISK. As of June 30, 2003, receivables from two customers comprised 44% of accounts receivable. A concentration of our receivables from a small number of customers places us at risk should these receivables become uncollectable. If any one or more of our major customers is unable to pay us it could adversely affect our results of operations and financial condition. Color Imaging attempts to manage this credit risk by performing credit checks, requiring significant partial payments prior to shipment where appropriate, and actively monitoring collections. APPROXIMATELY 39% 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 31% of our sales for the six months ended June 30, 2003, were derived from products limited to a specific supplier. For the six months ended June 30, 2003, we purchased 39% of our supplies from that same supplier. We do 17 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. IF OUR CRITICAL SUPPLIERS FAIL TO DELIVER SUFFICIENT QUANTITIES OF MATERIALS OR PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER IT COULD NEGATIVELY AFFECT OUR BUSINESS. We use a wide range of materials in the production of our products, and we use numerous suppliers to supply materials and certain finished products. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of customers' orders, we do not maintain an extensive inventory of materials for manufacturing or resale. Key suppliers include providers of special resins, toners and our injection molder affiliate that provides plastic bottles, cartridges and related components designed to avoid the intellectual property rights of others. Although we make reasonable efforts to ensure that raw materials, toners and certain finished products are available from multiple suppliers, this is not always possible; accordingly, some of these materials are being procured from a single supplier or a limited group of suppliers. Many of these suppliers are outside the United States, resulting in longer lead-times for many important materials, which could cause delays in meeting shipments to our customers. We have sought, and will continue to seek, to minimize the risk of production interruptions and shortages of key materials and products by: o selecting and qualifying alternative suppliers for key materials and products; o monitoring the financial stability of key suppliers; and o maintaining appropriate inventories of key materials and products. There can be no assurance that results of operations will not be materially and adversely affected if, in the future, we do not receive in a timely and cost-effective manner a sufficient quantity of raw materials, toners or finished products to meet our production or customer delivery requirements. 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 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 decline, our business will be materially and adversely affected. OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY DEVELOP, OR ACQUIRE FROM THIRD PARTIES, INTELLECTUAL PROPERTY OR PRODUCTS THAT WE CAN COMMERCIALIZE AND THAT ACHIEVE MARKET ACCEPTANCE. 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. 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. Success in the aftermarket imaging industry depends, in part, on developing consumable products that are compatible with the printers, photocopiers and facsimile machines made by the OEMs, and that have a selling price less than that of like consumable supplies offered by the OEM. For example, if the OEMs introduce chemical toners with better imaging characteristics and higher yields, microprocessor chips that communicate between the toner cartridge and the device, or introduce products using patented or other proprietary technologies, then the aftermarket industry has to respond with ongoing development programs to offer compatible products that emulate the OEMs' without infringing upon the OEM's intellectual property. 18 Technical innovations are inherently complex and require long development cycles and appropriate professional staffing. Our future business success depends on our ability, and that of critical suppliers, to develop and introduce new products that successfully address the changing technologies of the OEMs, meet the customer's needs and win market acceptance in a timely and cost-effective manner. If we do not develop and introduce products compatible with the OEM's technologies in a timely manner in response to changing market conditions or customer requirements, our business could be seriously harmed. The challenges we face in implementing our business model include establishing market acceptance of existing products 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 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. OUR BUSINESS MIGHT BE ADVERSELY AFFECTED BY OUR DEPENDENCE ON FOREIGN BUSINESS. We sell a significant amount of product to customers outside of the United States. International sales accounted for 41%, 37%, 24% and 10% of net sales for the six months ended June 30, 2003, and in the years ended December 31, 2002, 2001 and 2000, respectively. We expect that shipments to international customers will continue to account for a material portion of net sales. During the six months ended June 30, 2003, our sales were made to customers outside the United States as follows: o Europe/Eastern Europe - 22% o Mexico - 12% o Asia/Southeast Asia - 3% o Other - 4% Most of our products sold internationally, including 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. Most of our products are priced in U.S. dollars, but because we began selling products in Europe denominated in Euros during 2001, 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. We recorded a gain of $75,865 for the six months ended June 30, 2003. We recorded a gain of $2,858 and a charge of $1,877 during the years ended December 31, 2002 and 2001, respectively, as a result of foreign currency transactions. While our business has not been materially affected in the past by foreign business or currency fluctuations, because of our significant dependence on international revenues, our operating results could be negatively affected by a continued or additional decline in the economies of any of the countries or regions in which we do business. Periodic local or international economic downturns, trade balance issues, changes to duties, tariffs or environmental regulations, political instability and fluctuations in interest and currency exchange rates could negatively affect our business and results of operations. We cannot assure you that these factors will not have a material adverse effect on our international sales and would, as a result, adversely impact our results of operation and financial condition. OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED IF WE ARE UNABLE TO RECOUP OUR INVESTMENT IN RESEARCH AND DEVELOPMENT. The rapid change in technology in our industry requires that we continue to make investments in research and development in order to not only develop technologies that function like the OEMs' and do not infringe on the OEMs' intellectual property rights, but we must also enhance the performance and functionality of our products and to keep pace with competitive products and satisfy customer demands for improved performance, features, functionality and 19 costs. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements or that we will be able to secure the financial resources necessary to fund future development. Research and development costs typically are incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business could be seriously harmed if we are unable to sell our products at favorable prices or if our products are not accepted by the market in which we operate. 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. WE DEPEND ON THE EFFORTS AND ABILITIES OF CERTAIN SENIOR MANAGEMENT AND OTHER KEY PERSONNEL 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. WE HAVE A SINGLE MANUFACTURING FACILITY AND WE MAY LOSE REVENUE AND BE UNABLE TO MAINTAIN OUR CLIENT RELATIONSHIPS IF WE LOSE OUR PRODUCTION CAPACITY. We manufacture all of the products we sell in our existing facility in Norcross, Georgia. If our existing production facility becomes incapable of manufacturing products for any reason, we may be unable to meet production requirements, we may lose revenue and we may not be able to maintain our relationships with our customers. Without our existing production facility, we would have no other means of manufacturing products until we were able to restore the manufacturing capability at our facility or develop an alternative manufacturing facility. Although we carry business interruption insurance to cover lost revenue and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing customers resulting from our inability to produce products for them. 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. 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, 20 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. 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. 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. THE IMAGING SUPPLIES INDUSTRY IS COMPETITIVE AND WE ARE RELATIVELY SMALL IN SIZE AND HAVE FEWER RESOURCES IN COMPARISON WITH MANY OF OUR COMPETITORS. Our industry includes large original equipment manufacturers of printing and photocopying equipment and the related imaging supplies, as well as other manufacturers and resellers of aftermarket imaging supplies, with substantial resources to support customers worldwide. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. All of the original equipment manufacturers and many of our other competitors are diversified companies with greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. We face competition from companies whose strategy is to provide a broad array of products, some of which compete with the products that we offer. These competitors may bundle their products in a manner that may discourage customers from purchasing our products. In addition, we face competition from smaller emerging imaging supply companies whose strategy is to provide a portion of the products and services that we offer. Loss of competitive position could impair our prices, customer orders, revenues, gross margins, and market share, any of which would negatively affect our operating results and financial condition. Our failure to compete successfully with these other companies would seriously harm our business. There is risk that larger, better-financed competitors will develop and market more advanced products than those that we currently offer or may be able to offer, or that competitors with greater financial resources may decrease prices thereby putting us under financial pressure. The occurrence of any of these events could have a negative impact on our revenues. 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. 21 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 BENEFICIALLY OWN APPROXIMATELY 42% OF THE OUTSTANDING SHARES OF COMMON STOCK, ALLOWING THESE STOCKHOLDERS TO CONTROL MATTERS REQUIRING APPROVAL OF THE STOCKHOLDERS. As a result of such ownership by our officers and directors, 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 July 28, 2003, we had issued and outstanding 12,925,005 shares of common stock and 935,337 outstanding warrants and 970,000 outstanding options to purchase additional shares of common stock, inclusive of 66,670 shares of our common stock and warrants to purchase 133,340 shares of our common stock that have been repurchased pursuant to a repurchase agreement and will be cancelled upon their receipt from escrow. Further, subject to cancellation upon certification, are 9,500 shares that we repurchased in the market pursuant to our stock repurchase program. 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. WE MAY FACE POTENTIAL REGULATORY ACTION OR LIABILITY IN CONNECTION WITH OUR 2001 PRIVATE PLACEMENT. Our issuance of common stock and warrants in a private placement which was completed in 2001 could subject us to potential adverse consequences, including securities law liability and the voiding of contracts entered into in connection with the private placement. If our activities or the activities of other parties in the 2001 private placement are deemed to be inconsistent with securities laws under Section 29 of the Securities Exchange Act of 1934 or our activities or the activities or the activities of other parties are deemed to be inconsistent with the broker dealer registration provisions of Section 15(a) of the Exchange Act: o we may be able to void our obligation to pay transaction-related fees in connection with the private placement and we may receive reimbursement for fees already paid; o persons with whom we have entered into securities transactions that are subject to these transaction-related fees may have the right to void these transactions; and o we may be subject to regulatory action. Due to the inherent uncertainties involved with the interpretation of securities laws, we are unable to predict the following: the validity of any potential liability in connection with our private placement, the outcome of any regulatory action or potential liability or the outcome of voiding transactions in connection with the private placement. The defense of any regulatory action or litigation and any adverse outcome could be costly and could have a material adverse effect on our financial position and results of operations and could divert management attention. 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. 22 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, but are not limited to: 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; 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. 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 23 our securities or cash flow, the ability to expand capacity by placing in service additional manufacturing equipment during 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, our introduction of new products and our increasing our sales from digital copier, color and magnetic character recognition toner products during 2003, the prospective effects of having discontinued the Logical Imaging Solutions operations, 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 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. ITEM 3. Quantitative and Qualitative Disclosures about Market Risks Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market sensitive financial instruments, including long-term debt. We do not hold any investments or assets outside of the United States. However, we are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. We estimate that about 7% of our transactions are denominated in U.S. dollars, excepting those sales in Euros to a few customer's in Europe, including our second largest customer European operations. Accordingly, beginning in 2001, we are subject to foreign currency risk with respect to future costs or cash flows from our sales in Euros. We have adjusted our prices annually with our customer to reflect the change in the exchange rate and do not expect to be subject to material foreign currency risk, accordingly, with respect to those sales. As a result, to date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange. We incurred a net foreign currency transaction gain of $75,865 in the six months ended June 30, 2003, and we incurred a net foreign currency transaction gain of $2,858 and a loss of $1,877 in the years ended December 31, 2002 and 2001, respectively. Our contract pricing for our products sold in Euros is currently at the rates of 0.96 and 1.00 Euros relative to the U.S. dollar. A 10% change in the value of the Euro relative to the United States dollar would cause approximately an $8,000 foreign currency translation adjustment in an average month, a type of other comprehensive income (loss), which would be a direct adjustment to stockholders' equity. Our revolving line of credit bears interest based on interest rates tied to the LIBOR rate, which may fluctuate over time based on economic conditions. As a result, we are subject to market risk for changes in interest rates and could be subjected to increased or decreased interest payments if market rates fluctuate and we are in a borrowing mode. At June 30, 2003, there were no amounts outstanding under the line of credit agreement and, accordingly, a sustained increase in the reference rate of 1% would not cause our annual interest expense to change. Our investment policy requires investments with high credit quality issuers and or over night repurchase agreements with our bank. Investments we make will principally consist of U.S. government and government agency obligations and investment-grade, interest-bearing corporate debt securities with varying maturity dates of five years or less, or the overnight purchase of securities held in our bank's investment portfolio. Because of the credit criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates. We had approximately $1,750,000 invested in securities, which are available for sale, at June 30, 2003, and we experienced a net asset value loss of $1,037 as the result of the recent interest rate change. Management believes that a reasonable change in raw material prices could have a material impact on future earnings or cash flows, because we generally are not able to offset increases to our costs with higher prices for our products. ITEM 4. Controls and Procedures a) On July 24, 2003, 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. 24 b) Our President and principal executive officer and Chief Financial Officer are involved in ongoing evaluations of internal controls. On July 24, 2003, in anticipation of the filing of this Form 10-Q, they reviewed our internal controls and have determined, based on such review, that, since the date of their review, 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 January 23, 2003, the Company's registration statement on Form SB-2, registering up to 7 million shares of the Company's common stock, was declared effective (Registration Statement No. 333-76090), and the offering was commenced by the Company's officers and directors. On March 13, 2003, the Company completed the public sale of 4,500,000 shares of the Company's common stock at a price of $1.35 per share, whereby the Company received $6,075,000 in gross proceeds from an affiliate, and the Company terminated the offering before the sale of all 7 million of registered shares. From the effective date of the Company's registration statement through March 31, 2003, the Company incurred total expenses for professional fees and printing of $30,129 in connection with the issuance and distribution of the Company's common stock. The net proceeds received by the Company, after expenses of $30,129, was $6,044,871. None of the aforementioned expenses were direct or indirect payments to directors, officers, their associates or persons owning ten (10) percent or more of the common stock of the Company. Our intended uses of the $6,075,000 of proceeds received from the public sale of our common stock, and our uses through June 30, 2003, are listed below in descending order of priority:
Purpose: Amount Used Reallocated Remaining - ------------------- ---------- ---------- ----------- ---------- Accounts payable and other corporate and offering expenses. . . . . . . . . . . . . . . $1,000,000 $ 403,684 $ 0 $ 596,316 To retire debt (1). . . . . . . . . . . . . . . . . $ 350,000 $ 324,301 $ 25,699 $ 0 To retire debt (2). . . . . . . . . . . . . . . . . $1,050,000 $ 956,883 $ 93,117 $ 0 To retire debt (3). . . . . . . . . . . . . . . . . $ 0 $ 235,000 $ 235,000 $ 0 To acquire capital assets . . . . . . . . . . . . . $1,500,000 $ 30,131 $ 0 $1,469,869 To repurchase our stock $ 0 $ 0 $ 1,000,000 $1,000,000 For other general corporate purposes including working capital. . . . . . . . . . . . . $2,175,000 $ 260,000 $ 1,116,185 $ 798,815 ---------- ---------- ---------- Total: $6,075,000 $2,210,000 $3,865,000 Pending application: - ------------------- Short-term investments. . . . . . . . . . . . . . . $2,365,000 Pay down of revolving line of credit. . . . . . . . $1,500,000
- ---------------- (1) On November 30, 2000, we entered into a loan for $500,000 with a 5-year term, secured by specific manufacturing equipment, maturing November 30, 2004, with General Electric Capital Corporation for the purchase of toner manufacturing equipment. The interest rate is 10.214% and the monthly principal and interest payments are $10,676.39. (2) On June 24, 1999, we entered into a loan for $1,752,000 with a 7-year term, secured by our business assets, maturing June 24, 2006, with SouthTrust Bank for the refinancing of obligations owing the bank for the acquisition of equipment and that due under a previous working capital line of credit. The interest rate is 7.90% per annum and the monthly principal and interest payments are $27,205.00. (3) On July 24, 1999, as amended, we entered into a borrowing arrangement under a revolving line of credit in the maximum amount of $2.5 million. During March 2003 we temporarily used $1,735,000 of our proceeds from our public offering on Form SB-2 to pay down the line of credit to $0, which at that time had an interest rate of 3.8375%. On June 16, 2003, we renewed and restructured the line of credit with the bank, reducing the maximum availability to $1.5 million and permanently retiring $235,000. 25 During March 2003, using proceeds from the offering on Form SB-2, the Company retired debt owed to General Electric Capital Corporation and SouthTrust Bank, and to the extent proceeds were not required in the amounts outlined for those purposes, they have been reallocated to be used for general corporate purposes. During March 2003, pending application of the proceeds from the offering on Form SB-2, the Company paid down its line of credit with the bank by the then outstanding principal balance of $1,735,000. On June 16, 2003, with the renewal of our line of credit with SouthTrust Bank, we permanently reduced our revolving line of credit to $1,500,000; and, as a result, we retired $235,000 of that debt with our bank. On April 18, 2003, the Company established a stock repurchase program under which the Company may purchase on the open market the lesser of the aggregate value of $1,000,00 or 1,000,000 shares in compliance with Rule 10b-18, and we have reallocated proceeds for this program. In July 2003, under the repurchase program the Company has repurchased 9,500 shares of our common stock on the open market at an average price of $.66. Approximately $994,000 remains available for future common stock repurchases. Pending application, we have retained the balance of the net proceeds in a deposit account with the bank and an investment account with a securities firm related to the bank. No direct or indirect payments to directors, officers, their associates or persons owing ten (10) percent or more of the Company's common stock were made with proceeds from the Company's offering on Form SB-2 On March 4, 2003, the Company completed the repurchase from a stockholder of 12,939 shares of the Company's common stock together with warrants to purchase 25,878 shares of the Company's common stock at an exercise price of $2.00 per share for $25,878. The shares and warrants were originally sold in the Company's private placement that was completed in December 2001, and the shares and warrants repurchased by the Company were cancelled. On February 27, 2003, the Company entered into an agreement with a stockholder to repurchase 150,000 shares of common stock and warrants to purchase 300,000 shares of the Company's common stock at an exercise price of $2.00 per share. Under the agreement, the stockholder has a one-time right to cancel the sale of the common stock and warrants not yet paid for by the Company upon written notice to the Company. Upon receipt of such notice, the Company is not obligated to purchase the remaining common stock and warrants. The agreement provides that the Company is to pay $2.00 for each common share and warrant to purchase two common shares of the Company's common stock. The shares and warrants are to be repurchased in approximately equal installments over nine months, beginning in March and ending in November 2003. From March 24, 2003 through June 30, 2003, the Company repurchased 66,670 of the Company's common shares and warrants to purchased 133,340 common shares, paying $133,340. The shares and warrants repurchased by the Company are held in escrow, pending the completion of the repurchase in November 2003, or its earlier cancellation, at which time they will be cancelled. ITEM 3. Defaults upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Registrant held its Annual Meeting of Stockholders on June 16, 2003. The following proposals were adopted by the votes indicated. (b) Seven directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2003. The names of these Directors and votes cast in favor of their election and shares withheld are as follows:
NAME VOTES FOR % FOR VOTES WITHHELD ---- --------- ----- -------------- Jui-Hung Wang 10,616,263 82.1 115,541 Sueling Wang, Phd 10,670,546 82.6 61,258 Morris E. Van Asperen 10,616,296 82.1 115,508 Yi Jen Wang 10,616,296 82.1 115,508 Jui-Chi Wang 10,616,296 82.1 115,508 Jui-Kung Wang 10,616,296 82.1 115,508 Richard S. Eiswirth 10,720,546 82.9 11,258
26 (c) The proposal to approve the Color Imaging 2003 Stock Incentive Plan was approved by 9,785,701 votes for with 946,103 votes withheld. (d) The prior grant of options to employees, officers and directors of Color Imaging was ratified by a vote of 9,786,592 for and 945,212 votes withheld. (e) The selection of Lazar Levine & Felix, LLP as our independent accountants for the year ending December 31, 2003 was ratified by 10,676,386 votes for with 55,418 votes withheld. ITEM 5. Other Information None 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(1) 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 Exhibit 3.1 to the Registration statement on Form SB-2 filed 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 Exhibit 4.1 to the Registration statement on Form SB-2 filed May 31, 2002. 4.2 Promissory Note of Wall Street Consulting Corp. dated October 30, 2001, incorporated by reference to Exhibit 4.2 to the Registration statement on Form SB-2 filed May 31, 2002. 4.3 Form of Warrant issued to Selling Stockholders, incorporated by reference to Exhibit 4.3 to the Registration statement on Form SB-2 filed November 28, 2001. 4.4 Development Authority of Gwinnett County, Georgia Industrial Development Trust Indenture dated June 1, 1999, incorporated by reference to Exhibit 4.27 to the Registration statement on Form SB-2 filed May 31, 2002. 4.5 Loan Agreement between the Company, Kings Brothers LLC and the Development Authority of Gwinnett County, Georgia dated June 1, 1999, incorporated by reference to Exhibit 4.28 to the Registration statement on Form SB-2 filed May 31, 2002. 4.6 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 Exhibit 4.28 to the Registration statement on Form SB-2 filed February 11, 2002. 27 Exhibit No. Description ----------- ----------- 4.7 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 Exhibit 4.29 to the Registration statement on Form SB-2 filed February 11, 2002. 4.8 $500,000 Promissory Note between Color Imaging and Sueling Wang dated March 14, 2002, incorporated by reference to Exhibit 4.34 to the Registration statement on Form SB-2 filed April 11, 2002. 4.9 $500,000 Promissory Note between Color Imaging and Jui Hung Wang dated August 21, 2002, incorporated by reference to Exhibit 4.50 to the Registration statement on Form SB-2 filed October 2, 2002. 4.10 $100,000 Promissory Note between Color Imaging and Jui Chi Wang dated August 21, 2002, incorporated by reference to Exhibit 4.51 to the Registration statement on Form SB-2 filed October 2, 2002. 4.11 First Note Modification Agreement between Sueling Wang and Color Imaging dated August 27, 2002, incorporated by reference to Exhibit 4.52 to the Registration statement on Form SB-2 filed October 2, 2002. 4.12+ Amended and restated $1,500,000 revolving note between Color Imaging and SouthTrust Bank dated June 16, 2003. 4.13+ Amended and restated loan and security agreement between Color Imaging and SouthTrust Bank dated June 16, 2003. 10.1 Employment Agreement between Color Imaging and Dr. Sueling Wang dated June 28, 2000, incorporated by reference to Exhibit 10.2 to the Registration statement on Form SB-2 filed November 28, 2001. 10.2 Employment Agreement between the Company and Morris E. Van Asperen dated June 28, 2000, incorporated by reference to Exhibit 10.3 to the Registration statement on Form SB-2 filed November 28, 2001. 10.3+ Employment Agreement amendment between the Company and Morris E. Van Asperen dated July 14, 2003. 10.4 Deferred Compensation Agreement Amendment between Charles R. Allison and Color Imaging, Inc., December 27, 2002, incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 2002. 10.5+ Amendment to Deferred Compensation Agreement between Color Imaging and Charles R. Allison dated June 27, 2003. 10.6 Lease Agreement between Color Imaging and Kings Brothers LLC dated April 1, 1999, incorporated by reference to Exhibit 10.5 to the Registration statement on Form SB-2 filed November 28, 2001. 10.7 Amendment No. 1 to Lease Agreement between the Company and Kings Brothers LLC dated April 1, 1999, incorporated by reference to Exhibit 10.6 to the Registration statement on Form SB-2 filed November 28, 2001. 10.8 Commercial Lease Agreement Amendment between Kings Brothers LLC and Color Imaging, Inc. dated February 5, 2003, incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 2002 10.9 Form of Warrant between Digital Color Print, Inc. and Color Imaging, Inc., incorporated by reference to Exhibit 10.10 to the Registration statement on Form SB-2 filed November 13, 2002. 10.10 Purchase and Sale and Release Agreement between Michael Edson and Color Imaging, Inc. dated February 27, 2003, incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the year ended December 31, 2002 10.11 Purchase and Sale and Release Agreement between Stephen Chromik and Color Imaging, Inc. dated February 27, 2003, incorporated by reference to Exhibit 10.15 to the Registrant's Form 10-K for the year ended December 31, 2002 10.12 Form of Indemnification Agreement, incorporated by reference to the post effective Amendment No. 1 to Form SB-2 filed April 1, 2003. 31+ Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 32+ Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 - ------------------------ + Filed herewith. (1) Pursuant to Rule 601(b)(2), the schedules and exhibits to this Agreement shall not be filed. A list of the schedules and exhibits is contained on the last page of the Agreement. The Registrant agrees to furnish supplementally a copy of any of the omitted schedules and exhibits to the Securities and Exchange Commission upon request. 28 (b) REPORTS ON FORM 8-K On April 1, 2003, the Company filed a Current Report on Form 8-K disclosing that the Company had not authorized and was not responsible for a press release, or its content, issued that date by Warrior Capital. On April 22, 2003, the Company filed a Current Report on Form 8-K announcing that the Company's board of directors had approved a stock repurchase program whereby the Company will buy back, at prices to be determined, its common stock in the open market (through a broker or otherwise) from time to time. 29 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 -------------------------------------- July 28, 2003 Sueling Wang, PhD President (principal executive officer) /S/ MORRIS E. VAN ASPEREN -------------------------------------- Morris E. Van Asperen Executive Vice President and Chief Financial Officer 30 1639953 EX-4.12 3 colorimaging10q63003ex412.txt AMENDED AND RESTATED REVOLVING NOTE EXHIBIT 4.12 AMENDED AND RESTATED REVOLVING NOTE $ 1,500,000.00 Atlanta, Georgia June 16, 2003 FOR VALUE RECEIVED, the undersigned, COLOR IMAGING, INC. ("Borrower"), a Delaware corporation, promises to pay to the order of SOUTHTRUST BANK ("Bank"), an Alabama banking corporation, at the office of Bank in Atlanta, Georgia, or at such other place as the holder of this Note may from time to time designate in writing, the principal sum of ONE MILLION FIVE HUNDRED THOUSAND and No/l00 Dollars ($1,500,000), or so much thereof as may have been advanced to Borrower from time to time and not repaid by Borrower pursuant to the terms hereof, together with interest on the unpaid principal amount of such advances at a per annum rate determined as set forth below as in effect from time to time so long as the principal amount, or any part thereof, is outstanding. The principal amount of each advance shall bear interest from the date of such advance. This Note is issued and outstanding pursuant to the Amended and Restated Loan and Security Agreement (the "Loan Agreement") between Borrower and Bank dated as of the date hereof. Interest will accrue under this Note as set forth in the Loan Agreement. The principal amount outstanding and the interest due hereunder will be payable as set forth in the Loan Agreement. Time is of the essence with respect to the amounts due hereunder. All capitalized terms utilized herein, not defined herein but defined in the Loan Agreement shall have the definitions ascribed thereto in the Loan Agreement. During the Commitment Period (as defined in the Loan Agreement), Borrower may borrow, repay and reborrow the principal sum of this Note, all in accordance with the terms of the Loan Agreement but only in such amounts and to the extent therein provided. On July 1, 2004, or such earlier date as may be provided in the Loan Agreement (the "Maturity Date"), this Note shall mature and all principal, interest, and other fees and charges due with respect hereto, if not previously paid, shall be immediately due and payable. Borrower will pay to Bank a late charge equal to three percent (3 %) of any payment not received by Bank within fifteen (15) days after the due date thereof. Collection or acceptance by Bank of such late charge shall not constitute a waiver of any remedies of Bank provided herein. This Note is referred to in and is entitled to the benefits of the Loan Agreement and is secured by the security set forth and/or referred to in said Loan Agreement. Funds disbursed hereunder shall be disbursed in accordance with the Loan Agreement. The principal sum evidenced by this Note, together with accrued but unpaid interest, shall be due and payable on the Maturity Date, but in any event at the option of Bank upon the occurrence of (a) any failure by Borrower to pay as and when due any installment of principal or interest due hereunder; (b) any default or Event of Default under the Loan Agreement or any other default or failure by Borrower to observe any covenant, condition or agreement under the terms of this Note, the Loan Agreement, any of the Loan Documents (as defined in the Loan Agreement) or any other security documents heretofore or hereafter executed by Borrower to secure this Note; (c) the expiration of the Commitment Period (as defined in the Loan Agreement); (d) the filing by Borrower of a voluntary petition in bankruptcy, the adjudication of Borrower as a bankrupt or insolvent, the filing by Borrower of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or Borrower's seeking or consenting to or acquiescence in the appointment of any trustee, receiver or liquidator or the making of any general assignment for the benefit of creditors or its admission in writing of its inability to pay its or his debts generally as they become due; (e) the entry by a court of competent jurisdiction of an order, judgment or decree approving a petition filed against Borrower seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency, or other relief for debtors, which order, judgment or decree remains unvacated and unstayed for thirty (30) consecutive days from the date of entry thereof, or the appointment of any trustee, receiver or liquidator of Borrower or of a substantial part of its property or of any or all of the rents, revenues, issues, earnings, profits or income thereof, or (f) the occurrence of any material adverse change in the financial condition or prospects of Borrower. Upon any default, Borrower agrees to pay interest to Bank (or any holder) at the annual rate equal to the Default Rate, as said rate shall change from time to time, on the aggregate indebtedness represented by this Note, including interest earned to maturity, from maturity, whether or not resulting from acceleration, until such aggregate indebtedness is paid in full. The Bank (or any holder) shall be entitled to recover all expenses of collecting this Note, including, without limitation, costs of court and reasonable and actual attorneys' fees. The acceptance by the Bank of any payment or payments due hereunder, or any part of such payment, after any default shall not constitute a waiver of such default by the Bank. With respect to the amounts due under this Note, Borrower waives the following: 1. All rights of exemption of property from levy or sale under execution or other process for the collection of debts under the Constitution or laws of the United States or any state thereof; 2. Demand, presentment, protest, notice of dishonor, notice of non-payment, suit against any party, diligence in collection, and all other requirements necessary to charge or hold the undersigned liable on any obligations hereunder; and 3. Any further receipt for or acknowledgment of any collateral now or hereafter deposited as security for the obligations hereunder. Regardless of any provision contained in this Note or any of the Loan Documents, in no event shall the aggregate of all amounts that are contracted for, charged or collected pursuant to the terms of this Note or any of the Loan Documents, and that are deemed interest under Applicable Law, exceed the Maximum Rate. No provision of this Note or in any of the Loan Documents or the exercise by Bank of any right hereunder or under any Loan Document or the prepayment by Borrower of any of the Obligations or the occurrence of any contingency whatsoever, shall entitle Bank to charge or receive, or to require Borrower to pay, interest or any amounts deemed interest by Applicable Law (such amounts being referred to herein collectively as "Interest") in excess of the Maximum Rate, and all provisions hereof or in any Loan Document which may purport to require Borrower to pay Interest exceeding the Maximum Rate shall be without binding force or effect to the extent only of the excess of Interest over such Maximum Rate. Any Interest charged or received in excess of the Maximum Rate ("Excess"), shall be conclusively presumed to be the result of an accident and bona fide error, and shall, to the extent received by Bank, at the option of Bank, either be applied to reduce the principal amount of the Obligations or returned to Borrower. The right to accelerate the maturity of any of the Obligations does not include the right to accelerate unaccrued interest and no such interest will be collected by Bank. All monies paid to Bank hereunder or under any of the Loan Documents shall be subject to any rebate of unearned interest as and to the extent required by Applicable Law. By the execution of this Agreement, Borrower covenants that: (a) the credit or return of any Excess shall constitute the acceptance by Borrower of such Excess, and (b) Borrower shall not seek or pursue any other remedy, legal or equitable, against Bank, based in whole or in part upon contracting for, charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Bank, all interest at any time contracted for, charged or received from Borrower in connection with this Agreement shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Obligations. Borrower and Bank shall, to the maximum extent permitted under Applicable Law, (a) characterize any non-principal payment as an expense, fee or premium rather than as Interest and (b) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into each Loan Document (whether or not any provision of this Section is referred to therein). BORROWER AND BANK HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY PERTAINING OR RELATING TO THIS NOTE, THE LOAN AGREEMENT, ANY LOAN DOCUMENT, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION WITH THIS NOTE OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF THE PARTIES HERETO WITH RESPECT TO THIS NOTE, THE LOAN AGREEMENT, ANY LOAN DOCUMENT, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR IN CONNECTION WITH THE TRANSACTIONS RELATED THERETO OR CONTEMPLATED THEREBY OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES THEREUNDER, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. BORROWER AND BANK AGREE THAT EITHER OR BOTH OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED AGREEMENT BETWEEN THE PARTIES IRREVOCABLY TO WAIVE TRIAL BY JURY, AND THAT ANY DISPUTE OR CONTROVERSY WHATSOEVER BETWEEN THEM SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. Bank shall not by any act, delay, omission, or otherwise be deemed to have waived any of its rights or remedies, and no waiver of any kind shall be valid unless in writing and signed by the Bank. All rights and remedies of Bank under the terms of this Note and under applicable statutes or rules of law shall be cumulative and may be exercised successively or concurrently. Borrower agrees that there are no defenses, equities or set offs in respect to the obligations set forth herein. The obligations of Borrower hereunder shall be binding upon and enforceable against Borrower's successors and assigns. The obligations of each person named as Borrower herein shall be joint and several obligations of all such persons. This Note shall be governed by, and construed in accordance with, the laws of the State of Georgia. Any provision in this Note which may be unenforceable or invalid under any law shall be ineffective to the extent of such unenforceability or invalidity without affecting the enforceability or validity of any other provision hereof. Any notice required to be given shall be deemed given if mailed, postage prepaid, to Borrower at the address set forth in the Loan Agreement. This Note renews, amends and restates that certain Revolving Note dated June 24, 1999, in the original principal amount of $1,500,000, as previously amended and renewed, and is not intended to be, nor shall it be construed to create, a novation or accord and satisfaction of such promissory note or any other obligation of Borrower owing to Bank at any time and shall be only a modification, extension and restatement of existing obligations of Borrower to Bank. IN WITNESS WHEREOF, Borrower has executed this instrument under seal as of the day and year first above written. BORROWER: COLOR IMAGING, INC., a Delaware corporation /S/ SUELING WANG By: ----------------------------------------- Dr. Sue-Ling Wang, President [CORPORATE SEAL] EX-4.13 4 colorimaging10q63003ex413.txt AMENDED AND RESTATED LOAN AND SECURITY AGMT. EXHIBIT 4.13 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT executed as of June 16, 2003, to be effective for all purposes as of July 1, 2003, by and between COLOR IMAGING, INC. ("Borrower"), a Delaware corporation, and SOUTHTRUST BANK ("Bank"), an Alabama banking corporation. R E C I T A L S: 1. CURRENT CIRCUMSTANCES. Borrower is indebted to Bank under a revolving loan in the maximum principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) evidenced by Loan and Security Agreement (as amended and modified prior to the date hereof, the "LOAN AGREEMENT") dated as of May 5, 2000, between Color Image, Inc. ("Georgia Color"), a Georgia corporation and Bank, as amended and affected by Amendment of Loan Documents dated as of August 30, 2000, Second Amendment of Loan Documents dated as of November 30, 2000, Third Amendment of Loan Documents made as of July 5, 2001, to be effective for all purposes as of June 30, 2001, Fourth Amendment of Loan Documents dated as of November 1, 2001, Fifth Amendment of Loan Documents made as of December 31, 2001, Sixth Amendment of Loan Documents made as of February 5, 2002, Seventh Amendment of Loan Documents made as of June 28, 2002, effective for all purposes as of June 30, 2002, and Eighth Amendment of Loan Documents dated as of April 7, 2003. 2. AGREEMENT. Borrower and Bank have agreed further to amend the Loan Agreement and to restate the Loan Agreement in its entirety as so amended. NOW, THEREFORE, Borrower and Bank, intending to be legally bound, agree as follows: 1. RECITALS. The foregoing recitals and provisions are true and correct and are hereby incorporated herein by this reference as an integral part hereof. 2. RESTATEMENT; NO NOVATION. Borrower and Bank hereby restate, without novation, Articles I through XII of the Loan Agreement, and the Exhibits to the Loan Agreement as required, in their entirety as follows: ARTICLE I DEFINED TERMS, GENERAL MATTERS 1.1. DEFINED TERMS. As used in this Loan and Security Agreement, the following terms shall have the following meanings: Account Debtor - any Person who is or may become obligated under or on account of an Account. Accounts - all accounts, accounts receivable, chattel paper, chattel mortgages, leases, instruments, documents, promissory Note, contracts for receipt of money, conditional sales contracts, and evidences of Debt of or owing to or acquired by Borrower whether now existing or hereafter arising, including, without limitation, (i) all accounts and other rights to payment of money which arise or result from Borrower's selling or other disposition of Borrower's goods or the providing of services by the Borrower, (ii) the proceeds of any insurance covering the Collateral and (iii) the return of unearned insurance premiums. Adjusted Net Earnings - with respect to any fiscal period, means the net earnings (or loss) after provision for income taxes for such fiscal period of Borrower, all as reflected on the financial statement of Borrower supplied to Bank pursuant to Sections 6.5 and 6.6 hereof, but excluding: (i) any gain or loss arising from the sale of capital assets; (ii) any gain arising from any write-up of assets; (iii) earnings of any Subsidiary accrued prior to the date it became a Subsidiary; (v) earnings of any corporation, substantially all the assets of which have been acquired in any manner by Borrower, realized by such corporation prior to the date of such acquisition; (v) net earnings of any business entity (other than a Subsidiary) in which Borrower has an ownership interest unless such net earnings shall have actually been received by Borrower in the form of cash distributions; (vi) any portion of the net earnings of any Subsidiary which for any reason is unavailable for payment of dividends to Borrower; (vii) the earnings of any Person to which any assets of Borrower shall have been sold, transferred or disposed of, or into which Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (viii) any gain arising from the acquisition of any securities of Borrower; and (ix) any gain arising from extraordinary or non-recurring items. Affiliate - any director or officer of Borrower or any Person who, directly, indirectly or beneficially, owns 5% or more of the capital stock of Borrower or any member of the immediate family of any such officer, director or stockholder, or any corporation or other entity which is controlled by, controls, or is under common control with the Borrower. Aggregate Loan Values - the lesser of (i) the sum of $ 1,500,000 or (ii) the sum of the Loan Value of Accounts and the Loan Value of Inventory. Agreement - this Amended and Restated Loan and Security Agreement. Authorized Affiliate Debt - collectively, the liability of Borrower under (a) the promissory note dated as of August 21, 2002, in the face amount of $500,000 payable to Jui-Hung Wang; (b) the promissory note dated as of August 21, 2002, in the face amount of $100,000 payable to Jui-Chi Wang and (c) the promissory note dated as of March 14, 2002, in the face amount of $500,000 payable to Sueling Wang, as amended August 27, 2002. Applicable Laws - all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Loan Document in question, including, but not limited to, all applicable common law and equitable principles; all provisions of all applicable state and federal constitutions, statutes, rules, regulations and order of governmental bodies; and all orders, judgments and decrees of all courts and arbitrators. Average Monthly Loan Balance - the amount obtained by adding the unpaid balance of the Loan owing by Borrower to Bank at the end of each day for each day during the month in question and by dividing such sum by the number of days in such month. 2 Bank - SouthTrust Bank, an Alabama banking corporation, successor by conversion to SouthTrust Bank, National Association. Borrower - Color Imaging, Inc., a Delaware corporation. Borrower's Report - the certificate or report of Borrower referred to in Section 2. 1 (c) of this Agreement. Business Day - a day, other than Saturday, Sunday or days on which banks located in Atlanta, Georgia are authorized by law to close. Capital Expenditures - expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the direct or indirect acquisition of such assets by way of increased product or service charges, offset items or otherwise and the principal portion of payments with respect to Capitalized Lease Obligations. Capitalized Lease Obligations - any Debt represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Debt shall be the capitalized amount of such obligations determined in accordance with GAAP. Closing Date - the date of this Agreement. The Closing Date is not necessarily the date of initial funding of the Loan, and the execution and delivery of this Agreement and acceptance hereof shall not be deemed waiver by Bank of any of the conditions to lending set forth in Article III hereof. Collateral - collectively, the Borrower's Accounts, General Intangibles, Equipment, and Inventory, the other property and interests described in Section 8.1 hereof and elsewhere in the Loan Documents, and the proceeds and products of each, as the case may be. Collected Balance - the book balance in a bank account, minus the aggregate amount of all checks and other items of payment in the process of collection, said amount to be computed in accordance with the Bank's standard practices. Commitment Period - shall mean that period during which Bank is obligated to make advances under the Loan, as provided in Section 2.1 hereof. The Commitment Period shall commence upon satisfaction of the conditions to lending set forth in Article III and shall continue until July 1, 2004, unless sooner terminated according to the provisions hereof. Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance with GAAP. Current Liabilities - at any date means the amount at which all of the current liabilities of a Person would be properly classified as current liabilities on a balance sheet at such date in accordance with GAAP. Debt - the sum of (i) indebtedness for borrowed money or for the deferred purchase price of property or services, (ii) Capitalized Lease Obligations and (iii) all other items which in accordance with GAAP would be included in determining total liabilities as shown on a balance sheet of a Person as of the date as of which Debt is to be determined. Debt Service Coverage - a ratio in which the initial number is the sum of Borrower's net income (after provision for federal and state taxes and excluding any extraordinary income) plus Interest Expense, lease expenses, depreciation and amortization of intangible expenses for the 12-month period 3 preceding the applicable date, and the second number is the sum of lease expenses plus Interest Expense of the Borrower for the 12-month period preceding the applicable date plus the current portion of long-term debt as of the applicable date. Debt to Tangible Net Worth Ratio - for any period, the ratio of (a) Debt (including Subordinated Debt) to (b) Tangible Net Worth for such period. Default Rate - a rate of interest equal to two percent (2%) in excess of the rate that would otherwise be applicable under this Agreement, calculated daily and computed on the actual days elapsed over a year of 360 days (unless reference to a 365 or a 366-day year is necessary in order not to exceed the highest rate permitted by Applicable Law), said rate to change as and when the rate otherwise applicable changes. Eligible Account - an Account arising in the ordinary course of Borrower's business from the sale of goods or rendition of services which Bank, in its sole credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (i) it arises out of a sale made by Borrower to a Subsidiary or to an Affiliate of Borrower or to a Person controlled by an Affiliate or Subsidiary of Borrower; or (ii) it is unpaid for more than ninety (90) days after the original due date shown on the invoice; or (iii) it is due or unpaid more than ninety (90) days after the original invoice date; or (iv) twenty-five percent (25%) or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; or (v) the total unpaid Accounts of the Account Debtor exceed twenty-five percent (25%) of the net amount of all Accounts, to the extent of such excess; or (vi) any covenant, representation or warranty contained in this Agreement with respect to such Account has been breached; or (vii) the Account Debtor is also Borrower's or an Affiliate's creditor or supplier, or has disputed liability with respect to such Account, or has made any claim with respect to any other Account due from such Account Debtor to Borrower or an Affiliate, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor or an Affiliate of the Account Debtor; or (viii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief under the federal bankruptcy laws has been filed against the Account Debtor, or the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed of it or for all or a significant portion of its assets or affairs; or (ix) it arises from a sale to an Account Debtor outside the United States or to an Account Debtor who is not a resident of the United States or involves a shipment to an address outside of the United States; or (x) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (xi) Bank believes, in its sole judgment, that collection of such Account is insecure or that payment thereof is doubtful or will be delayed by reason of the Account Debtor's financial condition; or (xii) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Bank, in form and substance satisfactory to Bank, so as to comply with the Assignment of Claims Act of 1940, as amended; or (xiii) the Account is subject to a Lien; or (xiv) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (xv) the total unpaid Accounts of the Account Debtor exceed a credit limit determined by Bank, in its sole discretion, to the extent such Account exceeds such limit; or (xvi) the Account is evidenced by chattel paper, a note, or an instrument of any kind, or has been reduced to judgment; or (xvii) Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xviii) Borrower has made an agreement with the Account Debtor to extend the time of payment thereof, or (xix) the Account arises from a retail sale of goods to a Person who is purchasing same primarily for personal, family or household purposes; or (xx) the Account is deemed ineligible by the Bank in its sole judgment and discretion. In addition, Eligible Accounts shall not include any portion of an Account which consists of service charges, late charges or 4 penalties, interest or other charges relating to the extension of credit by the Borrower or the timing of payment by Account Debtor. In determining the aggregate amount of Eligible Accounts, there shall be excluded from consideration any credit balance of an Account Debtor which is more than 90 days old as measured from the date of original posting of said credit balance to Borrower's books and records. Eligible Inventory - Inventory valued at the lesser of cost or current market value, all of which Inventory is, at any given time, (a) not damaged or defective in any way; (b) not sold or segregated for sale and reflected as an Account of Borrower; (c) not consigned Inventory; (d) not inventory-in-transit or located in a place other than at the location's listed in Section 5.10 of this Agreement; (e) not work-in-process Inventory; (f) not constituting packaging materials and supplies; (g) not Inventory evidenced by negotiable warehouse receipts or by non-negotiable warehouse receipts or documents of title which have not been issued in the name of Bank; (h) not subject to a document of title such as a warehouse receipt or bill of lading; and (i) not Inventory deemed ineligible by Bank in its sole discretion. Environmental Regulations - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to the environment or to public health, safety and environmental matters, or petroleum products, or radon radiation, or oil or hazardous substances, including, but not limited to, the Resource Conversation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Toxic Substances Control Act, the Clean Water Act, the Clean Air Act, the River and Harbor Act, the Water Pollution Control Act, the Marine Protection Research and Sanctuaries Act, the Deep-Water Port Act, the Safe Drinking Water Act, the Superfund Amendments and Reauthorization Act of 1986, the Federal Insecticide, Fungicide and Rodenticide Act, the Mineral Lands and Leasing Act, the Surface Mining Control and Reclamation Act, the Oil Pollution Act of 1990, state and federal superlien and environmental cleanup programs and laws, U.S. Department Transportation regulations, laws regulating hazardous, radioactive and toxic materials and underground petroleum products storage tanks, and all similar state, federal and local laws and regulations. Equipment - all equipment and fixtures of whatever kind or nature now owned or hereafter acquired by Borrower, including, without limitation, all machinery, vehicles, tools, dies, trade fixtures, furnishings and equipment, patterns, cranes, furniture, furnishings, motor vehicles, tractors, trailers, rolling stock, office machines and equipment, material handling equipment, manufacturing equipment, conveyors, forklifts, machine systems, computers, and all other goods used in the operation of Borrower's business, together with all accessories, parts and additions now or hereafter affixed thereto or used in connection therewith. ERISA - the Employee Retirement Income Security Act of 1974 and all rules and regulations promulgated thereunder. Event of Default - any one of the events enumerated in Section 10. 1 hereof. Fixed Charge Coverage Ratio - adjusted net earnings plus depreciation, amortization, interest expense and lease expense, less dividends and distributions for the rolling twelve (12) month period preceding the applicable date, divided by the current portion of the long-term debt of Borrower as of the applicable date plus the interest expense and lease expense of Borrower for the twelve (12)-month period preceding the applicable date. GAAP - generally accepted accounting principles in the United States of America in effect from time to time consistently applied. General Intangibles - all general intangibles of Borrower, whether now owned or hereafter acquired, including, without limitation, all payment intangibles, software, choses in action, causes of action, corporate or other 5 business records, deposit accounts, inventions, designs, patents, patent applications, trademarks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, computer programs, all claims under guaranties, performance and payments bonds or bonds for the furnishing of labor and materials, rights under non-compete agreements with third parties, cash surrender value of life insurance policies owned by Borrower, security interests or other security held by or granted to Borrower to secure payment of any of the Accounts by an Account Debtor, all rights to indemnification, and all other intangible property of every kind and nature (other than Accounts). Interest Expense - for any period, Borrower's consolidated interest expense accrued during such period in respect of all Debt of Borrower. Inventory - all inventory of whatever kind or nature of Borrower, now owned or hereafter acquired by Borrower, and wherever located, including, without limitation, all goods held for sale or lease or furnished or to be furnished under contracts, and any raw materials, goods in transit, work in process or finished goods, supplies, returned or repossessed goods, together with all goods and materials used or consumed in Borrower's business. Inventory Cap - the sum of $ 750,000, said sum being the maximum value that can be given to the Loan Value of Inventory pursuant to this Agreement. Kings Brothers - King Brothers, LLC, a Georgia limited liability company. Ledger Balance - the balance reflected on the books of the Bank of the amounts deposited in the Special Collection Account as further described in Section 4.2 of this Agreement. LIBOR Rate - a per annum rate of interest (rounded upwards, if necessary, to the nearest 1/16th of one percent) equal to the "London Interbank Offered Rate (LIBOR)" for contracts with a maturity date of thirty (30) days, as quoted in the MONEY RATES section of The Wall Street Journal as effective for contracts entered into on the first day of the applicable interest period (expressed as a decimal). Lien - any interest in property (real, personal or mixed, and tangible or intangible) securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest, security title or Lien arising from a security agreement, mortgage, deed of trust, deed to secure debt, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include covenants, conditions, restrictions, leases and other encumbrances affecting any property. For the purpose of this Agreement, Borrower shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes. Loan - the revolving loan in the maximum principal amount of up to $1,500,000 advanced by the Bank to the Borrower from time to time evidenced by the Note (and any substitutions therefor, extensions thereof and renewals thereof). Loan Account - the loan account established on the books of Bank pursuant to Section 2.1 hereof. Loan Documents - this Agreement, the Note and each and every mortgage, deed of trust, guarantee, reimbursement agreement, credit agreement, loan agreement, note, security agreement, financing statement or other instrument executed and delivered to evidence the Loan or any other Obligation, to constitute collateral for the Loan or any other Obligation, or to evidence security for the Loan or any other Obligation, and any and all other agreements, 6 instruments, and documents heretofore, now or hereafter, executed by Borrower and delivered to Bank in respect to the transactions contemplated by this Agreement. Loan Value of Accounts - at any time, an amount which is not more than 75% of the aggregate Eligible Accounts of Borrower. Loan Value of Inventory - an amount which is not more than 50% of Borrower's Eligible Inventory consisting of raw materials and 50% of Borrower's Eligible Inventory consisting of finished goods; provided, however, the Loan Value of Inventory shall not at any time exceed the lesser of the Inventory Cap or fifty percent (50%) of the outstanding principal balance of the Loan. Maximum Rate - the maximum non-usurious rate of interest permitted by Applicable Law that at any time, or from time to time, may be contracted for, taken, reserved, charged or received on the Debt in question or, to the extent permitted by Applicable Law, under such Applicable Laws that may hereafter be in effect and which allow a higher maximum non-usurious interest rate than Applicable Laws now allow. Notwithstanding any other provision hereof, the Maximum Rate shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 365 or 366 days, as the case may be). Multiemployer Plan - has the meaning set forth in Section 4001 (a)(3) of ERISA. Note - the Amended and Restated Revolving Note dated as of the date hereof executed by Borrower for the benefit of Bank in the maximum principal amount of One Million Five Hundred Thousand Dollars ($1,500,000), together with and any substitutions therefor, extensions thereof and renewals thereof. Obligations - the Loan and all other advances, debts, liabilities, obligations, covenants and duties owing, arising, due or payable from Borrower to Bank of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under this Agreement or any of the other Loan Documents or otherwise, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however evidenced or acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and any other sums chargeable to Borrower under any of the Loan Documents and all rights Bank may at any time or times have to reimbursement in connection with any letter of credit or guaranty issued for Borrower' s benefit. Overadvance - an advance by Bank hereunder or under the Note when an Overadvance Condition exists or would result from the making of such advance. Overadvance Condition - at any date, a condition such that the outstanding principal amount of the Loan on such date exceeds the Aggregate Loan Values on such date. Permitted Liens - any Lien of a kind specified in Section 7.2 of this Agreement. Person - an individual, partnership, corporation, joint stock company, firm, land trust, business trust, limited liability company, limited liability partnership, unincorporated organization, or other business entity, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. Prohibited Transaction - any transaction set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986. 7 Reimbursement Agreement - Reimbursement Agreement dated as of June 1, 1999, among Color Image, Inc., a Georgia corporation, Kings Brothers and Bank, as amended. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Solvent - as to any Person, means such Person (i) owns property, real, personal, and mixed, whose aggregate fair saleable value is greater than the amount required to pay all of such Person's Debt (including contingent debts), (ii) is able to pay all of its Debt as such Debt matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Subordinated Debt - excluding Authorized Affiliated Debt, the Debt of the Borrower owed to any officer, owner or employee of Borrower or to any Affiliate which is fully subordinated to the Loan (including principal, interest, and agreed charges) in a manner satisfactory to the Bank (which may be either according to its terms or by separate agreement) and which Debt arises from the Borrower's actual receipt of cash and not from "in kind" or non-cash consideration. Subsidiary - any corporate entity or partnership, or other business entity, controlling interest of which is owned by the Borrower. Tangible Net Worth - for any period, total equity, plus Subordinated Debt less intangible assets, which include goodwill, patents, trademarks organizational costs, capitalized financing costs and amounts due from officers, shareholders or Affiliates. 1.2. ACCOUNTING TERMS. All accounting terms used herein shall be construed in accordance with GAAP. 1.3. INTERPRETATION. The terms "herein", "hereof, and "hereunder", and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronouns used shall be deemed to cover all genders. Whenever the singular or plural number is used herein, it shall equally include the other. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any instruments or agreements, including, without limitation, references to any of the Loan Documents shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 1.4. UNIFORM COMMERCIAL CODE. All other terms contained in this Agreement shall, unless otherwise defined herein or unless the context otherwise indicates, have the meanings provided for by the Uniform Commercial Code of the State of Georgia. ARTICLE II THE LOAN 2.1. LOAN. (a) Subject to all terms set forth herein but only during the Commitment Period and for so long as no Event of Default exists, Bank agrees, from time to time and on the terms hereinafter set forth, to loan to Borrower, when requested by Borrower, principal amounts under the Loan aggregating up to the lesser of (i) $1,500,000 or (ii) the Aggregate Loan Values as determined by the Bank from the periodic reports submitted by Borrower to the Bank. Within the aforesaid limits, the Borrower may borrow, make payments, and reborrow under the Loan, subject to the provisions hereof. Advances made under the Loan shall be subject to the Note. 8 (b) The obligation to repay the Loan shall be evidenced by the Note payable to the order of the Bank and maturing upon the earlier to occur of an Event of Default or the expiration of the Commitment Period. Amounts due under the Note and otherwise under this Agreement and under the Loan Documents in regard to the Loan shall be reflected in the Loan Account. (c) Not later than July 31, 2003, Borrower shall submit a Borrower's Report in the form attached hereto as EXHIBIT "A" (or in such other form as may be furnished by Bank from time to time) effective as of June 30, 2003, and thereafter at least quarterly (or on such other schedule as Bank may request from time to time) thereafter during the term of this Agreement. Bank may, in its sole discretion, require that each advance made under the Loan be effected by Borrower's submitting (and the Bank's receiving) a Borrower's Report at least one Business Day prior to the date Borrower desires the advance to be made. Bank shall, if all the terms and provisions of this Agreement have been met, including, without limitation, the absence of an Event of Default hereunder, make such advances. Each such Borrower's Report shall be signed by an officer or employee of Borrower authorized by Borrower to execute such reports, whose name(s) shall be included in a certificate furnished to the Bank. (d) At its discretion, Bank may make advances to Borrower under the Loan without specific request by automatic advance based on availability in accordance with procedures established by Bank. In addition, as an accommodation to Borrower, Bank may permit telephonic requests for Loan and electronic transmittal of instructions, authorizations, agreements or reports to Bank by Borrower. Unless Borrower specifically directs Bank in writing not to accept or act upon telephonic or electronic communications from Borrower, Bank shall have no liability to Borrower for any loss or damage suffered by Borrower as a result of Bank's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to Bank telephonically or electronically and purporting to have been sent to Bank by Borrower and Bank shall have no duty to verify the origin of any such communication or the authority of the person sending it. (e) If the outstanding principal amount of the Loan at any time exceeds the lesser of $ 1,500,000 or the Aggregate Loan Values as reflected on the Borrower's Report, the Borrower shall immediately, upon demand by Bank, pay the Bank an amount equal to such excess as a payment on the principal amount of the Loan. Without limiting the foregoing, which provision may be enforced by Bank at any time and which provision, as well as the other provisions hereof, may not under any circumstance be waived or altered by a course of dealing or otherwise, insofar as Borrower may request and Bank may be willing in its sole and absolute discretion to make Overadvances, Bank shall enter such Overadvances as debits in the Loan Account. All Overadvances shall be payable on demand, shall be secured by the Collateral and shall bear interest as provided in this Agreement for the Loan generally. Bank may in its sole discretion honor any request (or deemed request) for an advance even though an Overadvance Condition then exists, or would exist with the making of such advance, and without regard to the existence of, and without waiving, any default or Event of Default. (f) Each borrowing under the Loan shall be effected by crediting the amount thereof to the regular checking account of Borrower maintained with the Bank or with another bank approved by the Bank. (g) The principal amount of the Loan shall bear interest at a rate per annum equal to the LIBOR Rate plus two hundred fifty (250) basis points. Interest shall be paid to Bank on the amount of the Loan outstanding and shall be payable monthly in arrears on the first day of each month beginning with August 1, 2003, and continuing on the same day of each month thereafter through and until such time as there remains no unpaid principal balance on the amounts advanced to the Borrower. Interest shall be calculated based on a 360-day year (i.e., computed on the actual number of days elapsed over a year of 360 days unless reference to a 365 or a 366-day year is necessary in order not to exceed the highest rate permitted by Applicable Law). The applicable LIBOR Rate shall be initially calculated on the date of initial applicability and shall be recalculated by Bank on each regularly-scheduled payment date thereafter, notwithstanding that such recalculation date is more or less than thirty (30) days from the previous calculation date. If the recalculation date falls on a 9 date upon which Bank is not open for business, the recalculation shall occur on the next business day on which Bank is open for business. From and after the occurrence of an Event of Default, the principal amount of the Loan outstanding from time to time shall, subject to the provisions of the following subsection, bear interest at the Default Rate. (h) Borrower acknowledges and agrees that the provisions herein and in the Note relating to the Default Rate represent a fair and reasonable estimate by Borrower and Bank of a fair average compensation for the loss that may be sustained by Bank due to the failure of Borrower to make timely payments with respect to the Obligations and for the cost and expenses that may be incurred by Bank by reason of the occurrence of an Event of Default, the parties recognizing that the damages caused by such extra administrative expenses and loss of the use of funds is impracticable or extremely difficult to ascertain or estimate. Interest at the Default Rate shall be paid without prejudice to the rights of Bank to collect any other amounts provided to be paid hereunder. (i) Bank shall enter disbursements under the Loan as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrower and all proceeds of Collateral which are finally paid to Bank in regard to the Loan, and may record therein, in accordance with customary accounting practice, all charges and expenses properly chargeable to Borrower hereunder in regard to the Loan. (j) Borrower shall use the proceeds of the Loan for working capital purposes only. (k) Notwithstanding any provision in this Agreement, the Bank may, in its sole discretion, at any time limit the amount of the Loan advanced to the Borrower to an amount less than the Aggregate Loan Values. The Loan shall, notwithstanding any course of dealing or conduct on the part of the parties hereto, or any other covenants or undertakings of the parties hereunder, be fully due and payable without further notice or demand from Bank upon the expiration of the Commitment Period. 2.2. TERM. This Agreement shall remain in force and effect until the Loan and the Obligations, and any renewals or extensions, and all interest thereon and costs provided for herein with regard to either of them have been indefeasibly paid or satisfied in full and until the Bank has no further obligation to advance funds to the Borrower hereunder. The indemnities provided for in Article XI shall survive the payment in full of the Loan and the Obligations and the termination of this Agreement. 2.3. PAYMENTS. All sums paid to the Bank by Borrower hereunder the Note shall be paid directly to the Bank in immediately available funds no later than 2:00 P.M., Atlanta, Georgia time on the date on which payment is due, except if such date is not a Business Day such payment shall then be due on the first Business Day after such date, but interest shall continue to accrue until the date payment is received. Any payment received after 2:00 p.m. Atlanta, Georgia, time shall be deemed to have been received on the immediately following Business Day for all purposes, including, without limitation, the accrual of interest on principal. The Bank shall send Borrower statements of all amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within ten (10) days of its receipt of any statement which it deems to be incorrect. The Bank may, in its sole discretion, without waiver of any default or Event of Default and without prejudice to any other remedy, (a) charge against any deposit account of the Borrower all or any part of any amount due hereunder, including, without limitation, the fees and expenses of the Bank to be paid by Borrower as provided for in Sections 12.1 through 12.3 of this Agreement, any advances made by Bank to protect the Collateral, and any commitment or servicing fee due the Bank, and (b) advance to Borrower, and charge to the Loan, a sum sufficient each month to pay all interest accrued on the Loan and fees and expenses due under this Agreement, including, without limitation, the fees and expenses of the Bank to be paid by Borrower as provided for in Sections 12.1 through 12.3 of this Agreement, any advances made by Bank to protect the Collateral, and any commitment or servicing fee due the Bank, during or for the immediately preceding month or any month prior. Borrower shall be deemed to have requested an advance under the Loan upon the occurrence of an overdraft in any of 10 Borrower's checking accounts maintained with the Bank or another bank owned by SouthTrust Corporation. 2.4. APPLICATION OF PAYMENTS. Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Bank from or on behalf of Borrower or from any of the Collateral, and Borrower does hereby irrevocably agree that Bank shall have the continuing exclusive right to apply such payments and collections received at any time or times hereafter by Bank or its agent against the Obligations, in such manner as Bank may deem advisable, notwithstanding any entry by Bank upon any of its books and records. If as the result of collections of Accounts or for any other reason, a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower but shall be available to Borrower at any time or times for so long as no Event of Default exists. 2.5 PREPAYMENT. Borrower shall have the right to prepay the Loan at any time. ARTICLE III CONDITIONS OF LENDING Bank shall not be obligated to make or continue the Loan, or to make any advance under the Loan, unless at the time thereof the following conditions shall have been met: 3.1. CORPORATE PROCEEDINGS. All proper corporate proceedings shall have been taken by Borrower to authorize this Agreement and the transactions contemplated hereby. 3.2. DOCUMENTATION. All instruments and proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to Bank, and Bank shall have received on the date of this Agreement copies of all documents, including records of corporate proceedings, which it may have requested in connection therewith, including, without limitation, certified copies of resolutions adopted by the Board of Directors of the Borrower, certificates of good standing, and certified copies of the Articles of Incorporation and By-Laws, and all amendments thereto, of the Borrower. 3.3. LOAN DOCUMENTS. Bank shall have received executed copies of all instruments evidencing security for the Loan and copies of the insurance policies and related certificates of insurance referred to in Sections 6.1 and 9.6 of this Agreement. 3.4. NO DEFAULT. No event shall have occurred or be continuing which constitutes an Event of Default or which would constitute an Event of Default with the giving of notice or the lapse of time or both; and neither the business nor assets nor the condition, financial or otherwise, of Borrower shall have been adversely affected in any material manner as the result of any fire, explosion, accident, strike, riot, condemnation, act of God, or any other event or development. 3.5. REPORTS. Bank shall have received all reports and information from Borrower called for under the Agreement as and when due. 3.6. PAYMENT OF FEES. Payment by Borrower of all fees and expenses required by this Agreement. 3.7. INCUMBENCY CERTIFICATE. Bank shall have received an incumbency certificate, dated as of the date of this Loan Agreement, executed by the Secretary or Assistant Secretary of Borrower, which shall identify by name and title and bear the signature of the officer of such Borrower authorized to sign this Loan Agreement and the Note on behalf of the Borrower. The Bank shall be entitled to rely upon such incumbency certificate in completing the transactions contemplated herein or in any Loan Document and in all its other dealings with Borrower. 11 3.8. CONSENTS. Bank shall have received consents and agreements of the landlords of each of the premises leased by Borrower on which the Collateral is located as provided in Section 4.1 hereof, all in form satisfactory to Bank. 3.9. LIEN SEARCH. Bank shall have received a report acceptable to Bank indicating that there are no Liens against that portion of the Collateral constituting personal property except Permitted Liens. 3.10. DISBURSEMENT AUTHORIZATION. Borrower shall have delivered to bank such disbursement authorizations, draw requests, and other documents and writings as Bank shall have requested evidencing Borrower's request for disbursement of funds. 3.11. ADDITIONAL DOCUMENTS. Bank shall have received such additional legal opinions, certificates, proceedings, instruments and other documents as the Bank or its counsel may reasonably request to evidence (i) compliance by the Borrower with legal requirements, (ii) the truth and accuracy, as of the date of this Agreement, of the representations and warranties of Borrower contained herein, and (iii) the due performance or satisfaction by the Borrower, at or prior to the date hereof, of all agreements required to be performed and all conditions required to be satisfied by the Borrower pursuant hereto, including, without limitation, all such matters as are listed on any preliminary closing checklist issued by Bank and furnished to Borrower. ARTICLE IV SECURITY FOR LOAN The Loan and the Note shall be secured by each of the following: (a) A first priority security interest in Borrower's Accounts, General Intangibles, Equipment, and Inventory, the Collateral, and other properties and interests as provided for in Section 8.1 and other parts of this Agreement (except that Lender's security interest shall be second (2nd) priority in regard to the Equipment described on EXHIBIT "G" attached hereto and by this reference made a part hereof, subject only to Lender's security interest therein to secure Borrower's obligations under the Reimbursement Agreement, as more particularly set out in the Partial Liability Severance and Limitation Agreement dated as of April 7, 2003, among Bank, Borrower, Kings Brothers and others); and (b) This Agreement and the other Loan Documents. Part of the Equipment may constitute motor vehicles and other vehicles subject to registration under the motor vehicle title registration statutes of Georgia or other states, and with respect to which the security interest of Bank therein is required to be registered on the vehicle title certificate. Borrower agrees to execute and deliver on a timely basis all such title certificates and instruments as shall be requested by Bank from time to time. Part of the Equipment may be affixed to real estate owned or leased by Borrower and constitute fixtures under the Uniform Commercial Code. The Borrower agrees that any such fixtures shall be included within the meaning of Equipment as used and defined herein and that the Bank is hereby granted a security interest in and a lien upon such fixtures. The Borrower agrees to execute and deliver, or cause the execution and delivery of, such security agreements, deeds of trust, mortgages, assignments, guaranties, consents, subordination agreements, and financing statements as may be required by Bank to evidence such security, all in form satisfactory to Bank, as well as such consents and agreements of the landlords of each of the premises leased by Borrower on which the Collateral is located, all in form satisfactory to Bank. 12 ARTICLE V REPRESENTATIONS, WARRANTIES AND GENERAL COVENANTS Borrower represents, warrants and covenants to and with Bank, which representations, warranties and covenants shall survive until the Obligations are indefeasibly satisfied in full, that: 5.1. ORGANIZATION AND QUALIFICATION. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has the corporate power to own its properties and to carry on its business as now being conducted; and is duly qualified to do business and is in good standing in every jurisdiction in which the character of the properties owned by it or in which the transaction of its business makes its qualification necessary. 5.2. CORPORATE POWER AND AUTHORIZATION. Borrower has full power and authority to enter into this Agreement, to borrow hereunder, to execute and deliver the Note and the other Loan Documents and to incur the obligations provided for herein, all of which have been authorized by all proper and necessary corporate action. 5.3. ENFORCEABILITY. This Agreement, the Note and each of the other Loan Documents constitute a valid and legally binding obligation of Borrower enforceable in accordance with their respective terms and will not violate, conflict with, or constitute any default under any law, government regulation, Borrower's Articles of Incorporation or By-Laws, or any other agreement or instrument binding upon Borrower. 5.4. PENDING ACTIONS. Borrower is not a defendant, or a plaintiff against whom a counterclaim or crossclaim has been asserted, in any civil or criminal action, suit or litigation, and no action or investigation is pending or, so far as Borrower's officers and directors know, threatened before or by any court or administrative agency which might result in any material adverse change in the financial condition, operations or prospects of Borrower. 5.5. FINANCIAL STATEMENTS. The financial statements of Borrower dated heretofore delivered to Bank and all other financial statements and reports furnished by Borrower to Bank are complete and correct and fairly present the financial condition of Borrower and the results of its operations and transactions as of the dates and for the periods referred to and have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved. There are no liabilities, direct or indirect, fixed or contingent, of Borrower as of the date of such financial statements which are not reflected therein or in the Note thereto. Neither said financial statements nor any other financial statements, reports, and information furnished by Borrower to Bank contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading. There is no fact which Borrower has failed to disclose to Bank in writing which materially affects adversely or, so far as Borrower can now foresee, will materially affect adversely the Collateral, business, prospects, profits or condition (financial or otherwise) of Borrower or the ability of Borrower to perform this Agreement. 5.6. TITLE TO PROPERTIES. Borrower has good and marketable title to all of its assets, other than the Collateral, subject to no Lien, mortgage, pledge, encumbrance, or charge of any kind except inchoate Liens arising by operation of law for obligations which are not yet due and except for Permitted Liens. Borrower enjoys peaceable and undisturbed possession under all leases under which it is operating, and none of such leases contain any provisions which may materially and adversely affect or impair the operations of the Borrower, and all of such leases are valid and subsisting and in full force and effect. 5.7. PENSION PLANS. Except as set forth on EXHIBIT "D", Borrower has not established and is not a party to any Plan or to any stock option or deferred compensation plan or contract for the benefit of its employees or officers, any pension, profit sharing or retirement plan, stock redemption agreement, or any other agreement or arrangement with any officer, director or stockholder, members of their families, or trusts for their benefit. Borrower is in compliance with all applicable provisions of ERISA. Neither Borrower nor any of its Subsidiaries has received any notice to the effect that it is not in full compliance with any of the requirements of ERISA and the regulations promulgated 13 thereunder. No fact or situation that could result in a material adverse change in the financial condition of Borrower, including, but not limited to, any Reportable Event or Prohibited Transaction, exists in connection with any Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability in connection with a Multiemployer Plan. 5.8. TAXES. Borrower has filed all federal, state and local tax returns which are required to be filed and has paid, or made adequate provision for the payment of, all taxes which have or may become due pursuant to said returns or to assessments received by Borrower, including, without limitation, all applicable federal, state, and local employee withholding taxes. 5.9. TITLE TO COLLATERAL. Except for Permitted Liens, Borrower is, or as to Collateral to be acquired after the date hereof will be, the sole owner of the Collateral free from any adverse Liens, security interests or other encumbrances. Borrower shall defend the Collateral against all claims and demands of all other parties who at any time claim any interest in the Collateral. 5.10. PLACE OF BUSINESS. Borrower's chief executive office is located at 4350 Peachtree Industrial Avenue, Suite 100, Norcross, Gwinnett County, Georgia 30071. The Inventory and Equipment and other Collateral is and shall be located only at the locations listed on EXHIBIT "C" to this Agreement. Except as indicated on said exhibit, the real estate constituting each said location is owned by Borrower. With respect to locations not owned by Borrower, said exhibit sets forth the name and address of each landlord, the location of the property, and the remaining term of the lease. Borrower has separately furnished to Bank true and correct copies of the lease agreements for each said parcel. 5.11. FULL DISCLOSURE. All information furnished by Borrower to the Bank concerning the Borrower, its financial condition, the Collateral, or otherwise for the purpose of obtaining credit or an extension of credit, is, or will be at the time the same is furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to give the Bank a true and accurate knowledge of the subject matter. 5.12. BORROWER'S NAME. Borrower has not changed its name or been known by any other name within the last five (5) years, nor has it been the surviving corporation in a merger effected within the last five (5) years, except for (a) consummation of the transactions described in Merger Agreement and Plan of Reorganization dated as of May 16, 2000, among Advatex Associates, Inc., Logical Acquisition Corp., Color Acquisition Corp., Logical Imaging Solutions, Inc. and Color Image, Inc., a Georgia corporation, as amended June 15, 2000, and (b) merger with Color Image, Inc., a Georgia corporation, in which Borrower was the surviving corporation. Borrower does not now use nor has it ever used any trade or fictitious name in the conduct of its business, except for "Color Image". 5.13. EXISTING DEBT. Borrower is not in default with respect to any of its existing Debt or with respect to any material agreement to which Borrower is a party. 5.14. INSOLVENCY. Borrower is now and, after giving effect to the transactions contemplated hereby, at all times will be, Solvent. The benefits received by Borrower as a result of this Agreement and the Loan equal or exceed in value the obligations incurred under this Agreement and the value of Borrower's interest in the Collateral. The execution, delivery and performance of this Agreement will assist Borrower in preserving its assets and continuing its business activities. 5.15. SUBSIDIARIES. Borrower has no Subsidiaries. 5.16. ENVIRONMENTAL MATTERS. Borrower is in compliance with all Environmental Regulations and with all other federal, state and local laws and regulations relating to the environment and pollution, including such laws and regulations regulating hazardous, radioactive and toxic materials and underground petroleum products storage tanks. No assessment, notice of (primary or secondary) liability or notice of financial responsibility, and no notice of 14 any action, claim, investigation, proceeding, or inquiry to determine such liability or responsibility, or the amount thereof, or to impose civil penalties has been received by Borrower, and there are no facts, conditions or circumstances known to Borrower which could result in any investigation or inquiry if all such facts, conditions, and circumstances, if any, were fully disclosed to the applicable governmental authority. Borrower has paid any environmental excise taxes due and payable, including without limitation, those imposed pursuant to Sections 4611, 4661, or 4681 of the Internal Revenue Code of 1986, as amended from time to time. Borrower has not obtained and is not required to obtain any permits, licenses, or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures or equipment in connection with its business by reason of any Environmental Regulations. No oil, toxic or hazardous substances or solid wastes have been disposed of or released by Borrower in connection with the operation of its business and Borrower will not dispose of or release oil, toxic or hazardous substances or solid wastes at any time in its operation of its business (the terms "hazardous substance" and "release" shall have the meanings specified in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and the terms "solid waste" and "disposal," "dispose" or "disposed" shall have the meanings specified in the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), except that if such acts are amended to broaden the meanings thereof, the broader meaning shall apply herein). 5.17. OWNERSHIP. Borrower is a public corporation, the shares of which are traded over the counter. 5.18. INVENTORY. All Inventory has been produced, and during the term hereof will be produced, in compliance with the requirements of the Federal Fair Labor Standards Act. No Inventory is now, nor shall any Inventory at any time or times hereafter be, stored with a bailee, warehouseman or similar party without Bank's prior written consent and, if Bank gives such consent, Borrower will concurrently therewith cause any such bailee, warehouseman, or similar party to issue and deliver to Bank, in form and substance acceptable to Bank, warehouse receipts therefor in Bank's name. No Inventory is or will be consigned to any Person without Bank's prior written consent, and, if such consent is given, Borrower shall, prior to the delivery of any Inventory on consignment, (i) provide Bank with all consignment agreements to be used in connection with any consigned inventory, all of which shall be acceptable to Bank, (ii) prepare, execute and file appropriate financing statements with respect to any such consigned inventory, showing Bank as assignee, (iii) conduct a search of all filings made against the consignee in all jurisdictions in which any consigned Inventory is to be located and deliver to Bank copies of the results of all such searches, (iv) notify, in writing, all the creditors of the consignee which are or may be holders of Liens in the Inventory to be consigned that Borrower expects to deliver certain inventory to the consignee, all of which Inventory shall be described in such notice by item or type, and (v) do all such other things and acts as may be necessary or desirable to fully perfect on a first priority basis Bank's security interest in said Inventory. 5.19. LABOR RELATIONS. Neither Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement, and there are no material grievances, disputes or controversies with any union or any other organization of Borrower's employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 5.20. TRADE RELATIONS. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Borrower and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Borrower, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially affect adversely Borrower or prevent Borrower from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 15 5.21. PARTNERSHIPS. Borrower is not a partner or joint venturer with any other Person or a participant in any business enterprise other than its own for which it is generally liable, nor does Borrower have any contingent liabilities of any description other than as indicated in the financial statements heretofore delivered to Bank. 5.22. SURETY OBLIGATIONS. Borrower is not obligated as guarantor, surety or indemnitor under any indemnity, guaranty, surety or similar bond or other contract issued or entered into or any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person, except under manufacturer's warranties issued in the ordinary course of Borrower's business. 5.23. NO APPROVAL. No authorization or approval or other action by, and no notice to or filing with, any federal, state, or local government body, agency, or authority is required for the due execution, delivery, and performance by Borrower of this Agreement, the Note, or the Loan Documents. 5.24. RACKETEERING. Borrower is not engaged in any activity that might constitute a pattern of racketeering activity or in any other conduct that might subject all or a material portion of Borrower's assets to forfeiture. 5.25. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All patents, trademarks, service marks, tradenames, copyrights, licenses and other similar rights owned or used by Borrower are listed on EXHIBIT "E" attached hereto and made a part hereof. Where said patents are not owned outright by Borrower, said exhibit lists the owner thereof and identifies the license or other agreement pursuant to which they are used by Borrower. 5.26. REPRESENTATIONS TRUE. No representation or warranty by the Borrower contained herein or in any certificate or other document furnished by the Borrower pursuant hereto contains any untrue statement of material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made. ARTICLE VI GENERAL COVENANTS Borrower agrees and covenants that until the Obligations have been indefeasibly paid in full and until the Bank has no further obligation to make advances under the Loan, Borrower shall: 6.1. INSURANCE. Maintain insurance with insurance companies satisfactory to Bank on such of its properties, in such amounts and against such risks as is customarily maintained in similar businesses operating in the same vicinity, and shall file with Bank upon request, from time to time, a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of the insurance, dates of expiration thereof, and the properties and risks covered thereby, and, within 10 days after notice in writing from Bank, shall obtain such additional insurance as Bank may reasonably request. All such policies shall name the Bank as a named insured and provide that any losses payable thereunder shall (pursuant to loss payable clauses, in form and content acceptable to the Bank, to be attached to each policy) be payable to the Bank, and provide that the insurance provided thereby, as to the interest of the Bank, shall not be invalidated by any act or neglect of the Borrower, nor by the commencing of any proceedings by or against the Borrower in bankruptcy, insolvency, receivership or any other proceedings for the relief of a debtor, nor by any foreclosure, repossession or other proceedings relating to the property insured, nor by any occupation of such property or the use of such property for purposes more hazardous than permitted in the policy. Borrower hereby assigns to the Bank all right to receive proceeds, directs any insurer to pay all proceeds directly to the Bank, and authorizes the Bank to endorse any check or draft for such proceeds and apply the same toward satisfaction of the Obligations. The Borrower shall furnish to the Bank insurance certificates, in form and substance satisfactory to the Bank, evidencing compliance by it with 16 the terms of this Section and, upon the request of the Bank at any time, the Borrower shall furnish the Bank with photostatic copies of the policies required by the terms of this Section. The Borrower will cause each insurer under each of the policies to agree (either by endorsement upon such policy or by letter addressed to the Bank) to give the Bank at least 10 days' prior written notice of the cancellation of such policies in whole or in part or the lapse of any coverage thereunder. Borrower agrees that it will not take any action or fail to take any action which action or inaction would result in the invalidation of any insurance policy required hereunder. At least 10 days prior to the date the premiums on each such policy or policies shall become due and payable, the Borrower shall furnish to the Bank evidence of the payment of such premiums. Borrower shall furnish to the Bank such evidence of insurance as Bank may require. 6.2. CORPORATE EXISTENCE: QUALIFICATION. Maintain its corporate existence and, in each jurisdiction in which the character of the property owned by it or in which the transaction of its business makes its qualification necessary, maintain good standing. 6.3. TAXES. During each fiscal year, accrue all current tax liabilities of all kinds, all required withholding of income taxes of employees, all required old age and unemployment contributions, all required payments to employee benefit plans, and pay the same when they become due. 6.4. COMPLIANCE WITH LAWS. Comply with all Applicable Laws, including, without limitation, Environmental Regulations, and pay all taxes, assessments, charges, claims for labor, supplies, rent, and other obligations. Specifically, Borrower shall pay when due all taxes and assessments upon the Collateral, this Agreement, the Note, or any Loan Document, including, without limitation, any stamp taxes or intangibles taxes imposed by virtue of the transactions outlined herein. 6.5. ANNUAL FINANCIAL STATEMENTS. Within 120 days after the close of each fiscal year, furnish Bank with annual audited financial statements of Borrower consisting of balance sheets, operating statements and such other statements as Bank may reasonably request, for the period(s) involved, prepared in accordance with GAAP consistently applied for the period involved and for the preceding fiscal year and certified as reviewed by independent certified public accountants acceptable to the Bank. At the time of furnishing said financial statements, Borrower shall furnish Bank with (i) a certificate from the President or the chief financial officer of Borrower, or any other officer of Borrower properly authorized as evidenced by a Secretary's Certificate, including resolution and incumbency certificate, in form and substance acceptable to Bank, stating that (A) the certifier has reviewed this Agreement and the affairs of Borrower, (B) to the best of the certifier's knowledge and belief the certifier is unaware of the occurrence of an event which constitutes an Event of Default hereunder or which would constitute such an Event of Default with the giving of notice or the lapse of time or both, and, if so, stating the facts with respect thereto, (C) setting forth the calculations to show compliance with the financial covenants set forth herein, said certificate to be in the form of EXHIBIT "F" hereto unless otherwise specified by Bank, and (ii) a letter from such independent certified public accountants stating that the Bank may rely on such financial statements and their opinion with respect thereto. 6.6. INTERIM FINANCIAL STATEMENTS. Within 45 days after the close of each fiscal quarter, furnish Bank with unaudited quarterly and year-to-date financial statements of Borrower, consisting of balance sheets and operating statements and a listing of all contingent liabilities of the Borrower for the periods involved and such other statements as Bank may request, prepared in accordance with GAAP applied on a basis consistent with the financial statement(s) previously furnished to Bank, taken from the books and records of Borrower and certified as correct by the chief financial officer of Borrower. At the time of furnishing such financial statements, Borrower shall furnish Bank with a certificate from the President or the chief financial officer of Borrower, or any other officer of Borrower properly authorized as evidenced by a Secretary's Certificate, including resolution and incumbency certificate, in form and substance acceptable to Bank, stating that the certifier has reviewed this Agreement and the affairs of the Borrower and that to the best of the certifier's knowledge and belief the certifier is unaware of the occurrence of an event which constitutes an Event of Default hereunder or which would constitute such an Event of Default with the giving of notice or the lapse of 17 time or both, and if so, stating the facts with respect thereto. Said certificates shall further confirm that Borrower was at the time of issuance of said financial statements, and has at all times since, been Solvent. Unless otherwise specified by Bank, said certificate shall be in the form of EXHIBIT "F" hereto. In addition, Borrower shall furnish to Bank upon request by Bank from time to time all federal and state tax returns and informational reports, including, without limitation, the Form 941 Quarterly payroll tax information form and all other forms filed with any state, federal, or local agency pertaining to payment of applicable payroll and other federal, state and local taxes. 6.7. VISITS AND INSPECTIONS. Permit persons designated by Bank to inspect any and all of the property and corporate and financial books and records of Borrower and to discuss its affairs with its officers and employees at such reasonable times as Bank shall request and furnish Bank with such miscellaneous information as it may request. 6.8. PAYMENTS ON NOTE. Duly and punctually pay the principal and interest on the Note, in accordance with the terms of this Agreement and of the Note, and pay all other Debt of Borrower reflected on the financial statements delivered to Bank and referred to in Section 5.5 hereof and all other Debt incurred after the date hereof in accordance with the terms of such Debt, it being understood, however, that this Section shall not be deemed to permit any Debt in violation of the provisions of Sections 7.1 and 7.2 hereof. 6.9. CONDUCT OF BUSINESS. Conduct its business as now conducted and do all things necessary to preserve, renew and keep in full force and effect its rights, privileges and franchises necessary to continue its business. 6.10. MAINTENANCE OF PROPERTIES. Keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needed and proper repairs, renewals, replacements, additions, and improvements thereto and comply with the provisions of all leases to which it is a party or under which it occupies property so as to prevent any loss or forfeiture thereof or thereunder. 6.11. ADDITIONAL DOCUMENTS. Join the Bank in executing any security agreements, assignments, consents, financing statements or other instruments, in form satisfactory to the Bank, as the Bank may from time to time request in connection with the Collateral and the other security for the Loan referred to in Section 4.1 hereof. 6.12. NOTICE TO BANK. Immediately notify the Bank of (i) any event causing a material loss or depreciation in value of the Collateral and the amount of such loss or depreciation, (ii) if Borrower becomes aware of the occurrence of any Event of Default or of any fact, condition or event that, with the giving of notice or passage of time, or both, could become an Event of Default or of the failure of the Borrower to observe any of its undertakings hereunder, or (iii) any material lawsuit involving Borrower. 6.13. COLLATERAL REPORTS. Furnish to Bank at least quarterly (and more frequently if requested by Bank) a detailed accounts receivable aging report, a detailed accounts payable aging report, and an inventory report, all in form and substance, and containing such detail and information, as Bank shall request, and furnish to Bank copies of all physical inventory listings when prepared by Borrower. 6.14. SUBORDINATION OF DEBT. Provide Bank with a debt subordination agreement, in form and substance satisfactory to Bank, executed by Borrower and any Person who is an officer, director, shareholder or Affiliate of Borrower to whom Borrower is or hereafter becomes indebted, subordinating in right of payment and claim all Debt owed by Borrower to any said Person and any future advances thereon to the full and final payment of the Obligations. 6.15. COLLECTION OF ACCOUNTS. Diligently pursue collection of all Accounts and other amounts due Borrower by others, including Affiliates of Borrower. 18 6.16. LANDLORD AND STORAGE AGREEMENTS. Provide Bank with copies of all agreements between Borrower and any landlord or warehouseman which owns any premises at which any inventory or other Collateral may, from time to time, be kept. 6.17. AUDITORS, INSURANCE REPRESENTATIVES AND AGENTS. Furnish the Bank with a copy of each letter written to the Borrower by its independent certified public accountant concerning internal controls and management review immediately upon receipt of same and any comments made by the Borrower with respect thereto and permit Bank to communicate directly with said accountants and with Borrower's insurance representatives and agents regarding the financial affairs and condition of Borrower, the books and records of Borrower, and insurance matters pertaining to Borrower's business. 6.18. ERISA COMPLIANCE. (i) At all times make prompt payment of contributions required to meet the minimum funding standards set forth in ERISA with respect to each Plan; (ii) promptly after the filing thereof, furnish to Bank copies of any annual report required to be filed pursuant to ERISA in connection with each Plan and any other employee benefit plan of it and its Affiliates; (iii) notify Bank as soon as practicable of any Reportable Event and of any additional act or condition arising in connection with any Plan which Borrower believes might constitute grounds for the termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States district court of a trustee to administer the Plan; and (iv) furnish to Bank, promptly upon Bank's request therefor, such additional information concerning any Plan or any other such employee benefit plan as may be reasonably requested. 6.19. BANK ACCOUNTS. Maintain its principal bank accounts with the Bank or another bank designated by the Bank, except that Borrower may continue to maintain its payroll account where it is presently located. 6.20. BUSINESS RECORDS. Keep, and cause each Subsidiary to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions. 6.21 FINANCIAL COVENANTS. Maintain at all times that this Agreement is in effect the following: (a) Fixed Charge Coverage Ratio with respect to the twelve-month period ending on the last day of any Fiscal Quarter of any Fiscal Year of not less than 1.2:1:00, excluding from the calculation (i) Authorized Affilate Debt and (ii) liabilities and obligations of Kings Brothers under the Reimbursement Agreement; (b) a ratio of Debt to Tangible Net Worth of not more than 2.1 to 1, including in the definition of "Debt" Authorized Affiliate Debt, but excluding liabilities and obligations of Kings Brothers under the Reimbursement Agreement; and (c) Tangible Net Worth of not less than $7,000,000. The note receivable of $974,000 owed to Borrower from Kings Brothers in regard to Kings Brother's portion of the $1,100,000 industrial revenue bond obligation to which the Reimbursement Agreement pertains shall not be deducted from equity to determine Tangible Net Worth. The offsetting debt of $974,000 shall not be included in the definition of Debt for covenant calculation purposes. 6.22. FILING. Deliver to Bank a copy of any filings with any governmental body, agency or authority which regulates Borrower's business (except for tax returns filed in the ordinary course of business). 19 ARTICLE VII NEGATIVE COVENANTS Until the Obligations have been indefeasibly repaid and satisfied in full and until the Bank has no further obligation to make advances under the Loan, without the prior written consent of Bank, the Borrower shall not: 7.1. INDEBTEDNESS. Except as permitted or contemplated by this Agreement, create, incur, assume or suffer to exist any Debt or obligation for money borrowed, or guarantee, or endorse, or otherwise be or become contingently liable in connection with the obligations of any Person (including, without limitation, any Affiliate), except 7. 1. 1. Indebtedness for taxes not at the time due and payable or which are being actively contested in good faith by appropriate proceedings and against which reserves deemed adequate by Bank have been established by Borrower, but only if the non-payment of such taxes being contested does not result in a Lien upon any property of Borrower that has priority over the Lien held by Bank; 7.1.2. Contingent liabilities arising out of the endorsement of negotiable instruments in the ordinary course of collection or similar transactions in the ordinary course of business; 7.1.3. Accounts payable to trade creditors which are not aged more than one hundred twenty (120) days from billing date and current operating expenses (other than for borrowed money) which are not more than sixty (60) days past due, in each case incurred in the ordinary course of business and paid within such time period, unless the same are actively being contested in good faith and by appropriate and lawful proceedings and Borrower shall have set aside such reserves, if any, with respect thereto as have been recommended by independent public accountants; 7.1.4. Debt to third parties for purchase money borrowing incurred in connection with the purchase of capital assets used in the business of Borrower not to exceed $100,000 during any fiscal year of Borrower; 7.1.5. Debt for money borrowed from the Bank; 7.1.6 Subject to Section 7.1.7, Debt to Affiliates provided that and so long as (a) such Debt at no time exceeds One Million Dollars ($1,000,000) in outstanding principal amount in the aggregate; (b) such Debt is in all respects and at all times subordinate and subject to the Obligations pursuant to subordination agreements acceptable to Bank in its sole discretion; (c) such Debt requires Borrower to pay only interest thereon so long as the Obligations or any portion thereof is outstanding, except that such Debt may require Borrower to pay principal to the extent of additional cash equity investments actually made in Borrower, and (d) no Event of Default exists; and 7.1.7 Authorized Affiliate Debt, provided that and so long as no Event of Default exists hereunder or results from any payment under Authorized Affiliated Debt. 7.2. LIENS AND SECURITY INTERESTS. Create, incur, assume, or suffer to exist any mortgage, security deed, deed of trust, security interest, pledge, encumbrance, Lien or charge of any kind (including charges on property purchased under conditional sales or other title-retention agreements) on any of its property or assets, now owned or hereafter acquired, except for the following (all of which are referred to herein as "Permitted Liens"): 20 7.2.1. Liens for taxes not yet due or which are being contested in good faith by appropriate proceeding and against which reserves deemed adequate by Bank have been set up (excluding any Lien imposed pursuant to any of the provisions of ERISA); 7.2.2. Other Liens, charges and encumbrances incidental to the conduct of its business or the ownership of its property and assets and created by operation of law; 7.2.3. Purchase money Liens and encumbrances created to secure the indebtedness permitted by Section 7.1.4 hereof; 7.2.4. Liens, charges and encumbrances in favor of the Bank; and 7.2.5. Liens, charges and encumbrances reflected on EXHIBIT "B" to this Agreement. 7.3. DIVIDENDS AND DISTRIBUTIONS. Declare any dividends on any shares of any class of its capital stock, or apply any of its property or assets to the purchase, redemption or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Borrower, except under the stock repurchase plans described on SCHEDULE 7.3 hereto; provided, however, that during such time as Borrower maintains an effective election to be taxed under the provisions of Chapter "S" of the Internal Revenue Code of 1978, as amended, Borrower shall be entitled to distribute to its shareholders in each year an amount not to exceed that portion of the federal income tax liability incurred by each said shareholder on income tax returns for the prior year which resulted from its holdings of shares in Borrower. 7.4. AFFILIATE TRANSACTIONS. Purchase, acquire or lease property from, or sell, transfer or lease any inventory, materials, goods, equipment, assets, rights or property to, any Affiliate of Borrower, except in the ordinary course of Borrower's business and under terms and conditions which would apply if disinterested parties were involved. 7.5. FINANCING STATEMENTS. Permit any financing statement (except Bank's financing statements) to be on file with respect to the Collateral. 7.6. LOCATION OF COLLATERAL. Change the locations at which the Collateral is maintained; change the name, identity, or corporate structure of Borrower; adopt or make use of any fictitious or trade name not disclosed elsewhere in this Agreement; or change the location of its chief executive office. 7.7. DESTRUCTION OF COLLATERAL. Waste or destroy the Collateral or use it in violation of any statute or ordinance. 7.8. MERGER OR CONSOLIDATION. Enter into any merger or consolidation or acquire all or substantially all of the assets of any Person; or sell, lease, or otherwise dispose of any of its assets in an aggregate amount exceeding $50,000 during any fiscal year, except sales in the ordinary course of its business. 7.9. LOANS OR ADVANCES. Make Loan or make advances or pay any management or similar fees to any Person. 7.10. ACQUISITIONS. Purchase or acquire the obligations or stock of or any other interest in any Person, except direct obligations of the United States of America or certificates of deposit or other investments issued by the Bank or by any bank designated in writing by the Bank. 7.11. PAYMENT OF DEBT. Pay any portion of the principal of, or prepay, any Debt except Debt to the Bank; provided, however, the Borrower may take ordinary trade discounts on purchases made in the ordinary course of business and make 21 payments or prepayments under Authorized Affiliate Debt provided that and so long as no Event of Default exists or results from any such payment. 7.12. LEASE TRANSACTIONS. Enter into any sale and lease-back arrangement, either directly or indirectly. 7.13. AMENDMENTS. Amend any instrument evidencing a Permitted Lien or the indebtedness secured thereby. 7.14. SALARIES. Increase the salary and fringe benefits of any officer or director or shareholder or any Affiliate of any officer or director or shareholder of Borrower by more than 15% in any fiscal year from the amount paid in the previous fiscal year. 7.15. ADVERSE TRANSACTIONS. Enter into any transaction, or permit any Subsidiary to enter into any transaction, which materially and adversely affects or may materially and adversely affect the Collateral or Borrower's ability to repay the Obligations or permit or agree to any material extension, compromise or settlement or make any change or modification of any kind or nature with respect to any Account, including any of the terms relating thereto, other than discounts and allowances in the ordinary course of business. 7.16. SUBSIDIARY ACQUISITIONS. Hereafter create any Subsidiary or divest itself of any material assets by transferring them to any Subsidiary. 7.17. SUBSIDIARY DIVESTITURES. Transfer, sell, pledge, encumber or otherwise assign any shares of stock or other interest in any Subsidiary or permit any Subsidiary to sell or otherwise dispose of all of substantially all of its assets. 7.18 PARTNERSHIPS OR JOINT VENTURES. Become or agree to become a general or limited partner in any general or limited partnership or a joint venturer in any joint venture. 7.19. SUBORDINATED DEBT. Make any payment (principal or interest) with respect to Subordinated Debt, or with respect to any Debt that would be Subordinated Debt but for the absence of a subordination agreement in effect with respect thereto. ARTICLE VIII GRANT OF SECURITY INTEREST 8.1. SECURITY INTEREST. As security for the payment of the Loan and all other Obligations, now existing or in the future incurred, and including any extensions or renewals or changes in form of the Loan, any Overadvances, and any other Debt of Borrower to the Bank, and all costs and expenses of collection thereof, including, without limitation, attorneys' fees, Borrower hereby assigns to Bank and grants to Bank a security interest in and Lien upon the following: (a) All of Borrower's Accounts; (b) All of Borrower's General Intangibles; (c) All of Borrower's Inventory; (d) All of Borrower's Equipment; (e) All of Borrower's chattel paper, documents and instruments and rights of payment evidenced thereby; 22 (f) All of Borrower's investment property, deposit accounts, letters of credit and letter of credit rights; (g) All of proceeds and products, as the case may be, of Borrower's Accounts, General Intangibles, Equipment, and Inventory and all other of the foregoing portions of the Collateral; (h) All monies and other property of any kind, real, personal, or mixed, and tangible or intangible, now or at any time or times hereafter, in the possession or under the control of Bank or a bailee of Bank; (i) All accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (a) through (h) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; (j) All books and records (including, without limitation, customer lists, credit files, magnetic, digital and laser tapes and disks, electronic and computer storage media, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of (a) through (i) above. 8.2. SALE OF INVENTORY. Until the occurrence of an Event of Default hereunder or until expiration of the Commitment Period, whichever occurs first, Borrower may use and dispose of the Inventory in the ordinary course of business where such is not inconsistent with this Agreement, provided that the ordinary course of business does not include a transfer in partial or total satisfaction of Debt nor a transfer (other than a sale on terms and conditions which would apply if disinterested parties were involved) to an Affiliate of Borrower. 8.3. NOTICE TO ACCOUNT DEBTORS. At any time after the occurrence of an Event of Default, but without prior notice to Borrower, except such notice as may be required by law, Bank shall have the right to notify the Account Debtors obligated on any or all of the Accounts to make payment thereof directly to Bank and to take control of all proceeds of any such Accounts. Any such notice by the Bank to such Account Debtors shall be given by an authorized representative of the Bank. Borrower, if requested by Bank, shall stamp or cause to be stamped on each Account item in legible letters "Pledged to SouthTrust Bank" and shall turn over physical possession of the Accounts to Bank. Borrower authorizes Bank to sign and endorse Borrower's name upon any check, draft, money order, or other form of payment of any Account item and to sign and endorse satisfactions and releases of Account items in Borrower's name. Until such time as Bank elects to exercise the right to collect and enforce said Accounts, Borrower is authorized, as agent of the Bank, to collect and enforce said Accounts in Borrower's name. The costs of such collection and enforcement, including attorneys' fees and out-of-pocket expenses and all other expenses and liabilities resulting therefrom, shall be borne solely by Borrower whether the same are incurred by the Bank or Borrower. 8.4. VERIFICATION OF ACCOUNTS. Whether or not an Event of Default has occurred, any of Bank's officers, authorized representatives, employees or agents shall have the right, at any time or times hereafter, in the name of Bank or in any trade or fictitious name selected by Bank, or in the name of any designee of Bank or Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, telegraph, or otherwise. Borrower shall cooperate fully with Bank in an effort to facilitate and promptly conclude any such verification process. 8.5 CONTROL. Borrower will cooperate with Bank for Bank to obtain control of the Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper. Borrower will not create any electronic chattel paper without taking all steps deemed necessary by Bank to confer control of the electronic chattel paper upon Bank. 23 8.6. GOVERNMENTAL ACCOUNTS. If any of Borrower's Accounts in excess of $ 10,000 arise out of contracts with the United States or any department, agency, or instrumentality thereof, Borrower will immediately notify the Bank thereof in writing and execute any instruments and take any steps required by the Bank in order that all monies due and to become due under such Account shall be assigned to the Bank and notice thereof given to the Government under the Federal Assignment of Claims Act. 8.7. ACCOUNTS EVIDENCED BY INSTRUMENTS. If any of Borrower's Accounts are or should become evidenced by promissory Note, trade acceptances, chattel paper, chattel mortgages, conditional sales contracts, or other instruments, Borrower will immediately deliver same to Bank, endorsed or assigned with recourse to the Bank's order and, regardless of the form of such endorsement or assignment, Borrower hereby waives presentment, demand, notice of dishonor, protest and notice of protest and all other notices with respect thereto. 8.8. LEASE OF RECORDS. Borrower hereby leases to the Bank, and the Bank hires from Borrower, for a term which shall be effective so long as the Loan or other Obligations secured hereby are owing to the Bank by Borrower and until the Bank has no further obligation under the Agreement, all of Borrower's present and future books of Accounts, computer printouts, magnetic, digital and laser tapes and disks, computer and electronic storage media, computer software programs, trial balance records, ledgers and cabinets in which they are located, reflected or maintained, in any way relating to the Collateral, and all present and future supporting evidence and documents relating thereto in the form of written applications, credit information, account cards, payment records, trial balances, correspondence, delivery receipts, certificates and the like, as well as the past and current information stored in computer software programs for and on Borrower's behalf by third parties. Borrower, if requested by Bank, agrees to legend all of the foregoing to indicate the lease thereof to the Bank. If an Event of Default occurs, then, in addition to all of the other rights and remedies of the Bank herein, the Bank will have the right forthwith or at any time thereafter to remove from Borrower's premises all of the foregoing and keep and retain the same in Bank's possession until the Loan and other Obligations secured hereby shall have been fully paid and discharged and the Bank has no further obligation under the Agreement. The provisions of this Section shall not be deemed to diminish or contravene the security interest of the Bank in the Borrower's General Intangibles or in the property, materials, and interests described in this Section but shall be deemed to be in addition to any rights the Bank may have with respect to the Borrower's grant of a security interest in its General Intangibles to the Bank. 8.9. LICENSE OF RIGHTS. Bank is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter or any property of a similar nature as it pertains to the Collateral, in advertising for sale and in selling any Collateral, and Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit. 8.10. ATTORNEY-IN-FACT. Borrower hereby irrevocably designates, makes, constitutes and appoints Bank (and all Persons designated by Bank) as Borrower's true and lawful attorney (and agent-in-fact) and Bank, or Bank's agent, may, without notice to Borrower and in either Borrower's or Bank's name, but at the cost and expense of Borrower: 8.10.1. At such time or times hereafter as Bank or said agent, in its sole discretion, may determine, endorse Borrower's name on any checks, Note, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Bank or under Bank's control; and 8.10.2. At such time or times as Bank or its agent in its sole discretion may determine (and irrespective of whether an Event of Default exists): (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral; (iii) sell or collect any of the Accounts or other 24 Collateral upon such terms, and for such amounts and at such time or times as Bank deems advisable; (iv) take possession, in any manner, of any item of payment or proceeds relating to any Collateral and apply the same to the Obligations; (v) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to Borrower and to notify postal authorities to change the address for delivery thereof to such address as Bank may designate; (vii) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Bank or any other bank on account of the Obligations; (viii) endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, and any other Collateral and to which Borrower has access; (xi) make and adjust claims under policies of insurance; and (xii) for and in the name of Borrower to give instructions and direct any bank or financial institution in which proceeds of the Collateral are deposited to turn over said proceeds to Bank; and (xiii) do all other acts and things necessary, in Bank's determination, to fulfill Borrower's obligations under this Agreement. ARTICLE IX ADDITIONAL REPRESENTATIONS, COVENANTS, AND AGREEMENTS RELATING TO COLLATERAL 9.1. RELIANCE ON STATEMENTS. With respect to all Accounts, Borrower represents and warrants to Bank that Bank may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts, and unless otherwise indicated in writing to Bank, that with respect to each Account: 9.1.1. It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; 9.1.2. It arises out of a completed, bona fide sale and delivery of goods or rendition of services by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; 9.1.3. It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Bank; 9.1.4. Such Account, and Bank's security interest therein, is not, and will not be in the future, subject to any offset, Lien, deduction, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is deemed by Bank to be immaterial, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; 9.1.5. Borrower has made no agreement with any Account Debtor thereunder for any deduction therefrom, except discounts or allowances which are granted by Borrower in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto; 9.1.6. There are no facts, events or occurrences which in any way impair the validity or enforceability thereof or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Bank with respect thereto; 25 9.1.7. To the best of Borrower's knowledge, the Account Debtor thereunder (i) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (ii) such Account Debtor was and is Solvent; 9.1.8. Borrower has no knowledge of any fact or circumstance which would impair the validity or collectibility of the Account, and to the best of Borrower's knowledge there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account; and 9.1.9. Borrower will have paid or provided for the payment of all taxes arising from the transaction creating the Account. 9.2. NOTIFICATION. Borrower shall immediately notify Bank of any event, occurrence or circumstance which causes any representation pertaining to any Account set forth in Section 9.1 above to cease to be true in all respects, and Borrower will promptly notify Bank (i) if any Account Debtor or any Affiliate of any Account Debtor has or may have any right of setoff, deduction, or defense against any Account or (ii) if any such Account Debtor or Affiliate of such Account Debtor has or may have a contractual or business relationship with Borrower such that at any time such right may exist or be asserted or (iii) if Borrower ships any inventory or goods or furnishes any services to any Person which has or may have any right of setoff, deduction or defense against any asset, including any Account, of Borrower. 9.3. AFFIRMATION OF REPRESENTATIONS. Each request for a loan or advance made by Borrower pursuant to this Agreement or any of the other Loan Documents shall constitute (i) an automatic representation and warranty by Borrower to Bank that there does not then exist any default or Event of Default and (ii) a reaffirmation as of the date of said request that all of the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true in all material respects except for any changes in the nature of Borrower's business or operations that would render the information contained in any exhibit attached hereto either inaccurate or incomplete, so long as Bank has consented to such changes or such changes are expressly permitted by this Agreement. 9.4. WAIVERS. Borrower hereby releases and waives any and all actions, claims, causes of action, demands and suits which it may ever have against the Bank as a result of any possession, collection, settlement, compromise or sale by Bank of any of the Collateral upon the occurrence of an Event of Default hereunder, notwithstanding the effect of such possession, collection, settlement, compromise or sale upon the business of Borrower. Said waiver shall include all causes of action and claims which may result from the exercise of the power of attorney conferred upon Bank in Section 8.10. The failure at any time or times hereafter to require strict performance by Borrower of any of the provisions, warranties, terms and conditions contained in this Agreement or any other agreement, document or instrument now or hereafter executed by Borrower, and delivered to the Bank, shall not waive, affect, or diminish any right of the Bank thereafter to demand strict compliance and performance therewith and with respect to any other provisions, warranties, terms and conditions contained in such agreements, documents or instruments, and any waiver of default shall not waive or affect any other default, whether prior or subsequent thereto, and whether the same are of a different type. None of the warranties, conditions, provisions and terms contained in the Agreement or any other agreement, document or instrument now or hereafter executed by Borrower and delivered to the Bank shall be deemed to have been waived by any act or knowledge of the Bank, its agents, representatives, officers or employees, but only by an instrument in writing signed by an officer of the Bank and directed to the Borrower specifying such waiver. 9.5. DISCHARGE OF TAXES AND LIENS. At its option, the Bank may discharge taxes, Liens, security interests or other encumbrances at any time levied or placed on the Collateral and may pay for the maintenance and preservation of the Collateral. Borrower agrees to reimburse the Bank, on demand, for any payment 26 made or expense incurred by Bank pursuant to the foregoing authorization, including, without limitation, attorneys' fees. 9.6. INSURANCE. Without limiting any other provision hereof, Borrower will keep the Collateral insured in amounts equal to its full insurable value, with companies, and against such risks as may be satisfactory to the Bank. Borrower will pay the costs of all such insurance and deliver policies evidencing such insurance to the Bank with mortgagee loss payable clauses in favor of the Bank. Borrower hereby assigns to the Bank all right to receive proceeds, directs any insurer to pay all proceeds directly to the Bank, and authorizes the Bank to endorse any check or draft for such proceeds and apply the same toward satisfaction of the Loan and other Obligations secured hereby. 9.7. COMPLETE RECORDS, INSPECTION RIGHTS. Borrower will at all times keep accurate and complete records of the Collateral, and the Bank or its agents shall have the right to call at Borrower's place or places of business at intervals to be determined by Bank, upon reasonable notice and during Borrower's regular business hours, and without hindrance or delay, to inspect and examine the Inventory and the Equipment and to inspect, audit, check, and make abstracts from the books, records, journals, orders, receipts, computer printouts, correspondence and other data relating to the Collateral or to any other transactions between the parties hereto. If requested by Bank, Borrower agrees to make its books, records, journals, orders, receipts, computer printouts, correspondence, and other data relating to the Collateral available at the Bank's main office for inspection, audit and checking by the Bank or its agents. 9.8. U.C.C. FINANCING STATEMENT. The Borrower agrees that a carbon, photographic or other reproduction of this Agreement or a financing statement with respect to the Collateral shall be sufficient as a financing statement and may be filed as such by the Bank. ARTICLE X EVENTS OF DEFAULT; CERTAIN REMEDIES 10.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: 10.1.1. Payment Default. If Borrower shall fail to make any payment of any installment of principal or interest on the Note when and as the same shall become due and payable, whether at stated maturity, upon expiration of the Commitment Period, by declaration, upon acceleration, or otherwise; or 10.1.2. Fees and Expenses. If Borrower shall fail to pay when due any other expense, fee or charge provided for in this Agreement and such failure shall continue for a period of ten (10) days; or 10.1.3. Other Defaults. If Borrower shall fail for a period of fifteen (15) days after written notice from Bank to perform, keep, or observe any covenant, agreement or provision of any of the following Sections of this Agreement: 6.4, 6.9, 6.10, 6.11, 6.14, 6.17, 6.18, 6.20, and 6.21; or if Borrower shall fail or neglect to perform, keep or observe, or shall default with respect to, any other covenant, agreement or provision contained in this Agreement (other than a covenant, agreement or provision a default in the performance of which is dealt with specifically elsewhere in this Section 10.1); or 10.1.4. Representations False. If any warranty, representation, or other statement made or furnished to Bank by or on behalf of Borrower or in any of the Loan Documents proves to be false or misleading in any material respect when made or furnished; or 10.1.5. Financial Difficulties. If the Borrower shall be involved in financial difficulties as evidenced. 27 (a) by its admission in writing of its inability to pay its debts generally as they become due or of its ceasing to be Solvent; (b) by its filing a petition in bankruptcy or for reorganization or for the adoption of an arrangement under the U.S. Bankruptcy Code (as now or in the future amended) or any similar law regarding debtors' rights and remedies or an admission seeking the relief therein provided; (c) by its making a general assignment for the benefit of its creditors; (d) by its consenting to the appointment of a receiver for all or a substantial part of its property; (e) by its being adjudicated a bankrupt; (f) by the entry of a court order appointing a receiver or trustee for all or a substantial part of its property without its consent, which order shall not be vacated, set aside or stayed within ninety (90) days from the date of entry; or (g) by the assumption of custody or sequestration by a court of competent jurisdiction of all or substantially all of its property, which custody or sequestration shall not be suspended or terminated within 60 days from its inception; or 10.1.6. ERISA. If a Reportable Event shall occur which Bank, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if Borrower is in "default" (as defined in Section 4219(c) (5) of ERISA) with respect to payments to a Multiemployer Plan resulting from Borrower's complete or partial withdrawal from such Plan; or 10.1.7. Cancellation of Subordination Agreement. If any subordination agreement executed by any creditor of Borrower or pertaining to any Subordinated Debt should be canceled, terminated, or breached; or 10.1.8. Default on Other Obligations. If Borrower shall default in payment of more than $10,000 due on any Debt of Borrower to others or if Borrower shall default under any loan or security agreement with others or under any material lease involving a payment of more than $10,000 and any such default shall not be cured within 30 days after written notice to Borrower from Bank or any holder; or 10.1.9. Judgments. If a final judgment for the payment of money in excess of $ 10,000 shall be rendered against the Borrower and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, unless such judgment is fully covered by collectible insurance; or 10.1.10. Actions. If Borrower shall be criminally indicted or convicted under any law that could lead to a forfeiture of any property of Borrower; or 10.1.11. Uninsured Losses; Unauthorized Dispositions. Any material loss, theft, damage or destruction not fully covered by insurance (as required by this Agreement and subject to such deductibles as Bank shall have agreed to in writing), or sale, lease or encumbrance of any of the Collateral or the making of any levy, seizure, or attachment thereof or thereon except in all cases as may be specifically permitted by other provisions of this Agreement; or 10.1.12. Adverse Changes. There shall occur any material adverse change in the financial condition or business prospects of Borrower; or 28 10.1.13. Collateral. If a creditor of Borrower shall obtain possession of any of the Collateral by any legal means; or 10.1.14. Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of Borrower for a period which significantly affects Borrower's capacity to continue its business, on a profitable basis; or Borrower shall suffer the loss or revocation of any license or permit now held or hereafter acquired by Borrower which is necessary to the continued or lawful operation of its business; or Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which Borrower leases, uses or occupies any of its properties shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such properties shall be impaired through condemnation; or 10.1.15. Bank Insecurity. Bank shall reasonably and in good faith deem itself insecure; or 10.1.16. Change in Control. If any of the present executive officers of Borrower should resign or be removed or if there occurs a change in majority stock ownership of Borrower; or 10.1.17. Subordination Agreements. If a breach or default shall occur with respect to any subordination agreement executed by any creditor of Borrower (including any Affiliate), or if any said agreement shall otherwise terminate or cease to have legal effect; or 10.1.18. Other Documents. If a default or event of default or breach occurs under any Loan Document (other than the breaches enumerated in Sections 10. 1. 1 through 10. 1. 17 above), or under or with respect to any of the Obligations, or under any other note, evidence of indebtedness, loan agreement, security agreement, guaranty, pledge, mortgage, assignment, or security document executed by Borrower and delivered to the Bank. The Borrower agrees that default under any Loan Document shall constitute default with respect to all Loan Documents and vice versa. 10.2. REMEDIES. Upon or at any time after the occurrence of any one or more of the foregoing Events of Default, Bank or the holder of the Note may at its option (i) proceed to protect and enforce its rights by suit in equity, action at law and/or the appropriate proceeding either for specific performance of any covenant or condition contained in the Note or in any Loan Document, (ii) terminate the Commitment Period and cease disbursing advances under the Note, and/or (iii) declare the unpaid balance of the Loan and Note together with all accrued interest to be forthwith due and payable, and thereupon such balance shall become so due and payable without presentation, protest or further demand or notice of any kind, all of which are hereby expressly waived. Without limiting the foregoing, upon the occurrence of any Event of Default, and at any time thereafter, Bank shall have the rights and remedies of a secured party under the Uniform Commercial Code in addition to the rights and remedies provided herein or in any other instrument or paper executed by Borrower. The Bank may require the Borrower to assemble the Equipment and the Inventory and to make the same available to the Bank at a place to be designated by the Bank which is reasonably convenient to both parties. Unless the Collateral is perishable or threatens to decline speedily in value, or is of a style customarily sold on a recognized market, the Bank will give Borrower reasonable notice of the time after which any private sale or other intended disposition thereof is to be made. The requirement of reasonable notice shall be met if such notice is mailed postage prepaid to the Borrower at least ten (10) days before the time of such sale or disposition. The Borrower shall pay the Bank on demand any and all expenses, including legal expenses and reasonable attorneys' fees, incurred or paid by the Bank in protecting or enforcing the 29 Loan and all other Obligations secured hereby and other rights of the Bank hereunder, including its right to take possession of the Collateral. The Bank shall not be liable for failure to collect the Accounts or to enforce any contract rights or for any action or omission on the part of the Bank, its officers, agents and employees, except willful misconduct. No remedy herein conferred upon, or reserved to, the Bank is intended to be exclusive of any other remedy or remedies, including those of any note or other evidence of Debt held by the Bank, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity. Exercise or omission to exercise any right of the Bank shall not affect any subsequent right of the Bank to exercise the same. Borrower waives notice prior to Bank's taking possession or control of any of the Collateral or any bond or security that might be required by any court prior to allowing Bank to exercise any of Bank's remedies, including, without limitation, the issuance of an immediate writ of possession. The Borrower agrees that the Bank may apply the net proceeds received from the Collateral among the Loan and the Obligations toward satisfaction of the same in its sole discretion. Any such proceeds remaining after satisfaction in full of the Loan, the Obligations, and the other obligations and liabilities of the Borrower to the Bank shall be distributed as required by Applicable Laws. 10.3. RIGHT OF SET-OFF. Upon and after the occurrence of any Event of Default, Bank may, and is hereby authorized by Borrower to, at any time and from time to time, to the fullest extent permitted by Applicable Laws, and without advance notice to Borrower (any such notice being expressly waived by Borrower), set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and any other indebtedness at any time owing by Bank to, or for the credit or the account of, Borrower against any or all of the Loan and Obligations and other liabilities and obligations of Borrower now or hereafter existing whether or not such obligations have matured and irrespective of whether Bank has exercised any other rights that it has or may have with respect to the Loan and Obligations and other liabilities and obligations, including, without limitation, any acceleration rights. The aforesaid right of set-off may be exercised by Bank against Borrower or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of Borrower, notwithstanding the fact that such right of set-off shall not have been exercised by Bank prior to the making, filing or issuance, or service upon Bank of, or of notice of, any such petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Bank agrees to notify Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Bank under this Section are in addition to the other rights and remedies (including, without limitation, other rights of setoff) which Bank may have. ARTICLE XI INDEMNIFICATION 11.1. INDEMNIFICATION. Borrower agrees to defend, indemnify and hold harmless the Bank, its directors, officers, employees, accountants, attorneys, and agents (collectively, the "Indemnitees") from and against any and all claims, demands, judgments, damages, actions, causes of action, injuries, orders, penalties, costs and expenses (including attorneys' fees and costs of court) of any kind whatsoever arising out of or relating to any breach or default by Borrower or any other Person under this Agreement or any Loan Document or the failure of Borrower to observe, perform or discharge Borrower's duties hereunder or thereunder. Without limiting the generality of the foregoing, Borrower's obligation to indemnify Bank shall include indemnity from any and all claims, demands, judgments, damages, actions, causes of action, injuries, orders, penalties, costs and expenses arising out of or in connection with the activities of the Borrower, its predecessors in interest, third parties who have trespassed on Borrower's property, or parties in a contractual relationship with Borrower, whether or not occasioned wholly or in part by any condition, accident or event caused by an act or omission of the Indemnitees, which: (a) arise out of the actual, alleged or threatened discharge, dispersal, 30 release, storage, treatment, generation, disposal, or escape of radioactive materials, radioactivity, pollutants or other toxic or hazardous substances, including any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste (including materials to be recycled, reconditioned or reclaimed); or (b) actually or allegedly arise out of the use, specification, or inclusion of any product, material, or process containing chemicals or radioactive material, the failure to detect the existence or proportion of chemicals or radioactive material in the soil, air, surface water or groundwater, or the performance or failure to perform the abatement of any pollution source or the replacement or removal of any soil, water, surface water, or groundwater containing chemicals or radioactive material; or (c) arises out of or relates to breach by Borrower of any of the provisions of Section 5.16 hereof relating to Environmental Regulations. In addition, Borrower will indemnify and hold Bank harmless from and against any liability, claim, cost or expense incurred by Bank or imposed against Bank for any stamp tax, intangible tax, or other tax, fee or charge imposed by any governmental entity arising out of or relating to the Note or this Agreement or the transactions anticipated herein. ARTICLE XII COSTS AND EXPENSES, MISCELLANEOUS 12.1. COSTS OF PREPARATION; BROKERS FEES. Borrower shall bear all expenses of the Bank in connection with the Loan and with the investigation, review and approval of this transaction, the preparation of the Agreement and the Loan Documents, and the issuance and delivery of the Note to Bank and also in connection with any amendment or modification thereto, and the administration thereof, including, without limitation, (i) all legal fees, expenses and disbursements and other actual third-party expense reimbursements incurred or sustained by Bank in connection with this transaction, (ii) all travel, appraisal, audit, search and filing fees incurred or sustained by Bank in connection with this transaction or the administration of the Loan; (iii) all recording and filing fees, intangibles taxes, documentary and revenue stamps, other taxes or other expenses and charges payable in connection with this Agreement, the Note or any Loan Document and (iv) all costs, expenses (including fees and expenses of outside consultants), related to the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby and/or periodic audits and appraisals performed by Bank. The Borrower agrees to indemnify and save Bank harmless against all broker's and finder's fees, if any. 12.2. OTHER COSTS AND EXPENSES. If, at any time or times hereafter, whether before or after the occurrence of an Event of Default, the Bank employs counsel to advise or provide other representation with respect to this Agreement or any Loan Document, or to collect the balance of the Loan, or to take any action in or with respect to any suit or proceeding relating to this Agreement or any of the Loan Documents, or to protect, collect, or liquidate the Collateral or to attempt to enforce any security interest or Lien granted to the Bank by Borrower; then in any such events, all of the reasonable attorneys' fees arising from such services, and any expenses, costs and charges relating thereto, shall constitute additional obligations of Borrower payable on demand of the Bank. 12.3. LEGAL COUNSEL. Borrower acknowledges and agrees that legal counsel to Bank does not represent Borrower as Borrower's attorney, that Borrower has retained (or has had an opportunity to retain) counsel of its own choice and has not and will not rely upon any advice from Bank's counsel. In no event shall Borrower's reimbursement of expenses pursuant to this Agreement (even if effected by payment directly by Borrower to Bank's counsel) be deemed to establish any attorney-client relationship between Borrower and Bank's counsel. 12.4. NO WAIVER. No waiver of any Event of Default hereunder, and no waiver of any default or Event of Default under any other Loan Document shall extend to or affect any subsequent or other then existing default or shall impair any rights, remedies or powers of Bank. No delay or omission of Bank or any subsequent holder of the Note to exercise any right, remedy, power or privilege hereunder after the occurrence of such default or Event of Default shall be construed as a waiver of any such default, or acquiescence therein. 31 12.5. HEADINGS. Except for the definitions set forth in Section 1.1, the headings of the articles, sections, paragraphs and subdivisions of this Agreement are for convenience of reference only, are not to be considered a part hereof, and shall not limit or otherwise affect any of the terms hereof. 12.6. MARSHALLING OF ASSETS; PAYMENTS SET ASIDE. Bank shall be under no obligation to marshall any assets or securities in favor of Borrower or any other Person or against or in payment of any or all of the Obligations. To the extent that any sum credited against the Obligations is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 12.7. SURVIVAL OF COVENANTS. All covenants, agreements, representations and warranties made herein and in certificates or reports delivered pursuant hereto shall be deemed to have been material and relied on by Bank, notwithstanding any investigation made by or on behalf of Bank, and shall survive the execution and delivery to Bank of the Note or Loan Document. 12.8. ADDRESSES. Any notice or demand which by any provision of this Agreement is required or provided to be given shall be deemed to have been sufficiently given or served for all purposes by (i) being delivered in person to the party to whom the notice or demand is directed or (ii) by being sent as first class mail, postage prepaid, in either event to the following address: If to Borrower, 4350 Peachtree Industrial Avenue, Suite 100, Norcross, Georgia 30071; or if any other address shall at any time be designated by Borrower in writing to the holders of record of the Note at the time of such designation to such other address; and if to Bank, One Georgia Center, Suite 450, 600 West Peachtree Street, Atlanta, GA 30308; or if any other address shall at any time be designated in writing to Borrower, to such other address. Notwithstanding the foregoing, no notice shall be effective as to Bank until actually received by Bank. Any written notice that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 12.9. VENUE AND JURISDICTION. Borrower agrees that any legal action brought by the Bank to collect the Loan or any Obligation or to assert any claim against Borrower under any Loan Document, or any part thereof, may be brought in any court in the State of Georgia having subject matter jurisdiction, waives its right to object to any such action on grounds it is brought in the improper venue, and irrevocably consents that any legal action or proceeding against it under, arising out of, or in any manner relating to the Loan, the Obligations, or any Loan Document may be brought in the Superior Court of Fulton County, Georgia or in any other court of jurisdiction in Fulton County, Georgia or in the U.S. District Court for the Northern District of Georgia. Borrower, by the execution of this Agreement, expressly and irrevocably assents and submits to the personal jurisdiction of any such court in any such action or proceeding. Borrower consents to the service of process relating to any such action or proceeding by mail to the address set forth in this Agreement. 12.10. CONTINUING OBLIGATION; BENEFITS. This Agreement, and each and every provision hereof, is a continuing obligation and shall (i) be binding upon the Borrower and the Bank, their successors and assigns, and (ii) inure to the benefit of and be enforceable by the Borrower and Bank and their successors and assigns; provided, that the Borrower may not assign all or any part of this Agreement without the prior written consent of Bank, which consent may be granted or withheld in the sole discretion of Bank. 12.11. CONTROLLING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia; provided, however, that if any of the Collateral shall be located in any jurisdiction other than Georgia, the laws of such jurisdiction shall govern the applicable law for the method, manner and procedure for foreclosure of Bank's lien upon such Collateral and the enforcement of Bank's other remedies in respect of such Collateral to the extent 32 that the laws of such jurisdiction are different from or inconsistent with the laws of Georgia. 12.12. STANDARD OF REVIEW. Any document, writing or instrument required or permitted to be delivered to Bank under this Agreement shall be deemed satisfactory only if approved by Bank in the exercise of its sole discretion, and any act or approval permitted to be done by Bank under this Agreement shall be in Bank's sole discretion. Where in this Agreement reference is made to Bank's "discretion", or "sole discretion", said reference shall mean that with respect to the matter so designated, Bank shall have the absolute right to make decision with respect thereto and shall not be subject to any standard of good faith, fair dealing, reasonableness, or any other standard implied by any court or imposed by law, it being the intention of the parties that the decision of the Bank with respect to said matter shall be absolutely final and binding. 12.13. PARTICIPATION. Borrower acknowledges that Bank may, at its option, sell participation interests in the Loan to participating banks. The amounts of any such participations shall be determined solely by the Bank. Borrower agrees with each present and future participant in the Loan, the names and addresses of which will be furnished to Borrower, that if an Event of Default should occur, each present and future participant shall have all of the rights and remedies of Bank with respect to any deposit due from any participant to Borrower. The execution by a participant of a participation agreement with Bank, and the execution by Borrower of this Agreement, regardless of the order of execution, shall evidence an agreement between Borrower and said participant in accordance with the terms of this Section. 12.14. MISCELLANEOUS. The Loan Documents, this Agreement and the agreements and instruments executed in connection with this Agreement constitute the entire agreement between Borrower and Bank in regard to the subject matter hereof. This Agreement may not be varied, altered, or amended except by a written instrument executed by an authorized officer of the Bank. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be an original, but such counterparts shall together constitute one and the same instrument. Any provision in this Agreement which may be unenforceable or invalid under any law shall be ineffective to the extent of such unenforceability or invalidity without affecting the enforceability or validity of any other provisions hereof. 12.15. GENERAL WAIVERS. To the fullest extent permitted by Applicable Law, Borrower waives (i) presentment, demand and protest and notice of presentment, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Bank on which Borrower may in any way be liable; (ii) notice prior to Bank's taking possession or control of any of the Collateral or any bond or security which might be required by any court prior to allowing Bank to exercise any of Bank's remedies, including the issuance of an immediate writ of possession; (iii) the benefit of all valuation, appraisement and exemption laws; (iv) any right Borrower may have upon payment in full of the Obligations to require Bank to terminate its security interest in the Collateral until the execution by Borrower of an agreement indemnifying Bank from any loss or damage Bank may incur as the result of dishonored checks or other items of payment received by Bank from Borrower or any Account Debtor and applied to the Obligations; and (v) notice of Bank's acceptance hereof or of any Loan Document. 12.16. MAXIMUM INTEREST. Regardless of any provision contained in this Agreement or any of the Loan Documents, in no event shall the aggregate of all amounts that are contracted for, charged or collected pursuant to the terms of this Agreement, the Note or any of the Loan Documents, and that are deemed interest under Applicable Law, exceed the Maximum Rate. No provision of this Agreement or in any of the Loan Documents or the exercise by Bank of any right hereunder or under any Loan Document or the prepayment by Borrower of any of the Obligations or the occurrence of any contingency whatsoever, shall entitle Bank to charge or receive, or to require Borrower to pay, interest or any amounts deemed interest by Applicable Law (such amounts being referred to herein collectively as "Interest") in excess of the Maximum Rate, and all provisions hereof or in any Loan Document which may purport to require Borrower to pay 33 Interest exceeding the Maximum Rate shall be without binding force or effect to the extent only of the excess of Interest over such Maximum Rate. Any Interest charged or received in excess of the Maximum Rate ("Excess"), shall be conclusively presumed to be the result of an accident and bona fide error, and shall, to the extent received by Bank, at the option of Bank, either be applied to reduce the principal amount of the Obligations or returned to Borrower. The right to accelerate the maturity of any of the Obligations does not include the right to accelerate unaccrued interest, and no such interest will be collected by Bank. All monies paid to Bank hereunder or under any of the Loan Documents shall be subject to any rebate of unearned interest as and to the extent required by Applicable Law. By the execution of this Agreement, Borrower covenants that (i) the credit or return of any Excess shall constitute the acceptance by Borrower of such Excess, and (ii) Borrower shall not seek or pursue any other remedy, legal or equitable, against Bank, based in whole or in part upon contracting for, charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Bank, all interest at any time contracted for, charged or received from Borrower in connection with this Agreement shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Obligations. Borrower and Bank shall, to the maximum extent permitted under Applicable Law, (i) characterize any non-principal payment as an expense, fee or premium rather than as Interest and (ii) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into the Note and each Loan Document (whether or not any provision of this Section is referred to therein). 12.17. WAIVER OF RIGHT TO TRIAL BY JURY. As and to the extent allowed by Applicable Law, Borrower and Bank hereby waive any right to trial by jury on any claim, counterclaim, setoff, demand, action or cause of action (a) arising out of or in any way pertaining or relating to this Agreement, the Note, the Loan Documents, or any other instrument, document or agreement executed or delivered in connection with this Agreement or (b) in any way connected with or pertaining or related to or incidental to any dealings of the parties hereto with respect to this Agreement, the Note, the Loan Documents, or any other instrument, document or agreement executed or delivered in connection herewith or in connection with the transactions related thereto or contemplated thereby or the exercise of either party's rights and remedies thereunder, in all of the foregoing cases whether now existing or hereafter arising, and whether sounding in contract, tort or otherwise. Borrower and Bank agree that either or both of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained agreement between the parties irrevocably to waive trial by jury, and that any dispute or controversy whatsoever between them shall instead be tried in a court of competent jurisdiction by a judge sitting without a jury. 12.18 TIME OF ESSENCE. Time is of the essence of this Agreement. [EXECUTIONS COMMENCE ON NEXT PAGE] 34 IN WITNESS WHEREOF, each of the Borrower and the Bank has caused this instrument to be executed under seal by its duly authorized officer as of the date first above written. - -------------------------------------------------------------------------------- DEBTOR, BY EXECUTING THIS AGREEMENT, HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS DEBTOR MAY HAVE TO NOTICE PRIOR TO THE SEIZURE OF THE COLLATERAL. THIS WAIVER IS GIVEN BY DEBTOR TO SECURED PARTY IN ACCORDANCE WITH SECTION 44-14-263 OF THE OFFICIAL CODE OF GEORGIA IN ORDER TO ELIMINATE THE REQUIREMENT THAT SECURED PARTY FURNISH A BOND SHOULD SECURED PARTY SEEK AN IMMEDIATE WRIT OF POSSESSION. - -------------------------------------------------------------------------------- BORROWER: COLOR IMAGING, INC., a Delaware corporation By: /S/ SUELING WANG --------------------------------------- Dr. Sue-Ling Wang, President Attest: /S/ MORRIS E. VAN ASPEREN ------------------------------------- Morris E. Van Asperen Its: Executive Vice President [CORPORATE SEAL] BANK: SOUTHTRUST BANK By: /S/ SCOTT M. SMITH -------------------------------------- Its: ASSISTANT VICE PRESIDENT -------------------------------------- [BANK SEAL] EXHIBIT "A" BORROWER'S REPORT SEE FOLLOWING PAGES A-1 SOUTHTRUST BANK COLLATERAL LOAN BANK REPORT COMPANY: Color Imaging, Inc. Report Date: __________________________ This certifies that the information herein is true and correct and in compliance with the Amended and Restated Loan and Security Agreement between the Company and SouthTrust Bank dated ____________, 2003. This form is subject to change. SECTION 1: ACCOUNTS RECEIVABLE AVAILABILITY 1. Accounts Receivables forward (from line 4 prior report) --------------- 2. Additions to A/R: a. Invoices/Billings, Opening balance --------------- b. Return items debited to A/R --------------- c. Other Increases to A/R (non-A/R deposits, etc.) --------------- d. Subtotal 0.00 0.00 -------------- 3. Deductions from A/R: a. Applied collections (from _____ to ________) --------------- b. Discounts, returns, allowances, adjustments --------------- c. Credit memos --------------- d. Other - Progress Billings --------------- e. Subtotal 0.00 -------------- 4. Total Ending A/R (line 1 plus line 2d less line 3e) 0.00 -------------- 5. Ineligible A/R a. 60 past due date on N30 invoices --------------- b. 30 days or more past due date on datings --------------- c. 50% Rule --------------- d. 25% Concentration --------------- e. Contra accounts f. Related party accounts -------------- g. Credit balances -------------- h. Cash/COD -------------- i. Other(foreign A/R not backed by L/Cs or credit insured.) -------------- j. Total Ineligibles 0.00 -------------- 6. Eligible Receivables(Line 4 less Line 5j) 0.00 -------------- 7. A/R Availability (Line 6 x 75%) 0.00 -------------- A-2 SECTION 2: INVENTORY AVAILABILITY 8. Gross Inventory (including inventory in transit) a. In House --------------- b. In Transit --------------- c. In Transit - L/C --------------- d. Total Inventory (Line8 a, b, c) 0.00 -------------- 9. Ineligible Inventory a. Obsolete Inventory and used inventory --------------- b. Inventory at third party location --------------- c. Packaging and shipping supplies --------------- d. Work in process/inventory --------------- e. Total Ineligible Inventory (Line 9a, b, c, d) 0.00 -------------- 10. Eligible Inventory (Line 8d less Line 9e) 0.00 -------------- 11. Inventory Availability a. Line 10 x 50% --------------- b. Inventory Cap = $750,000 --------------- 12. Inventory Availability - the lesser of Lines 11 a and 11 b. 0.00 -------------- SECTION 3: TOTAL AVAILABLE AND EXCESS AVAILABILITY 13. Total Availability (LINE 7 PLUS LINE 12) 0.00 -------------- 14 a. Loan balance forward --------------- b. Deduct Payments in transit --------------- c. Add advances requested --------------- d. Add miscellaneous reserves --------------- e. Add reserves for L/Cs on inventory in-transit (100%) --------------- f. Add reserves for L/Cs on non-inventory in-transit (50%) --------------- g. Add reserve for Standby L/Cs (100%) --------------- h. Adjusted line balance --------------- 15. Line Limit $1,500,000 16. Excess Availability (OVERADVANCE)-LINE 13 LESS LINE 14h 0.00 -------------- SECTION 4: CERTIFICATION In compliance with the Amended Loan and Security Agreement between Borrower and SouthTrust Bank, the Borrow hereby certifies that all of said inventories are now at the below listed location(s), have the dollar values listed, are valued in accordance with generally accepted accounting principles at the lower of cost or market (unless otherwise specified), and are owned by the Borrower free and clear of all claims or encumbrances, except for the security interest of SouthTrust Bank. The Borrower agrees that said inventories will not be removed without the written permission of SouthTrust Bank except for delivery to buyers in the ordinary course of business or other normal business reason. The Borrower certifies that all of said inventories have been produced in compliance with the requirements of the Federal Fair Labor Standards Act. The Borrower understands that SouthTrust Bank will rely upon these representations in making or A-3 continuing Loan under the Amended and Restated Loan and Security Agreement with the Borrower, and that SouthTrust Bank's security interest attaches to all such inventories through all stages of manufacture or production, and to the finished products and goods, and to all other inventories acquired by the Borrower from time to time in the future. SECTION 5: LOCATION(S) OF INVENTORY WAREHOUSE INVENTORY THIRD PARTY ADDRESS INVENTORY IN-TRANSIT WAREHOUSE - ------- --------- ---------- --------- Company Name: Color Imaging, Inc. BY: _______________________________________ ITS: _______________________________________ DATE: _______________________________________ A-4 EXHIBIT "B" ----------- LIENS AND ENCUMBRANCES ---------------------- NONE B-1 EXHIBIT "C" ----------- COLLATERAL LOCATIONS AND OWNERSHIP INFORMATION ---------------------------------------------- Location Name and Address of Landlord - -------- ---------------------------- 4350 Peachtree Industrial Avenue Kings Brothers, LLC Suite 100 4350 Peachtree Industrial Blvd Norcross, Georgia 30071 Suite 800 Norcross, GA 30071 C-1 EXHIBIT "D" ----------- PENSION PLANS ------------- 1. The Color Imaging, Inc. 2003 Stock Incentive Plan 2. The Color Imaging, Inc 401(k) Plan 3. Salary Continuation and Deferred Compensation Agreement dated May 1, 1998, as amended, between Color Imaging, Inc. and Charles Allison D-1 EXHIBIT "E" ----------- INTELLECTUAL PROPERTY RIGHTS ---------------------------- NONE E-1 EXHIBIT "F" ----------- COMPLIANCE CERTIFICATE ---------------------- SEE FOLLOWING PAGES F-1 COVENANT COMPLIANCE CERTIFICATE ------------------------------- This certificate is submitted pursuant to that Amended and Restated Loan and Security Agreement (the "Loan Agreement") dated ___________, 2003, between Color Imaging, Inc. as Borrower and SouthTrust Bank as Lender. When terms that are defined in the Loan Agreement are used herein, they shall have the same meanings as assigned to them in the Loan Agreement. The information set forth herein is as of the ___________day of ____________________________20__. We hereby certify that the following covenants are calculated in accordance with the Loan Agreement and that they are in compliance with the terms of the Loan Agreement. There currently exists no default under the covenants nor any other Event of Default. These covenants are calculated based on the financial statement(s) dated______________________,.20__, copies of which are enclosed with this certificate. A. FIXED CHARGE COVERAGE RATIO Adjusted Net Earnings 0.00 ------------- Plus: Depreciation 0.00 ------------- Amortization 0.00 ------------- Interest Expense 0.00 ------------- Lease Expense 0.00 ------------- Less: Dividends (0.00) ------------- Distributions (0.00) ------------- A. 1. Sub-Total 0.00 -------------- Interest Expense 0.00 ------------- Plus: Lease Expense 0.00 ------------- Current Maturities of Long Term Debt 0.00 -------------- Less: Current Maturities of Authorized Affiliate Debt (0.00) ------------- Less: Kings Brothers Obligations under Reimbursement Agreement (0.00) --------------- A.2. Sub-Total 0.00 -------------- A.3. Total of A. 1. divided by A.2. 0.00 -------------- COVENANT LEVEL NOT LESS THAN 1.2 TO 1.00. COMPLIANCE: Y/N --- F-2 B. DEBT TO TANGIBLE NET WORTH RATIO; TANGIBLE NET WORTH B. 1. Total Debt 0.00 -------------- Total Equity 0.00 -------------- Plus: Subordinated Debt 0.00 -------------- Less: Intangible Assets (0.00) -------------- Amounts Due from Officers, Shareholders, Affiliates (0.00) -------------- Less: Kings Brothers Obligations under Reimbursement Agreement (only to extent, if at all, included in Total Debt above) (0.00) -------------- B.2. Tangible Net Worth 0.00 -------------- B.3. B.1. divided by B.2. 0.00 -------------- RATIO OF DEBT TO TANGIBLE NET WORTH NOT GREATER THAN 2.1 TO 1.00. COMPLIANCE: Y/N --- TANGIBLE NET WORTH NOT LESS THAN $7,000,000 COMPLIANCE: Y/N --- Color Imaging, Inc. is Solvent as of the date hereof. Color Imaging, Inc. hereby certifies the above to be true and correct to the best of its knowledge. COLOR IMAGING, INC. By:____________________________________ Its:___________________________________ F-3 EXHIBIT "G" ----------- SECOND PRIORITY EQUIPMENT ------------------------- SEE FOLLOWING PAGES G-1 SCHEDULE 7.3 STOCK REPURCHASE ARRANGEMENTS 1. Purchase and Sale and Release Agreement between Stephen Chromik and Color Imaging, Inc. dated February 27, 2003. 2. Stock Repurchase Program as described in Borrower's April 22, 2003, SEC Form 8-k. EX-10.3 5 colorimaging10q63003ex103.txt EMPLOYMENT AGREEMENT AMENDMENT EXHIBIT 10.3 [COMPANY LOGO] July 14, 2003 Mr. Morris E. Van Asperen 4161 Riverview Run Ct Suwanee, GA 30024 Subject: Employment Agreement Made June 28, 2000, First Amendment Dear Van: In connection with the Employment Agreement made June 28, 2000 ("the Agreement") between you and Color Imaging, Inc. (the "Employer" or "Company"), it is agreed that the following changes shall be effective as of the date(s) indicated: (1) Position & Title. Effective August 1, 2003, you are hereby assigned the responsibilities and duties of Marketing and Sales, excepting the supervision of the newly hired Director of Sales and his staff, and including marketing and channel sales for all-in-one imaging, toner and drum cartridges recently introduced by the Company. In addition, you remain the Chief Financial Officer and Secretary of the Company with the responsibilities and duties in connection therewith until such time(s) as other(s) may be appointed to those positions. (2) Compensation. Article III of the Agreement is amended as follows: a) Section 3.01 paragraph 1 is hereby amended and your compensation shall consist of a base salary and commission. Effective August 4, 2003, your base salary shall be $78,000 per annum paid ratably every two weeks at $3,000 per pay period. Effective August 1, 2003 you shall earn and be paid a commission of 1/2 of 1 percent (0.5%) on all of the net sales of the Company, excepting those of the President and the new accounts to be established under the supervision of the newly hired Director of Sales, paid monthly in arrears with the first such commission for the month of August 2003 being due and payable on or before September 26, 2003. b) Section 3.01 paragraph 2, providing for an annual salary increase of five percent (5%) per year is hereby deleted, together with Section 3.01 paragraph 4 and Exhibit II, which provided for your participation in a Cash Value Life Insurance, Retirement Supplement Plan. To indicate your understanding and acceptance of these amendments to the above referenced Agreement, please sign where indicated hereafter. Sincerely, Acknowledged and accepted: EMPLOYER EMPLOYEE /S/ SUELING WANG /S/ MORRIS E. VAN ASPEREN _______________________ __________________________ Sueling Wang, Phd Morris E. Van Asperen President 1639371 EX-10.5 6 colorimaging10q63003ex105.txt AMENDMENT TO DEFERRED COMPENSATION AGMT. EXHIBIT 10.5 [COMPANY LOGO] June 27, 2003 Mr. Charles R. Allison 525 Sweet Birch Lane Roswell, GA 30076 Subject: Amendment to Salary Continuation and Deferred Compensation Agreement Dear Chuck: In connection with the Salary Continuation and Deferred Compensation Agreement made May 1, 1998 ("SCDC Agreement"), as amended, between you and the Company, it is agreed that the following change thereto shall be effective this date: Whereas your retirement is effective as of this date and was previously contemplated to be on December 31, 2003, unless otherwise agreed to between you and the Company; and Whereas prior amendments to the SCDC Agreement provided that you either elect to (1) within 30 days of your retirement have the ownership of the life insurance policy purchased by the Company in connection with the SCDC Agreement transferred to you or (2) receive $2,500 per month in accordance with the SCDC Agreement; NOW THEREFORE IT IS AGREED, that you shall have until January 30, 2004, to elect to either (1) have the life insurance policy purchased by the Company in connection with the SCDC Agreement transferred to you or (2) commence to receive the $2,500 per month in accordance with the SCDC Agreement; BE IT FURTHER AGREED, that you shall have from this date until January 30, 2004 to make the abovementioned election; and FURTHER AGREED, that should you die prior to having made the election defined herein, then the election shall be made by Kay Allison not later than January 30, 2004, and absent any instructions from either you or Kay Allison by January 30, 2004, then the Company shall at its sole discretion either commence the payment of $2,500 per month or transfer the life insurance policy as provided for in the SCDC Agreement. To indicate your understanding and acceptance of these amendments to the above referenced SCDC Agreement, please sign where indicated hereafter. Sincerely, Acknowledged and accepted: /S/ SUELING WANG /S/ CHARLES R. ALLISON - ----------------------- ------------------------- Sueling Wang, Phd Charles R. Allison President 1639372 EX-31 7 colorimaging10q63003ex31.txt 302 CERTIFICATIONS EXHIBIT 31 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-Q 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 --------------------------------------- July 28, 2003 Sueling Wang, PhD President (principal executive officer) 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-Q 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): d) 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 e) 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 ------------------------------------ July 28, 2003 Morris E. Van Asperen Executive Vice President and Chief Financial Officer EX-32 8 colorimaging10q63003ex32.txt 906 CERTIFICATIONS EXHIBIT 32 Color Imaging, Inc. Form 10-Q - Second Quarter Ended June 30, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Sueling Wang, certify that: The Form 10-Q of Color Imaging, Inc. for the period ended June 30, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Color Imaging, Inc. for the periods presented. This certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and, except to the extent required by the Sarbanes-Oxley Act, shall not be deemed to be filed as part of the periodic report described herein nor shall it be deemed filed by Color Imaging, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. /S/ SUELING WANG --------------------------------------- Sueling Wang Date: July 28, 2003 President (principal executive officer) Color Imaging, Inc. Form 10-QSB - Second Quarter Ended June 30, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Morris E. Van Asperen, certify that: The Form 10-Q of Color Imaging, Inc. for the period ended June 30, 2003 fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Color Imaging, Inc. for the periods presented. This certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and, except to the extent required by the Sarbanes-Oxley Act, shall not be deemed to be filed as part of the periodic report described herein nor shall it be deemed filed by Color Imaging, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. /S/ MORRIS E. VAN ASPEREN --------------------------------------- Morris E. Van Asperen Date: July 28, 2003 Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----