As filed with the Securities and Exchange Commission on ______ _, 2000
Registration Statement No. ___________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CADAPULT GRAPHIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 5045 84-0475073
-------- ----------------- ----------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification
or organization) Code Number) Number)
110 Commerce Drive
Allendale, New Jersey 07401
(201) 236-1100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Michael W. Levin
Chief Executive Officer and President
Cadapult Graphic Systems, Inc.
110 Commerce Drive
Allendale, New Jersey 07401
(201) 236-1100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of communications to:
Dan Brecher, Esq.
Law Offices of Dan Brecher
99 Park Avenue, 16th Floor
New York New York 10016
(212) 286-0747
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Title of each class Maximum Maximum Amount of
of securities Amount to be Offering Price Aggregate Registration
to Be Registered Registered Per Unit(1) Offering Price(1) Fee
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
common stock, par value
$.001 per share........ 3,591,500 $2.22 $7,973,130 $2,136.80
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(c) under the Securities Act solely for
purposes of calculating the Registration Fee. The fee is based upon
the average of the bid and ask price for shares of common stock of the
registrant, $2.19 and $2.25, respectively, reported on the OTC
Bulletin Board on June 27, 2000.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission acting
pursuant to said Section 8(a), may determine.
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<PAGE>
SUBJECT TO COMPLETION, DATED _______ _, 2000
PROSPECTUS
Cadapult Graphic Systems, Inc.
3,591,500 shares of common stock
This prospectus relates only to the resale of 3,591,500 shares of common
Stock of Cadapult Graphic Systems, Inc., a Delaware corporation, of which
- 1,705,000 shares of common stock underlie 550,000 shares of
series A preferred stock, assuming conversion at the rate of
one series A preferred share into 3.1 shares of common stock;
and
- 1,886,500 shares of common stock underlie warrants to
purchase shares of common stock.
The shares may be offered and sold, from time to time, by certain
of our stockholders. We will not receive any of the proceeds from the sale
of the shares of common stock by the selling stockholders.
The selling stockholders may from time to time sell their shares of
common stock to or through one or more underwriters, directly to other
purchasers or through agents, on the OTC Bulletin Board in ordinary brokerage
transactions, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to the then-prevailing
market price or at negotiated prices.
Our common stock is quoted on the OTC Bulletin Board under the
symbol "GRFX".
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of the disclosures in this Prospectus. Any
representation to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed.
The selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and it is not a
solicitation of an offer to buy these securities in any state where the offer
or sale is not permitted.
The date of this Prospectus is _______ _, 2000.
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 4
We operated at a loss in 1999 and we expect our expenses to increase
in 2000, so we may not be profitable or generate cash from
operations in the future 4
If we default on our obligations under a credit line with
Summit Commercial, Summit Commercial could foreclose on most
of our assets 4
As a reseller of computer graphics products, our business is
dependent on vendors and suppliers and the loss of Tektronix as
a supplier could cause our revenues to decrease significantly 5
Because we cannot quantify the benefits that we received from the
Tektronix, Inc. Reseller franchise, we do not know the effect
that the loss of the lawsuit that we commenced against
Tektronix, Inc. may have on our business 5
We were recently joined as a party to a lawsuit initially commenced
between Tektronix, Inc. and ultrahue, Inc. and we are not in a
position to adequately evaluate the merits of the lawsuit or the
effects of the lawsuit on our operations or financial condition 5
Our recent growth is based on acquisitions, and because we intend
to acquire additional computer graphics companies, we may make
poor investments or acquisitions that are not compatible with
our existing business or successful 6
We may be liable for the material our customers distribute over
the Internet causing us to engage in costly and time
consuming litigation 7
Our common stock does not trade actively and may be subject to
great price volatility as more shares of common stock become
freely tradable 7
We have authorized a class of preferred stock which may alter
the rights of common stock holders by giving preferred stock
holders greater dividend rights, liquidation rights and voting
rights than our common stockholders have 8
We have issued Series A preferred stock with an adjustable
conversion price that will dilute common stock holders and we
cannot predict the exact number of shares of common stock that
we may have to issue upon conversion of the Series A preferred
stock 8
Use of Proceeds 11
Management's Discussion and Analysis of Financial Conditions
and Results of Operations 12
About Us 18
Our Management 30
Executive Compensation 33
Ownership of Securities 39
Certain Relationships and Related Transactions 40
Selling Stockholders 42
Plan of Distribution 47
Our Securities 49
Legal Matters 52
Experts 52
Indemnification 53
Where You Can Find More Information 53
Index to Financial Statements 54
-2-
<PAGE>
PROSPECTUS SUMMARY
OUR BUSINESS
We provide computer graphics systems, peripherals, supplies and service
to visual communicators and graphics professionals. We operate through three
business units: Reseller Operations, eCadapult and Media Sciences. We are a
leading supplier of computer graphics solutions in the Northeast United
States. Through eCadapult, we provide value added services to the creative
graphics community over the Internet. Through Media Sciences, we are a
manufacturer of color solid ink and refiller of color toner cartridges for
graphics printers.
We are a Delaware corporation. Our principal corporate office is
located at 110 Commerce Drive, Allendale, New Jersey 07401. Our telephone
number is (201) 236-1100.
THE OFFERING
Total shares outstanding 3,218,451 shares of common stock
550,000 shares of series A preferred stock
Common stock offered for resale
to the public 3,591,500 shares of common stock
Price per share of common stock
to the public Market price at the time of resale
Proceeds from offering We will not receive any of the
proceeds from the sale of the shares
of common stock offered by the
selling stockholders.
Trading Symbol for common stock GRFX
-3-
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making
an investment. Although the factors identified below are important factors,
those are not the only ones facing us. If any of the following risks
occurs, our actual results could differ significantly, and the
trading price of our common stock could decline, and you may lose all or part
of your investment. You should also keep these risk factors in mind when you
read forward-looking statements. We have identified all of the material
risks which we believe may affect our business and the principal ways in which
we anticipate that they may affect our business or financial condition.
WE OPERATED AT A LOSS IN 1999 AND WE EXPECT OUR EXPENSES TO INCREASE IN 2000,
SO WE MAY NOT BE PROFITABLE OR GENERATE CASH FROM OPERATIONS IN THE FUTURE.
We expect our expenses to increase as we expand our business to include
Internet-based services and our Media Sciences division. We may incur
operating losses and net losses for the near term as we incur additional
costs associated with the development of our Internet-based services and our
Media Sciences division, entry into new markets, and the expansion of our
administrative, operational, marketing and sales organizations. We operated
at a loss for our fiscal year ended April 30, 1998. We generated gross sales
of $10,227,628 for the one year period ended June 30, 1999, representing an
increase of 44% over the one year period ended April 30, 1998. In June 1998,
we elected to change our fiscal year end to June 30. For the one year period
ended June 30, 1999, we incurred a net loss of $444,374 or $0.16 per share as
compared to a net loss of $219,242 or $0.14 per share, for the one year
period ended April 30, 1998. We do not know how much capital we will need to
develop these services and products. We cannot assure you that our revenues
will increase as a result of our increased spending. If revenues grow more
slowly than we anticipate, or if operating expenses exceed our expectations,
we may not become profitable. Even if we become profitable, we may be
unable to sustain our profitability.
IF WE DEFAULT ON OUR OBLIGATIONS UNDER A CREDIT LINE WITH SUMMIT
COMMERCIAL, SUMMIT COMMERCIAL COULD FORECLOSE ON MOST OF OUR ASSETS.
We have a $6,000,000 revolving line of credit with Summit
Commercial/Gibraltar. If we are unable to repay our outstanding indebtedness
under the credit line, Summit Commercial/Gibraltar could foreclose on most of
our assets. If we do not have sufficient cash flow to repay the credit line
indebtedness or if we cannot refinance the obligation, we will not be able to
implement our business plan, which would have a material adverse affect on our
future viability. Under the line of credit, the available credit is 50%
of eligible inventory, which available credit cannot exceed $1,000,000 plus
85% of eligible receivables. Borrowings bear interest at 2% over the lender's
base rate, are payable on demand, and are collateralized by all of our assets.
As of June 30, 1999, we had used $1,677,024 of this line. As of December 31,
1999, the total available credit was $1,548,848 and we had used $1,325,165.
As of May 16, 2000, the total available credit was $1,802,561 and we had used
$910,097. Michael W. Levin, our President and principal stockholder, has
personally guaranteed up to $500,000 of our indebtedness under the revolving
line of credit. He has no obligation to furnish his guaranty in connection
with any extension of our line of credit or any of our future financing
needs. We may not be able to repay our outstanding indebtedness under the
credit line. Substantially all of our assets are subject to security
interests held by Summit Commercial/Gibraltar. Unless the security interests
are released, assets will not be available to us to secure future
indebtedness, which may adversely affect our ability to borrow in the future.
-4-
<PAGE>
AS A RESELLER OF COMPUTER GRAPHICS PRODUCTS, OUR BUSINESS IS DEPENDENT ON
VENDORS AND SUPPLIERS AND THE LOSS OF TEKTRONIX AS A SUPPLIER COULD CAUSE
OUR REVENUES TO DECREASE SIGNIFICANTLY.
The loss of Tektronix, Inc. as a supplier would result in a significant
decrease of our revenues and our business operations. Although we obtain
computer graphics products from several suppliers, our principal supplier
is Tektronix, Inc. We derived 45% of our fiscal year 1999 revenues from
sales and services of Tektronix products. Although we also sell products
supplied by Mita Corporation, Access Graphics, Ricoh, Alias, Merisel, Ingram,
and Tekgraf, each of these suppliers account for substantially less than 10%
of our revenues annually. As a value added dealer or value added
reseller of computer graphics equipment and supplies, we depend upon vendors
and suppliers of computer graphics equipment and supplies to provide us with
products for resale.
BECAUSE WE CANNOT QUANTIFY THE BENEFITS THAT WE RECEIVED FROM THE TEKTRONIX,
INC. RESELLER FRANCHISE, WE DO NOT KNOW THE EFFECT THAT THE LOSS OF THAT
LAWSUIT THE WE COMMENCED AGAINST TEKTRONIX, INC. MAY HAVE ON OUR
BUSINESS.
Although we do not believe that the lawsuit that we commenced against
Tektronix, Inc. would materially impact our business operations based on
our historical sales, the Tektronix reseller franchise provides us with
business leads and promotion of our services which cannot be quantified;
therefore, we do not know and cannot predict if the loss of all or a part of
the lawsuit will have a material adverse affect on our future business
operations. In August 1999, we began an action against Tektronix, Inc.
before the United States District Court for the District of New Jersey,
seeking certain injunctive relief and an indeterminate amount of damages
because Tektronix terminated that part of our agreement with Tektronix that
is our Tektronix Premier Plus Reseller franchise. In the lawsuit, we alleged
that Tektronix violated the New Jersey Franchise Practices Act, the New
Jersey Antitrust Act, federal acts prohibiting restraints of trade, breach of
contract and unfair competition, among other claims. We derived 45% of our
fiscal year 1999 revenues from sales and services of Tektronix products,
including revenues from the Tektronix Premier Plus Reseller franchise.
Although the Tektronix Premier Plus Reseller franchise accounted for only
about $80,000 of our gross profit margin based on historical sales, which
represented less than 3% of our overall gross profit margin. The lawsuit has
only recently commenced and may not be resolved in the near future. Our
request for injunctive relief was denied. Tektronix has motioned to
transfer the lawsuit to Oregon.
WE WERE RECENTLY JOINED AS A PARTY TO A LAWSUIT INITIALLY COMMENCED BETWEEN
TEKTRONIX, INC. AND ULTRAHUE, INC. AND WE ARE NOT IN A POSITION TO ADEQUATELY
EVALUATE THE MERITS OF THE LAWSUIT OR THE EFFECTS OF THE LAWSUIT ON OUR
OPERATIONS OR FINANCIAL CONDITION.
On or about May 19, 2000, we were served by Xerox Corporation with an
amended answer and counterclaims in connection with a motion filed on April
17, 2000 by Xerox before the United States District Court, Western District
of Washington at Seattle, for leave to intervene in an action between
ultraHue, Inc., and Tektronix, Inc. for joinder of Cadapult and Media
Sciences as additional parties and for leave to file and serve an amended
answer. Because we have not had the opportunity to adequately review the
amended answer and counterclaims, we are not in a position to assess the
validity of the allegations or the effects of the lawsuit on our operations
or financial condition. While it is our present belief that resolution of
this litigation will not have a material adverse affect on our consolidated
financial position, an unfavorable outcome could have a material adverse
affect on our results of operations or cash flow in the quarter or annual
period in which this matter is resolved.
-5-
<PAGE>
The lawsuit was initially commenced in October 1999 when ultraHue had
initiated an action against Tektronix claiming that Tektronix was engaging in
illegal business behavior by informing resellers and end users of Tektronix's
belief that ultraHue ink sticks had caused failures in Tektronix brand
printers or had produced inferior quality output, and by failing to provide
marketing assistance and rebates to resellers who market and sell ultraHue
solid ink. In December 1999, our subsidiary, Media Sciences, acquired
substantially all of the assets of ultraHue. In January 2000, Xerox acquired
substantially all of the assets of Tektronix's printer business, including
Tektronix's claims against ultraHue. Through the motion for joinder, Xerox
sought to intervene in the action and assert counterclaims against us alleging
that we violated the Lanham Act, engaged in unfair competition, infringed the
design of the Tektronix ink stick, and infringed certain claims of Xerox's
patent, and to seek relief that may include our profits on sales of ultraHue
solid ink, or damages or a reasonable royalty, injunctive relief from selling
the current formulation of the solid ink, and injunctive relief against patent
infringement. We intend to deny any wrongdoing and we intend to vigorously
defend the action, but we can give no assurance that we will prevail in this
litigation.
OUR RECENT GROWTH IS BASED ON ACQUISITIONS, AND BECAUSE WE INTEND TO ACQUIRE
ADDITIONAL COMPUTER GRAPHICS COMPANIES, WE MAY MAKE POOR INVESTMENTS OR
ACQUISITIONS THAT ARE NOT COMPATIBLE WITH OUR EXISTING BUSINESS OR SUCCESSFUL.
Because our growth strategy has been and continues to be based
primarily on the acquisition of other computer graphics resellers, we may
encounter difficulties in making our operations compatible causing us to
expend our capital in unproductive activities if we make poor acquisition
decisions. If we do not have the cash flow from our operations or if we
cannot obtain the necessary financing, we will not have the ability to grow
by acquiring other businesses. We have taken steps to grow within the
consolidating computer graphics industry. We currently provide computer
graphics services to commercial customers primarily in the Northeast United
States. In October 1996, we began our expansion plan by opening a sales
location in Boston, Massachusetts. In March 1998, we acquired the assets of
BBG Technologies, Inc., a computer graphics products reseller in Boston,
Massachusetts. In January 1999, we acquired the assets of Tartan Technical,
Inc., a computer graphics products reseller in Massachusetts. In June 1999,
we acquired the assets of WEB Associates, Inc., a computer graphics products
reseller in Pennsylvania. We intend to acquire additional computer graphics
businesses in the Northeast United States and in other regions of the United
States. The success of our reseller operations will depend on our ability
on how well we can integrate acquired the operations and management of
acquired reseller businesses. If we fail to do so, our operating margins
will not improve.
Our acquisition strategy is not limited to the acquisition of computer
graphics resellers. In December 1999, we acquired the assets of ultraHue,
Inc., a manufacturer of solid printer ink headquartered in Washington. In
past years, we have operated primarily as a computer graphics products
reseller. With the acquisition of ultraHue, we are starting a new business
division involving the manufacture and sale of solid printer ink supplies. We
do not have prior experience in operating a printer ink supplies business. We
do not know if we can successfully grow and integrate ultraHue's business with
our reseller operations. We may incur significant expenses associated with
developing a new division not related to our core reseller operations.
-6-
<PAGE>
WE MAY BE LIABLE FOR THE MATERIAL OUR CUSTOMERS DISTRIBUTE OVER THE INTERNET
CAUSING US TO ENGAGE IN COSTLY AND TIME COMSUMING LITIGATION.
We may become subject to legal claims relating to the content in the
web sites we host. Litigation could take the focus of management away from
our business operations and cause us to expend a considerable amount of our
financial resources thereby resulting in lower revenues. The law relating to
the liability of online service providers, private network operators and
Internet service providers for information carried on or disseminated through
their networks is currently unsettled. We may become subject to legal claims
relating to the content in the web sites we host. Claims could also involve
matters such as defamation, invasion of privacy and copyright infringement.
Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content of material. If we have to take
costly measures to reduce our exposure to these risks, or are required to
defend ourselves against such claims, our business, financial condition and
results of operations may be materially and adversely affected.
OUR COMMON STOCK DOES NOT TRADE ACTIVELY AND MAY BE SUBJECT TO GREAT PRICE
VOLATILITY AS MORE SHARES OF COMMON STOCK BECOME FREELY TRADABLE.
Because there has been a very limited market for our common stock,
it may be difficult to sell our common stock in the open market. Because of
our new services which may generate substantial revenues and increased
dilution caused by our private placement and incentive based options granted
to our employees, we expect to encounter substantially more activity in
trading in our common stock and expect the market price of our common stock
to be highly volatile in the future.
-7-
<PAGE>
WE HAVE AUTHORIZED A CLASS OF PREFERRED STOCK WHICH MAY ALTER THE RIGHTS
OF COMMON STOCK HOLDERS BY GIVING PREFERRED STOCK HOLDERS GREATER DIVIDEND
RIGHTS, LIQUIDATION RIGHTS AND VOTING RIGHTS THAN OUR COMMON STOCKHOLDERS
HAVE.
The Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of common stock. Our amended Certificate of
Incorporation authorizes a class of 5,000,000 shares of preferred stock
with such designation, rights and preferences as may be determined from time
to time by the Board of Directors. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of Cadapult.
We have filed a certificate of designation for a series of 1,000,000
shares of series A preferred stock. We may issue more shares of preferred
stock in the future which may have different designations, rights and
preferences than the series A preferred stock.
WE HAVE ISSUED SERIES A PREFERRED STOCK WITH AN ADJUSTABLE CONVERSION PRICE
THAT WILL DILUTE COMMON STOCK HOLDERS AND WE CANNOT PREDICT THE EXACT NUMBER OF
SHARES OF COMMON STOCK THAT WE MAY HAVE TO ISSUE UPON CONVERSION OF THE
SERIES A PREFERRED STOCK.
The conversion of our series A preferred stock into shares of our common
stock will dilute the holders of our common stock and could cause the market
price of our common stock to drop significantly. Because the conversion
price will be substantially below the market value of our common stock, we
expect the holders of series A preferred stock to ultimately convert all of
their preferred stock and sell the common stock, and, as a result, our
income per share could be materially and adversely affected.
In March 2000, we completed a private placement in which we
raised gross proceeds of $5,500,000 through the sale of 550,000 units at
$10.00 per unit. Each unit consisted of one share of series A preferred stock
and warrants to purchase two shares of common stock. The series A preferred
stock bears a fixed 11.5% dividend per year, and it is convertible into
shares of common stock. Each warrant is exercisable for five years at $4.50
per share into one share of common stock. The resale of the shares of common
stock underlying the preferred stock and warrants can be made no sooner than
October 1, 2000 and pursuant to an effective registration statement.
For two years from the date of issuance, each holder of series A
preferred stock can convert one series A preferred share into 3.077 shares of
common stock. After each of two and four years from the date of issuance,
the conversion rate adjusts. At the adjusted conversion rate, the number of
shares of common stock received for one share of preferred stock equals $10
divided by 75% of the average bid price of our common stock during the 90
days preceding each of the two and four year anniversary dates. For example,
if the 90 day average bid price of our common stock is $10 at the two year
anniversary date, the conversion rate adjusts to $10 divided by 75% of $10,
so that a share of series A preferred stock could be converted into 1.33
shares of common stock. However, if the 90 day average bid price of our
common stock is $3.00 at the two year anniversary date, the conversion rate
adjusts to $10 divided by 75% of $3, so that a share of series A preferred
stock could be converted into 4.44 shares of common stock. The maximum
conversion rate is five shares of common stock for one share of series A
preferred stock.
-8-
<PAGE>
The table below illustrates how the conversion feature would work for
one share of series A preferred stock into shares of common stock after each
of the two and four year anniversary dates of issuance.
90 Day 75% of Calculated Shares of
Average Average Conversion Rate Common Stock
Bid Bid ($10 divided by 75% Issued At
Price Price of Average Bid Price) Conversion
--------------------------------------------------------------
$ 2.00 $1.50 6.67 5.00
$ 2.67 $2.00 5.00 5.00
$ 3.00 $2.25 4.44 4.44
$10.00 $7.50 1.33 1.33
You should note that if the 90 day average bid price of our common stock is
$2.67 or lower, the maximum conversion rate applies. If the 90 day average
bid price of our common stock is $2, instead of conversion at the rate
determined $10 divided by 75% of $2, which would compute to 6.67 shares of
common stock for one share of series A preferred stock, a maximum of five
shares of common stock would be issued.
To the extent that the series A preferred stock may be convertible into
shares of common stock at below the market price of our common stock, that
will have a dilutive impact on our common stockholders. At the current
conversion price of one share of series A preferred stock into 3.077 shares
of common stock, we will issue about 1,692,350 shares of common
stock if all the outstanding 550,000 shares of series A preferred stock are
converted. At the maximum conversion rate, we will issue up to 2,750,000
shares of common stock upon the conversion of the outstanding 550,000 shares
of series A preferred stock.
As the holders of series A preferred stock convert and sell their shares
of common stock, the market price of our common stock could decline and lower
the adjusted conversion price at the two year and four year anniversary
dates of issuance. That would permit the selling stockholder to convert
their series A preferred stock into a greater number of shares of common
stock. As more series A preferred stock are converted into common stock and
sold, a further downward pressure on the price of the common stock is likely
to occur. This downward pressure on the common stock is likely to occur
until substantially all of the series A preferred stock are converted and
sold.
-9-
<PAGE>
Downward pressure on the price of our common stock could encourage
short sales of the common stock by the selling stockholder or by other
stockholders. Material amounts of short selling could place further
downward pressure on the market price of the common stock. A short sale is
a sale of stock that is not owned by the seller. The seller borrows the
stock for delivery at the time of the short sale, and buys back the stock
when it is necessary to return the borrowed shares. If the price of the
common stock declines between the time the seller sells the common stock and
the time the seller subsequently repurchases the common stock, the seller
may realize a profit.
The conversion of series A preferred stock is linked to a percentage
discount to the market price of our common stock. Until conversion occurs,
we do not know the precise maximum number of common stock shares that may be
issued. The lower the price of our common stock at the two year and four year
anniversary dates of issuances, the greater the number of shares of our
common stock into which the series A preferred stock can be converted. This
will further dilute holders of common stock and cause the common stock price
to decline further.
-10-
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking information. Generally, the
words "anticipates," "expects," "believes," "intends," "could," "may," and
similar expressions identify forward looking statements. Forward-looking
statements involve risks and uncertainties, including those described under
"Risk Factors" in this prospectus. We caution you that while we believe any
forward-looking statement are reasonable and made in good faith,
expectations almost always vary from actual results, and the differences
between our expectations and actual results may be significant.
The following discussion and analysis should be read in conjunction with
the information set forth in the audited financial statements for the year
ended June 30, 1999, in conjunction with the information set forth in the
unaudited financial statements for the nine month period ended March 31,
2000, and in conjunction with the information set forth in the unaudited
financial statements and notes and the audited financial statements and the
notes, included in the Form 8K/A, filed on September 1, 1998. On June 24,
1998, we elected to change our fiscal year from April 30 to June 30.
For the purposes of this analysis, the results of operations for the year
ended June 30, 1999 are being compared to the results of operations for the
year ended April 30, 1998.
Results of Operations
For the Year Ended June 30, 1999
--------------------------------
Sales. Sales for the year ended June 30, 1999 compared to the year period
ended April 30, 1998 increased approximately 44% to $10,227,628 from
$7,103,906. The revenue mix in 1999 has shifted with supplies revenue
increasing as a percentage of total sales, while systems revenue has
decreased as a percentage of total sales. Service revenues, as a percentage
of sales have remained consistent. Approximately $1,365,000 of the increase
in sales can be attributed to the Tartan acquisition, $103,000 to the WEB
Associates acquisition, and $1,655,000 to our internal growth.
Cost of Sales. Cost of sales for the year ended June 30, 1999 were
$7,442,239 or approximately 73% of sales, as compared to $5,174,402 or
approximately 73% for the year period ended April 30, 1998. Gross profit
margins remained stable for the year ended June 30, 1999 as compared to the
year ended April 30, 1998 despite the acquisition of businesses that were
previously generating significantly lower margins. This was achieved
primarily through the conversion of manufacturer service agreements to
agreements fulfilled by us and through the sale of private label
supplies.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended June 30, 1999 increased to $3,069,682 from
$2,138,915 for the year ended April 30, 1998. Selling, general and
administrative expenses were approximately 30% of sales for both periods.
Selling, general and administrative expenses for the year ended June 30, 1999
included increased legal of about $9,000, accounting fees of about $17,500,
and consulting fees of about $15,200 associated with the merger with Seafoods
Plus, Ltd. in June of 1998, with being a publicly held company, the
amortization of goodwill of about $62,000 resulting from acquisitions, and to
increase in payroll attributable to the acquisitions and development of the
our infrastructure for future growth of about $470,000. Selling, general and
administrative expenses for the year ended June 30, 1999 includes a one time
expense of $130,000 for the development of SamplePrint.com.
Interest Expense. Interest expense for the year ended June 30, 1999
increased to $160,081 from $90,829 incurred for the year ended April 30,
1998. The increase in 1999 was due primarily to an increase in borrowings to
finance our increased receivables and inventory due to the
acquisitions.
Income Taxes. For the year ended June 30, 1999, we recorded a tax
benefit of $217,000 primarily due to a net operating loss carryforward offset
by a valuation allowance of $217,000. For the one year ended April 30, 1998,
we recorded a tax benefit of $62,498 primarily due to the
utilization of a net operating loss carryback.
Net Income (Loss). For the one year ended June 30, 1999, we had a
net loss of $444,374 or $0.16 per share as compared to a net loss of $219,242
or $0.14 per share for the year ended April 30, 1998. We had a loss before
income taxes in the fourth quarter of the year ended June 30, 1999 totaling
$314,978 as compared to an average loss of approximately $43,132 for the
previous three quarters. Contributing to the additional loss were
approximately $130,000 for development costs related to SamplePrint.com and
$40,000 for year end adjustments to inventory and the allowance for doubtful
accounts. Additional loss was due to a shortfall of approximately $250,000
in sales resulting in $70,000 gross profit reduction. Additional loss of
$30,000 was due to additional general and administrative costs relating to
the two business acquired earlier in the year.
-12-
<PAGE>
Results of Operations
For the Three Months and Nine Months Ended March 31, 2000 and 1999
--------------------------------------------------------------------
Sales. Our consolidated sales for the three months ended March 31, 2000
compared to the same period in 1999, increased approximately 26% to
$3,773,640 from $2,995,803. Our consolidated sales for the nine months ended
March 31, 2000 compared to the same period in 1999, increased approximately
32% to $9,884,209 from $7,471,438. The increase in our sales can be
attributed to the acquisitions of Tartan Technology, WEB Associates and
ultraHue, offset by a decrease in the sales of our reseller business. For
the three months ending March 31, 2000, the acquisitions contributed
incremental sales of $1,455,873 and for the nine months ended March 31, 2000,
the acquisitions contributed incremental sales of $3,728,843. The decrease
in sales of our non-acquired businesses can be attributed to competition from
Internet based resellers, and the continuing deflationary environment in
which the reseller business operates.
Cost of Sales. Our cost of sales for the three months ended March 31, 2000
were $1,916,107, or approximately 50.8% of sales, as compared to $2,115,523,
or approximately 70.6% of sales for the comparable period in 1999. Cost of
sales for the nine months ended March 31, 2000 were $6,223,161, or
approximately 63% of sales, as compared to $5,350,337, or approximately 71.6%
of sales for the comparable period in 1999. The decrease in our cost of
sales can be attributed to the high margin business generated by our Media
Sciences subsidiary, as well as an increase in margins in our reseller
business.
Selling, General and Administrative. For the three months ended March 31,
2000 compared to the same period in 1999, our selling, general and
administrative expenses increased to $1,220,205 from $803,143, which
represents a increase to 32% of sales from 27% of sales. For the nine months
ended March 31, 2000, our selling, general and administrative expenses
increased to $3,130,441 from $2,152,200, which represents a increase to 32%
of sales from 29% of sales. The increase in our selling, general and
administrative expenses can be attributed to the additional overhead created
by our acquisitions and in preparation for our continued growth.
Interest Expense. For the three months ended March 31, 2000 compared to the
same period in 1999, our Interest expense increased to $68,448 from $41,095.
For the nine months ended March 31, 2000, interest expense increased to
$186,929 from $98,297. The increase in 2000 is due primarily to the increase
in borrowing due to our acquisitions and to the increased costs of our new
lending facility.
Income Taxes. For the three months ended March 31, 2000, we have recorded a
deferred income tax expense of $227,471. For the nine months ended March 31,
2000 we have recorded a deferred income tax benefit of $79,529. This benefit
results from the elimination of the valuation allowance, due to ultraHue's
historical profitability, that offset net operating loss tax benefits from
prior periods, net of the income tax expense for the three months ending
March 31, 2000.
Dividends. For the three months ending March 31, 2000, we paid $123,969 of
stock dividends to our preferred shareholders of record as of March 31, 2000.
For the nine months ending March 31, 2000, we paid $144,081 of stock
dividends to our preferred shareholders.
Net Income (Loss). For the three month period ended March 31, 2000, we
earned a net profit of $217,440 or $0.07 per share basic, and $0.06 per share
diluted as compared to a net profit of $36,042 or $0.01 per share basic and
diluted for the corresponding three month period ended March 31, 1999. For
the nine month period ended March 31, 2000, we earned a net profit of
$279,126 or $0.09 per share basic and $0.08 per share diluted as compared to
a net loss of $90,396 or $0.03 per share for the corresponding nine month
period ended March 31, 1999.
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<PAGE>
Results of Operations For the Two Months Ended
June 30, 1998 and 1997, and For the Year Ended April 30, 1998
-------------------------------------------------------------
Sales. Consolidated sales for the two months ended June 30, 1998 compared to
the same period in 1997, increased approximately 100% to $1,623,754 from
$821,633. This increase was due to additional sales of $238,877 generated
from the acquisition of BBG Technologies, which was completed in March 1998,
and from increased sales to existing and new customers of $563,000. Sales for
the year ended April 30, 1998 compared to the year period ended April 30, 1997
decreased approximately 17% to $7,103,906 from $8,594,082. The revenue mix
in 1998 between systems, supplies and services has remained comparable to the
same period in 1997.
Cost of Sales. Cost of sales for the two months ended June 30, 1998 were
$1,237,942, or approximately 76% of sales, as compared to $614,582 or
approximately 75% of sales for the comparable period in 1997. Cost of sales
for the year ended April 30, 1998 were $5,174,402 or approximately 73% of
sales, as compared to $6,468,513 or approximately 75% for the year period
ended April 30, 1997. The cost of revenues in 1998 have remained consistent
from the same period in 1997, along with the revenue mix.
Selling, General and Administrative. For the two months ended June 30, 1998,
selling, general and administrative expenses increased to $482,819 from
$377,527, which represents a drop to 30% of sales from 46% of sales. The
dollar increase in 1998 is due mainly to an increase in legal fees of $21,000,
accounting fees of $13,600, and consulting fees of $23,000 associated with the
merger and being a publicly held company, and to amortization of goodwill
resulting from the acquisition of BBG Technologies in March 1998. The
percentage decrease can be attributed to the increase in sales as described
above.
Selling, General and Administrative expenses for the year ended April 30,
1998 increased to $2,138,915 from $1,972,221 for the year ended April 30,
1997. Selling, general and administrative expenses were approximately
30% of sales for the year ended April 30, 1998, and approximately 23% for the
year ended April 30, 1997. The increase is attributable to the development of
our infrastructure for future growth.
Interest Expense. For the two months ended June 30, 1998, interest expense
increased to $21,894 from $6,316. Interest expense for the year ended April
30, 1998 increased to $90,829 from $78,175 incurred for the year ended April
30, 1997. The increase in 1998 is due primarily to the increase in borrowing
due to the acquisition of BBG Technologies in March 1998.
Income Taxes. For the two months ended June 30, 1998, we have not
recorded a tax benefit of a net operating loss carryforward due to the
uncertainty of its future utilization. For the two months ended June 1997,
we were able to carry back its net operating losses. For the one year
ended April 30, 1998, we recorded a tax benefit of $62,498 primarily
due to the utilization of a net operating loss carryback. For the one year
ended April 30, 1997, we recorded a tax detriment of $18,500.
Net Loss. For the two month period ended June 30, 1998, we incurred
a net loss of $108,901 or $0.06 per share as compared to a net loss of
$128,992 or $0.08 per share for the corresponding two month period ended June
30, 1997. For the one year ended April 30, 1998, we had a net loss of
$219,242 or $0.14 per share as compared to a net gain of $56,673 or $0.04 per
share for the year ended April 30, 1997.
-14-
<PAGE>
Liquidity and Capital Resources
-------------------------------
We experienced positive cash flow of $467,294 for the nine months ended March
31, 2000. Cash used in operations resulted in positive cash flows of $43,078
primarily due to a profit of $423,207, non cash charges for depreciation,
amortization and issuance of our securities for services of $345,358, a
decrease in inventory of $8,711 and an increase in deferred revenue of
$133,289 offset by the non-cash income tax benefit of $79,529, an increase in
accounts receivables of $59,335 and decrease in accounts payable and accrued
expenses of $727,281.
The cash we used in investing activities included the purchase of equipment,
a URL and the net assets of ultraHue for a total of $2,616,868.
We have an agreement with a lender under which we can borrow up to
$6,000,000 under a revolving line of credit, subject to availability of
collateral. Under the line of credit, the available credit is 50% of eligible
inventory, which available credit cannot exceed $1,000,000 plus 85% of eligible
receivables. Borrowings bear interest at 2% over the lender's base rate, are
payable on demand and are collateralized by all of our assets. As of
June 30, 1999, we had used $1,677,024 of this line. As of September
30, 1999, we had used $1,282,380 of this line. As of December 31, 1999, the
total available credit was approximately $1,548,848, and we had used
$1,325,165. As of May 16, 2000, the total available credit was $1,802,561 and
we had used $910,097. As of June 30, 1998, we had an agreement with a bank
under which we could borrow up to $1,200,000 under a revolving line of credit,
subject to availability of collateral. As of June 30, 1998, borrowings bore
interest at 1% over the bank's base rate, payable on demand and collateralized
by all of our assets. As of June 30, 1998, we had used $695,000
of this line. As of December 31, 1999, we had used $1,325,165 of this line.
In August 1998, we completed a private placement for $655,000,
consisting of 524,000 shares of common stock at a purchase price of $1.25.
Expenses associated with the private placement were approximately $35,000,
providing us with net proceeds of $620,000. We used substantially
all of the proceeds in the retirement of bank debt assumed in the acquisition
of Tartan in January 1999.
We had a negative cash flow of $359,748 for the two months ended June
30, 1998. This resulted primarily from the repayment of $305,000 from the
credit line and $14,823 on long term debt. Cash used in operations resulted
in negative cash flows of $35,856 which consists of an increase in accounts
receivable of $538,646 and an increase in inventory of $277,157, offset by an
increase in accounts payable of $911,199.
We experienced positive cash flow of $10,336 for the year ended June
30, 1999. Cash used in operations resulted in negative cash flows of
$221,653 primarily due to a loss of $444,374 offset by a non cash charge to
depreciation and amortization of $180,494, a decrease in accounts receivable
of $89,130, a decrease in inventory of $170,259, an increase in deferred
revenue of $149,489, and a decrease in accounts payable of $473,241. Cash
used in investing activities was primarily comprised of purchase of equipment
and the acquisitions of WEB Associates and Tartan Technical. The above uses
of cash were offset by increased borrowing under our credit facility and
proceeds from the sale of common stock.
-15-
<PAGE>
In September 1999, we completed a private placement for $255,500 consisting
of 127,750 shares of common stock at a purchase price of $2.00. Expenses
associated with the private placement were approximately $15,000, providing
us with net proceeds of $240,500. We used substantially all of the proceeds
to invest in our Internet initiatives, including SamplePrint.com and the
upgrade of our accounting system in preparation for our Internet storefront.
On October 1, 1999, we entered into a managing dealer agreement with a
placement agent for a proposed private offering of up to $5,000,000. The
private offering is of 500,000 units of our securities with a
face value of $10.00 per unit. Each unit consists of one share of
convertible adjustable preferred stock and one warrant to purchase two shares
of common stock at $4.50. For two years, each share of series A preferred
stock is convertible into 3.077 shares of common stock. After each of two and
four years from the date of issuance, the conversion rate of one share of
series A preferred stock into shares of common stock adjusts. At the adjusted
conversion rate, the number of shares of common stock received equals $10
divided by 75% of the average bid price of our common stock during the 90 days
preceding each of the two and four year anniversary dates. A maximum of five
shares of common stock will be issued upon conversion of a share of series A
preferred stock. In addition, the preferred stock will carry a dividend,
paid quarterly, of 11.5% per annum. The offering is to be sold to accredited
investors only in states where permitted. The use of proceeds will be
targeted at additional acquisitions, expansion of our No-Cap Color
printer program and for working capital. The offering is on a "best efforts"
basis, but we could ultimately raise up to about $11 million if fully
sold and if the included warrants are exercised. In December 1999, our Board
of Directors approved an increase of the private placement to $5,500,000.
We closed this offering on March 10, 2000 having sold 550,000 units,
representing 550,000 shares of Series A Preferred Stock and 1,100,000
warrants to purchase common stock for $4.50, providing us with net proceeds
of $4,577,758.
We generated cash from the sale of our common and preferred stock of
$4,726,729 for the nine months ended March 31, 2000. With these proceeds, we
executed the ultraHue acquisition and repaid $1,185,299 in bank debt.
We do not have any material commitments for capital expenditures. However, in
2000, we intend to develop our No-Cap Color program. We intend to allocate
about $1,000,000 raised in our private placement of units to purchase up to
350 printers or lease up to 1,000 printers for use in our No-Cap Color
program. We intend to buy or lease the printers as we need them.
-16-
<PAGE>
Inflation
---------
We have historically offset any inflation in operating costs by a
combination of increased productivity and price increases, where appropriate.
We do not expect inflation to have a significant impact on our
business in the future.
Seasonality
-----------
We anticipate that our cash flow from operations will be significantly
greater in the fall and winter months than in the spring and summer months
due to the purchasing cycles associated with our products. If we are
unable to generate sufficient cash flows from operations during the seasons
of peak operations, we may be required to utilize other cash reserves,
if any, or seek additional equity or debt financing to meet operating expenses,
and there can be no assurance that there will be any other cash reserves or
that additional financing will be available or, if available, on reasonable
terms.
Year 2000 Discussion
--------------------
We have completed a review of Year 2000 issues that may affect us in November
1999. We have determined that there are no significant Year 2000 issues
within our internal systems or services. In our internal operations, we use
equipment and software supplied by third-parties who have informed us that
their equipment and software are or will be Year 2000 compliant.
Based on our review, we believe that our systems are Year 2000 compliant.
Although we periodically purchase new computer equipment and upgrade our
software programs in our normal business operations, we did not spend any
significant expense for the specific purpose of being Year 2000 compliant, and
we do not expect to incur any significant expenses in ensuring that we are
Year 2000 compliant. We use and rely upon third parties to conduct our
business. All of the significant third parties that we rely upon, including
our vendors, have provided us written assurances that they have conducted a
Year 2000 review and reasonably believe that Year 2000 issues will not affect
them. We believe that our reasonable worst case scenario is that we may
experience delays in receipt of purchase orders and delays in shipping and may
experience computer glitches in our Internet-based services. However, we do
not believe such a scenario will significantly impair our business because our
products are not the type of products for which customers demand immediate
next-day delivery, and our Internet-based services are not significantly used
presently. Because we believe our Year 2000 investigation provided reasonably
assurance that we would not encounter significant Year 2000 problems, we did
not create a contingency plan. We have continued to monitor how Year 2000
issues may affect us through June 2000 and intended to create a contingency
plan if we began to encounter Year 2000 problems. To date, we have not
experienced any Year 2000 problems that have disrupted our business and do
not believe that a contingency plan is needed, although we cannot assure you
that Year 2000 problems will not arise in the future.
-17-
<PAGE>
ABOUT US
Our Organization History
We are a Delaware corporation named Cadapult Graphic Systems, Inc.
We originally incorporated under the laws of the State of Utah on August 11,
1983 under the name Communitra Energy, Inc. On July 16, 1985, we filed
with the Secretary of State of the State of Utah Articles of Amendment to our
Articles of Incorporation, changing our name to Seafoods Plus, Ltd. We did
not engage in any substantive business activity from approximately 1988 to
June 18, 1998.
On June 18, 1998, we acquired Cadapult Graphic Systems Inc., a
privately-held New Jersey corporation formed on May 1, 1987 ("CGSI"), in a
transaction viewed as a reverse acquisition. CGSI was a provider of computer
graphics systems, peripherals, supplies and services to visual communicators
and graphics professionals. Pursuant to an Agreement and Plan or
Reorganization dated June 5, 1998, between us, CGSI, all of the
shareholders of CGSI, Jenson Services, Inc., a Utah corporation, Duane S.
Jenson and Jeffrey D. Jenson, we issued 1,650,000 shares of common stock to
the shareholders of CGSI in exchange for all of the outstanding common stock
of CSGI. Pursuant to the acquisition, the shareholders of CSGI became the
controlling shareholders of our company, our officers and directors
resigned and elected the CSGI nominees in their places, and CSGI
became our wholly-owned subsidiary.
On August 14, 1998, we reincorporated under the laws of the
State of Delaware as Cadapult Graphic Systems, Inc. On August 14, 1998,
we merged with CGSI, our wholly-owned New Jersey subsidiary.
On August 11, 1999, we formed Media Sciences, Inc. as a wholly-owned New
Jersey subsidiary, for the manufacture and distribution of digital color
printer supplies.
In August 1999, we amended our Certificate of Incorporation to change
the authorized capital from 50,000,000 shares of common stock, par value
$.001 per share, to 25,000,000 shares consisting of 20,000,000 shares of
common stock, par value $.001 per share, and 5,000,000 shares of preferred
stock, par value $.001 per share.
Our Business
We provide computer graphics systems, peripherals, supplies and service
to visual communicators and graphics professionals. We operate through three
business units:
- Reseller Operations,
- eCadapult, and
- Media Sciences.
We are a leading supplier of computer graphics solutions in the Northeast
United States.
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<PAGE>
Under our Reseller Operations, we are a systems integrator, value added
dealer or value added reseller of computer graphics equipment and supplies.
Our products include:
- animation and design software and workstations,
- publishing software and workstations,
- file servers,
- networks,
- color scanners, and
- color printers and copiers.
Our markets include:
- advertising and marketing companies,
- printers,
- quick print shops,
- service bureaus,
- animators,
- industrial designers, and
- the broad corporate market for color printers.
We have expanded our business operations through eCadapult, a recently
established division of our company, which provides value added services to
the creative graphics community over the Internet. In June 1999, we
launched SamplePrint.com, a one-stop evaluation resource for buyers of color
printing technology. We intend to offer two new e-commerce services in fall
1999, Cadapult Storefront and GraphicSmart.com, through which customers can
purchase supplies and products from us directly over the Internet.
In August 1999, we formed Media Sciences, Inc., a wholly owned New
Jersey subsidiary, for the purpose of acquiring ultraHue, Inc. and operating
its printer ink business. We completed the acquisition of ultraHue in
December 1999. ultraHue manufactures color solid ink and remanufactures and
refills color toner cartridges, all for use in Tektronix color printers.
ultraHue distributes these products and transparency media, also for use in
Tektronix color printers, to dealers and distributors internationally. Media
Sciences intends to manufacture and distribute, internationally, these digital
color printer supplies. We intend to grow this business through expansion of
the product line, additional marketing, expansion of the existing channel and
distribution agreements and potentially through joint ventures.
As of December 13, 1999, our Reseller Operations has accounted for
almost 100% all of our revenues, and our eCadapult division has accounted for
about $10,000 of our revenues since June 1999. Our Media Sciences division
began active operations on December 13, 1999 after we completed the ultraHue
acquisition and it did not account for any of our revenues prior to December
13, 1999.
Our strategy for long-term growth is to acquire other computer graphics
dealers and service providers. Our growth strategy involves:
- integrating acquired businesses,
- increasing overall efficiency,
- providing a high degree of customer service, and
- improving and expanding services.
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<PAGE>
Operating Strategy
The computer industry is going through a consolidation that stems
from shrinking margins. This consolidation is likely to occur in the
vertical markets in which we operate. We have the objective of becoming a
comprehensive computer graphics services provider throughout the United
States and to provide color printing supplies internationally. We believe
that we are ready to expand our operations, acquire competitors and
consolidate the computer graphics market.
We currently provide computer graphics services to commercial customers
primarily in the Northeast United States. We have taken steps to grow within
the consolidating computer graphics industry.
- In October 1996, we began our expansion plan by opening a sales
location in Boston, Massachusetts.
- In March 1998, we acquired the assets of BBG Technologies, Inc.,
a computer graphics products reseller in Boston, Massachusetts
with $2 million of annual revenues.
- In January 1999, we acquired the assets of Tartan Technical,
Inc., a computer graphics products reseller in Massachusetts
with $3.5 million of annual revenues.
- In June 1999, we acquired the assets of WEB Associates, Inc., a
computer graphics products reseller in Pennsylvania with $2.7
million of annual revenues.
We intend to acquire additional computer graphics businesses in the
Northeast United States as well as in other regions of the United States. Our
ability to acquire other businesses will depend on available cash flow or other
sources of financing, which we have not have or be able to obtain.
We intend for Media Sciences to become a leading supplier of
alternative supplies for digital color printers. ultraHue, Inc.'s printer ink
is currently the only alternative to high cost ink produced by Tektronix for
Tektronix solid ink printers, and is the only third party provider of toner
cartridges for Tektronix Phaser 560 color laser printers. In fall 1999, Xerox
acquired Tektronix's color printer business. Media Sciences is planning to
expand its product line to include remanufactured and refilled toner
cartridges for Tektronix color laser printers. We believe that we can expand
Media Sciences' business through a product line expansion, through alternative
applications for its solid ink technology, through an expansion of its
distribution channels and through joint ventures and other partnerships.
We anticipate that the relationship between our reseller operations and
Media Sciences will provide benefits to customers. We expect our reseller
operations will develop and implement marketing and service programs, such as
No-Cap Color, to strengthen Media Sciences' market position.
-20-
<PAGE>
In September 1999, Media Sciences entered into an asset purchase
agreement with ultraHue, Inc., a New Mexico corporation, and Donald Gunn and
Randy Hooker, shareholders of ultraHue, for the acquisition of certain assets
and the assumption of certain liabilities of ultraHue. The acquisition was
completed on December 13, 1999. Media Sciences acquired:
- certain proprietary information and intellectual property
rights of ultraHue, and
- other assets owned and used by ultraHue in its operations,
including its
- trade secrets,
- accounts receivable,
- inventory,
- certain property and equipment,
- the name ultraHue,
- other trademarks, service marks or copyrights,
- customer lists,
- sales, service and vendor contracts,
- security deposits, and
- on-going business records.
Media Sciences assumed the following liabilities of ultraHue:
- accounts payable as of the date of closing;
- customer deposits as of the date of closing; and
- leases and contracts to the extent they are to be performed
after the date of closing.
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<PAGE>
Our Principal Products and Services
Reseller Operations
-------------------
Systems. Products sold by our reseller operations business include
publishing software and workstations, file servers, networks, color scanners
and color printers and copiers. We typically purchase directly from the
manufacturer of the equipment or through a distributor of those products.
Supplies. Approximately one-third of our revenues comes from the
sale of digital color printer and copier supplies. We intend to grow this
revenue stream through aggressive sales and marketing efforts, and by adding
new supplies to our product line.
Hardware and Software Service and Support. Providing servicing of
hardware and software is a growing opportunity for us. We have experienced
that our customers are moving away from manufacturers' services to our own.
We believe that the opportunity to service other products in the computer
graphics market exists. We intend to add service technicians as our business
demands. In addition, we plan to add sales personnel to actively market our
services.
No-Cap Color. We launched a new program called No-Cap Color. Under
this program, a customer will be provided with one or more color printers, at
no charge, in return for a commitment to purchase certain supplies over a two
year period. The printers remain our property. We plan to expand this
program through aggressive marketing, through the creation of an agent
program and through the addition of more printers eligible under the program.
eCadapult: Internet Services
-----------------------------
eCadapult is our interactive division. The mission of the eCadapult
division is to establish an Internet-based market within the creative
graphics industry for our services and computer graphics equipment and
related merchandise. We have developed and launched two new interactive
services, SamplePrint.com and Cadapult Storefront, and plan for the
development of one e-commerce site, GraphicSmart.com, which is
expected to be introduced in July 2000. Our web site for GraphicSmart.com is
under construction and are presently not operational.
SamplePrint.com. SamplePrint.com is a website dedicated to helping
business buyers evaluate color printer and copier products over the Internet.
We expect SamplePrint.com to function as a one-stop evaluation resource for
buyers of color printing technology-an objective resource for buyers by
providing product information, technical benchmarks, sample prints and other
services. A critical decision-making factor for buyers of color printing and
copying equipment is the ability to evaluate the buyers' own images and files
printed from the products. SamplePrint.com allows any buyer to submit files
over the Internet which will be printed on a variety of printer choices. We
expect that the cost of these samples will be borne by the buyer if the
manufacturer of that printer is not a sponsor, or by the manufacturer if it
is a sponsor. Our goal is to provide all samples free to the buyer and have
the manufacturers bear the costs. This service provides a prospective
business buyer with the ability to make a purchase decision based on the
image quality of the print samples and additional information provided on
the web site.
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<PAGE>
We plan for SamplePrint.com to support both buyers and manufacturers of
workgroup color printers. With the market for color printers and copiers
growing, the need for generating samples for buyers is about to explode.
International Data Corporation, as reported by InfoWorld on June 15, 1998,
forecasts the U.S. market for color laser printers in unit shipments
is expected to grow at an average growth rate of 42.9% from the year 1995
through the year 2001. We anticipate that SamplePrint.com will become
a service to manufacturers by off-loading their sample printing support
requirements while providing an objective resource for the buyers. We
launched SamplePrint.com in June 1999, with initial sponsorship from Hewlett-
Packard and Okidata. We are currently in discussions with several other
leading printer manufacturers to sponsor this site.
Cadapult Storefront. Cadapult Storefront is intended to be an e-
commerce site where existing customers can purchase supplies and products
from Cadapult directly over the Internet, seven days a week, 24 hours a day.
Cadapult intends to integrate Cadapult Storefront with Cadapult's accounting
and order processing system to increase efficiency in the ordering process.
This e-commerce site will echo the products and margins associated with
Cadapult's traditional reseller business. Cadapult Storefront is intended to
be an alternative means of placing orders for existing customers.
GraphicSmart.com. We intend to launch an additional e-commerce site as
an alternative to the Cadapult Storefront and other Internet commerce sites.
This site will offer a broad selection of computer graphics products at
aggressive discounts. The purpose of this site is to capture the price
sensitive customers and businesses that are moving and will be moving to the
Internet as a source of supply.
GraphicAuction.com. We intend to offer an on-line auction site for
computer graphics equipment and related merchandise where buyers and sellers
are brought together in an efficient forum that is available 24 hours a day,
seven days a week to buy and sell computer graphics products. We plan to
design GraphicAuctions.com to permit us, manufacturers and the public to list
items for sale, which may be browsed through in a fully automated, topically
arranged, and easy-to-use format, and allow buyers to bid on and purchase
items of interest. We plan to offer buyers a large selection of list new,
refurbished, reconditioned, used, demonstration, and discontinued items that
can be costly to find and purchase through the traditional marketplace. We
intend to charge the seller a nominal fee for each completed transaction, but
sellers and bidders will not be charged for listing items or for making bids
through GraphicAuction.com. We believe that this auction forum may attract
more potential customers and create more interest in our products and
services, as well as permit us to better gauge market demand for certain
products.
-23-
<PAGE>
Marketing and Sales Plans
We intend to increase our marketing and sales efforts. The goal of
these efforts is to increase revenues through increased market awareness
about us, through the introduction of new products and services to the
customer base and through the increase in the number of salespeople.
Industry and Market Overview
The market for computer graphics, in which we operate, has grown
over recent years and is expected to continue to expand at a rapid pace.
We focus our products and services on the following markets:
- Digital Pre-Press
- Display Graphics
- Presentation Graphics
- Digital Imaging
- Digital Color Printing
Digital Pre-Press
-----------------
Over the last several years, there has been a dramatic shift in the
process printing industry from manual, analog production of printed materials
to the use of computers. Historically, the production of a printed brochure,
magazine or catalog involved numerous manual steps using photographic
materials to produce the final press-ready copy.
With rapid advances in software and hardware, much of today's printed
materials are produced digitally. The print production process now allows a
printed piece to go from concept to imaged printing plate in a fully digital
environment. Copy writing, proofing and revisions all take place on a desktop
computer, increasing the speed and efficiency of the pre-press process, and
streamlining personnel requirements in the process. We believe this
market is in a period of rapid transition regarding the manner in which
electronics products are delivered to the traditional printing customer.
Display Graphics
----------------
The most rapidly growing segment of the computer graphics output market
is display graphics. Display graphics, or large format graphics, describes a
process that allows computer-generated or captured images to be printed in
sizes up to 60 inches wide.
-24-
<PAGE>
Historically, these images could only be printed on color electrostatic
printers. However, over the last several years,
significant advances in ink-jet technology, software, specialty inks and
media have reduced the costs of display graphics systems
, and market acceptance has been rapid. End-users of this
technology include a wide range of industries and markets, such as:
- Trade-show graphics - production of booth and arcade displays
- Point of Sale graphics - floor displays
- Sign Shops - traditional signage, fleet graphics
- Print-for-Pay - stores like Kinkos, Sir Speedy
- Package Design - package prototyping
- Graphic Arts - imposition proofing
Presentation Graphics
---------------------
This segment of the computer graphics market consists of the creation
of visual communication materials such as slides, overhead transparencies,
multimedia presentations and associated hard copy materials. Once a highly
specialized business, presentations can now be created by just about anyone
with a computer and presentation software. The presentation itself is
displayed or printed on digital color printers, film recorders and digital
projectors.
Digital Imaging
---------------
This segment of the computer graphics market consists of the capture,
manipulation, storage, databasing, transfer and output of digital images.
Examples include digital photo restorations and combining several different
images into one new image. As more and more digital content is created,
different technology is required to address each of the above facets of
digital imaging. These include scanners and digital cameras that capture
images, and specialized software that allows the user to change, manipulate,
combine and retouch images. Digital images, especially color images are
inherently large and therefore have specialized storage requirements such as
Redundant Array of Inexpensive Disks technology, CD-ROM and tape storage.
A large volume of digital assets dictates a database, or asset management
solution, to manage, search and retrieve these images. High bandwidth
networks are required to transfer these images within a user environment and
to external destinations. Finally, a variety of digital output devices, as
described above, are used to print these images.
-25-
<PAGE>
Digital Color Printing
----------------------
This broad segment of the computer graphics market includes all
business color printers from desktop color printers to high speed connected
color copiers. Desktop color printers are starting to replace black and
white printers in the office environment as quality and speed improve and
costs are reduced. International Data Corporation, as reported by InfoWorld
on June 15, 1998 forecasted that the market for color laser printers in
the United States is expected to grow at an annual rate of 42.9% in units from
the shipment of 50,000 units in 1995 to 425,000 units in 2001.
International Data Corporation, as reported by Electronic Buyers' News in
February 22, 1999, forecasts the shipment of color desktop printers to grow
from 150,000 units in 1997 to 1,400,000 units in 2002, an annual growth rate
of 56.3%. Lyra Research, as reported by Computer Reseller News in October 5,
1998, forecasted that the worldwide shipments of color printers could reach
2,774,000 units in 2002. For those who need more volume, higher speeds
or better quality, color copiers can be connected to a network and become
very fast, high quality digital color printers.
Digital color printers and copiers create an ongoing requirement for
service and supplies. This reoccurring business often exceeds the original
cost of the device over its lifetime. Today, in the business color printer
market, supplies for these printers are manufactured by, and distributed by,
the printer manufacturer. There exists little or no competition to these
sources of supplies. As adoption of color printing technology continues, we
expect demand for alternative supplies to grow dramatically.
Distribution Methods of the Products and Services
In our reseller operation, we sell directly to end users through own
sales force, at our sales offices, and over the Internet. We present live
product demonstrations to clients and potential clients. We solicit and
fulfill orders over the telephone. In our Media Sciences division, we sell
exclusively to dealers and distributors. We sell products from a number of
manufacturers, including our competitors products.
Status of any Publicly Announced New Product or Service
We plan for the development of an e-commerce site,
GraphicSmart.com, which is expected to be introduced in July 2000.
Competition
All facets of the computer graphics business are competitive. The
color printer business is becoming increasingly competitive as the products
become commoditized. On the systems side of the business, there are other
systems integrators, valued added resellers and dealers that offer similar
or the same products, some of which are substantially larger and better funded
than we are. On the supplies front, we compete with other supply dealers as
well as supply only companies that are often national and catalog based
companies. Based on the sales volumes of these companies, it is often
difficult to compete on a price basis; therefore, we compete based upon local
delivery and better availability of product.
-26-
<PAGE>
We seek to compete by servicing most of the products that we sell
as opposed to some of our competitors who rely on manufacturer or third party
service. We offer a seven day a week, 24 hours a day premium
service through a service contract on many products, unlike many of our
competitors.
Our principal competitors are larger and better funded than we are,
and our competitors include: Globix Corporation, AOE Ricoh, MCS Canon,
Minolta Business Systems, Professional Graphics Systems and Services, Inc.,
Electronic Business Products, Inc., Charrette, NAPC, and Cambridge
Electronics, Inc.
Media Sciences' primary competitor is Xerox Corp., which recently
acquired the color printer business of Tektronix, Inc. Tektronix has been the
leading manufacturer of solid ink for use in digital color printers,
representing approximately ninety seven percent of the United States market
of solid ink.
Major Supplier
We typically purchase directly from the manufacturer of the equipment
or through a distributor of those products. We currently obtain certain
equipment and supplies from a limited number of sources of supply. Our
principal vendor is Tektronix, Inc., whose products accounts for approximately
45% of our revenues annually. The loss of a vendor agreement with Tektronix
may have a material affect on our business and operations. We also sell
products supplied by Mita Corporation, Access Graphics, Ricoh, Alias,
Merisel, Ingram, and Tekgraf, each of which suppliers account for less than
5% of our revenues annually.
Major Customers
We are not dependent on any customer, the loss of which would have a
material adverse affect on our operations.
Research and Development
In the fiscal year ended 1999, we spent approximately $150,000 on
research and development activities to develop our SamplePrint.com service.
In 2000, we expect to spend about $1,000,000 to buy or lease printers for use
in our No-Cap Color Program.
No Government Regulation
We are not subject to governmental regulation of, and do not need
governmental approval of, our products or services.
-27-
<PAGE>
Employees
We currently have 42 full-time employees, including 7 management level
employees.
Office Facilities
We maintain our executive offices in approximately 7,212
square feet, including 1,200 square feet of warehouse space, at Allendale, New
Jersey, pursuant to a lease expiring on March 31, 2002. We also
maintain three sales offices in the eastern United States and one
manufacturing facility in New Mexico.
The following table sets forth the location, approximate square
footage, approximate annual rent, use of each location and expiration date of
each lease:
<TABLE>
<CAPTION>
APPROX.
APPROX. ANNUAL LEASE
LOCATION SQ. FEET RENT(1) USE EXPIRATION DATE
--------------------- -------- -------- ---------------- ------------------
<S> <C> <C> <C> <C>
110 Commerce Drive 7,212 $101,993 Executive Office Mar. 31, 2002(2)
Allendale, NY Warehouse
137 Fifth Avenue 1,400 $ 39,690 Sales Office July 14, 2000
New York, NY
24 Westech Drive 4,000 $ 28,748 Sales Office Jan. 31, 2002(4)
Tyngsboro, MA
2551 Industry Lane 2,500 $ 12,000 Sales Office June 30, 2000
Norristown, PA
5600 McLeod N.E. 2,600 $16,200 Manufacturing June 30, 2000
Albuquerque, NM 87109 Facility
</TABLE>
______
(1) Certain of these leases provide for moderate annual rental increases.
(2) Lease provides for a five year renewal option.
(3) Lease provides for a one year renewal option.
(4) Lease provides for a renewal option for either a three year or five
year term.
We are actively seeking a new corporate executive office, including
warehousing and manufacturing facilities, of 12,000-15,000 square feet for
leasing in New Jersey. We use substantially all of the available space at
our present executive office and warehousing facility in New Jersey. We are
outgrowing our present corporate office in New Jersey and need larger
facilities to accommodate our increasing warehouse requirements, expanding
service facilities, and to support the manufacturing requirements of
our new Media Sciences division. We intend to move our corporate office as
soon as we find suitable facilities in the first half of 2000. We may not
find suitable facilities at reasonable rates. Our corporate office and sales
offices are adequately covered by insurance.
-28-
<PAGE>
Legal Proceedings
In August 1999, we instituted an action against Tektronix, Inc.
before the Superior Court in New Jersey, which action has been moved before
the United States District Court for the District of New Jersey. In our
lawsuit, we seek certain injunctive relief and an indeterminate amount of
damages, and allege that Tektronix, Inc. violated the New Jersey Franchise
Practices Act, the New Jersey Antitrust Act, federal acts prohibiting
restraints of trade, breach of contract and unfair competition, among other
claims. In our lawsuit, we allege that, in August 1999, Tektronix, Inc.
unilaterally, and without notice, illegally terminated our Tektronix
Premier Plus Reseller franchise because we were selling a non-Tektronix
product, Cadapult solid ink that was supplied to us by ultraHue, Inc. We are
informed that Tektronix controlled 97% of the U.S. solid ink market for digital
printers which essentially were only Tektronix printers. The results of our
pending lawsuit could have material positive or material adverse consequences
to our business. We derived 45% of our fiscal year 1999 revenues from sales
and services of Tektronix products. Although the Tektronix Premier Plus
Reseller franchise accounted for only about $80,000 of our gross profit
margin based on historical sales, which represented less than 3% of our
overall gross profit margin. The lawsuit has only recently commenced and may
or may not be resolved in the near future. The lawsuit has been transferred
to the United States District Court, District of Oregon. Although we do not
believe that the loss of the lawsuit would materially impact our business
operations based on historical sales, the reseller franchise provides us with
business leads and promotion of our services which cannot be quantified;
therefore, we do not know and cannot predict whether the loss of all or a
part of this lawsuit will have a material adverse affect our future business
and operations.
On April 17, 2000, Xerox Corporation filed a motion before the United
States District Court, Western District of Washington at Seattle, for leave
to intervene in an action between ultraHue, Inc., and Tektronix, Inc. for
joinder of Cadapult and Media Sciences as additional parties and for leave
to file and serve an amended answer. In October 1999, ultraHue had initiated
an action against Tektronix claiming that Tektronix was engaging in illegal
business behavior by informing resellers and end users of Tektronix's belief
that ultraHue ink sticks had cause failures in Tektronix brand printers or
had produced inferior quality output, and by failing to provide marketing
assistance and rebates to resellers who market and sell ultraHue solid ink.
Tektronix denied the claims, stated various affirmative defenses and asserted
a counterclaim for unfair competition. ultraHue denied the counterclaims.
In December 1999, our subsidiary, Media Sciences, acquired substantially
all of the assets of ultraHue. In January 2000, Xerox acquired substantially
all of the assets of Tektronix's printer business, including Tektronix's
claims against ultraHue. Through the motion for joinder, Xerox sought to
intervene in the action and assert counterclaims against us alleging that we
violated the Lanham Act, engaged in unfair competition, infringed the design
of the Tektronix ink stick, and infringed certain claims of Xerox's patent,
and to seek relief that may include our profits on sales of ultraHue solid
ink, or damages or a reasonable royalty, injunctive relief from selling the
current formulation of the solid ink; and injunctive relief against patent
infringement. On May 10, 2000, the court granted Xerox's motion to join
Cadapult and Media Sciences in the action. We were served with the amended
answer on or about May 19, 2000. We have not had the opportunity to
adequately review the amended answer and counterclaims, and therefore, we
are not in a position to assess the validity of the allegations or the
effects of the lawsuit on our operations or financial condition. While we
presently believe that resolution of this litigation will not have a material
adverse affect on our consolidated financial position, an unfavorable outcome
could have a material adverse affect on our results of operations or cash
flow in the quarter or annual period in which this matter is resolved. We
presently intend to deny any wrongdoing, and we intend to vigorously defend
the action, but we can give no assurance that we will prevail in this
litigation.
Change in Accountants
On July 6, 1998, we informed Mantyla, McReynolds & Associates that it
had been dismissed as our principal accountants. The former principal
accountants' report on the financial statements neither contained an adverse
opinion or disclaimer of opinion, nor was modified as to uncertainty, audit
scope, or accounting principles. Our decision to change our principal
accountant was recommended and approved by our Board of Directors.
There were no disagreements with the former accountants on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. We have authorized the former accountants to
respond fully to all inquires of the successor accountant concerning any
matter.
On July 6, 1998, we engaged Wiss & Company, LLP as our principal
accountants. Wiss & Company had been the principal accountants for CGSI
since April 23, 1998. Pursuant to a reverse acquisition which was completed
on June 18, 1998, we acquired CGSI became as a wholly-owned subsidiary.
Following the acquisition, our Board of Directors selected Wiss & Company to
serve as our principal accountants.
-29-
<PAGE>
OUR MANAGEMENT
The following persons are our present directors and executive officers.
Edwin Ruzinsky became a director on August 27, 1999. Donald Gunn and Henry
Royer became directors on December 23, 1999.
Name Age Position
---- --- --------
Michael W. Levin 35 Chief Executive Officer, President and
Chairman of the Board
Frances Blanco 39 Vice President Marketing and Investor
Relations, Treasurer, Secretary and
Director
Duncan Huyler 39 Vice President Technical Services
Paul C. Baker 62 Director
Edwin Ruzinsky 66 Director
Donald Gunn 48 Director
Henry Royer 68 Director
Our directors are elected annually to serve for one year
and hold office until the next annual meeting of the shareholders and until
their successors are elected and qualified. Our Board of Directors may
increase the size of the Board of Directors. Any director who fills a
position created by the Board of Directors serve until the next annual meeting
of the shareholders. Our officers are elected by the Board of Directors at
the first meeting after each annual meeting of our shareholders, and hold
office until their death, resignation or removal from office.
MANAGEMENT PROFILES
Michael W. Levin, Chief Executive Officer, President and Chairman of the Board:
------------------------------------------------------------------------------
Mr. Levin has served as our Chief Executive Officer, President and
Chairman of the Board since June 18, 1998. Before June 1998, he had
served as President, Treasurer, Secretary and Chairman of CGSI since 1987,
when he founded CGSI while attending Lehigh University. He is responsible for
a senior management team as well as merger and acquisition activity and
corporate finance. He earned a Bachelor of Science degree in Mechanical
Engineering from Lehigh University in 1987, graduating summa cum laude.
Frances Blanco, Vice President of Marketing and Investor Relations, Treasurer,
Secretary and Director:
----------------------
Ms. Blanco has served as our Vice President of Marketing and Investor
Relations, Treasurer, Secretary and a Director since June 18, 1998.
From 1993 to June 18, 1998, she served as Vice President of
Marketing and Investor Relations, Treasurer, Secretary and a director of
CGSI. Ms. Blanco manages all aspects of marketing, including brand identity,
demand creation and vendor relationships for us as well as investor
relations. From 1984 through 1989, Ms. Blanco was a Reseller Account Manager
at Lotus, where she designed and implemented marketing programs. From August
1989 through June 1993, Ms. Blanco served as a Business Development Manager
at Tektronix, Inc., where she was responsible for the development of long
term and strategic customers. She earned a Bachelor of Science degree in
Marketing from Bentley College in 1982 and a Masters of Business
Administration degree from Boston College in 1985.
-30-
<PAGE>
Duncan Huyler, Vice President of Technical Services:
---------------------------------------------------
Mr. Huyler has served as our Vice President of Technical Services
since June 18, 1998. From 1993 to June 18, 1998, he served as
Vice President of Technical Services for CGSI. Mr. Huyler manages all
the technical aspects for us, including running the business under
its own P/L, developing service plans, hiring staff, developing and
implementing training programs and obtaining service authorizations. From
May 1983 through October 1987, Mr. Huyler served in the U.S. Army. From
September 1988 through August 1993, Mr. Huyler worked for Lord & Taylor,
where his positions included Senior Financial Analyst and Director of
Systems. Mr. Huyler graduated from Cornell University in 1983 with a
Bachelor of Science degree in Business and earned a Masters of Business
Administration from the University of Louisville in 1987.
Paul C. Baker, Director:
-----------------------
Mr. Baker has served as a Director since June 18, 1998.
From 1986 to the present, he has been President of Sherwood Partners, Inc., a
venture capital and management consulting company, which he founded, that
focuses on developing companies with high growth potential. Prior to
founding Sherwood Partners, Inc. in 1986, Mr. Baker held numerous positions
during his twenty-five years of employment with American Cyanamid Co.
At Cyanamid, Mr. Baker held several domestic and international
management positions, including President of Domestic Operations from April
1975 through October 1979, President of Shulton Inc. from October 1977
through October 1979 and Group Vice President of Cyanamid from October 1979
through December 1984. Mr. Baker graduated from Lehigh University in 1959
with a Bachelor of Arts degree in Liberal Arts, earned a B.S.I.E. degree in
Engineering in 1960 from Lehigh University, and received a Masters in
Business Administration in 1963 from Fairleigh Dickinson University.
-31-
<PAGE>
Edwin Ruzinsky, Director:
------------------------
Mr. Ruzinsky has served as a Director since August 27, 1999.
He is a Certified Public Accountant and a Certified Management
Consultant. Prior to his retirement on June 1, 1996 as a Partner in Deloitte
Consulting LLC, a wholly-owned subsidiary of Deloitte & Touche LLP, he
served for many years as the firm's National Director-Media Industry
Services. He previously served Times Mirror Company as Vice
President of Finance & Administration/Book Publishing Group and Parents'
Magazine Enterprises, Inc. as Chief Accounting Officer. Mr. Ruzinsky
continues serving as a member of the Pace University/Dyson School of Liberal
Arts & Sciences/Master of Science in Publishing Advisory Board. He is
currently a member of the Board of Dowden Publishing Company, Inc., a
provider of specialized publications and customized communication products
for healthcare professionals and consumers. In addition, he has been a
consultant to The CPA Journal, published by the New York State Society of
Certified Public Accountants, for the past twenty-five years.
Donald Gunn, Director:
----------------------------------------------------------
Mr. Gunn has served as a Director since December 23, 1999. Since
December 13, 1999, he has served as Vice President of Media Sciences. He
founded ultraHue, Inc., a manufacturer of ink and toner products for computer
printers in March 1996. He served as President and Chief Executive Officer of
ultraHue until we acquired ultraHue on December 13, 1999. From June 1997 to
November 1998, he served as the Western Sales Manager for Invention Machine
Corporation, a Boston based provider of software designed to aid engineers in
the development of engineering solutions. From August 1995 to May 1997, he
worked as Regional Manager for the Pacific Northwest for 3D Systems, located
in Valencia, California, a company that produces stereo lithography machines.
From October 1987 to August 1995, he worked for the Color Printer Division of
Tektronix, Inc., located in Wilsonville, Oregon, in various sales and marketing
positions, including Major Account Manager and VAR Account Manager for the
Western United States. From July 1986 to October 1987, he worked as a sales
manager for Silma, Inc., located in Santa Clara, California, a company that
produced software for industrial equipment. From January 1985 to June 1986,
he as the Western Area Sales Manager for AAB Robotics, located in Fort
Collins, Colorado, a company that produced equipment for the welding industry.
He received a Bachelors of Science degree in Electrical Engineering from the
University of Illinois in 1974.
Henry Royer, Director:
---------------------
Henry Royer has served as a Director since December 23, 1999. From 1950
until 1962, he was employed for four years by Pillsbury Mills and for four
years by Peavey Company as a grain merchandiser. From 1962 through 1965, he
was employed as Treasurer and served on the Board of Lehigh Sewer Pipe and
Tile. He joined First National Bank of Duluth in 1965, where he served in
various capacities, including Assistant Cashier, Assistant Vice President,
Assistant Manager of the Commercial Loan Department and Senior Vice President
in Charge of Loans. When he left First National Bank in 1983, he was serving
as Executive Vice President/Loans. He then joined The Merchants National Bank
of Cedar Rapids, currently called Firstar Bank Cedar Rapids, N.A., where he
served as Chairman and President until August 1994. From September 1994
through December 31, 1997, he served as the President and Chief Executive
Officer of River City Bank, Sacramento, California from September 1994 through
December 31, 1997. He served as an Independent Trustee of Berthel Growth &
Income Trust I from its date of inception in 1995 through February 5, 1999,
when he resigned. He joined Berthel Fisher & Company Planning Inc. in
February 1999 and was elected President in July 1999. He was elected
President of Berthel SBIC, LLC in August 1999. He graduated in 1953 from
Colorado College with a B.A. in Money and Banking.
-32-
<PAGE>
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and
long-term compensation during our last three fiscal years of
our Chief Executive Officer and other most highly compensated
employees and all of our other officers and directors.
Each of Kathleen Morrison, Jason Osborn and Terry Hardman received 1,000
shares of our common stock pursuant to a Registration Statement on Form S-8
filed on or about June 5, 1998. The value of the 1,000 shares is estimated to
be $150, based upon a price of $.15 per share.
On June 18, 1998, we acquired CGSI, a privately-held company. Kathleen
Morrison, Jason Osborn and Terry Hardman resigned as officers and directors
effective June 18, 1998. Michael Levin and Frances Blanco became officers and
directors on June 18, 1998. Duncan Huyler became an officer on June 18, 1999.
Paul Baker became a director on June 18, 1998. We changed our fiscal year end
from December 31 to April 30, and CGSI changed its fiscal year end from April
30 to June 30. The 1998 fiscal year compensations in the table below for Mr.
Levin, Ms. Blanco, and Mr. Huyler includes the operations of CGSI for the
period May 1, 1997 through April 30, 1998. Our matching contributions to
employees' 401(k) plan are included in the table as all other compensation.
<TABLE>
Summary Compensation Table
Long Term
Compensation
------------
Annual Compensation Awards
----------------------------------------------- ------
Name and Other Securities
Principal Annual Underlying All Other
Position Year Salary Bonus Compensation Options/SARS Compensation
-------------------------- ---------------------------------------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Levin 1999 $ 130,000 $ 0 $ 0 500,000 $ 2,379
Chief Executive Officer, 1998 $ 141,583 $ 0 $ 0 51,223 $ 2,727
President and Chairman
Of the Board
Frances Blanco 1999 $ 80,000 $ 10,000 $ 0 100,000 $ 2,021
Vice President Marketing 1998 $ 75,000 $ 25,000 $ 0 7,741 $ 2,158
and Investor Relations,
Treasurer, Secretary and
Director
Duncan Huyler 1999 $ 95,000 $ 0 $ 0 100,000 $ 4,630
Vice President Technical 1998 $ 91,000 $ 25,000 $ 0 9,265 $ 3,867
Services
Paul C. Baker 1999 $ 0 $ 0 $ 0 33,000 $ 0
Director 1998 $ 0 $ 0 $ 0 0 $ 0
Kathleen L. Morrison 1998 $ 0 $ 0 $ 150 0 $ 0
Former President and 1997 $ 0 $ 0 $ 0 0 $ 0
Director
Jason Osborn 1998 $ 0 $ 0 $ 150 0 $ 0
Former Vice President and 1997 $ 0 $ 0 $ 0 0 $ 0
Director
Terry Hardman 1998 $ 0 $ 0 $ 150 0 $ 0
Former Secretary, 1997 $ 0 $ 0 $ 0 0 $ 0
Treasurer and Director
</TABLE>
-33-
<PAGE>
The table below sets forth information concerning options granted
during the fiscal year ended June 30, 1999 to those persons named in the
preceding Summary Compensation Table. The percentage of total options is
based 1,069,632 options granted to officers, directors, and employees,
including options during the 1999 fiscal year and includes options granted
during the two month fiscal year transition period from May 1 through June 30,
1998.
Under employment agreements, we granted 500,000 options to Mr. Levin,
100,000 options to Ms. Blanco, and 100,000 options granted to Mr. Huyler.
These options are performance-based and vest after we achieve certain levels
of corporate earnings. The terms of vesting are described in the discussion
of the Long-Term Incentive Plan table. None of these options have vested.
The other options listed in the table are presently exercisable and were
granted under our incentive stock option plan for our employees.
<TABLE>
Option/SAR Grants in Last Fiscal Year
(Individual Grants)
Number of
Securities Percent of total
Underlying options/SARS granted Exercise or
Options/SARs to employees in base price Expiration
Name Granted (#) fiscal year ($/Sh) Date
---------------- ------------ -------------------- ------------ ----------
<S> <C> <C> <C> <C>
Michael W. Levin 500,000 47.7% $1.375 6-18-03
Michael W. Levin 51,223 4.8% $1.375 6-18-03
Frances Blanco 100,000 9.3% $2.00 3-05-04
Frances Blanco 7,741 0.7% $1.25 6-18-08
Duncan Huyler 100,000 9.3% $2.00 3-05-04
Duncan Huyler 9,265 0.9% $1.25 6-18-08
Paul Baker 3,000 0.3% $2.00 6-11-08
Paul Baker 30,000 2.8% $3.31 4-06-09
</TABLE>
-34-
<PAGE>
None of the options held by those individuals listed in the Summary
Compensation Table were exercised in fiscal year ended 1999. The following
table sets forth information concerning the value of unexercised stock
options at June 30, 1999 for those individuals named in the Summary
Compensation Table.
We calculated the dollar values in the table by multiplying the number
of options by the difference between the fair market value of a share of
common tock underlying an option and the exercise price of the option.
The last sale price of a share of our common stock on June 30, 1999 was
$2.625, as reported by the OTC Bulletin Board.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of securities
Shares underlying unexercised Value of unexercised
Acquired Value Options/SARs in-the-money options/SARs
on realized at FY-end (#) at FY-end ($)(a)
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Levin -- -- 51,223 500,000 $ 134,460 $ 1,312,500
Frances Blanco -- -- 7,741 100,000 $ 20,320 $ 262,500
Duncan Huyler -- -- 9,265 100,000 $ 24,321 $ 262,500
Paul Baker -- -- 33,000 -- $ 86,625 $ --
</TABLE>
The table below sets forth information concerning long-term options
granted during the fiscal year ended June 30, 1999 to those persons named in
the preceding Summary Compensation Table. We have not adopted a formal
long-term incentive option plan. The options presented in the table below
were granted pursuant to employment agreements, as amended, with our executive
officers.
You need to keep the following factors in mind when reading the table
below:
- The number of shares equals the options granted to the
individual.
- The performance period is the length of the individual's
employment under his or her employment agreement. If the
options do not vest during the employment term, the options
expire.
- The threshold refers to the minimum number of options that could
vest during the performance period.
- The target refers to the number of options that we reasonably
believe may vest in the 2000 fiscal year.
- The maximum refers to the total number of options that may vest
during the performance period.
These long-term incentive options vest only if we achieve certain levels of
corporate earnings. For each individual, 25% of the maximum payout are to
vest after a fiscal year for which our earnings before interest, taxes,
depreciation and amortization exceeds each of $500,000, $1,000,000,
$1,500,000, and $2,000,000. Each option is exercisable for five years into one
share of common stock. The exercise price for the options equals the fair
market value of a share of common stock on the date of grant. These options
are cumulative and are subject to anti-dilution rights.
-35-
<PAGE>
<TABLE>
Long-Term Incentive Plans-Awards in Last Fiscal Year
Number Performance
of shares, or other units or
units or period until
other maturation or Estimated Future Payouts under
Name rights (#) payout Non-Stock Price-Based Plans
------------------------------------------------------------------------------------------
Threshold Target Maximum
(#) (#) (#)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael W. Levin 500,000 5/98 - 4/01 125,000 125,000 500,000
Frances Blanco 100,000 5/99 - 4/01 25,000 25,000 100,000
Duncan Huyler 100,000 5/99 - 4/01 25,000 25,000 100,000
</TABLE>
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS AND CHANGE OF CONTROL
Michael W. Levin serves as our Chief Executive Officer and President
pursuant to a five year employment agreement that began on May 1, 1998, as
amended. His current annual salary is $130,000. His salary increases
annually by the cost-of-living adjustments tied to the Consumer Price Index.
We may increase his salary at any time. Commencing in his third year of
employment and each year after, his annual salary increases, per quarter, by
one percent of our earnings before interest, taxes, depreciation and
amortization in the prior fiscal year. We granted 500,000 five-year options
to purchase 500,000 shares of common stock. These options vest only after
we achieve certain corporate levels of earnings. The exercise price for the
options is $1.375 per share. He may exercise 125,000 options following the
first fiscal year that our earnings before interest, taxes, depreciation
and amortization exceeds each of $500,000, $1,000,000, $1,500,000 and
$2,000,000. These options are cumulative and are subject to anti-dilution
rights. He also receives:
- death benefits of $100,000,
- a fifteen year term life insurance policy for $1,000,000,
- a luxury automobile, and
- reimbursement for reasonable travel and other business related
expenses.
We may also award him financial or other bonuses as determined by
the Board of Directors.
If we undergo a "change of control", we must pay him an amount equal to
290% of his salary. He has the right to terminate his employment if we undergo
a change in control. As defined in his employment agreement, a change of
control refers to:
- a change in our ownership or management that must
be reported in under the Exchange Act of 1934;
- the acquisition of 25% or more of our common stock or our
voting securities;
- a change in a majority of our Board of Directors that our
Board does not approve of or that results from a proxy contest);
- a reorganization, merger, consolidation or sale of substantially
all of our assets after which our shareholders do not own, in
the same proportion, more than 50% of the voting power, after
which a majority of the board of directors changes, and after
which a new shareholder beneficially owns 25% or more of the
voting power; or
- shareholder approval of our liquidation or dissolution.
-36-
<PAGE>
Frances Blanco serves as our Vice President of Marketing and Investor
Relations, Treasurer and Secretary pursuant to a three year employment
agreementthat began on May 1, 1998 and was amended on March 5, 1999. She
earns a current annual salary of $90,000. We may grant her financial
bonuses as we may determine. We granted her 100,000 five-year options to
purchase 100,000 shares of our common stock. These options vest only after
we achieve certain corporate levels of earnings. The options have an
exercise price of $2.00 per share. She may exercise 25,000 options following
the first fiscal year that our earnings before interest, taxes, depreciation
and amortization exceeds each of $500,000, $1,000,000, $1,500,000 and
$2,000,000. These options are cumulative and are subject to anti-dilution
rights.
Duncan Huyler serves as our Vice President of Technical Services
pursuant to a three year employment agreement that began on May 1, 1998 and
was amended on March 5, 1999. He earns a current annual salary of $95,000.
We may grant him financial bonuses as we may determine. We granted him
100,000 five-year options to purchase up to 100,000 shares of our common
stock. These options vest only after we achieve certain corporate levels of
earnings. The options have an exercise price of $2.00 per share. He may
exercise 25,000 options following the first fiscal year that our earnings
before interest, taxes, depreciation and amortization exceeds each of
$500,000, $1,000,000, $1,500,000 and $2,000,000. These options are
cumulative and are subject to anti-dilution rights.
INCENTIVE STOCK OPTION PLAN
Under our incentive stock option plan for employees, which was adopted
by our Board of Directors and approved by our shareholders, we reserved
500,000 shares of our common stock . Our incentive stock option plan for
employees is administered by our Chairman of the Board. An incentive stock
option entitles the holder to purchase a share of our common stock at a
purchase price equal to the fair market value of the common stock on the day
of grant. We filed a Form S-8 to register the 500,000 shares underlying the
stock options. Employees have exercised options to purchase 19,214 shares of
common stock. We have outstanding incentive stock options to purchase about
265,279 shares of common stock, exercisable for five or ten years
at prices of $1.25 to $4.00 per share, including 121,230 options to our
officers and directors.
-37-
<PAGE>
EMPLOYEE PROFIT SHARING PLAN
We have a tax-qualified employee paired profit sharing plan sponsored
by Kemper Financial Services, Inc. This 401(k) plan covers all of our
employees that have been employed for at least six months and meet other age
and eligibility requirements. Under the 401(k) plan, employees may choose
to reduce their current compensation by up to 15% each year and have that
amount contributed to the 401(k) plan. We make matching contributions equal
to 25% of the employee's contribution. In our discretion, we may contribute
unmatched contributions. The 401(k) plan qualifies under Section 401 of the
Internal Revenue Code, so that we can deduct contributions by employees or by
us. Employee contributions to the 401(k) plan are fully vested at all times,
and our contributions, if any, vest at the rate of 25% after two years and
after two years at the rate of 25% a year until fully vested.
-38-
<PAGE>
OWNERSHIP OF SECURITIES
The table below sets forth, as of June 26, 2000, the shares of
our common stock beneficially owned by each person known to us to be
the beneficial owner of more than five percent of our outstanding
shares of common stock, by each of our officers and directors, and by all of
our officers and directors as a group. This information was determined in
accordance with Rule 13(d)-3 under the Securities Exchange Act of 1934, and
is based upon the information provided by the persons listed below. All
persons named in the table have the sole voting and dispositive power with
respect to common stock beneficially owned.
You should consider the following factors when reviewing the table:
- For each person listed, shares of common stock that can be
acquired by that person within 60 days are included.
- Except for the beneficial ownerships of Henry Royer and of
Berthel SBIC, the percent of class does not include shares of
common stock which may be acquired upon the conversion of any
outstanding shares of series A preferred stock.
- Mr. Levin's reported shares of common stock includes beneficial
ownership of 62,000 shares owned by his minor children and
51,223 shares underlying exercisable five-year options, and
excludes other options, subject to future vesting, to acquire
500,000 shares of common stock.
- Ms. Blanco's reported shares of common stock includes 7,741
shares underlying exercisable ten-year options, and excludes
other options, subject to future vesting, to acquire 100,000
shares of common stock.
- Mr. Huyler's reported shares of common stock includes 9,265
shares underlying exercisable ten-year options, and excludes
other options, subject to future vesting, to acquire 100,000
shares of common stock.
- Mr. Baker's reported shares of common stock includes 33,000
shares underlying exercisable ten-year options.
- Mr. Ruzinsky's reported shares of common stock includes 10,000
shares underlying exercisable ten-year options.
- Mr. Gunn's reported shares of common stock excludes options
to acquire 50,001 shares of common stock which have not vested.
- Henry Royer's beneficial ownership excludes shares of common
stock and options to acquire common stock owned by Berthel SBIC.
- Berthel SBIC's beneficial ownership includes shares of common
stock which may be acquired upon the exercise of warrants to
acquire 323,000 shares of common stock and upon the conversion
of 100,000 series A preferred stock shares, at an assumed
conversion rate of one series A preferred stock share into 3.1
shares of common stock, into 310,000 shares of common stock.
- Berthel SBIC's beneficial ownership also includes options to
acquire 10,000 shares of common stock because its internal
policy prohibits Mr. Royer, President of Berthal SBIC, from
direct ownership of the options that he would have acquired
from serving on our Board of Directors.
- For purpose of calculating the shares held by officers and
directors, shares beneficially owned by Berthel SBIC are not
included as shares held by a director.
The address of each of the persons named in the table is Cadapult
Graphic Systems, Inc., 110 Commerce Drive, Allendale, New Jersey 07401, except
for Henry Royer and Berthel SBIC, LLC whose address is 100 Second Street SE,
Cedar Rapids, Iowa 52407.
<TABLE>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Owner of Class
------------------- ------------------- --------
<S> <C> <C>
Michael W. Levin 1,569,673 48.0%
Frances Blanco 48,516 1.5%
Duncan Huyler 50,040 1.6%
Paul Baker 100,500 3.1%
Edwin Ruzinsky 10,000 0.3%
Donald Gunn 25,000 0.8%
Henry Royer 0 0.0%
Berthel SBIC, LLC 643,000 16.7%
All officers and directors as a group (7 persons) 1,803,729 54.2%
</TABLE>
We do not have any arrangements which may result in a change in control.
-39-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1998, we filed a registration statement on Form S-8 for
66,068 shares of common stock. We issued the shares to four individuals,
including to our officers and directors, pursuant to written
compensation agreements, as follows:
- Leonard W. Burningham, 63,068 shares;
- Kathleen L. Morrison, 1,000 shares;
- Jason Osborn, 1,000 shares; and
- Terry Hardman, 1,000 shares.
Kathleen L. Morrison, Jason Osborn, and Terry Hardman resigned as our
directors and officers effective as of June 18, 1998.
On June 18, 1998, we completed the acquisition of CGSI, a privately-
held New Jersey corporation, in a transaction viewed as a reverse
acquisition. Pursuant to an Agreement and Plan or Reorganization dated June
5, 1998, between us, CGSI, all of the shareholders of CGSI, Jenson
Services, Inc., a Utah corporation, Duane S. Jenson and Jeffrey D. Jenson, we
issued 1,650,000 shares of common stock to the shareholders of CGSI in
exchange for all of the outstanding common stock of CSGI. Pursuant to the
acquisition, the shareholders of CSGI became our controlling shareholders,
our officers and directors resigned and elected the CSGI nominees
in their places, and CSGI became our wholly-owned subsidiary.
Michael W. Levin acquired 300 shares, no par value, of CGSI on May
1, 1987 for $300. Frances Blanco acquired 7.90 shares, no par value, of CSGI
on June 3, 1997 for $15,000. Duncan Huyler acquired 7.90 shares, no par
value, of CSGI on June 3, 1997 for $15,000. Duncan Yates acquired 3.8748
shares, no par value, of CGSI on April 20, 1998 for $15,000. In May 1998,
Mr. Levin made a gift of 3.1 shares to each of their two minor children.
Pursuant to the acquisition, Mr. Levin and his children, Ms. Blanco, Mr.
Huyler and Mr. Yates, representing all the issued and outstanding shares of
CGSI, exchanged their shares of CGSI proportionally for 1,650,000 shares of
our common stock pursuant to our acquisition of CGSI. Michael W. Levin
currently serves as our Chief Executive Officer, President and Chairman of
the Board, and he is our largest stockholder. Frances Blanco
currently serves as our Vice President, Secretary, Treasurer and as a
director. Duncan Huyler currently serves as our Vice President.
We issued to Mr. Levin under an employment agreement stock options to
purchase up to 500,000 shares of common stock to vest upon us attaining
certain specified corporate milestones based upon corporate earnings,
exercisable for five years at $1.375. We issued to each of Ms. Blanco
and Mr. Huyler under employment agreements stock options to purchase
up to 100,000 shares of common stock each to vest upon us attaining
certain specified corporate milestones based upon corporate earnings,
exercisable for five years at $2.00.
In August 1998, Paul and Brenda Levin, the parents of Michael W. Levin,
converted a $50,000 note payable by us to them for 40,000 shares of our
common stock at the rate of $1.25 per share. This transaction was part of
a private placement of common stock at $1.25 per share that we completed in
August 1998.
In August 1998, we filed a registration statement on Form S-8 for our
incentive stock option plan for employees under which we may issue options
that may be exercised for up to 500,000 shares of common stock. To date,
employees have exercised options to purchase 19,214 shares of common stock.
Incentive stock options to purchase approximately 265,279 shares are
outstanding. Those options are exercisable at $1.25 to $4.00 per share and
expire five to ten years from the dates of issuances. Executive officers and
directors have been granted the following options pursuant to the incentive
stock option plan:
- Michael W. Levin, 5-year options to purchase 51,223 shares at
$1.375;
- Frances Blanco, 10-year options to purchase 7,741 shares at
$1.25;
- Duncan Huyler, 10-year options to purchase 9,265 shares at $1.25;
- Paul Baker, 10-year options to purchase 3,000 shares at $2.00
and 30,000 shares at $3.31;
- Edwin Ruzinsky, 10-year options to acquire 10,000 shares at
$2.06; and
- Henry Royer, 10-year options to acquire 10,000 shares at $3.125.
-40-
<PAGE>
On December 13, 1999, we completed, through our subsidiary Media
Sciences, the acquisition of certain assets and the assumption of certain
liabilities of ultraHue, Inc., a New Mexico corporation, pursuant to an asset
purchase agreement dated September 7, 1999. We acquired certain proprietary
information and intellectual property rights of ultraHue and other assets used
in its business operations, including:
- its trade secrets;
- its accounts receivable less allowances;
- its inventory;
- rights to the name ultraHue;
- its customer lists;
- its sales, service and vendor contracts; and
- its security deposits.
We assumed the following liabilities of ultraHue:
- its accounts payable as of the closing date;
- its customer deposits as of the closing date; and,
- its leases and contracts.
The purchase price we paid at closing included:
- $2,340,000 at closing;
- a promissory note for $1,160,000, with 7% annual interest rate
payable in one year; and,
- a sum equal to ultraHue's cost for its inventory delivered to
us at the closing date.
The purchase price also includes:
- the sum of accounts receivables as of the closing date that we
collect;
- for one year from closing, 10% of the net profits that Media
Sciences derives from the first $1,500,000 dollars of Media
Sciences' gross profits;
- for one year from closing, 30% of the net profits of Media
Sciences that is attributable to its gross profits in excess
of $1,500,000;
- for two years from closing, 10% of the quarterly net profits
derived by Media Sciences from the first $1,000,000 of gross
profits; and
- for two years from closing, 30% of the net profits of Media
Sciences that is attributable to its gross profits in excess
of $1,000,000 dollars.
On December 13, 1999, Donald Gunn, an officer, director and controlling
shareholder of ultraHue, became Vice President of Media Sciences. Under a
three year employment agreement, we issued him options to purchase 50,001
shares of our common stock. The exercise price of the options is $3.125
per share. One-third of the options vest on each of the three anniversary
dates of employment. On December 23, 1999, Mr. Gunn was elected to serve on
our Board of Directors.
On December 13, 1999, Randy Hooker, an officer, director and controlling
shareholder of ultraHue, became an employee of Media Sciences. Under a three
year employment agreement, we issued him options to purchase 50,001 shares
of our common stock. The exercise price of the options is $3.125 per
share. One-third of the options vest on each of the three anniversary dates
of employment.
In December 1999, Berthel SBIC purchased 100,000 units of our securities
in a private placement at $10 per unit. Berthel SBIC beneficially owns
407,692 shares of common stock which may be acquired upon the conversion of
100,000 shares of series A preferred stock, at the current conversion rate of
one preferred stock share into 3.077 common stock shares, and the exercise of
five-year warrants to acquire 200,000 shares of common stock at $4.50 per
share which underlie the 100,000 units. Berthel SBIC also owns five year
warrants to acquire another 90,000 shares of common stock. On December 23,
1999, Henry Royer, President of Berthel SBIC, was elected to serve on our
Board of Directors. Berthal SBIC owns the 10,000 incentive stock options that
we granted to Henry Royer as an outside director.
On January 14, 2000, Henry Royer purchased 10,000 shares of our common
stock in the public market at $3.25 per share.
On March 10, 2000, Henry Royer purchased 10,000 units of our securities
in our private placement conducted from December 1999 through March 10, 2000.
Units sold in the private placement were offered at $10.00 per unit and
consisted of one share of series A preferred stock and warrants to purchase
two shares of common stock. The warrants are exercisable for five years at
$4.50.
Henry Royer sold all of his shares and units of our securities in May
2000 to attempt to comply with the internal policies of Berthal SBIC of which
he is President. He sold his 10,000 shares of common stock in the public
market at a loss, as follows:
- 1,000 shares were sold at $3.00 on May 2, 2000;
- 1,000 shares were sold at $3.00 on May 4, 2000;
- 1,000 shares were sold at $2.50 on May 22, 2000;
- 1,000 shares were sold at $2.53 on May 22, 2000;
- 2,000 shares were sold at $2.1875 on May 23, 2000; and
- 4,000 shares were sold at $2.125 on May 23, 2000.
Henry Royer also sold his 10,000 units of our securities at the same price
of $10.00 per unit he paid for the units in a private transaction to one
individual who represented that he was an accredited and sophisticated
person with whom he has had prior business relationships, and who accepted
all of the same conditions of purchase as had Mr. Royer when he purchased
said securities.
-41-
<PAGE>
SELLING STOCKHOLDERS
This prospectus relates to the resale of 3,591,500 shares of common
stock owned by certain of our present stockholders, of which:
- 1,705,000 shares of common stock underlie 550,000 shares of
series A preferred stock, assuming conversion at the rate of
one series A preferred share into 3.1 shares of common stock;
- 1,886,500 shares of common stock underlie warrants to
purchase shares of common stock.
The table below sets forth:
- the names of the selling stockholders;
- the number of shares of common stock beneficially owned by
each of the selling stockholders before this offering, assuming
the conversion of each unit held by a selling stockholder into
five shares of common stock;;
- the number of shares of common stock being offered under
this prospectus by each of the selling stockholders;
- the number of shares of stock of common stock
owned by each of the selling stockholder after the completion of
the offering; and
- the percentage of shares of common stock owned by each of the
selling stockholder after the completion of the offering,
based on 3,218,451 shares of common stock issued and outstanding
on June 27, 2000, as adjusted for each selling stockholder to
include shares of common stock beneficially owned by each
selling stockholder assuming the conversion of series A
preferred stock and the exercise of warrants.
The symbol "*" in the table indicates less than 1% ownership of our
outstanding shares of common stock after this offering.
The shares of common stock offered by this prospectus may be offered
from time to time by the selling stockholder. Our registration does not
necessarily mean that any selling stockholder will sell all or any of its
shares.
-42-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Number of Shares Percent
Owned Prior Number of Shares Owned After Owned After
Name of Selling Stockholder to this Offering Being Offered this Offering Offering
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Physicians Service Group, Inc. 7,500 7,500 0 *
Paul A. Anctil 750 750 0 *
Ricky K. Barnes 25,500 25,500 0 *
Charles C. and Charles F. Bearoff 255,000 255,000 0 *
Fred Beroff 51,000 51,000 0 *
Berthel SBIC, LLC (1) 643,000 593,000 50,000 1.5%
Eric T. Besag 76,500 76,500 0 *
Jon Besag 4,500 4,500 0 *
Bloom Rev. Living Trust (2) 25,500 25,500 0 *
Travis A. Branch 750 0 0 *
Dan Brecher, IRA (3) 86,000 51,000 35,000 1.1%
Brookstreet Securities Corporation, Inc. 255,900 255,900 0 *
Alfonso Burgos 3,000 3,000 0 *
Lee Burton 7,500 7,500 0 *
James R. Carpenter and Judy Carpenter 25,500 25,500 0 *
Carty & Company, Inc. 155,250 155,250 0 *
Dr. Debabrata Chakrabarty IRA 12,750 12,750 0 *
Jayasri Chakrabarty IRA 12,750 12,750 0 *
Conley Revocable Trust 12,750 12,750 0 *
Frank A. Conte 12,750 12,750 0 *
Lawrence Cooper Trust 5/9/99 FL (4) 51,000 51,000 0 *
Dayl Crow 3,000 3,000 0 *
Charles W. Davidson Company Money
Purchase Pension Plan (5) 12,750 12,750 0 *
Davidson Living Trust CA 12/6/89 12,750 12,750 0 *
Jesse C. Dickinson 3,000 3,000 0 *
Robert C. Faris 12,750 12,750 0 *
Denis Frelinghuysen 750 750 0 *
General Conference Corp. of
Seventh-day Adventists 255,000 255,000 0 *
Jamie E. Georgeson, IRA 12,750 12,750 0 *
GKN Securities 750 750 0 *
Paul Graff 3,000 3,000 0 *
James Haberman 12,750 12,750 0 *
Ethel G. Haitinger 12,750 12,750 0 *
Gary G. Harrigan Family Trust (6) 12,750 12,750 0 *
Andrew Herbert 51,000 51,000 0 *
Bettie Jane Hoover Rev. Trust U/A (7) 17,850 17,850 0 *
Richard Houlihan 12,750 12,750 0 *
HSC Capital, Ltd. 16,126 16,126 0 *
O. Ray Hubble 12,750 12,750 0 *
Albert M. Iosue 38,250 38,250 0 *
</TABLE>
------
(1) The beneficial owners are: Thomas J. Berthel, Chief Executive Officer
and Chairman; Ronald O Brendengen, Chief Financial Officer and Chief
Operation Officer; Henry Royer, President; Leslie D. Smith, Secretary;
and Julie K. Driscoll, Assistant Secretary.
(2) The beneficial owners are: Genevieve Bloom, Gianna Fuller, Suzanne
Fuller, Agnes Lesher, Robert Postma, James Postma, and Arcadia Reformed
Church.
(3) The shares being registered are held through two retirement plans.
(4) The beneficial owner is Lawrence Cooper.
(5) The beneficial owners are: William Beaman, Ray R. Bold, Gloria K.
Chang, Bill Davidson, Charles W. Davidson, Cheryl Davidson, Sandra
Davidson, Stephanie Davidson, Ward C. Dayley, W. Vance Dickinson,
Michelle Fisk, Lawrence Giraudo, Allen Green, Kathryn A. Jackson
Moira Jacobs, Albert E. Luedeke, Martin Macken, Ilustre Nepomuceno,
Patricia J. Propolanis, Terry Rucker, Nuria I. Rusch-Weber, Janele
Seyer, Peter B. Smith, Michele L. Tigue, Jennifer Wasson, Brian
Westover, and Orchid White.
(6) The beneficial owners are: Tracy Padgni, Leslie Bell, Mike
Harrington, and Mitch Harrington.
(7) The beneficial owners are: Kathy Lane, Eunice Paavernod, and
Margaret Jane Systens.
-43-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Number of Shares Percent
Owned Prior Number of Shares Owned After Owned After
Name of Selling Stockholder to this Offering Being Offered this Offering Offering
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James Wesley Jack 2,250 2,500 0 *
Estate of James H. Jones 25,500 25,500 0 *
Peggy Bort Jones Trust (8) 25,500 25,500 0 *
Jeffrey M and Minna Josef MD 12,750 12,750 0 *
Thomas E. Kalange 25,500 25,500 0 *
Carolyn Kawananakoa 12,750 12,750 0 *
Kevin R. Keating 27,000 27,000 0 *
Richard L. Kerbs 6,750 6,750 0 *
James B. Kreamer Revoc Trust (9) 30,600 30,600 0 *
L&D Construction Co., Inc. Money
Purchase Pension Plan (10) 12,750 12,750 0 *
Francis Landau Trust (11) 12,750 12,750 0 *
Charles Reid Lau 12,750 12,750 0 *
Lee Family Trust (12) 12,750 12,750 0 *
Lesher Rev. Living Trust (13) 25,500 25,500 0 *
Paul and Brenda Levin 52,750 12,750 40,000 1.2%
Paul Levine 12,750 12,750 0 *
Harvey Manes 25,500 25,500 0 *
David and Martha McWilliams Family Trust 8,250 8,250 0 *
David Grey Merryman 3,112 3,112 0 *
Wayne D. Mitchell 12,750 12,750 0 *
Dale Moquist 12,750 12,750 0 *
Frances L. Daniels and Beverly
D. Morgan 25,500 25,500 0 *
Noble Financial Inv., Inc. 44,200 44,200 0 *
Noble International Investments, Inc. 33,150 33,150 0 *
Northeast Securities 1,125 1,125 0 *
Thomas W. Olds 450 450 0 *
Thomas W. Olds and Mary G. Olds 7,650 7,650 0 *
Gordon Otter 1,500 1,500 0 *
Wayne A. Ottoson and Diane M. Ottoson 12,750 12,750 0 *
</TABLE>
------
(8) The beneficial owners are: Peggie Bort Jones, Clift Jones, Lee Jones,
and Carson Jones.
(9) The beneficial owner is James B. Kreamer.
(10) The beneficial owners are: Ricardo Amezcua, Robert Beatty, Peitro
Brezzo, Charles Buxton, Sue Byron, Jennifer Cheng, Charles Davidson,
Steve Davis, Michael Delua, Don Edwards, Jeff Ford, Jose Garcia,
Robert Graham, Juan Hernandez, Pam Husted, Jim Kempton, Harold Kniss,
Richard Lander, Michael Lodoen, Stpehn Lodoen, Cheryl Lytle, Ted
Lytle, Joseph Manzi, Lisa Manzi, Thuy Nguyen, Michael Pearson, Stan
Rufener, Karen Sabin, Leonardo Santiago, WM Shoffstall, Virgil
Tarpley, Karen Valerio, Ronnie Vanderbyl, Chat Vong, Al Weigal,
Kevin Weigal, Byron Weslund, Anakarina White, and Steve Wilson.
(11) The beneficial owners are William B. Landau And Betty L. Schram.
(12) The beneficial owners are Chang Y. Lee and Florence Y. Lee.
(13) The beneficial owners are: Agnes Lesher, Genevieve Bloom, Gianna
Fuller, Robert Postma, James Postma, and Arcadia Christian Reformed
Church.
-44-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Number of Shares Percent
Owned Prior Number of Shares Owned After Owned After
Name of Selling Stockholder to this Offering Being Offered this Offering Offering
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kathleen and Alexander D. Park 12,750 12,750 0 *
Victoria I Paterno and Michael
Eric Mahler 7,650 7,650 0 *
Ronald E. Poorvin and Joan L. Poorvin
Revocable Trust (14) 15,300 15,300 0 *
Joseph H. Popolow 2,625 2,625 0 *
Marvin D. Preuss 12,750 12,750 0 *
Nico Pronk 12,750 12,750 0 *
Michael R. Quinlan 102,000 102,000 0 *
Dean Reinmuth 25,500 25,500 0 *
Robert C. and George Ann Reinholt 12,750 12,750 0 *
Louise H. Roehrs and Sara L. Robinson 12,750 12,750 0 *
David L. and Rosemarie D. Rosier 12,750 12,750 0 *
David L. Rosier 263,850 263,850 0 *
Edward J. Rosso Trust (15) 51,000 51,000 0 *
Dick and Jean Roughton 12,750 12,750 0 *
Hermine Wiener and Joan Rozansky (16) 54,750 12,750 42,000 1.3%
Scott W. Ryan 10,200 10,200 0 *
S.W. Ryan & Company 600 600 0 *
James M and Lauri A Schreiner 12,750 12,750 0 *
Julie Q. Schubert 12,750 12,750 0 *
Matthew B. Sellers 25,500 25,500 0 *
Cheryl W. Sillings 1,050 1,050 0 *
Robert Simmons, IRA 25,500 25,500 0 *
Allen and Anita Skole 12,750 12,750 0 *
Andrew D. Smith 562 562 0 *
Andrew D. Smith Profit Sharing Plan 12,750 12,750 0 *
F. Kirby Smith, Jr. and Carole S. Smith 13,500 13,500 0 *
Lew Sonn 25,500 25,500 0 *
John Spadavecchia 12,750 12,750 0 *
David S. Stare 12,750 12,750 0 *
Antoinette Sudderth 51,000 51,000 0 *
</TABLE>
------
(14) The beneficial owners are Ronald E. and Joan L. Poorvin.
(15) The beneficial owner is Edward J. Rosso.
(16) Includes shares owned individually in reporting beneficial ownership.
-45-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Number of Shares Percent
Owned Prior Number of Shares Owned After Owned After
Name of Selling Stockholder to this Offering Being Offered this Offering Offering
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estelle G. Taylor 12,750 12,750 0 *
Chalres E. and Karen N. Teeter 15,000 15,000 0 *
Rennie and Kathleen H. Tejeda 12,750 12,750 0 *
Kenneth L and Rebecca W. Thorne 25,500 25,500 0 *
Roger E. and Judy G. Tidwell 12,750 12,750 0 *
373823 Ontario Ltd. 6,375 6,375 0 *
Robert C. Treece and Pam M. Treece 12,750 12,750 0 *
H. Bruce Trent Jr. 8,000 8,000 0 *
Robert Wandrei IRA 12,750 12,750 0 *
Dan Watters 51,000 51,000 0 *
Dwaine A. and Patricia L. White 12,750 12,750 0 *
Mary Wolf 6,375 6,375 0 *
--------- --------- -------
TOTAL 3,758,500 3,591,500 167,000
========= ========= =======
</TABLE>
-46-
<PAGE>
PLAN OF DISTRIBUTION
The following discussion describes the material terms of the plan of
distribution. The shares of common stock may be offered and sold from time to
time by the selling stockholders at various times in transactions:
- in the over-the-counter market;
- to purchasers directly;
- in ordinary brokerage transactions in which the broker solicits
purchasers;
- through purchases by a broker or dealer as principal and resale
by such broker or dealer for its own account pursuant to this
prospectus;
- block trades in which a broker-dealer so engaged will attempt
to sell the shares as agent but may take a position and resell
a portion of the block as principal to facilitate the
transaction;
- in connection with short sales; or
- in any combination of one or more of these methods.
Selling stockholders may sell their shares of common stock:
- at market prices prevailing at the time of sale;
- at prices related to such prevailing market prices;
- at negotiated prices;
- at fixed prices; or
- at a combination of such prices.
Selling stockholders may use dealers, agents or underwriters to
sell their shares. If this happens, the dealers, agents or underwriters may
receive compensation in the form of discounts or commissions from the selling
stockholder or from the purchaser of shares or from both, which compensation
to a particular broker might be in excess of customary compensation.
Selling stockholder and any dealers, agents or underwriters that
participate with the selling stockholders in the distribution of the shares
may be deemed to be "underwriters", as this term is defined in the Securities
Act. Any commissions paid or any discounts or concessions allowed to any
such persons, and any profits received on the resale of such shares offered
by this prospectus, may be deemed to be underwriting commissions or discounts
under the Securities Act.
We may be required to file a supplemental prospectus in connection with
any activities involving a seller which may be deemed to be an
"underwriting." In that case, a supplement to this prospectus would contain:
- the name or names of the underwriters;
- whether the underwriters are acting as principals or agents;
- the compensation to be received by an underwriter; and
- the compensation to be received by any other broker-dealer, in
the event the compensation of such other broker-dealers is in
excess of usual and customary commissions.
-47-
<PAGE>
Underwriters may be entitled under agreements with us to
indemnification by us against certain civil liabilities, including
liabilities under the Securities Act, or to contribution from us for payments
the underwriters may be required to make in connection with certain civil
liabilities. These underwriters may engage in transactions with, or perform
services for, us for customary compensation.
We will pay for substantially all of the expenses incident to the offer
and sale of the shares of common stock offered by the selling stockholders
using this prospectus. The selling stockholders will pay applicable stock
transfer taxes, transfer fees and brokerage commissions or underwriting or
other discounts.
To comply with the securities laws of certain states, the shares of
common stock offered by this prospectus may need to be offered or sold in
such jurisdictions only through registered or licensed brokers or dealers.
The offering of the shares of common stock pursuant to this prospectus
will terminate on the earlier of the time when the shares of common stock:
- have been sold by the selling stockholders pursuant to this
prospectus;
- the time when all of the shares of common stock are eligible
to be sold pursuant to Rule 144(k) under the Securities Act; or
- this prospectus is no longer effective.
-48-
<PAGE>
OUR SECURITIES
General
Our authorized capital consists of 20,000,000 shares of common stock,
par value $.001 per share, and 5,000,000 shares of preferred stock, par value
$.001 per share. As of June 27, 2000, 3,218,451 shares of common
stock were issued and outstanding and there were 550,000 shares of our
series A preferred stock issued and outstanding.
Common Stock
The holders of the common stock are entitled to cast one vote for each
share held of record on all matters presented to stockholders. The holders
of common stock do not have cumulative voting rights, which means that the
holders of more than 50% of the outstanding shares voting for the election of
our directors can elect all of the directors, and in such an event, the
holders of the remaining shares will be unable to elect any of our directors.
The holders of the outstanding shares of common stock are entitled to
receive dividends out of assets legally available at such times and in such
amounts as the Board of Directors may from time to time determine, subject to
the rights of the holders of our preferred stock. Upon our liquidation,
dissolution, or winding up, the assets legally available for distribution
to the stockholders will be distributed equally among the holders of the
shares, subject to the rights of the holders of our preferred stock.
Preferred Stock
Our Certificate of Incorporation allows our Board of Directors to issue
shares of preferred stock in one or more series. The Board can fix for each
series, voting powers, designations, preferences and relative, participating,
or other special rights to the extent permissible under the Delaware General
Corporation Law. The Board has designated 1,000,000 shares as series A
preferred stock. The Board, without a vote of the series A preferred stock
holders, can increase the number of authorized series A preferred stock above
the number of shares of series A preferred stock actually outstanding at any
time.
The preferred stock does not carry voting rights.
Our series A preferred stock is convertible into shares of common stock.
The holder can convert its series A preferred stock into shares of common
stock beginning 30 days after the date of issuance. For a two year period
from the date of issuance, each holder of series A preferred stock can
convert one share of series A preferred stock into 3.077 shares of common
stock. After each of two and four years from the date of issuance, the
conversion rate of one share of series A preferred stock into shares of common
stock adjusts. At the adjusted conversion rate, the number of shares of
common stock received equals $10 divided by 75% of the average bid price of
our common stock during the 90 days preceding each of the two and four year
anniversary dates. However, the maximum conversion rate is one share of
series A preferred stock into five shares of common stock.
-49-
<PAGE>
The table below illustrates how the conversion feature would work for
one share of series A preferred stock into shares of common stock after each
of the two and four year anniversary dates of issuance.
90 Day 75% of Calculated Shares of
Average Average Conversion Rate Common Stock
Bid Bid ($10 divided by 75% Issued At
Price Price of Average Bid Price) Conversion
--------------------------------------------------------------
$ 2.00 $1.50 6.67 5.00
$ 2.67 $2.00 5.00 5.00
$ 3.00 $2.25 4.44 4.44
$10.00 $7.50 1.33 1.33
You should note that if the 90 day average bid price of our common stock is
$2.67 or lower, the maximum conversion rate applies. If the 90 day average
bid price of our common stock is $2, instead of conversion at the rate
determined $10 divided by 75% of $2, which would compute to 6.67 shares of
common stock for one share of series A preferred stock, a maximum of five
shares of common stock would be issued.
While we have series A preferred stock outstanding, we will not
materially and adversely alter the rights of the series A preferred stock
without the consent of a majority of the series A preferred stock holders.
Under certain circumstances, we can redeem the shares of series A preferred
stock for $15.00 per share, plus all accrued and unpaid dividends.
If we liquidate, wind-up or dissolve, we will pay to the holder, for
each share of series A preferred stock, the sum of $10 plus unpaid dividends
out of our available assets. Once paid, the holders of series A preferred
stock will have no right or claim to any of the remaining assets of our
company. If our assets are not enough to pay them, then the holders of
series A preferred stock shall share ratably in such distribution of assets.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation
Law. This statute generally prohibits a publicly-held Delaware corporation
from engaging, under certain circumstances, in a business combination with
an interested stockholder for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless:
- prior to the date at which the person became an interested
stockholder, the board of directors approved either the business
combination or the transaction in which the person becomes an
interested stockholder;
- the stockholder acquires more than 85% of the outstanding
voting stock of the corporation, excluding shares held by
directors who are officers or held in certain employee stock
plans, upon consummation of the transaction in which the person
becomes an interested stockholder; or
- the business combination is approved by the board of
directors and by at least 66 2/3% of the outstanding voting
stock of the corporation, excluding shares held by the
interested stockholder, at a meeting of stockholders and not
by written consent held on or subsequent to the date such
person became an interested stockholder.
An interested stockholder is a person who, together with affiliates
and associates, owns, or at any time within the prior three years did own,
15% or more of the corporation's voting stock. Section 203 defines a
business combination to include mergers, consolidations, stock sales,
asset-based transactions and other transactions resulting in a financial
benefit to the interested stockholder.
-50-
<PAGE>
Transfer Agent
Continental Stock & Transfer Company, New York, New York, is our
transfer agent and registrar for our common stock.
Market Information
Beginning July 10, 1998, our common stock was quoted on the OTC
Bulletin Board under the symbol "GRFX". The following table sets forth for
the periods indicated, the high and low closing bid prices for a share of the
common stock as reported by the OTC Bulletin Board.
Fiscal Year 1999 Fiscal Year 2000
------------------ ------------------
Quarter Ended High Low High Low
------------- ------- ------- ------ -------
September 30 $ 4.00 $ 2.00 $ 2.562 $ 1.937
December 31 $ 3.620 $ 2.125 $ 3.25 $ 2.00
March 31 $ 3.250 $ 1.75 $ 4.375 $ 2.25
June 30 $ 3.562 $ 2.50
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
Before July 10, 1998, our common stock was listed in the "pink sheets"
of the National Quotation Bureau, Inc. and on the OTC Bulletin Board under
the symbol "SEUS". Before the time periods indicated above, an active trading
market for our common stock did not exist.
Holders
The approximate number of holders of record of our common
stock as of June 27, 2000 was 389. As of that date, there were
approximately 450 beneficial stockholders, including stockholders holding
stock under nominee security position listings.
Dividends
We have never declared any cash dividends on the common stock at any
time. Future cash dividends on the common stock, if any, will be at the
discretion of our Board of Directors and will depend on our future operations
and earnings, capital requirements and surplus, general financial condition,
contractual restrictions, and other factors that the Board of Directors may
consider important.
Our series A preferred stock bears a fixed dividend at an annual rate of
11.5%. Dividends are paid in cash each quarter in arrears. The first dividend
payment occurred on January 1, 2000. Unless we have fully paid all dividends
on the outstanding shares of series A preferred stock, we cannot declare or
pay cash dividends, or distribute or set aside assets, for any of our other
securities.
-51-
<PAGE>
LEGAL MATTERS
Our counsel, Law Offices of Dan Brecher, New York, New York, is giving
us an opinion on the validity of the shares offered by this prospectus. Dan
Brecher, the sole principal of the law firm, through his individual retirement
account and retirement plan purchased 20,000 shares of our common stock
at $1.25 per share in August 1998, 10,000 shares of our common stock at $2.00
per share in May 1999, 5,000 units of our securities at $10.00 per share in
December 1999, and 5,000 units of our securities in March 2000 at $10.00
per share . He purchased all of these securities in our private placements at
the prevailing offering prices. Each unit consists of one share of series A
preferred stock and warrants to purchase two shares of common stock. He also
owns five year warrants that expire on August 20, 2003 to purchase 50,000
shares of our common stock at $4.00 per share that he acquired in August 1998
as an attorney with the law firm of Fischbein Badillo Wagner Harding, which
firm had acquired a total of 75,000 warrants for legal services valued at
about $13,043. On March 23, 2000, he bought 2,000 shares at $2.75 per share
in the open market at the offered price. On March 24, 2000, he bought 1,000
shares at $2.84 per share in the open market at the offered price. On May 22,
2000, he bought 2,000 shares at $2.3125 per share in the open market at the
offered price. He is a selling stockholder of 51,000 shares of common stock
under this prospectus.
EXPERTS
Our financial statements for the year ended June 30, 1999,
the two months ended June 30, 1998, and the year ended April 30, 1998,
and the financial statements of ultraHue, Inc. as of and for the period
ended September 30, 1999 and the year ended December 31, 1998,
included in this prospectus have been audited by Wiss & Company, LLP,
independent auditors, as stated in their reports appearing in this prospectus,
and are included in reliance upon such reports given on the authority of said
firm as experts in accounting and auditing.
The financial statements of Tartan Technical, Inc. as of and for the
years ended December 31, 1998 and 1997, included in this prospectus have been
audited by Berlanger & Company, P.C., independent auditors, as stated in
their report appearing in this prospectus, and are included in reliance upon
such report given on the authority of said firm as experts in accounting and
auditing.
The financial statements of BBG Technologies, Inc. as of and for the
periods ended March 12, 1998 and December 31, 1997, included in this
prospectus have been audited by Rucci, Bardaro + Barrett, P.C., independent
auditors, as stated in their reports appearing in this prospectus, and are
included in reliance upon such reports given on the authority of said firm as
experts in accounting and auditing.
-52-
<PAGE>
INDEMNIFICATION
We will indemnify our directors, officers, and controlling persons
against liability under the Securities Act to the extent permitted by the
General Corporation Law of Delaware. We will indemnify them against all
expenses and liabilities that is reasonably incurred in connection with
this prospectus to the extent allowed under Delaware law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities, other than
the payment by us of expenses incurred or paid by any of our directors,
officers, or controlling persons in the successful defense of any action,
suit or proceeding, is asserted by such directors, officers or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read
and copy any documents we file at the Securities and Exchange Commission's
public reference rooms in Washington, D.C. at 450 Fifth Street, N.W.,
Washington, D.C. 20549, in New York, New York at 7 World Trade Center, Suite
1300, New York, New York 10048, and in Chicago, Illinois at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available on the Securities and Exchange
Commission's web site at http://www.sec.gov.
-53-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Financial Report - June 30, 1999 F-1
Financial Statements - Nine Months Ended March 31, 2000 (Unaudited) F2-1
Financial Statements of Tartan Technical, Inc. (Businesses Acquired) F3-1
Financial Statements of BBG Technologies, Inc. (Business Acquired) F4-1
Financial Statements of ultraHue, Inc. (Business Acquired) F5-1
Pro Forma Financial Information F6-1
-54-
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
Financial Report - June 30, 1999
Independent Auditors' Report F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Shareholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cadapult Graphic Systems, Inc.
We have audited the accompanying balance sheets of Cadapult Graphic Systems,
Inc. as of June 30, 1999 and June 30, 1998 and the related statements of
operations, changes in shareholders' equity and cash flows for the year ended
June 30, 1999, the two months ended June 30, 1998 and the year ended April
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadapult Graphic Systems,
Inc. at June 30, 1999 and 1998, and the results of its operations and its
cash flows for the periods indicated above in conformity with generally
accepted accounting principles.
/s/ Wiss & Company
WISS & COMPANY, LLP
Livingston, New Jersey
August 18, 1999
F-2
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
June 30,
------------------------------
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 33,157 $ 22,821
Accounts receivable, less allowance for doubtful
accounts of $35,000 in 1999 and $22,500 in 1998 1,950,399 1,653,624
Attorney escrow - 320,000
Inventories 1,276,621 1,016,381
Prepaid and refundable income taxes - 46,295
Prepaid expenses and other current assets 77,471 38,591
------------ ------------
Total Current Assets 3,337,648 3,097,712
------------ ------------
PROPERTY AND EQUIPMENT, NET 627,029 232,023
------------ ------------
OTHER ASSETS:
Goodwill and other intangible assets, net 835,889 410,195
Deferred acquisition costs 34,542 -
Security deposits 33,523 31,343
------------ ------------
903,954 441,538
------------ ------------
$ 4,868,631 $ 3,771,273
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 1,677,024 $ 695,000
Current maturities of long-term debt 87,547 89,219
Accounts payable 1,710,861 1,940,770
Accrued expenses and other current liabilities 131,767 131,510
Due to officer - 20,000
Deferred revenues 294,089 144,600
------------ ------------
Total Current Liabilities 3,901,288 3,021,099
------------ ------------
OTHER LIABILITIES:
Long-term debt, less current maturities 69,445 156,992
Notes payable to affiliates 20,832 20,832
------------ ------------
90,277 177,824
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
common stock, .001 par value,
Authorized 20,000,000 shares; issued 3,058,308
shares in 1999 and 2,583,518 in 1998 3,058 2,583
Additional paid-in capital 1,171,782 423,167
Retained earnings (deficit) (297,774) 146,600
------------ ------------
Total Shareholders' Equity 877,066 572,350
------------ ------------
$ 4,868,631 $ 3,771,273
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Two Months Year Ended
Year Ended Ended June 30, April 30,
June 30, 1999 1998 1998
------------- -------------- ----------
<S> <C> <C> <C>
NET SALES $10,227,628 $1,623,754 $7,103,906
----------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 7,442,239 1,282,495 5,174,402
Selling, general and administrative expenses 3,069,682 472,766 2,138,915
----------- ---------- ----------
10,511,921 1,755,261 7,313,317
----------- ---------- ----------
LOSS FROM OPERATIONS (284,293) (131,507) (209,411)
----------- ---------- ----------
OTHER EXPENSE (INCOME):
Interest expense, net 160,081 21,894 90,829
Gain on sale of equipment - - (18,500)
----------- ---------- ----------
160,081 21,894 72,329
----------- ---------- ----------
LOSS BEFORE INCOME TAXES (CREDITS) (444,374) (153,401) (281,740)
----------- ---------- ----------
INCOME TAXES (CREDITS):
Current - - (39,698)
Deferred - - (22,800)
----------- ---------- ----------
- - (62,498)
----------- ---------- ----------
NET LOSS $ (444,374) $ (153,401) $ (219,242)
=========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,844,819 2,019,677 1,622,682
=========== ========== ==========
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (.16) $ (.08) $ (.14)
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
Additional Retained Total
Common Stock Paid-in Earnings Shareholders'
----------------------
Shares Amount Capital (Deficit) Equity
---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES, APRIL 30, 1997 1,548,450 $ 300 $ - $ 519,243 $ 519,543
YEAR ENDED APRIL 30, 1998:
Sale of common stock to
employees 101,550 102 44,898 - 45,000
Change in par value - 1,248 (1,248) - -
Net loss - - - (219,242) (219,242)
---------- -------- ----------- --------- ---------
BALANCES, APRIL 30, 1998 1,650,000 1,650 43,650 300,001 345,301
TWO MONTHS ENDED JUNE 30, 1998:
Sale of common stock through
private placement 256,000 256 319,744 - 320,000
Issuance of common stock upon
conversion of note payable 40,000 40 49,960 - 50,000
Issuance of common stock in
connection with merger 637,518 637 9,813 - 10,450
Net loss - - - (153,401) (153,401)
---------- -------- ----------- --------- ---------
BALANCES, JUNE 30, 1998 2,583,518 2,583 423,167 146,600 572,350
YEAR ENDED JUNE 30, 1999:
Sale of common stock through
private placement 228,000 228 249,772 - 250,000
Issuance of common stock for
acquisition - Tartan 92,850 93 185,607 - 185,700
Issuance of warrants for legal
services - - 20,510 - 20,510
Sale of common stock through
private placement 67,750 68 120,432 - 120,500
Issuance of common stock for
acquisition - WEB 86,190 86 172,294 - 172,380
Net loss - - - (444,374) (444,374)
---------- -------- ----------- --------- ---------
BALANCES, JUNE 30, 1999 3,058,308 $ 3,058 $ 1,171,782 $(297,774) $ 877,066
========== ======== =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended Two Months Year Ended
June 30, Ended June 30, April 30,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (444,374) $ (153,401) $ (219,242)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 180,494 19,063 73,525
Gain on sale of equipment - - (18,500)
Deferred income taxes - (10,000) (22,800)
common stock and warrants for services 20,510 10,450 -
Provision for bad debts 6,000 - -
Changes in operating assets and liabilities:
Accounts receivable 89,130 (538,646) 394,474
Inventories 170,259 (236,454) (7,528)
Prepaid and refundable income taxes 46,295 - (46,295)
Prepaid expenses and other current assets 35,710 11,855 (91,318)
Security deposits (2,180) - (4,852)
Accounts payable (473,241) 914,997 9,523
Accrued expenses and other current liabilities 255 (41,971) 137,596
Deferred revenues 149,489 (11,748) 26,322
----------- ----------- -----------
Net cash flows from operating activities (221,653) (35,855) 230,905
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (303,271) (4,069) (105,703)
Proceeds from sale of equipment - - 18,500
Purchase of intangible assets (102,350) - -
Cost of net assets of acquired business (242,200) - (546,431)
Deferred acquisition costs (34,542) - -
----------- ----------- -----------
Net cash flows from investing activities (682,363) (4,069) (633,634)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to bank, net 333,071 (305,000) 450,000
Proceeds of long-term debt - - 250,000
Payments on long-term debt (89,219) (14,823) (10,147)
Attorney escrow account 320,000 (320,000) -
Advances from officer (20,000) - 20,000
Sale of common stock 370,500 320,000 45,000
----------- ----------- -----------
Net cash flows from financing activities 914,352 (319,823) 754,853
----------- ----------- -----------
NET CHANGE IN CASH 10,336 (359,747) (352,124)
CASH, BEGINNING OF PERIOD 22,821 382,568 30,444
----------- ----------- -----------
CASH, END OF PERIOD $ 33,157 $ 22,821 $ 382,568
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
Year Ended Two Months Year Ended
June 30, Ended June 30, April 30,
1999 1998 1998
----------- ------------ -----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 155,846 $ 21,894 $ 94,377
=========== =========== ===========
Income taxes paid $ - $ - $ 5,032
=========== =========== ===========
Issuance of common stock upon conversion of
Note payable to related party $ - $ 50,000 $ -
=========== =========== ===========
Non cash investing activity -
Acquisition of business:
Fair value of assets acquired $ 1,459,457 $ - $ 865,115
Fair value of liabilities assumed 859,177 - 318,684
Fair value of common stock issued 358,080 - -
----------- ----------- -----------
Net cash payment $ 242,200 $ - $ 546,431
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Nature of the Business - Cadapult Graphic Systems, Inc. (the "Company")
provides computer graphic systems, peripherals, supplies, training and
service to visual communicators and graphics professionals. The Company is a
systems integrator and a value added dealer/reseller of computer graphics
equipment and supplies to customers. The Company has its corporate
headquarters in New Jersey and has offices in Massachusetts, Albany and New
York City, New York and Pennsylvania.
Estimates and Uncertainties (The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and 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. Actual results, as determined at a
later date, could differ from those estimates.
Revenue Recognition - Revenue is recognized at the point of shipment
for goods sold, and ratably through the duration of service contracts.
Deferred revenue consists principally of billings on service contracts prior
to rendering related services.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consists primarily of
cash and unsecured trade receivables. The Company maintains its cash
balances in financial institutions which are insured by the Federal Deposit
Insurance Corporation up to $100,000 each. At June 30, 1999, the Company has
uninsured balances totalling approximately $150,000.
Concentrations of credit risk with respect to all trade receivables are
considered to be limited due to the quantity of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of
its customers' financial condition and does not require collateral.
Management feels that credit risk beyond the established allowance at June
30, 1999 is limited.
Inventories - Inventories are stated at the lower of cost (specific
identification method) or market.
F-8
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Property and Equipment - Property and equipment are stated at cost.
The Company provides for depreciation using the straight-line and accelerated
methods by charges to income at rates based upon the recovery periods of 5 to
7 years for furniture and equipment and over the useful lives or the lease
term, if shorter, for leasehold improvements.
Goodwill and Other Intangible Assets - Goodwill consists of the excess
of cost over fair market value of the net assets of the acquired business.
The intangible assets are being amortized on the straight-line method over
the following years:
Life (Years)
------------
Goodwill $781,670 15
Covenants-not-to-compete 51,000 3-5
Financing costs 74,880 1-3
--------
907,550
Accumulated amortization 71,661
--------
$835,889
========
During the year ended June 30, 1999, the Company capitalized $54,048 of
financing costs in connection with its current bank agreement and $49,302 of
costs associated with the purchase of businesses referred to in Note 2.
The carrying value of intangible assets is periodically reviewed by the
Company based on expected future undiscounted operating cash flows. Based
upon its most recent analysis, the Company believes that no material
impairment exists at June 30, 1999.
Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards.
Employee Benefit Plan - The Company has a 401(k) savings/retirement
plan for all of its eligible employees. The plan allows for employee
contributions to be matched by the Company on a pro-rata basis. Contributions
made by the Company for the year ended June 30, 1999, the two months ended
June 30, 1998 and the year ended April 30, 1998, were $14,502, $1,401 and
$10,461, respectively.
Deferred Acquisition Costs - Acquisition costs have been deferred,
pending the outcome of the negotiations. If the acquisition is completed,
these costs will be capitalized; otherwise they will be charged to expense.
Net Loss Per Share - Basic and diluted loss per share are based upon
the weighted average number of common shares outstanding during the period.
The computation of diluted earnings per share does not assume the conversion,
exercise or contingent issuance of securities that would have a dilutive
effect on loss per share.
F-9
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Stock Options - The Company accounts for stock option grants using the
intrinsic value based method prescribed by APB Opinion No. 25. Since the
exercise price equaled or exceeded the estimated fair value of the underlying
shares at the date of grant, no compensation was recognized in 1999 and 1998
for stock option grants.
Had compensation cost been based upon fair value of the option on the
date of grants, as prescribed by SFAS No. 123, the Company's proforma net
loss and net loss per share would have been $1,018,000 and $.36 in 1999 and
$288,000 and $.14 for the two months ended June 30, 1998 using the Black-
Scholes option pricing model. The proforma net loss and net loss per share
for the year ended April 30, 1998 would not have been materially different.
The fair value of options granted in 1999 and 1998 were estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions, respectively: risk-free interest
rates of 6.0%, dividend yield of 0.0%, volatility factors of the expected
market price of the Company's common stock of 108% and a weighted-average
expected life of the options of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of normal
publicly traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employees stock options.
Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities and will be adopted in the year ended June 30, 2000. The Company
does not engage in, nor does it expect to engage in derivative or hedging
activities, and therefore, the Company anticipates that the adoption of this
statement will have no impact on its financial statements.
Change in Fiscal Year - On June 24, 1998, the Company elected to change
from an April 30 to June 30 fiscal year. Therefore, the accompanying
financial statements include transitional financial statements for the two
months ended June 30, 1998. It is not practicable and cannot be cost
justified to furnish financial statements for the corresponding period of the
prior year; accordingly, unaudited financial data for the two months ended
June 30, 1997 follow which is the corresponding period. There were no
seasonal factors that affect the comparability of information or trends
reflected.
F-10
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Net sales $ 821,623
=========
Gross profit $ 207,051
=========
Income tax credit $ (47,800)
=========
Net loss $(128,992)
=========
Net loss per share $ (.08)
=======
NOTE 2 - PURCHASE OF BUSINESSES:
On March 13, 1998, the Company purchased for $546,431 in cash certain
assets and assumed certain liabilities of BBG Technologies, Inc. ("BBG"), a
Massachusetts corporation. The assets purchased included accounts receivable
and a covenant not-to-compete ($50,000). The excess of the purchase price
over the fair value of the net assets acquired ($350,000) was allocated to
goodwill.
On January 7, 1999, the Company issued 185,700 shares of its
unregistered and restricted common stock in exchange for certain assets and
the assumption of certain liabilities of Tartan Technical, Inc. ("Tartan") a
Massachusetts corporation. The assets purchased included accounts
receivable, inventories, property and equipment and the liabilities included
notes payable and accounts payable. The excess of the purchase price and
related costs over the fair value of the net liabilities assumed ($321,789)
was allocated to goodwill. Currently, 92,850 of the shares are held in
escrow pursuant to the resolution of a contingency based on Tartan achieving
certain gross profit levels over the next two years. When the contingency is
resolved, some or all of the 92,850 shares will either be recorded by the
Company as an additional cost of Tartan, or cancelled.
Effective June 18, 1999, the Company acquired for $242,200 in cash and
the issuance of 172,380 shares of its unregistered and restricted common
stock, certain assets and assumed certain liabilities of WEB Associates, Inc.
("WEB") a Pennsylvania corporation. The assets purchased included accounts
receivable, inventories, property and equipment and a covenant not-to-compete
($1,000) and the liabilities included accounts payable. The excess of the
purchase price and related costs over the fair value of net assets ($89,996)
was allocated to goodwill. Currently, 86,190 of the shares are held in
escrow pursuant to the resolution of a contingency based on WEB achieving
certain gross profit levels over the next two years. When the contingency is
resolved, some or all of the 86,190 shares will either be recorded by the
Company as an additional cost of WEB, or cancelled.
The following unaudited pro forma consolidated results of operations
for the years ended June 30, 1999 and April 30, 1998, assumes the BBG, Tartan
and WEB acquisitions had occurred on May 1, 1997 giving effect to purchase
accounting adjustments and financing. The pro forma results have been
prepared for informational purposes only and do not reflect any benefit from
economies, which might be achieved from combined operations. The pro forma
results do not represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
F-11
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
Two Months
Year Ended Ended Year Ended
June 30, June 30, April 30,
1999 1998 1998
----------- ---------- -----------
<S> <C> <C> <C>
Net sales $14,250,322 $2,521,860 $15,980,206
=========== ========== ===========
Net loss $ (556,819) $ (195,215) $ (74,126)
=========== ========== ===========
Basic and diluted loss
per share (.19) (.08) (.03)
=========== ========== ===========
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Office equipment $ 997,359 $ 598,931
Furniture and fixtures 165,213 129,109
Automobiles 65,379 65,379
Leasehold improvements 98,568 18,624
----------- -----------
1,326,519 812,043
Less: Accumulated depreciation and
amortization 699,490 580,020
----------- -----------
$ 627,029 $ 232,023
=========== ===========
</TABLE>
NOTE 4 - NOTE PAYABLE TO BANK:
The Company has an agreement with a bank under which it can borrow up
to $6,000,000 under a revolving line-of-credit, subject to availability of
collateral. Borrowings bear interest at 2% over the bank's base rate, are
payable on demand and are collateralized by all assets of the Company.
Advances under the note payable to bank become immediately due
and payable if certain financial covenants, as defined in the loan
agreements, are not met.
F-12
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - LONG-TERM DEBT:
A summary of long-term debt follows:
<TABLE>
Interest June 30,
--------------------------
Description Rate 1999 1998
--------------------------------------- -------- ---------- -----------
<S> <C> <C> <C>
Loan payable in monthly installments of
$6,944 plus interest through April
2001, collateralized by all assets of 1% over
the Company prime $ 152,778 $ 236,111
Loan payable in monthly installments of
principal and interest of $543 through
February 2000, collateralized by an
automobile 8.49% 4,214 10,100
---------- -----------
156,992 246,211
Less: Current maturities 87,547 89,219
---------- -----------
$ 69,445 $ 156,992
========== ===========
</TABLE>
Long-term debt at June 30, 1999 matures as follows:
<TABLE>
Year Ending June 30,
--------------------
<S> <C>
2000 $ 87,547
--------
2001 69,445
$156,992
========
</TABLE>
NOTE 6 - INCOME TAXES:
The components of income taxes are summarized as follows:
<TABLE>
Year Ended Two Months Ended Year Ended
June 30, June 30, April 30,
1999 1998 1998
----------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ (45,390)
State and local - - 5,692
----------- ---------- -----------
- - (39,698)
----------- ---------- -----------
Deferred:
Federal - - (15,100)
State and local - - (7,700)
----------- ---------- -----------
- - (22,800)
----------- ---------- -----------
$ - $ - $ (62,498)
=========== ========== ===========
</TABLE>
F-13
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
The Company recognizes deferred tax assets, net of applicable reserves,
related to net operating loss carryforwards and certain temporary
differences. The Company is required to recognize a future tax benefit to
the extent that realization of such benefit is more likely than not.
Otherwise a valuation allowance is applied. At June 30, 1999, the Company
believes that the "more likely than not" criteria have not been met, and
accordingly, a valuation allowance has been recognized.
The Company has available net operating loss carryforwards of
approximately $480,000 which expire through 2019. The Company's utilization
of it net operating loss carryforwards may be limited pursuant to Internal
Revenue Code Section 382 if cumulative changes in ownership are in excess of
50% within a three-year period.
A reconciliation of income tax benefit provided at the federal
statutory rate (34%) to income tax benefit is as follows:
<TABLE>
Year Ended Two Months Ended Year Ended
June 30, June 30, April 30,
1999 1998 1998
----------- ---------- -----------
<S> <C> <C> <C>
Income tax benefit computed at
federal statuary rate $ (151,087) $ (52,156) $ (95,792)
Permanent and other items (17,913) 17,156 20,294
Change in valuation allowance 169,000 35,000 13,000
----------- ---------- -----------
$ - $ - $ (62,498)
=========== ========== ===========
</TABLE>
Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
June 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $193,000 $ 33,000
Accruals and reserves 24,000 15,000
-------- --------
217,000 48,000
Less: valuation allowance 217,000 48,000
-------- --------
Total deferred tax assets $ - $ -
======== ========
</TABLE>
F-14
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - SHAREHOLDERS' EQUITY:
a) Merger:
Pursuant to an Agreement and Plan of Reorganization dated June 5,
1998, the stockholders of the Company exchanged all their shares of stock
owned for 1,650,000 shares (72%) of $.001 par value common stock of Seafoods
Plus, Ltd. ("SPL"), an inactive public company with nominal assets. Under
the agreement, the Company became a wholly-owned subsidiary of SPL, and then
merged with SPL in 1998. The merger was recorded as a recapitalization of
the Company and an issuance of shares to SPL's shareholders on June 5, 1998.
The Company will continue operating as Cadapult Graphic Systems, Inc.
All references to the Company's common stock in the 1998 balance
sheet, the 1998 statements of operations and notes to the financial
statements retroactively reflect Cadapult's operations and the
recapitalization.
b) Stock Compensation Plan:
The Company has an incentive stock option (the "1998 Plan"),
pursuant to which 500,000 of the Company's authorized but unissued shares of
common stock have been reserved for issuance of stock options. The stock
options (which may be "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended) entitle the holder to
purchase shares of the Company's common stock for up to ten years from the
date of grant (five years for persons owning more than 10 percent of the
total combined voting power of the Company) at a price not less than the fair
market value (110% of fair market value for persons owning more than 10% of
the combined voting power of the Company) of the common stock on the date of
grant. In general, any employee, director, officer or exclusive agent of,
advisor or consultant to, the Company or a related entity is eligible to
participate in the Plan. The stock options are nontransferable, except upon
death. Pursuant to the Plan, certain key employees, members of the Board of
Directors and the President were granted five and ten year incentive stock
options to purchase an aggregate total of 317,893 shares, net of forfeitures,
at a weighted average exercise price of $1.93 per share. A total of 174,443
shares with a weighted average exercise price of $1.69 are exercisable at
June 30, 1999.
The Company granted its President five year stock options to
purchase up to 500,000 shares which vest upon the Company attaining certain
specified milestones and are exercisable at $1.375 per share and expire in
June 2003.
The Company granted two employee's five year stock options to
purchase up to 100,000 shares which vest upon the Company attaching certain
specified milestones and are exercisable at $2.00 per share and expire in
March 2004.
F-15
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
c) Private Placements:
In August 1998 the Company completed a private placement through
the sale of 524,000 shares of its common stock for net proceeds of
approximately $620,000, including conversion of a $50,000 note payable to a
related party.
In June 1999, the Company sold 67,750 shares of its common stock
for $2.00 per share for net proceeds of approximately $120,500.
d) Warrants:
In August 1998, and February 1999, the Company issued 105,000
warrants to purchase its common stock at between $4.00-$5.00 per share in
exchange for legal services. The warrants, which had a value of $20,510,
using the Black-Scholes pricing model, expire through February 15, 2004.
e) Amendments to Certificate of Incorporation:
In August 1999, the Company's Board of Directors amended the
certificate of incorporation reducing the number of authorized shares of
$.001 par value common stock to twenty million shares and authorized five
million shares of $.001 par value preferred stock.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Leases - The Company leases its premises under lease agreements which
expire through 2002 and an automobile and equipment under operating leases
that expire in 2002. Future minimum lease payments are as follows:
Year Ending June 30,
--------------------
2000 $152,175
2001 108,639
2002 73,370
--------
$334,184
========
Rent expense amounted to $198,199, $31,755 and $176,463 for the year
ended June 30, 1999, the two months ended June 30, 1998 and the year ended
April 30, 1998, respectively.
Employment Agreements - On May 1, 1998, the Company entered into a five
year employment agreement with its President for a base salary of $130,000
per annum subject to certain adjustments and three year employment agreements
with three employees providing for aggregate compensation of $255,000 per
annum. In 1999, the Company entered into two year employment agreements with
three employees providing for aggregate compensation of $142,000 per annum.
F-16
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Litigation - In August 1999, the Company's attorneys filed a civil
action in the Superior Court of New Jersey on behalf of the Company which
alleges that the supplier referred to in Note 9 improperly cancelled the
Company's participation in certain programs which provided the Company with
preferential pricing, business leads and various additional rebates and
incentives. In part, the action charges the supplier with alleged violation
of the New Jersey Antitrust Act, breach of contract and unfair competition.
NOTE 9 - MAJOR SUPPLIER:
Direct purchases from one supplier accounted for approximately 34% of
total purchases in 1999 and 50% in 1998. At June 30, 1999, this supplier
accounted for approximately 22% of the Company's accounts payable. If the
supplier fails to provide the required inventories, it may have a negative
impact on the Company. (See Note 8).
NOTE 10 - SUBSEQUENT EVENTS (Unaudited):
Private Offering - On August 19, 1999, the Company entered into a
letter of intent with a placement agent wherein the placement agent will, on a
best efforts basis, offer up to $5,000,000 of the Company's convertible
adjustable preferred stock to accredited investors. Each unit will be priced
at $10.00 and include one share of Series A Preferred Stock ("Series A") and
two warrants to purchase a total of two shares of common stock for $4.50.
Dividends on Series A stock will accrue at the rate of 11.50% per annum and
are payable quarterly. Each Series A share is convertible at the option of
the holder beginning 30 days after closing (no later than December 31, 1999)
at a rate of 3.077 shares of common stock for one share of Series A. The
conversion price shall adjust to 75% of the average bid price for the 90 days
preceding the 24th month anniversary of the closing of the offering and again
on the 48th month anniversary. Under no circumstances can a new conversion
price be below $2.00 per share.
The discount, if any, resulting from allocation of the proceeds to the
beneficial conversion feature is analogous to a dividend and will be
recognized as a return to preferred shareholders over the minimum period from
the date of issuance through the date of earliest conversion using the
effective yield method.
The Series A stock will be callable by the Company at $15.00 per share
at any time Holders have the right to convert upon receipt of the call
notice.
The Company has agreed to register all of the shares of common stock
necessary for the conversion of the Series A stock and all shares of common
stock underlying warrants within 90 days of the closing of the offering.
F-17
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
The placement agent's fee will include a commission and a nonaccountable
expense allowance equal to 13% of the proceeds of the offering, five year
warrants to purchase up to 215,000 shares of the Company's common stock at
$1.65 per share and up to 500,000 shares of the Company's common stock at
$3.75 per share. The value of the warrants will be recognized as a cost of
issuance of the Series A shares.
Purchase of Business - On September 7, 1999 Media Sciences, Inc., a
newly formed wholly-owned subsidiary of the Company, entered into an Asset
Purchase Agreement ("Agreement") with ultraHue, Inc., a New Mexico
corporation. The Company has agreed to purchase certain assets and assume
certain liabilities of ultraHue for $3,500,000. The obligation of the
company to purchase the assets is contingent upon the Company obtaining
financing not less than $3,000,000 to fund the purchase. In the event the
Company does not obtain such financing by December 7, 1999, either party
shall have the option to terminate the Agreement.
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (Unaudited):
The Company had a loss before income taxes in the fourth quarter of the
year ended June 30, 1999 totaling $314,978 as compared to an average loss of
approximately $43,132 for the previous three quarters. Contributing to the
additional loss were approximately $130,000 for development costs related to
SamplePrint.com and $40,000 for year end adjustments to inventory and the
allowance for doubtful accounts. Additional loss was due to a shortfall of
approximately $250,000 in sales resulting in $70,000 gross profit reduction.
Additional loss of $30,000 was due to additional general and administrative
costs relating to the two business acquired earlier in the year.
F-18
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
Financial Statements - Nine Months Ended March 31, 2000 (Unaudited)
Consolidated Balance Sheets as of March 31, 2000 and F2-2
June 30, 1999
Consolidated Statements of Operations for the Three Months F2-3
and Nine Months Ended March 31, 2000 and 1999
Consolidated Statement of Changes in Shareholder's F2-4
Equity For the Nine Months Ended March 31, 2000
Consolidated Statements of Cash Flows F2-5
for the Nine Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements F2-6
F2-1
<PAGE>
Cadapult Graphic Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
March 31, June 30,
ASSETS 2000 1999
(Unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 500,451 $ 33,157
Accounts Receivable, less allowance for
doubtful accounts of $35,000 2,421,178 1,950,399
Inventories 1,464,532 1,276,621
Deferred tax asset 79,529 -
Prepaid expenses and other current assets 81,769 77,471
------------ ------------
Total Current Assets 4,547,459 3,337,648
PROPERTY AND EQUIPMENT, NET 651,635 627,029
OTHER ASSETS:
Goodwill and other intangible assets, net 4,395,737 835,889
Deferred acquisition costs 14,222 34,542
Security Deposits 30,567 33,523
------------ ------------
4,440,526 903,954
TOTAL ASSETS $ 9,639,620 $ 4,868,631
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to Bank $ 543,858 $ 1,677,024
Note payable 1,160,000 -
Current maturities of long-term debt 97,914 87,547
Accounts Payable 1,143,360 1,710,861
Accrued Expenses and other current
liabilities 73,580 131,767
Due to Seller 150,227 -
Deferred Revenue 427,378 294,089
------------ ------------
3,596,317 3,901,288
OTHER LIABILITIES:
Long-term debt, less current maturities 6,945 69,445
Note payable to related party 20,832 20,832
------------ ------------
27,777 90,277
COMMITMENTS
SHAREHOLDERS' EQUITY
Common Stock, .001 par value,
Authorized 20,000,000 shares; issued
3,218,451 in March and 3,058,308 in June 3,218 3,058
Preferred Stock, .001 par value,
Authorized 5,000,000 shares; issued
550,000 in March 550 -
Additional paid-in capital 6,011,758 1,171,782
Retained earnings (deficit) - (297,774)
------------ ------------
Total Shareholders' equity 6,015,526 877,066
Total Liabilities and Shareholders' Equity $ 9,639,620 $ 4,868,631
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F2-2
<PAGE>
Cadapult Graphic Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 3,773,640 $ 2,995,803 $ 9,884,209 $ 7,471,438
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 1,916,107 2,115,523 6,223,161 5,350,337
Selling, general and administrative
expenses 1,220,205 803,143 3,130,441 2,152,200
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 637,328 77,137 530,607 (31,099)
INTEREST EXPENSE, NET 68,448 41,095 186,929 98,297
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (CREDITS) 568,880 36,042 343,678 (129,396)
INCOME TAXES (CREDITS):
Current - - - -
Deferred 227,471 - (79,529) (39,000)
----------- ----------- ----------- -----------
227,471 - (79,529) (39,000)
NET INCOME (LOSS) $ 341,409 $ 36,042 $ 423,207 $ (90,396)
=========== =========== =========== ===========
PREFERRED STOCK DIVIDENDS $ (123,969) $ - $ (144,081) $ -
=========== =========== =========== ===========
INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 217,440 $ 36,042 $ 279,126 $ (90,396)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 3,215,042 2,904,368 3,159,211 2,788,600
=========== =========== =========== ===========
DILUTED 3,486,271 2,997,566 3,350,450 -
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE :
BASIC $ 0.07 $ 0.01 $ 0.09 $ (0.03)
=========== =========== =========== ===========
DILUTED $ 0.06 $ 0.01 $ 0.08 -
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F2-3
<PAGE>
Cadapult Graphic Systems, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
Six Months Ended December 31, 1999
(Unaudited)
<TABLE>
Common Stock Preferred Stock Additional Total
----------------------- ------------------- Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
------------ -------- -------- -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1999 3,058,308 $ 3,058 - $ - $ 1,171,782 $ (297,774) 877,066
PERIOD ENDED MARCH 31, 2000
Sale of Common Stock through
Private Placement, net 60,000 60 - - 119,640 - 119,700
Sale of Preferred Stock through
Private Placement, net - - 550,000 550 4,577,208 - 4,577,758
Issuance of Common Stock for
services 25,435 25 - - 50,975 - 51,000
Issuance of Stock for
Acquisition 34,818 35 - - 81,570 - 81,605
Issuance of Stock for Purchase
Price Adjustment 16,473 17 - - (170) - -
Exercise of employee stock options 23,417 23 - - 29,248 - 29,271
Preferred Stock Dividend, 11.5% - - - - (18,648) (125,433) (144,081)
Net Income - - - - - 423,207 423,207
------------ -------- -------- -------- ----------- ---------- -------------
BALANCES, MARCH 31, 2000 3,218,451 $3,218 550,000 $ 550 $ 6,011,758 $ - $ 6,015,526
============ ======== ======== ======== =========== ========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F2-4
<PAGE>
Cadapult Graphic Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Nine Months Ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 423,207 $ (90,396)
Adjustments to reconcile net Income (loss) to net cash
flows from operating activities:
Depreciation and amortization 294,358 108,540
Deferred income taxes (79,529) (39,000)
Issuance of common stock and warrants for services 51,000 20,510
Changes in operating assets and liabilities:
Accounts receivable (59,336) 67,288
Inventories 8,711 322,569
Prepaid and refundable income taxes - 46,295
Prepaid expenses and other current assets (4,298) (40,685)
Security deposits 2,956 -
Accounts payable (669,094) (448,101)
Accrued expenses and other current liabilities (58,187) (63,689)
Deferred revenue 133,289 95,181
------------ ------------
Net cash flows from operating activities 43,077 (21,487)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (118,696) (93,865)
Purchase of intangible assets (16,000) (19,885)
Cost of net assets of acquired business (2,502,493) -
Deferred acquisition costs 20,320 -
------------ ------------
Net cash flows from investing activities (2,616,868) (113,750)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to bank, net (1,133,166) (147,453)
Payments on long term debt (52,133) (66,867)
Advances from officer - (20,000)
Attorney escrow account - 320,000
Due to seller (356,266) -
Preferred Stock Dividend (144,081) -
Sale of preferred stock 4,577,758 -
Sale of common stock 148,971 250,000
------------ ------------
Net cash flows from financing activities 3,041,084 335,679
------------ ------------
NET CHANGE IN CASH 467,294 200,443
CASH, BEGINNING OF PERIOD 33,157 22,820
------------ ------------
CASH, END OF PERIOD $ 500,451 $ 223,263
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 186,929 $ 98,297
============ ============
Income taxes paid - -
============ ============
Non cash investing activities -
Acquisition of business :
Fair value of assets acquired $ 4,168,966 $ 1,014,667
Fair value of liabilities assumed - 828,967
Fair value of common stock issued - 185,700
Due to seller (506,473) -
Less Note payable (1,160,000) -
------------ ------------
Net cash payment $ 2,502,493 $ -
============ ============
Issuance of Common Stock upon partial
satisfaction of Tartan acquisition contingency $ 81,605 $ -
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F2-5
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
Our accounting and reporting policies conform to generally accepted
accounting principles. Except for the June 30, 1999 consolidated balance
sheet, the financial statements presented herein are unaudited but reflect
all adjustments which, in our opinion, are necessary for the fair
presentation of the consolidated financial position, results of operations
and cash flows for the interim periods presented. All adjustments reflected
in the interim financial statements are of a normal recurring nature. You
should read these financial statements in conjunction with the financial
statements and notes thereto and the report of independent accountants
included in our Annual Report on Form 10-KSB for the year ended June 30,
1999. The year end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the nine
months ended March 31, 2000 are not necessarily indicative of the results to
be expected for the full year.
NOTE 2 - ORGANIZATION AND NATURE OF BUSINESS:
Pursuant to an Agreement and Plan of Reorganization dated June 5, 1998
(the "Plan"), between us; Cadapult Graphic Systems, Inc., a New Jersey
corporation ("Cadapult"); all of the stockholders of Cadapult (the
"Cadapult Stockholders"); Jenson Services, Inc., a Utah corporation ("Jenson
Services"); and Duane S. Jenson and Jeffrey D. Jenson (collectively, the
"Jensons"), the CGSI Stockholders became our controlling stockholders in
a transaction viewed as a reverse acquisition, and Cadapult became a wholly-
owned subsidiary. The Plan was treated as a recapitalization of Cadapult for
accounting purposes, and the closing date of the Plan was June 18, 1998. The
historical financial statements of Seafoods Plus Ltd. prior to the merger
will no longer be reported, as Cadapult's financial statements are now
considered the financial statements of the ongoing reporting entity.
On August 10, 1998, our stockholders approved an amendment to our
Certificate of Incorporation to change our name from Seafoods Plus Ltd. to
Cadapult Graphic Systems, Inc. The stockholders also approved our
reincorporation as a Delaware corporation and a related Agreement and Plan of
Merger pursuant to which we merged into a wholly-owned Delaware subsidiary.
Our Board of Directors and the Board of Directors of our New Jersey
Subsidiary have authorized a Parent/Subsidiary merger of the two companies.
On June 24, 1998, we elected to change our fiscal year from a September
30 year end to a June 30 year end.
F2-6
<PAGE>
We are engaged in the business of providing computer graphics systems,
peripherals, supplies, training and service to graphics professionals. We
are a value-added dealer of computer graphics equipment and supplies,
including design software and workstations, publishing software and
workstations, file servers, networks, color scanners and color printers and
copiers. Our markets include advertising and marketing companies, printers,
quick print shops, services bureaus, animators and industrial designers, as
well as the broad market for color printers. Through our wholly owned
subsidiary Media Sciences, we manufacture and distribute solid ink and toner
products for use in workgroup color printers.
NOTE 3 - PRIVATE PLACEMENT
On October 1, 1999, we entered into a managing dealer agreement with a
placement agent wherein the placement agent will, on a best efforts basis,
offer up to $5,000,000 of units of our securities to accredited investors. In
December 1999, our Board of Directors approved an amendment to the managing
dealer agreement reflecting an increase in the offering from $5,000,000 to
$5,500,000. Each unit is priced at $10.00 and includes one share of series
A preferred stock and two warrants to purchase a total of two
shares of common stock for $4.50. Dividends on series A preferred stock
accrue at the rate of 11.50% per annum and are payable quarterly. Each series
A preferred share is convertible at the option of the holder beginning 30 days
after closing, which shall be no later than March 31, 2000, at a rate of 3.077
shares of common stock for one share of series A preferred. The conversion
price shall adjust to 75% of the average bid price for the 90 days preceding
the 24th month anniversary of the closing of the offering and again on the
48th month anniversary. Under no circumstances can a new conversion price be
below $2.00 per share.
The discount, if any, resulting from allocation of the proceeds to the
beneficial conversion feature is analogous to a dividend and will be
recognized as a return to preferred shareholders over the minimum period from
the date of issuance through the date of earliest conversion using the
effective yield method.
We have the right to call the series A preferred stock at $15.00 per
share at any time. Holders have the right to convert upon receipt of the call
notice.
We have agreed to register all of the shares of common stock necessary
for the conversion of the series A preferred stock and all shares of common
stock underlying warrants within 90 days of the closing of the private
placement.
The placement agent's fee included a commission and a
nonaccountable expense allowance equal to 13% of the proceeds of the
offering, five year warrants to purchase up to 236,500 shares of our
common stock at $1.65 per share and up to 550,000 shares of our common
stock at $3.75 per share. The value of the warrants will be recognized as a
cost of issuance of the series A preferred shares.
We closed this offering on March 10, 2000 having sold 550,000 units,
representing 550,000 shares of Series A Preferred Stock and 1,100,000
warrants to purchase common stock for $4.50, providing us with net proceeds
of $4,577,758.
F2-7
<PAGE>
NOTE 4 - ACQUISITION
On December 13, 1999, our wholly owned subsidiary, Media Sciences,
Inc., completed the acquisition of substantially all of the assets of
ultraHue, Inc. We paid $2,340,000 at closing, entered into a note, carrying
an interest rate of 7%, for $1,160,000 due on December 13, 2000, and agreed
to pay the value of the acquired receivables and inventory, less the assumed
trade payables, as those receivables were collected and inventory sold. In
addition, the Asset Purchase Agreement provides for an additional purchase
price of 10-30% of the Media Sciences' profits for three years.
NOTE 5 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share is
computed using the weighted average number of shares outstanding. Diluted
earnings per common share is computed using the weighted average number of
shares outstanding adjusted for the incremental shares attributed to
outstanding options and warrants to purchase common stock, and other
potentially dilutive securities. All earnings per share amount for all
periods have been presented in accordance with SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
Three Months Nine Months
Ended Ended
March 31, 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator :
Net income (loss) - basic $ 217,440 $ 36,042 $ 279,126 $ (90,396)
========== ========== ========== ==========
Net income (loss) - diluted $ 217,440 $ 36,042 $ 279,126 $ (90,396)
========== ========== ========== ==========
Denominator :
Denominator for basic earnings per share:
Weighted average shares 3,215,042 2,904,368 3,159,211 2,788,600
---------- ---------- ---------- ----------
Effect of dilutive securities
Employee stock options and warrants 271,229 93,198 191,239 -
---------- ---------- ---------- ----------
Denominator for diluted earnings per share 3,486,271 2,997,566 3,350,450 2,788,600
========== ========== ========== ==========
Earnings (loss) per share:
Basic $0.07 $0.01 $0.09 $(0.03)
========== ========== ========== ==========
Diluted $0.06 $0.01 $0.08 -
========== ========== ========== ==========
</TABLE>
The following warrants to purchase common stock were excluded from the
computation of diluted earnings per share for the three and nine months ended
March 31, 2000 and 1999 because the warrants' exercise price was greater
than the average market price of the common stock for those periods:
<TABLE>
Three Months Nine Months
Ended Ended
March 31, 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Anti-dilutive warrants and options 1,150,773 105,000 1,678,083 105,000
========== ========== ========== ==========
</TABLE>
The conversion of the Class A convertible preferred stock has been
excluded from the computation of diluted earnings per share for the three and
nine months ended March 31, 2000 and 1999. Such conversion when taking into
account the additional net income generated by the elimination of the
dividend would be anti-dilutive.
NOTE 6 - LITIGATION
In April 2000, Xerox Corporation filed a motion before the United
States District Court, Western District of Washington at Seattle, for leave
to intervene in an action between ultraHue, Inc., and Tektronix, Inc. for
joinder of Cadapult and Media Sciences as additional parties and for leave to
file and serve an amended answer. On May 10, 2000, the court granted Xerox's
motion to join Cadapult and Media Sciences in the action and Xerox served the
amended answer on or about May 19, 2000. In part, the action charges
trademark infringement, unfair competition, and patent infringement. At this
time, we are not in a position to assess the validity of the allegations or
the effects of the lawsuit on our operations or financial condition. While
management presently believes that resolution of this litigation will not
have a material adverse affect on our consolidated financial position, an
unfavorable outcome could have a material adverse affect on results of
operations or cash flows in the quarter or annual period in which this matter
is resolved. Because of the uncertainties associated with the above
litigation, management is currently unable to estimate a range of reasonably
possible loss. We intend to vigorously defend the action, but we can give no
assurance that we will prevail in this litigation.
F2-8
<PAGE>
Financial Statements of Tartan Technical, Inc.
(Business Acquired)
Independent Auditor's Report F3-2
Balance Sheets, December 31, 1998 and 1997 F3-3
Statement of Income and Retained Earnings for F3-4
the Years ended December 31, 1998 and 1997
Schedules of Operating Expenses for the Years F3-5
Ended December 31, 1998 and 1997
Statement of Cash Flows for the Years Ended F3-6
December 31, 1998 and 1997
Notes to Financial Statements F3-7
F3-1
<PAGE>
[Letterhead of Belanger & Company, P.C.]
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors and Stockholders
Tartan Technical, Inc.
Tyngsboro, Massachusetts
We have audited the accompanying balance sheets of Tartan Technical, Inc.
(an S Corporation) as of December 31, 1998 and 1997, and the related statements
of income and retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tartan Technical, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the financial statements, on December 17, 1998,
the Company entered into an asset purchase agreement, effective January 1, 1999,
for the transfer of substantially all assets and the assumption of substantially
all liabilities of the business.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules of operating expenses are
presented for the purposes of additional analysis and are not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Belanger & Company, P.C.
BELANGER & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Chelmsford, Massachusetts
February 1, 1999
F3-2
<PAGE>
<TABLE>
TARTAN TECHNICAL, INC.
BALANCE SHEET
DECEMBER 31, 1998 AND 1997
<CAPTION>
Assets
------
1998 1997
---------- ----------
<S> <C> <C>
Current Assets:
--------------
Cash $ 92,288 $ 18,328
Accounts receivable - trade (Notes 2 & 5) 223,086 452,533
Inventory 286,399 385,052
Prepaid expenses 20,027 11,168
---------- ----------
Total Current Assets 621,800 867,081
-------------------- ---------- ----------
Property and Equipment:
----------------------
Office furniture and equipment 123,484 98,559
Leasehold improvements 83,770 83,770
---------- ----------
207,254 182,329
Less: Accumulated depreciation 42,462 22,637
---- ---------- ----------
Net Property and Equipment 164,792 159,692
-------------------------- ---------- ----------
Other Assets:
------------
Organization costs 426 642
---------- ----------
Total Assets $ 787,018 $1,027,415
------------ ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
-------------------
Note payable - line of credit (Note 3) $ 145,823 $ 170,000
Note payable - short term (Note 4) 500,000 0
Accounts payable - trade (Note 5) 202,596 396,563
Sales taxes payable 9,026 22,408
Accrued expenses 52,170 54,292
----------- ----------
Total Current Liabilities 909,615 643,263
------------------------- ----------- ----------
Stockholders' Equity
--------------------
Common stock - 200,000 shares authorized
issued and outstanding 1,000 shares 181,545 181,545
Retained earnings (Note 6) (304,142) 202,607
----------- ----------
Total Stockholders' Equity (122,597) 384,152
-------------------------- ----------- ----------
Total Liabilities and Stockholders' Equity $ 787,018 $1,027,415
------------------------------------------ =========== ==========
See accompanying notes which are an integral part of these financial statements.
</TABLE>
F3-3
<PAGE>
<TABLE>
TARTAN TECHNICAL, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Sales (Note 5) $3,250,026 $4,175,125
----- ---------- ----------
Cost of Goods Sold:
------------------
Inventory - beginning of year 385,052 309,011
Purchases for resale 2,439,253 3,410,709
Freight in 7,410 11,883
---------- ----------
2,831,715 3,731,603
Inventory - end of year 286,399 385,052
---------- ----------
Total Cost of Goods Sold 2,545,316 3,346,551
------------------------ ---------- ----------
Gross Profit 704,710 828,574
------------
Operating Expenses - Schedule 648,960 673,168
----------------------------- ---------- ----------
Income From Operations 55,750 155,406
---------------------- ---------- ----------
Other Income (Expenses):
-----------------------
Interest income 171 367
Commissions income 1,755 32,619
Interest expense (20,987) (21,285)
Purchase discounts 3,431 13,077
Gain (loss) on sales of property and equipment (3,369) 0
---------- ----------
Other Income (Expenses) - Net (18,999) 24,778
----------------------------- ---------- ----------
Net Income For The Year 36,751 180,184
-----------------------
Retained Earnings - Beginning of Year 202,607 88,611
-------------------------------------
Distributions to shareholders (543,500) (66,188)
----------------------------- ---------- ----------
Retained Earnings - End of year $ (304,142) $ 202,607
------------------------------- ========== ==========
See accompanying notes which are an integral part of these financial statements.
</TABLE>
F3-4
<PAGE>
<TABLE>
TARTAN TECHNICAL, INC.
SCHEDULES OF OEPRATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Operating Expenses:
------------------
Salaries and wages - officers $ 111,693 $ 187,126
Salaries and wages - other 210,998 162,718
Payroll taxes 30,681 27,003
Employee benefits 17,161 17,867
Employee retirement plan (Note 7) 17,815 22,901
Advertising and promotion 37,348 20,891
Auto expenses 18,754 15,979
Bad debts (3,630) 18,867
Bank charges 5,267 4,064
Commissions 3,976 15,435
Depreciation 22,602 12,751
Dues and subscriptions 2,803 3,038
Freight out 24,054 20,089
Insurance 10,704 7,678
Legal and accounting 21,546 14,301
Office supplies and expense 19,024 26,341
Postage 3,439 3,940
Rent - building (Note 5) 29,138 27,991
Repairs and maintenance 1,237 7,564
Selling expenses 30,738 23,600
Taxes - other 1,239 1,433
Telephone 11,899 12,762
Travel and entertainment 9,588 12,260
Utilities 9,375 5,128
Sundry 1,511 1,441
---------- ----------
Total Operating Expenses 648,960 673,168
------------------------ ========== ==========
See accompanying notes which are an integral part of these financial statements.
</TABLE>
F3-5
<PAGE>
<TABLE>
TARTAN TECHNICAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
------------------------------------
Net income for the year $ 36,751 $ 180,184
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 22,818 12,966
Loss (Gain) on sale of property and equipment 3,369 0
Decrease (Increase) in operating assets:
Accounts receivable - trade 229,447 (21,569)
Accounts receivable - program discounts 0 24,996
Accounts receivable - shareholders 0 127,376
Inventory 98,653 (76,041)
Prepaid expenses (8,859) (2,832)
Increase (Decrease) in operating liabilities:
Accounts payable - trade (193,967) (84,689)
Sales tax payable (13,382) (5,556)
Accrued expenses (2,122) (17,594)
---------- ----------
Net Cash Provided By Operating Activities 172,708 137,241
----------------------------------------- ---------- ----------
Cash Flows From Investing Activities:
------------------------------------
Acquisition of property and equipment:
Office furniture and equipment (29,794) (70,350)
Motor vehicles (16,274) 0
Leasehold improvements 0 (83,770)
Proceeds from sales of property and equipment 14,997 0
Distributions to shareholders (543,500) (66,188)
---------- ----------
Net Cash Provided (Used) By
---------------------------
Investing Activities (574,571) (220,308)
-------------------- ---------- ----------
Cash Flows From Financing Activities:
------------------------------------
Proceeds from notes payable:
Short-term 525,000 368,000
Payments of notes payable:
Short-term (49,177) (318,000)
Long-term 0 (7,292)
---------- ----------
Net Cash Provided (Used) By
---------------------------
Financing Activities 475,823 42,708
-------------------- ---------- ----------
Net Increase (Decrease) In Cash 73,960 (40,359)
-------------------------------
Cash - Beginning of Year 18,328 58,687
------------------------ ---------- ----------
Cash - End of Year $ 92,288 $ 18,328
------------------ ========== ==========
See accompanying notes which are an integral part of these financial statements.
</TABLE>
F3-6
<PAGE>
TARTAN TECHNICAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1: Significant Accounting Policies:
-------------------------------
Business Activity:
-----------------
The Company is a value-added reseller of computers, computer
equipment, peripherals and supplies. The Company grants credit to
customers throughout New England and predominantly in Massachusetts.
The largest customer accounted for approximately 13% of total sales
for 1998.
Purchases from the Company's major supplier amounted to
approximately 56% of the total purchases for the year.
Use Of Estimates:
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Inventory:
---------
Merchandise inventory is stated at the lower of cost or
market. Cost is determined using the First-in, First-out (FIFO)
method of costing inventories.
Fixed Assets:
------------
For financial reporting purposes, depreciation and
amortization of fixed assets is computed utilizing the following
methods and estimated useful lives:
Asset Method Useful Life
----- ------ -----------
Office furniture and Straight line and
equipment declining balance 3 - 8 years
Leasehold improvements Straight line 39 years
The modified accelerated cost recovery system is used for
income tax purposes.
Expenditures for major renewals and betterments which extend
the useful lives of property and equipment are capitalized;
expenditures for maintenance and repairs are charged to expense as
incurred.
Corporation Income Taxes:
------------------------
The Company, at inception, elected by unanimous consent of its
shareholders to be taxed under subchapter S of the Internal Revenue
Code. Under those provisions, the Company does not pay corporate
income taxes on its taxable income. Instead, the stockholders are
liable for individual Federal and state income taxes on their
respective shares of the Company's taxable income.
F3-7
<PAGE>
Statement of Cash Flows:
-----------------------
Interest and income taxes paid for the years ended December
31, 1998 and 1997 were as follows:
1998 1997
--------- ---------
Interest $ 18,947 $ 20,029
========= =========
Income taxes $ -0- $ -0-
========= =========
Note 2: Accounts Receivable - Trade:
---------------------------
Accounts receivable - trade are stated net of an allowance for
doubtful accounts in the amount of $2,600 and $6,230 at December 31,
1998 and 1997, respectively.
Note 3: Note Payable - Line of Credit:
-----------------------------
The Company has established a line of credit in the amount of
$200,000 with interest at the bank's prime rate plus 50 basis points
(8.25% at December 31, 1998), secured by all Company assets and by
commercial real estate of the shareholders.
Note 4: Note Payable - Short Term:
-------------------------
Note payable - short term at December 31, 1998 consisted of a
note payable to Family Bank with interest payable monthly at 6.91%,
due on June 9, 1999, secured by a certificate of deposit owned by
the shareholders.
Note 5: Related Party Transactions:
--------------------------
During 1998, sales to a person related to the two shareholders
amounted to $630, sales to an entity that is 30% owned by a
shareholder of the Company amounted to $53,794 and the entity was
billed for reimbursement of Company operating expenses in the amount
of $41,423. The Company purchased equipment from this entity for
$6,250.
Accounts receivable - trade includes amounts due from the
related parties of $13,984 and accounts payable - trade includes
$6,250 due to related parties at December 31, 1998.
Accounts payable - trade also includes amounts due to a share-
holder of $13,403 for Company expenses paid by the shareholder at
December 31, 1997.
During the years ended December 31, 1998 and 1997, expenses
charged to operations include amounts paid to a trust controlled by
the shareholders of the Company for the lease of a building in the
amount of $29,138 and $23,562, respectively.
F3-8
<PAGE>
Note 6: Retained Earnings:
-----------------
The amount reflected in retained earnings at December 31, 1998
is as follows:
Accumulated Adjustments Account:
Balance - January 1, 1998 $ 175,830
Taxable income 21,358
Nondeductible expenses (1,190)
Distributions to shareholders (543,500)
---------
Balance - December 31, 1998 (347,502)
---------
Tax Timing Adjustments:
Balance - January 1, 1998 26,777
Excess tax depreciation 14,645
Accrued expenses - related parties (1,692)
Bad debts 3,630
---------
Balance - December 31, 1998 43,360
---------
$(304,142)
=========
Note 7: Defined Contribution Plan:
-------------------------
The Company sponsors a defined contribution pension plan
covering all eligible employees. Contributions to the plan totaled
$17,815 and $22,051 in 1998 and 1997, respectively.
Note 8: Subsequent Events:
-----------------
On December 17, 1998, the Company entered into an asset
purchase agreement with Catapult Graphic Systems, Inc., effective
January 1, 1999, for the transfer of substantially all assets and
the assumption of substantially all liabilities of the business, in
exchange for shares of unregistered and restricted common stock of
the purchaser.
F3-9
<PAGE>
Financial Statements of BBG Technologies, Inc.
(Business Acquired)
Financial Report, For the Period Ended March 12, 1998 F4-1
Financial Report, For the Year Ended December 31, 1997 F4-8
F4-1
<PAGE>
To the Board of Directors
BBG Technologies, Inc.
Stoneham, Massachusetts
We have audited the accompanying balance sheet of BBG Technologies, Inc. as of
March 12, 1998 and the related statements of income and retained earnings and
cash flows for the period January 1, 1998 to March 12, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material.
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BBG Technologies, Inc. as of
March 12, 1998, and the results of its operations and its cash flows for the
period January 1, 1998 to March 12, 1998 in conformity with generally accepted
accounting principles.
Rucci, Bardaro + Barrett, P.C.
Certified Public Accountants
Malden, Massachusetts
August 13, 1998
F4-2
<PAGE>
BBG TECHNOLOGIES, INC.
BALANCE SHEET
As of March 12, 1998
ASSETS
------
Current Assets
Cash - Medford Savings $ 10,349
Accounts Receivable 377,077
Tektronix Rebate Receivable 29,512
Inventory - Supplies 32,230
Inventory - Printers 16,676
----------
Total Current Assets $ 465,844
---------
TOTAL ASSETS $ 465,844
=========
LIABILITIES
Current Liabilities
Accounts Payable $ 318,684
Sales Tax Payable 10,973
Accrued Health Deduction 442
----------
Total Current Liabilities $ 330,099
----------
TOTAL LIABILITIES $ 330,099
----------
STOCKHOLDERS' EQUITY
Common Stock (200,000 Shares $ 42,710
Authorizing, Issued and
Outstanding)
Retained Earnings 93,035
----------
TOTAL STOCKHOLDERS' EQUITY $ 135,745
----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 465,844
==========
The accompanying notes are an integral part of the financial statements.
F4-3
<PAGE>
BBG TECHNOLOGIES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the period January 1, 1998 to March 12, 1998
Sales $ 369,465
Rebates - Tektronix 29,512
----------
Total Sales $ 398,977
Cost of Sales $ 360,970
----------
Gross Profit 38,007
Operating Expenses
Office Supplies Expense 465
Payroll Expense 8,113
Payroll Taxes Expense 1,030
Legal & Accounting Expense 8,144
Travel Expense 5,000
Group Insurance Expense 5,283
Miscellaneous Expense 79
Credit Card Expense 400
Penalties & Interest 681
Donations 100
--------
Total Operating Expenses 29,295
----------
Net Income $ 8,712
Retained Earnings,
January 1, 1998 114,323
Dividend Distribution (30,000)
----------
Retained Earnings,
December 31, 1998 $93,035
=======---
The accompanying notes are an integral part of the financial statements.
F4-4
<PAGE>
BBG TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
For the period January 1, 1998 to March 12, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,712
Net change in receivables, inventory
Payables and accrued items (14,787)
-----------
NET CASH PROVIDED BY OPERATIONS (6,075)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividend distributions (30,000)
-----------
NET CASH USED BY FINANCING
ACTIVITIES (30,000)
----------
NET DECREASE IN CASH (36,075)
Cash, January 1, 1998 46,424
----------
Cash, March 12, 1998 $ 10,349
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for:
MA Excise tax $ 456
==========
Interest $ 59
==========
The accompanying notes are an integral part of the financial statements.
F4-5
<PAGE>
BBG TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
March 12, 1998
NOTE A - BASIS OF OPERATIONS
1. Business
--------
On November 1, 1996, BBG Technologies, Inc. was formed by a
transfer of assets, specifically inventory only, from the two
shareholders, who in turn had received the inventory, immediately
prior, through a distribution from BBG New Media, Inc. For the
period January 1, 1996 through October 31, 1996 the activity of
BBG New Media, Inc. (formerly known as Boston Business Graphics,
Inc.), is presented as it relates to the activity of BBG
Technologies only, as extracted as a business segment of BBG New
Media, Inc., in a pro forma format in order to present a full
year of activity. For the two months ended December 31, 1996, BBG
Technologies, Inc. operated as a C Corporation. Beginning January
1, 1997, BBG Technologies, Inc. elected S Corporation status (See
Note B-3).
2. Business Operation
------------------
BBG Technologies, Inc., a Massachusetts corporation, is a
reseller of computer equipment and supplies as well as service
contracts covering the equipment they sell.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. Revenue Recognition
-------------------
Revenue for sales of computer equipment and related supplies are
recorded upon delivery.
2. Inventory
---------
BBG Technologies, Inc., values their inventory using the FIFO
method accounted for on a specific identification basis.
As of and prior to December 31, 1995, no inventory was
maintained.
3. Income Taxes
------------
As of January 1, 1997, the shareholders of BBG Technologies, Inc.
elected the provisions available under Subchapter S of the
Internal Revenue Code, whereby any loss or gain recognized by the
corporation is distributed to shareholders based on their
respective percentage of stock owned. Therefore, the corporation
is not responsible for Federal income taxes.
F4-6
<PAGE>
BBG TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
March 12, 1998
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
The Commonwealth of Massachusetts has adopted S-corporation
provisions resulting in similar treatment for state tax purposes,
with the exception of a minimum excise tax of $456.
4. Rebates
----------
BBG Technologies, Inc. receives rebates from their primary
supplier, Tektronix, Inc., based on a percentage of purchases
volume calculated by the vendor.
NOTE C - RELATED PARTY
As referred to in Note A-1 above, BBG Technologies, Inc. began
operations on November 1, 1996, when Boston Business Graphics,
Inc., effectively bifurcated operations, becoming BBG New Media,
Inc., and BBG Technologies, Inc. The two corporations utilize the
same office facilities. Additionally, stock of the two
corporations are owned by the same two shareholders, in the same
percentages.
Other than allocated amounts shown on the December 31, 1996
income statement there are no other allocation of expenses
between the related parties. While certain equipment and other
assets of Boston Business Graphics, Inc., may have been partially
utilized by BBG Technologies, Inc., no basis for allocation of
such exists.
NOTE D - SUBSEQUENT EVENT
On March 13, 1998, virtually all tangible and intangible
operating assets of BBG Technologies, Inc., were purchased by
Cadapult, Inc., an unrelated third party. As of that date, BBG
Technologies, Inc., ceased all operations as a going concern.
Subsequent Event - Going Concern
--------------------------------
As the amount realized in the sale exceeded the reported amounts
on the balance sheet as of March 12, 1998, realization of all
amounts reported is assured.
F4-7
<PAGE>
To the Board of Directors
BBG Technologies, Inc.
Stoneham, Massachusetts
We have audited the accompanying balance sheet of BBG Technologies, Inc. as of
December 31, 1997 and the related statements of income and retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material.
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BBG Technologies, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Rucci, Bardaro + Barrett, P.C.
Certified Public Accountants
Malden, Massachusetts
August 13, 1998
F4-8
<PAGE>
BBG TECHNOLOGIES, INC.
BALANCE SHEET
As of December 31, 1997
ASSETS
------
Current Assets
Cash - Medford Savings $ 46,424
Accounts Receivable 298,225
Tektronix Rebate Receivable 25,867
Inventory - Supplies 39,873
Inventory - Printers 16,675
-----------
Total Current Assets $ 427,064
-----------
TOTAL ASSETS $ 427,064
===========
LIABILITIES
-----------
Current Liabilities
Accounts Payable $ 241,518
Accounts Payable - Related Party 7,338
Sales Tax Payable 19,669
Accrued Health Deduction 441
Accrued Commission 524
Accrued Excise Tax 541
---------
Total Current Liabilities $ 270,031
----------
TOTAL LIABILITIES $ 270,031
----------
STOCKHOLDERS' EQUITY
--------------------
Common Stock (200,000 Shares $ 42,710
Authorizing, Issued and
Outstanding)
Retained Earnings 114,323
TOTAL STOCKHOLDERS' EQUITY $ 157,033
----------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 427,064
==========
The accompanying notes are an integral part of the financial statements.
F4-9
<PAGE>
BBG TECHNOLOGIES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the year ended December 31, 1997
Sales 2,052,105
Rebates - Tektronix 85,619
----------
Total Sales $ 2,137,724
Cost of Sales $ 1,770,245
-----------
Gross Profit 367,479
Operating Expenses
Office Supplies Expense 791
Payroll Expense 45,894
Payroll Taxes Expense 4,425
Entertainment Expense 10,322
Travel Expense 3,114
Education Expense 4,008
Computer Expense 2,590
Miscellaneous Expense 549
Credit Card Expense 3,424
Penalties & Interest 683
Massachusetts Excise Tax and Annual 541
Report
Employee Benefit Program 1,056
-----------
Total Operating Expenses 77,397
---------
Net Income $ 290,082
Retained Earnings, January 1, 1997 37,501
Dividend Distribution (213,260)
Retained Earnings, December 31, 1997 $ 114,323
=========
The accompanying notes are an integral part of the financial statements.
F4-10
<PAGE>
BBG TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
For the year ended December 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 290,082
Net change in receivables, inventory
payables and accrued items (56,959)
----------
NET CASH PROVIDED BY OPERATIONS $ 223,123
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividend distributions (213,260)
----------
NET CASH USED BY
FINANCING ACTIVITIES (213,260)
----------
NET INCREASE IN CASH 19,863
Cash, January 1, 1997 26,561
----------
Cash, December 31, 1997 $ 46,424
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 412
==========
Massachusetts Corporate Excise tax $ 4,910
==========
Federal Income Tax $ 9,056
==========
The accompanying notes are an integral part of the financial statements.
F4-11
<PAGE>
BBG TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1997
NOTE A - BASIS OF OPERATIONS
1. Business
--------
On November 1, 1996, BBG Technologies, Inc. was formed by a
transfer of assets, specifically inventory only, from the two
shareholders, who in turn had received the inventory,
immediately prior, through a distribution from BBG New Media,
Inc. For the period January 1, 1996 through October 31, 1996
the activity of BBG New Media, Inc. (formerly known as Boston
Business Graphics, Inc.), is presented as it relates to the
activity of BBG Technologies only, as extracted as a business
segment of BBG New Media, Inc., in a pro forma format in order
to present a full year of activity. For the two months ended
December 31, 1996, BBG Technologies, Inc. operated as a C
Corporation. Beginning January 1, 1997, BBG Technologies, Inc.
elected S Corporation status (See Note B-3).
2. Business Operation
------------------
BBG Technologies, Inc., a Massachusetts corporation, is a
reseller of computer equipment and supplies as well as service
contracts covering the equipment they sell.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. Revenue Recognition
-------------------
Revenue for sales of computer equipment and related supplies
are recorded upon delivery.
2. Inventory
---------
BBG Technologies, Inc., values their inventory using the FIFO
method accounted for on a specific identification basis.
As of and prior to December 31, 1995, no inventory was
maintained.
F4-12
<PAGE>
BBG TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Income Taxes
------------
As noted in Note A-1 above, for the first two months of
operation, BBG Technologies, Inc., operated as a C
Corporation, and was therefore responsible for federal and
state corporate taxes. The amount of federal and state
corporate taxes incurred in 1996 and paid in 1997 are $9,056
and $4,910 respectively.
As of January 1, 1997, the shareholders of BBG Technologies,
Inc. have elected the provisions available under Subchapter S
of the Internal Revenue Code, whereby any loss or gain
recognized by the corporation is distributed to shareholders
based on their respective percentage of stock owned.
Therefore, BBG Technologies, Inc., is not responsible for
Federal income taxes.
The Commonwealth of Massachusetts has adopted S-corporation
provisions resulting in similar treatment for state tax
purposes, with the exception of a minimum excise tax of $456.
4. Rebates
-------
BBG Technologies, Inc. receives rebates from their primary
supplier, Tektronix, Inc., based on a percentage of purchases
volume calculated by the vendor.
NOTE C - CONCENTRATION OF RISK
1. Sales
-----
BBG Technologies, Inc., sells computer equipment and supplies
to a variety of customers, the sales and related accounts
receivable balances for the top three largest customers are as
follows:
Accounts Receivable
Sales Balance
----- -------------------
MIT Lincoln Labs $ 434,000 $ 67,200
Polaroid 231,000 105,500
Cabletron Systems 136,000 6,500
--------- ---------
Total $ 801,000 $ 179,200
========= =========
F4-13
<PAGE>
BBG TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE C - CONCENTRATION OF RISK - Continued
2. Purchases
---------
BBG Technologies, Inc., purchases equipment, supplies and
service contracts for resale virtually exclusively from
Tektronix, Inc.
NOTE D - RELATED PARTY
As referred to in Note A-1 above, BBG Technologies, Inc. began
operations on November 1, 1996, when Boston Business Graphics,
Inc., effectively bifurcated operations, becoming BBG New
Media, Inc., and BBG Technologies, Inc. The two corporations
utilize the same office facilities. Additionally, stock of the
two corporations are owned by the same two shareholders, in
the same percentages.
Other than allocated amounts shown on the December 31, 1996
income statement there are no other allocation of expenses
between the related parties. While certain equipment and other
assets of Boston Business Graphics, Inc., may have been
partially utilized by BBG Technologies, Inc., no basis for
allocation of such exists.
NOTE E - SUBSEQUENT EVENT
On March 13, 1998, virtually all tangible and intangible
operating assets of BBG Technologies, Inc., were purchased by
Cadapult, Inc., an unrelated third party. As of that date, BBG
Technologies, Inc., ceased all operations as a going concern.
F4-14
<PAGE>
INDEX TO ULTRAHUE, INC. FINANCIAL REPORT, SEPTEMBER 30, 1999
Independent Auditor's Report F5-2
Balance Sheets for the Nine Months Ended September 30, 1999 and F5-3
the Year Ended December 31, 1998
Statement of Income and Retained Earnings for the Nine Months F5-4
Ended September 30, 1999 and the Year Ended December 31, 1998
Statement of Cash Flows for the Nine Months Ended September 30, 1999 F5-5
and the Year Ended December 31, 1998
Notes to Financial Statements F5-6
F5-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of UltraHue, Inc.
We have audited the accompanying balance sheets of UltraHue, Inc. as of
September 30, 1999 and December 31, 1998 and the related statements of income
and retained earnings and cash flows for the nine months ended September 30,
1999 and the year ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UltraHue, Inc. at September
30, 1999 and December 31, 1998, and the results of its operations and its
cash flows for the periods indicated above in conformity with generally
accepted accounting principles.
/s/ Wiss & Company, LLP
WISS & COMPANY, LLP
Livingston, New Jersey
January 20, 2000
F5-2
<PAGE>
ULTRAHUE, INC.
BALANCE SHEETS
<TABLE>
Nine Months
Ended Year Ended
September 30, December 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 185,023 $ 40,100
Accounts receivable, net of allowance for
doubtful accounts of $5,000 in 1999 397,998 245,607
Inventories 116,665 14,705
Advances to officers - 32,669
Prepaid rent 6,600 -
------------- -------------
Total Current Assets 706,286 333,081
PROPERTY AND EQUIPMENT, NET 29,969 8,777
SECURITY DEPOSIT 1,162 -
------------- -------------
$ 737,417 $ 341,858
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligation $ 2,214 $ -
Accounts payable 21,701 5,550
Accrued expenses 15,610 1,364
------------- -------------
Total Current Liabilities 39,525 6,914
------------- -------------
CAPITAL LEASE OBLIGATION, LESS CURRENT MATURITIES 10,826 -
------------- -------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value 30,000 shares authorized,
2,000 shares issued and outstanding 2,000 2,000
Retained earnings 685,066 332,944
------------- -------------
Total Stockholders' Equity 687,066 334,944
------------- -------------
$ 737,417 $ 341,858
============= =============
</TABLE>
See accompanying notes to financial statements.
F5-3
<PAGE>
ULTRAHUE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
NET SALES $ 2,144,283 $ 1,093,677
COST OF GOODS SOLD 554,369 306,542
------------- -------------
GROSS PROFIT 1,589,914 787,135
OPERATING EXPENSES 464,581 329,836
------------- -------------
INCOME FROM OPERATIONS 1,125,333 457,299
INTEREST EXPENSE 542 -
------------- -------------
NET INCOME 1,124,791 457,299
RETAINED EARNINGS, BEGINNING OF PERIOD 332,944 3,645
DISTRIBUTIONS (772,669) (128,000)
------------- -------------
RETAINED EARNINGS, END OF PERIOD $ 685,066 $ 332,944
============= =============
</TABLE>
See accompanying notes to financial statements.
F5-4
<PAGE>
ULTRAHUE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,124,791 $ 457,299
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 5,559 20,757
Provision for bad debts 5,000 -
Changes in operating assets and liabilities:
Accounts receivable (157,391) (227,632)
Inventories (101,960) (11,316)
Prepaid rent (6,600) -
Security deposits (1,162) -
Accrued expenses 14,246 1,364
Accounts payable 16,151 5,183
------------- -------------
Net cash flows from operating activities 898,634 245,655
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,030) (28,963)
Advances to officers 32,669 (32,669)
------------- -------------
Net cash flows from investing activities 19,639 (61,632)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (772,669) (128,000)
Stockholder loans - (37,354)
Capital lease (681) -
------------- -------------
Net cash flows from financing activities (773,350) (165,354)
------------- -------------
NET CHANGE IN CASH 144,923 18,669
CASH, BEGINNING OF PERIOD 40,100 21,431
------------- -------------
CASH, END OF PERIOD $ 185,023 $ 40,100
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 542 $ -
============= =============
Income taxes paid $ - $ -
============= =============
Noncash financing and investing activity -
Equipment addition by capital lease $ 13,721 $ -
============= =============
</TABLE>
See accompanying notes to financial statements.
F5-5
<PAGE>
ULTRAHUE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Nature of the Business - UltraHue, Inc. ("UltraHue") is a manufacturer
of solid ink and a distributor of transparencies and toner cartridges for
Tektronix color printers. It's manufacturing facility is located near
Albuquerque, New Mexico and its corporate office is located in Redmond,
Washington.
Estimates and Uncertainties - The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and 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. Actual results, as determined at a
later date, could differ from those estimates.
Concentration of Credit/Sales Risk - The Company maintains its cash
balances in a financial institution which is insured by the Federal Deposit
Insurance Corporation up to $100,000. At September 30, 1999, the Company has
an uninsured balance, including outstanding checks, totalling approximately
$140,000.
Sales to one customer and two customers comprised approximately 37% in
1999 and 46% in 1998, of the Company's net sales.
Concentration of credit risk with respect to other trade customers is
limited due to the large number of customers.
The Company periodically reviews its trade receivables and if
necessary, establishes an allowance for uncollectible accounts. Management
feels the credit risk beyond the established allowance, if any, is limited.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment - Property and equipment are stated at
cost. For financial reporting purposes, the Company provides for
depreciation generally on an accelerated method by charges to income at rates
based upon the estimated recovery periods of 5 to 7 years.
The Company capitalizes, for financial reporting purposes, leased
equipment where the term of the lease results in the transfer to the Company
of substantially all of the benefits and risks of ownership.
Income Taxes - The Company elected under Section 1361 of the Internal
Revenue Code and under New Mexico corporate statues to be taxed as an S
Corporation. Under these provisions, all earnings and losses of the Company
for federal and New Mexico income tax reporting purposes are reported on the
income tax returns of the shareholders. Accordingly, no provisions have been
made for federal or state income taxes. Washington has no state income
taxes.
F5-6
<PAGE>
ULTRAHUE, INC.
NOTES TO FINANCIAL STATEMENTS
Change in Fiscal Year - The Company elected to change from a December 31 to
September 30, fiscal year. Therefore, the accompanying financial statements
include transitional financial statements for the nine months ended September
30, 1999. Unaudited financial data for the nine months ended September 30,
1998 follow which is the corresponding period of the preceding fiscal year.
There were no seasonal factors that affect the comparability of information
or trends reflected.
Net sales $579,717
========
Gross profit $322,159
========
Net income $126,640
========
NOTE 2 - INVENTORIES:
Inventories include the following:
September 30, December 31,
1999 1998
------------- ------------
Raw materials $ 25,382 $ 14,705
Finished goods 91,283 -
------------- ------------
$ 116,665 $ 14,705
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
September 30, December 31,
1999 1998
------------- ------------
Computer equipment $ 37,227 $ 25,739
Furniture and fixtures 5,750 4,208
Machinery and equipment 16,650 2,929
------------- ------------
59,627 32,876
Less: Accumulated depreciation 29,658 24,099
------------- ------------
$ 29,969 $ 8,777
============= ============
NOTE 4 - LEASES:
The Company's machinery and equipment under a capital lease, which is
included in property and equipment, totalled $13,721 less accumulated
depreciation of $2,058.
F5-7
<PAGE>
ULTRAHUE, INC.
NOTES TO FINANCIAL STATEMENTS
Future minimum rental payments required for the capital lease at
September 30, 1999 are as follows:
Year Ending September 30,
-------------------------
2000 $ 3,669
2001 3,669
2002 3,669
2003 3,669
2004 2,446
----------
Total future minimum lease payments 17,122
Less: Amount representing interest 4,082
Present value of minimum lease payments 13,040
Less: Current maturities 2,214
----------
Non-current $ 10,826
==========
The Company leases its office facility on a month-to-month basis for
$2,200 per month and its New Mexico operating facility under a non-
cancellable operating lease which requires monthly payments of $1,350
expiring on June 30, 2000.
Rent expense for operating leases in 1999 and 1998 was $20,381 and
$15,411.
NOTE 5 - SUBSEQUENT EVENT:
On December 13, 1999, the Company sold substantially all of its assets,
subject to its liabilities, for $4,056,473, to Cadapult Graphic Systems, Inc.
("Cadapult") collectible as follows:
Cash $2,340,000
Note receivable 1,160,000
Due from Cadapult 556,473
==========
$4,056,473
The note receivable bears interest at the rate of 7% per annum and is
due on December 13, 2000.
Due from Cadapult is collectible as Cadapult liquidates the receivables
and inventories purchased and satisfies the payables assumed.
NOTE 6 - PRO FORMA INCOME TAXES:
The following unaudited pro forma statements of income for the nine
months ended September 30, 1999 and the year ended December 31, 1998 assume
that ultraHue was subject to federal and state corporation income taxes (at a
40 percent effective rate) and include a tax provision calculated on the
separate return basis. The pro forma results have been prepared for
informational purposes only and do not represent results which would have
occurred if ultraHue was actually subject to income taxes for the periods
represented above nor are they indicative of future results.
Nine Months
Ended Year Ended
September 30, December 31,
1999 1998
---------- ----------
Net sales $2,144,283 $1,093,677
========== ==========
Income before income taxes $1,124,791 $ 457,299
Income tax provision 450,000 183,000
---------- ----------
Net income $ 674,791 $ 274,299
========== ==========
F5-8
<PAGE>
INDEX TO PRO FORMA FINANCIAL DATA
Pro Forma Financial Data F6-2
Pro Forma Consolidated Statement of Operations for the Year Ended F6-3
June 30, 1999 (Unaudited)
Notes to Unaudited Pro Forma Statement of Operations F6-4
Pro Forma Consolidated Statement of Operations for the Acquisition F6-5
for the Nine Months Ended March 31, 2000 (Unaudited)
Notes to Unaudited Pro Forma Statement of Operations for the F6-6
Acquisition
F6-1
<PAGE>
PROFORMA FINANCIAL DATA
Set forth below are two sets of pro forma financial information and
related notes. The first set presents pro forma financial information for
the acquisitions that Cadapult consummated in fiscal 1999 and the acquisition
of certain assets and its assumption of certain liabilities from ultraHue,
Inc. on December 13, 1999 (the "Acquisitions"). This set includes an
unaudited pro forma consolidated statement of operations of Cadapult for the
year ended June 30, 1999 giving effect to the Acquisitions as if they had
occurred on July 1, 1998 (see Note 1 of Notes to Unaudited Pro Forma
Statement of Operations).
The second set presents pro forma financial information which reflects
the acquisition of certain assets and the assumption of certain liabilities
from ultraHue, Inc. This set includes an unaudited pro forma consolidated
statement of operations of Cadapult for the nine month period ended March
31, 2000, giving effect to the Acquisition of ultraHue that Cadapult
consummated on December 13, 1999 as if it had occurred on July 1, 1998.
This pro forma financial information is based on the estimates and
assumptions set forth herein and in the notes thereto and has been prepared
utilizing the financial statements and notes thereto appearing elsewhere in
this prospectus.
The following unaudited pro forma financial information is presented
for informational purposes only and is not necessarily indicative of (i) the
results of operations of Cadapult that actually would have occurred had the
Acquisitions been consummated on the dates indicated or (ii) the results of
operations of Cadapult that may occur or be attained in the future. The
following information is qualified in its entirety by reference to and should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Cadapult's financial
statements, including the notes thereto, and the other historical financial
information appearing elsewhere herein.
F6-2
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
Historical Tartan WEB ultraHue Adjustments Pro Forma
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 10,227,628 $ 1,365,939 $ 2,656,755 $ 1,093,677 $ (51,000)c $ 15,292,999
------------ ------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 7,442,239 1,089,846 2,186,736 306,542 (51,000)c 10,974,363
Selling, general and
administrative expenses 3,069,682 341,792 461,154 329,836 277,894 a,b 4,480,358
------------ ------------ ------------ ------------ ------------ ------------
10,511,921 1,431,638 2,647,890 636,378 226,894 15,454,721
------------ ------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (284,293) (65,699) 8,865 457,299 (277,894)d (161,722)
------------ ------------ ------------ ------------ ------------ ------------
OTHER EXPENSE:
Interest expense, net 160,081 13,765 6,583 - (26,000) 154,429
Loss on sale of equipment - 3,369 - - - 3,369
------------ ------------ ------------ ------------ ------------ ------------
160,081 17,134 6,583 - (26,000) 157,798
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (CREDITS) (444,374) (82,833) 2,282 457,299 (251,894) (319,520)
------------ ------------ ------------ ------------ ------------ ------------
INCOME TAXES (CREDITS): - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) (444,374) (82,833) 2,282 457,299 (251,894) (319,520)
------------ ------------ ------------ ------------ ------------ ------------
PREFERRED STOCK DIVIDENDS - - - - 632,500 632,500
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS)
APPLICABLE TO COMMON
STOCKHOLDERS $ (444,374) $ (82,833) $ 2,282 $ 457,299 $ (884,394) $ (952,020)
============ ============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 2,844,819 - - - 131,843 2,976,662
============ ============ ============ ============ ============ ============
BASIC AND DILUTED
NET LOSS PER SHARE OF
COMMON STOCK $ (.16) $ (.32)
============ ============
</TABLE>
See the accompanying notes to pro forma financial statements.
F6-3
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE 1 - ACQUISITIONS:
On January 7, 1999, Cadapult acquired certain assets and assumed
certain liabilities of Tartan Technical, Inc. ("Tartan"), a Massachusetts
corporation for 185,700 shares of the registrant's common stock. Currently,
92,850 of these shares are held in escrow pursuant to the resolution of a
contingency based on Tartan achieving certain gross profit levels over the
next two years. On June 18, 1999, Cadapult acquired certain assets and
assumed certain liabilities of WEB Associates, Inc. ("WEB") a Pennsylvania
Corporation for $242,200 in cash and 172,380 shares of the registrant's
common stock. Currently 86,190 of theses shares are held in escrow pursuant
to the resolution of a contingency based on WEB achieving certain gross
profit levels over the next two years. On December 13, 1999, Media Sciences,
Inc. ("Media Sciences"), a wholly-owned subsidiary of Cadapult, completed the
acquisition of certain assets and the assumption of certain liabilities of
ultraHue, Inc. for $2,340,000 in cash, a note payable for $1,160,000 bearing
interest at 7% per annum due on the first anniversary of the closing and
$556,473 due to ultraHue as Cadapult liquidates receivables and inventory
purchased and satisfies the payables assumed. Each acquisition was accounted
for under the purchase method of accounting. Under the purchase method of
accounting, the results of operations of an acquired entity are included in
Cadapult's historical financial statements from its acquisition date.
Acquired assets and assumed liabilities have been recorded based on their
fair market value as of the date of acquisition with the excess of the
purchase price over the fair value of the net assets acquired allocated to
goodwill. The financial information of Tartan and WEB reflect the results of
operations of each entity for the interim period from July 1, 1998 to the
date of acquisition. The financial information of ultraHue reflects the
results of operations for the year ended December 31, 1998.
NOTE 2 - PRESENTATION AND PRO FORMA ADJUSTMENTS:
The unaudited pro forma condensed statements of operations for the year
ended June 30, 1999 presented above have been prepared as if the Acquisitions
had been consummated as of July 1, 1998.
Cadapult financed the Acquisition through the use of proceeds from
a private placement of its preferred stock ("the Offering"). The gross
proceeds of the Offering was $5,500,000, based on the sale of 550,000
Units at $10.00 per Unit. Expenses of the Offering were $922,242. The net
proceeds to Cadapult of $4,577,758 was used to acquire ultraHue ($2,500,000),
pay down trade payables ($892,758) and to reduce note payable to bank
($1,185,000).
Pro forma adjustments have been made for the following:
a) Amortization expense adjustments to reflect amortization of
goodwill over a 15-year period at $27,512 per year for
Tartan and WEB and $242,000 for ultraHue.
b) Depreciation expense adjustments to reflect increased
depreciation over a three year period for the fair value of
fixed assets acquired over book value at $26,648 per year
for Tartan and WEB and $4,000 per year for ultraHue.
c) To eliminate intercompany sales.
d) Pro forma interest expense is increased by $81,000 to
account for 7% annual interest on the ultraHue note.
Interest expense has also been reduced by $107,000 for the
payoff of $1,185,000 on the note payable to bank from the
net proceeds of the Offering.
NOTE 3 - NET LOSS PER SHARE:
Pro forma basic net loss per share is calculated by treating all shares
of Common Stock issued to Tartan and WEB as outstanding for the entire year.
The 179,040 shares in escrow will not be included in basic loss per share
until the contingency is resolved. The contingent shares are not required to
be included in the calculation of diluted loss per share until the
contingency is resolved.
Basic earnings (loss) per common share was calculated by dividing
net income (loss) applicable to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share was calculated by dividing net income by the sum of the weighted
average number of common shares outstanding plus all additional common shares
that would have been outstanding if potentially dilutive securities or common
stock equivalents had been issued. For purposes of diluted earnings per
share, conversion of the Series A Preferred Stock is not assumed as the
effect is anti-dilutive. The dilutive effect of outstanding stock options
and warrants issued by Cadapult is reflected by application of the treasury
stock method.
NOTE 4 - INTERCOMPANY TRANSACTIONS:
The pro forma statement of operations has been adjusted to eliminate
intercompany sales totalling $51,000 for the period from July 1, 1998 to June
30, 1999; the related intercompany profit was not significant.
F6-4
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE ACQUISITION
NINE MONTHS ENDED MARCH 31, 2000
(Unaudited)
<TABLE>
Historical ultraHue Adjustments Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 9,884,209 $ 1,403,555 $ (141,000)h $11,146,764
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 6,223,161 350,621 (141,000)h 6,432,782
Selling, general and administrative 3,130,441 486,294 111,000 d 3,727,735
----------- ----------- ----------- -----------
9,353,602 836,915 (30,000) 10,160,517
----------- ----------- ----------- -----------
OPERATING INCOME 530,607 566,640 (111,000) 986,247
----------- ----------- ----------- -----------
INTEREST EXPENSE (INCOME), NET 186,929 - (13,000)g 173,929
----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES (CREDITS) 347,678 566,640 (98,000) 812,318
INCOME TAXES (CREDITS) (79,529) - 188,000 e 108,471
----------- ----------- ----------- -----------
NET INCOME $ 423,207 $ 566,640 $ (286,000) $ 703,847
=========== =========== =========== ===========
PREFERRED STOCK DIVIDENDS $ 144,081 $ - $ 330,294 $ 474,375
=========== =========== =========== ===========
INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 279,126 $ 566,640 $ (616,294) $ 229,472
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 3,159,211 3,159,211
=========== ===========
Diluted 3,350,450 3,350,450
=========== ===========
NET INCOME PER SHARE
OF COMMON STOCK:
Basic $ .09 $ .07
=========== ===========
Diluted $ .08 $ .07
=========== ===========
</TABLE>
See the accompanying notes to pro forma financial statements.
F6-5
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATMEMENTS
REFLECTING THE ACQUISITION
NOTE A - On December 13, 1999, Media Science, Inc. ("Media Sciences"), a
wholly-owned subsidiary of Cadapult, completed the acquisition of certain
assets and the assumption of certain liabilities of ultraHue, Inc. for
$2,340,000 in cash and a note payable for $1,160,000 bearing interest at 7%
per annum due on the first anniversary of the closing.
NOTE B - The acquisition was accounted for under the purchase method of
accounting. Under the purchase method of accounting, the results of
operations of an acquired entity are included in Cadapult's historical
consolidated financial statements from its acquisition date. Under that
method of accounting, the acquired assets are included based on an allocation
of their aggregate purchase price as of their date of acquisition.
The unaudited pro forma statement of operations for the nine month period
ended March 31, 2000 has been prepared as if the Acquisition had been
consummated as of July 1, 1998.
Cadapult acquired the operations and equipment of ultraHue. Cash of the
acquired business will remain the property of the seller. Accounts
receivable, inventory and accounts payable will be liquidated by Cadapult and
paid to the Seller. The net equity of ultraHue has been eliminated in
combination.
NOTE C - The purchase price of the Acquisition was $3,550,000, plus
estimated costs of acquisition of approximately $128,000. An estimated
allocation of the purchase price is as follows:
Equipment $ 50,000
Goodwill 3,628,000
----------
$3,678,000
----------
Goodwill will be amortized over 15 years at a rate of $242,000 per year.
NOTE D - Cadapult financed the Acquisition through the use of proceeds from
a private placement of its preferred stock ("the Offering"). The gross
proceeds of the Offering was $5,500,000, based on the sale of
550,000 Units at $10.00 per Unit. Expenses of the Offering were $922,242.
The net proceeds to Cadapult of $4,577,758 was used to acquire ultraHue
($2,500,000), pay down trade payables ($892,758) and to reduce note payable
to bank ($1,185,000).
NOTE E - Income taxes (credits) is a result of the elimination of a
valuation allowance of $307,000 offset by a required tax provision of
$188,000.
F6-6
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
REFLECTING THE ACQUISITION
NOTE F - Basic earnings per common share was calculated by dividing
net income applicable to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share was calculated by dividing net income by the sum of the weighted
average number of common shares outstanding plus all additional common shares
that would have been outstanding if potentially dilutive securities or common
stock equivalents had been issued. For purposes of diluting earnings per
share, conversion of the Series A Preferred Stock is not assumed as the
effect is anti-dilutive. The dilutive effect of outstanding stock options
and warrants issued by Cadapult is reflected by application of the treasury
stock method.
NOTE G - Pro forma interest expense is increased by $37,000 to account for
7% annual interest due December 13, 1999 on the ultraHue note. Interest
expense has also been reduced by $50,000 for the payoff of $1,185,000
on the note payable to bank from the net proceeds of the Offering.
NOTE H - The pro forma statement of operations has been adjusted to
eliminate intercompany sales totalling $141,000 for the period from July 1,
1999 to December 13, 1999; the related intercompany profit was not
significant.
F6-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Our Certificate of Incorporation provides that to the fullest
extent permitted by the General Corporation Law of Delaware, including,
without limitation, as provided in Section 102(b)(7) of the General
Corporation Law of Delaware, as the same exists or may hereafter be amended,
any of our director shall not be personally liable to us or
our stockholders for monetary damages for breach of fiduciary duty as a
director. Section 102(b)(7) of the Delaware General Corporation Law permits
a corporation to provide in its certificate of incorporation that a director
of the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of the director's duty of loyalty to the
corporation or its stockholders;
- for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
- for payments of unlawful dividends or unlawful stock repurchases
or redemptions; or
- for any transaction from which the director derived an improper
personal benefit.
If the General Corporation Law of Delaware is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended. Any repeal or modification of
the provision of the Certificate of Incorporation by our stockholders
shall not adversely affect any right or protection of our directors
existing at the time of such repeal or modification or with respect to events
occurring prior to such time.
Our Certificate of Incorporation and Bylaws further provide for
the indemnification of our directors and officers to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law,
including circumstances in which indemnification is otherwise discretionary.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees
and individuals against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed actions, suits
or proceedings in which such person is made a party by reason of such person
being or having been a director, officer, employee of or agent to the
registrant. The statute provides that it is not exclusive of other rights to
which those seeking indemnification may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
<PAGE>
Our Certificate of Incorporation provides that (we will
indemnify any of our directors, officers, employees, or agents with respect
to actions, suits, or proceedings relating to us and, subject to
certain limitations, a director will not be personally liable for monetary
damages for breach of his or her fiduciary duty.
Our directors or officers , or a person who at our request
serves as a director, officer, employee or agent of another business
entity, shall be indemnified by us against all expense, liability and
loss, including attorneys' fees, judgments, fines, other expenses and losses,
that is reasonably incurred or suffered in connection with any action, suit
or proceeding or threatened action, suit or proceeding. For a person to
receive indemnification under this provision, our Board of Directors
must authorize the indemnification, and the person seeking
indemnification must agree to repay us for all amounts advanced to him
or her if a court of law ultimately determines that the person should not
have been indemnified by us. A person who is entitled to indemnification
may recover from us, and may sue us if we fail to make
timely payment.
Item 25. Other Expenses of Issuance and Distribution.
The following is a statement of the expenses, all of which are
estimated other than the SEC registration fee, other than underwriting
discounts and commissions, to be incurred in connection with the distribution
of the securities registered under this registration statement.
AMOUNT
TO BE PAID
----------
SEC registration fee..........................................$ 2,137
Legal fees and expenses....................................... 10,000
Blue Sky fees and expenses.................................... 2,000
Accounting fees and expenses.................................. 3,000
Printing expenses............................................. 2,000
---------
Total...................................................$ 19,137
=========
We will pay all of the expenses listed above. The selling stockholders
are responsible for any stock transfer taxes, transfer fees, and brokerage
commissions or underwriting discounts and commissions.
Item 26. Recent Sales of Unregistered Securities
On June 18, 1998, we completed the acquisition of CGSI in a
transaction viewed as a reverse acquisition. Pursuant to the acquisition,
we issued 1,650,000 unregistered and restricted shares of common stock
to the six stockholders of CGSI in exchange for all of the outstanding common
stock of CSGI in transactions deemed to be exempt under Section 4(2) of the
Securities Act. All of the shares of CGSI were beneficially owned by officers,
Directors, or management level employees of CGSI who had the knowledge and
experience in finance and business matters to evaluate the risks and merits
of the transaction. We provided to the CGSI shareholders all material
information about us, including copies of our filings with the SEC under the
Securities Act and the Exchange Act. We responded to all of their due
diligence requests and provided them access to any information that they
requested.
<PAGE>
Between June and August 1998, we conducted a private placement
through the sale of 524,000 shares of unregistered and restricted common
stock and raised gross proceeds of $655,000 in a transaction deemed to be
exempt under Rule 505 of Regulation D under the Securities Act. We
applied the net proceeds to working capital, including the acquisition of
other businesses. The private placement was conducted by our officers
and directors and was not underwritten. We did not engage in general
solicitation and advertising for the private placement. We sold these shares
of common stock to 20 accredited persons and 17 nonaccredited persons. We
provided all of them with all material information about us, as would normally
be provided in a registration statement, including copies of our most recent
10-KSB and 10-QSB reports. We provided them access to, and responded to any
questions and requests for, documents. Each purchaser represented to us that
the purchaser had such knowledge and experience in financial and business
maters as to be capable of evaluating the merits and risks of the investment.
We made a determination that each purchaser was a sophisticated investor with
enough knowledge and experience in business to evaluate the risks and merits
of the investment.
In August 1998, we issued 75,000 warrants to purchase shares of
common stock, exercisable for five years at $4.00 per shares, to our securities
counsel, Fischbein Badillo Wagner Harding, for legal services valued at
$13,043, in a transaction deemed to be exempt under Section 4(2) of the
Securities Act. We did not provide nor were we asked to provide any specific
information in connection with the transaction. As our securities counsel,
Fischbein Badillo Wagner Harding had the knowledge and experience in finance
and business matter to evaluate the risks and merits of the investment.
On January 7, 1999, we completed the acquisition of certain
assets of Tartan Technical, Inc. Under the asset purchase agreement,
we issued 92,850 shares of unregistered and restricted common stock to
Tartan Technical and reserved in escrow an additional 92,850 shares of
unregistered and restricted common stock for possible future issuance to
Tartan Technical in a transaction deemed to be exempt under Section 4(2) of
the Securities Act. In December 1999, we issued to Tartan Technical 34,818
shares of the escrowed common stock. In January 2000, we issued to Tartan
Technical 11,607 shares of the escrowed common stock and we issued an
additional 4,866 shares reserved in escrow were released to Tartan Technical
as a purchase price adjustment under the asset purchase agreement. Tartan
Technical was provided access to all material information about us, and we
responded to all of its requests for information about us. The
transaction was approved by Tartan Technical's board of directors and
shareholders who had the business knowledge and experience to evaluate the
risks and merits of the transaction.
In February 1999, we issued 30,000 warrants to purchase shares
of common stock, exercisable for five years at $5.00 per shares, to our
business counsel, Bruce Meisel, for legal services valued at $7,467, in a
transaction deemed to be exempt under Section 4(2) of the Securities Act. We
did not provide nor were we asked to provide any specific information in
connection with the transaction. As our business counsel, Bruce Meisel had
the knowledge and experience in finance and business matter to evaluate the
risks and merits of the investment.
<PAGE>
On June 23, 1999, we completed the acquisition of certain
assets of WEB Associates, Inc. Under the asset purchase agreement,
we issued 86,190 shares of unregistered and restricted common stock to
WEB Associates and reserved in escrow an additional 86,190 shares of
unregistered and restricted common stock for possible future issuance to WEB
Associates in a transaction deemed to be exempt under Section 4(2) of the
Securities Act. WEB Associates was provided access to all material
information about us, and we responded to all of its requests for information
about us. The transaction was approved by WEB Associates' a majority vote of
the board of directors and shareholders who had the business knowledge and
experience to evaluate the risks and merits of the transaction.
On September 13, 1999, we completed a private placement sale
of 127,750 shares of unregistered and restricted common stock, of which
50,000 shares were held in escrow and released in December 1999, and raised
gross proceeds of approximately $255,500 in transactions deemed to be
exempt under Rules 505 and 506 of Regulation D under the Securities Act.
We applied the net proceeds to development of our Internet-based
services, working capital, and other general corporate purposes. The
private placement was conducted by our officers and directors and
was not underwritten. We did not engage in general solicitation and
advertising for the private placement. We sold these shares of common stock
to 11 accredited persons and 6 nonaccredited persons. We provided all of
them with all material information about us, as would normally be provided in
a registration statement, including copies of our most recent 10-KSB and
10-QSB reports. We provided them access to, and responded to any questions
and requests for, documents. Each purchaser represented to us that
the purchaser had such knowledge and experience in financial and business
maters as to be capable of evaluating the merits and risks of the investment.
We made a determination that each purchaser was a sophisticated investor with
enough knowledge and experience in business to evaluate the risks and merits
of the investment.
In September 1999, we issued 15,000 shares of common stock to
our litigation counsel, Norris, McLaughlin & Marcus, P.A., for
legal services valued at $21,000, in a transaction deemed to be exempt under
Section 4(2) of the Securities Act. We did not provide nor were we asked
to provide any specific information in connection with the transaction.
As our litigation counsel, Norris, McLaughlin & Marcus, P.A. had the
knowledge and experience in finance and business matter to evaluate the
risks and merits of the investment.
On December 13, 1999, as part of our acquisition of ultraHue, Inc.,
Donald Gunn became an employee of our Media Sciences division. Under a three
year employment agreement, we issued to him options to purchase 50,001 shares
of our common stock in a transaction deemed to be exempt under Section 4(2) of
the Securities Act. The exercise price of the options is $3.125 per share.
One-third of the options vest on each of the three anniversary dates of
employment. As an officer, director and a controlling shareholder of
ultraHue, we provided to him, or he had access to, all material information
about us in connection with the asset purchase agreement between us and
ultraHue. On December 23, 1999, he was elected to our Board of Directors.
He has represented to us that he was an accredited investor and that he had
such knowledge and experience in financial and business maters as to be
capable of evaluating the merits and risks of the investment. We made a
determination that he was a sophisticated investor with enough knowledge
and experience in business to evaluate the risks and merits of the investment.
<PAGE>
On December 13, 1999, as part of our acquisition of ultraHue, Inc.,
Randy Hooker became an employee of our Media Sciences division. Under a three
year employment agreement, we issued to him options to purchase 50,001 shares
of our common stock in a transaction deemed to be exempt under Section 4(2) of
the Securities Act. The exercise price of the options is $3.125 per share.
One-third of the options vest on each of the three anniversary dates of
employment. As an officer, director and a controlling shareholder of
ultraHue, we provided to him, or he had access to, all material information
about us in connection with the asset purchase agreement between us and
ultraHue. He has represented to us that he was an accredited investor and
that he had such knowledge and experience in financial and business maters as
to be capable of evaluating the merits and risks of the investment. We made a
determination that he was a sophisticated investor with enough knowledge
and experience in business to evaluate the risks and merits of the investment.
In December 1999, we issued 10,435 shares of common stock to our
litigation counsel, Norris, McLaughlin & Marcus, P.A., for legal services
valued at $30,000, in a transaction deemed to be exempt under Section 4(2)
of the Securities Act. We did not provide nor were we asked to provide any
specific information in connection with the transaction. As our litigation
counsel, Norris, McLaughlin & Marcus, P.A. had the knowledge and experience
in finance and business matter to evaluate the risks and merits of the
investment.
From October 1999 to March 10, 2000, we conducted a private
placement of 550,000 units of our securities and raised gross proceeds of
approximately $5,500,000 in transactions deemed to be exempt under
Section 4(2) of the Securities Act and under Rule 506 of Regulation D
promulgated under the Securities Act. Each unit consisted of one share of
convertible preferred stock and warrants to purchase two shares of common
stock. Each warrant is exercisable for one share of common stock at a price
of $4.50 per share for a five year period. The private placement was
conducted by a placement agent on a best efforts basis. The placement agent
received as compensation up to 8% of the total gross sales as commission,
2% of the total gross sales as non-accountable expenses, and 3% of the total
gross sales as non-accountable marketing expenses. The placement agent
received five-year warrants to purchase 236,500 shares of common stock,
exercisable at $1.65 per share, and five-year warrants to purchase
550,000 shares of common stock, exercisable at $3.75. We sold these
units of our securities to 91 accredited persons. We provided all of them
with all material information about us, as would normally be provided in a
registration statement, including copies of our most recent 10-KSB. We
provided them access to, and responded to any requests for, any question and
documents asked of us. Each purchaser represented to us that the purchaser
was an accredited person who had financial, tax and business sophistication
to evaluate the merits and risks of the investment. The preferred stock is
convertible beginning 30 days after its issuance. The warrant is immediately
exercisable. The units must be held by the purchaser for a minimum
of one year. We agreed to file a registration statement, at our expense, for
the sale of common stock underlying the units so that the purchaser can sell
its shares in the public market immediately after the one year holding
period. Each purchaser represented to us that the purchaser was an accredited
person who had financial, tax and business sophistication to evaluate the
merits and risks of the investment and agreed that the purchaser has no right
to demand that the units be registered. We made a determination that each
purchaser was an accredited investor and that each purchaser was a
sophisticated investor with enough knowledge and experience
in business to evaluate the risks and merits of the investment.
<PAGE>
Item 27. Exhibits
The following exhibits either are filed herewith or incorporated by
reference to documents previously filed or will be filed by amendment, as
indicated below:
Exhibit Description
------- -----------
2.1 Agreement and Plan or Reorganization between Seafoods Plus, Ltd.
and Cadapult Graphic Systems, Inc., a New Jersey corporation,
dated June 5, 1998 (Incorporated by reference to Exhibit 2.1 of
Annual Report on Form 10KSB filed on September 28, 1999).
2.2 Agreement and Plan of Merger between Cadapult Graphic Systems, Inc.
and Seafoods Plus, Ltd. (Incorporated by reference to Exhibit 2.1
of Quarterly Report on Form 10QSB/A filed on September 1, 1998).
2.3 Agreement and Plan of Merger between Cadapult Graphic Systems Inc.,
a New Jersey corporation, and Cadapult Graphic Systems, Inc., a
Delaware Corporation (Incorporated by reference to Exhibit 2.2 of
Quarterly Report on Form 10QSB/A filed on September 1, 1998).
2.4 Asset Purchase Agreement between Cadapult Graphic Systems, Inc. and
BBG Technologies, Inc. (Incorporated by reference to Exhibit 2.4 of
Annual Report on Form 10KSB filed on September 28, 1999).
2.5 Asset Purchase Agreement between Cadapult Graphic Systems, Inc. and
Tartan Technical, Inc. dated December 17, 1998 (Incorporated by
reference to Exhibit 2.5 of Annual Report on Form 10KSB filed on
September 28, 1999).
2.6 Asset Purchase Agreement between Cadapult Graphic Systems, Inc. and
WEB Associates, Inc. dated June 7, 1999 (Incorporated by reference
to Exhibit 2.6 of Annual Report on Form 10KSB filed on September
28, 1999).
2.7* Asset Purchase Agreement between Media Sciences, Inc. and
ultraHue, Inc. dated September 7, 1999
3(i)(1) Certificate of Incorporation of Cadapult Graphic Systems, Inc., a
Delaware corporation (Incorporated by reference to Exhibit 3.1 of
Quarterly Report on Form 10QSB/A filed on September 1, 1998).
3(i)(2) Certificate of Merger of Seafoods Plus, Ltd. into Cadapult
Graphic Systems, Inc., a Delaware corporation (Incorporated by
reference to Exhibit 3.1 of Quarterly Report on Form 10QSB filed
on November 9, 1998).
3(i)(3) Certificate of Merger of Domestic and Foreign Corporations into
Cadapult Graphic Systems, Inc.(Incorporated by reference to
Exhibit 3.2 of Quarterly Report on Form 10QSB filed on November 9,
1998).
3(i)(4) Certificate of Ownership and Merger Merging Cadapult Graphic
Systems Inc. into Cadapult Graphic Systems, Inc. (Incorporated by
reference to Exhibit 3.3 of Quarterly Report on Form 10QSB filed
on November 9, 1998).
3(i)(5) Certificate of Amendment of Certificate of Incorporation of
Cadapult Graphic Systems, Inc. (Incorporated by reference to
Exhibit 3(i)(5) of Annual Report on Form 10KSB filed on
September 28, 1999).
3(i)(6) Certificate of Incorporation of Media Sciences, Inc.
(Incorporated by reference to Exhibit 3(i)(6) of Annual Report
on Form 10KSB filed on September 28, 1999).
<PAGE>
3(ii) By-Laws (Incorporated by reference to Exhibit 3.2 of Quarterly
Report on Form 10QSB/A filed on September 1, 1998).
4.1 1998 Incentive Plan (Incentive Stock Option Plan) (Incorporated
by reference to Exhibit 4.1 of Annual Report on Form 10KSB filed
on September 28, 1999).
4.2 Form of Option Agreement for Management (Incorporated by reference
to Exhibit 4.2 of Annual Report on Form 10KSB filed on September
28, 1999).
4.3 Form of Option Agreement for Employees (Incorporated by reference to
Exhibit 4.3 of Annual Report on Form 10KSB filed on September 28,
1999).
4.4 Form of Warrant Certificate (Incorporated by reference to Exhibit
4.4 of Annual Report on Form 10KSB filed on September 28, 1999).
4.5 Certificate of Designation (Incorporated by reference to Exhibit
4.5 of Registration Statement on Form SB-2 filed on November 15,
1999).
4.6 Form of Warrant Certificate for Purchasers of Units
5** Opinion of Law Offices of Dan Brecher as to validity of Common
Stock being offered.
10.1 Amended Employment Agreement of Michael W. Levin dated as of
September 1, 1998 (Incorporated by reference to Exhibit 10.4 of
Annual Report on Form 10KSB filed on September 28, 1999).
10.2 Amended Employment Agreement of Duncan Huyler (Incorporated by
reference to Exhibit 3.2 of Quarterly Report on Form 10QSB filed on
May 4, 1999).
10.3 Amended Employment Agreement of Frances Blanco (Incorporated by
reference to Exhibit 3.3 of Quarterly Report on Form 10QSB filed
on May 4, 1999).
10.4 Lease (Incorporated by reference to Exhibit 10.8 of Annual Report
on Form 10KSB filed on September 28, 1999).
10.5* Tektronix, Inc. Value Added Dealer Agreement, August 1, 1991
10.6* Tektronix, Inc. Value Added Dealer Agreement, Supplement A,
September 1, 1992
10.7* Tektronix, Inc. Value Added Dealer Agreement, Amendment,
July 1, 1993
10.8* Tektronix, Inc. Value Added Dealer Agreement, Supplement A,
July 1, 1994
10.9* Tektronix, Inc. Dealer Agreement, 1995 Amendment
10.10* Tektronix, Inc. Value Added Dealer Agreement, Premier Reseller
Supplement A, July 29, 1996
10.11* Tektronix, Inc. Reseller Agreement, Premier Reseller Supplement A,
December 2, 1996
16* Letter on change in certifying accountant
21 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21 of Annual Report on Form 10KSB filed on September 28,
1999).
23.1** Consent of Law Offices of Dan Brecher (filed as Exhibit 5
herein)
23.2** Consent of Wiss & Company LLP
23.3** Consent of Belanger & Company, P.C.
23.4** Consent of Rucci, Bardaro + Barrett, P.C.
_____
* Previously filed.
** Filed herewith.
<PAGE>
Item 28. Undertakings.
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and
(c) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
<PAGE>
(C) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted against the registrant by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and
authorized this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Allendale, State of
New Jersey, on June 29, 2000.
CADAPULT GRAPHIC SYSTEMS, INC.
By: /s/ Michael W. Levin
-------------------------------------
Michael W. Levin
Chief Executive Officer and President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Michael W. Levin Chairman of the Board, President June 29, 2000
---------------------- Chief Executive Officer,
Michael W. Levin Principal Financial Officer, and
Principal Accounting Officer
/s/ Frances Blanco Vice President, Secretary, June 29, 2000
---------------------- Treasurer and Director
Frances Blanco
/s/ Paul C. Baker Director June 29, 2000
----------------------
Paul C. Baker
/s/ Donald Gunn Director June 29, 2000
----------------------
Donald Gunn
</TABLE>
