FORM 10-QSB/A
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ___________.
Commission file number 0-21853
CADAPULT GRAPHIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0475073
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
110 Commerce Drive, Allendale, New Jersey 07401
(Address of principal executive offices)
(201) 236-1100
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of May 8, 2000,
the issuer had 3,218,451 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
CADAPULT GRAPHIC SYSTEMS, INC.
AND SUBSIDIARIES
AMENDMENT NO. 1 TO
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 2000 and 4
June 30, 1999
Consolidated Statements of Operations 5
For the Three Months and Nine Months Ended
March 31, 2000 and 1999
Consolidated Statement of Changes in Shareholder's 6
Equity For the Nine Months Ended March 31, 2000
Consolidated Statements of Cash Flows 7
For the Nine Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index to Financial Statements:
Consolidated Balance Sheets as of March 31, 2000 and
June 30, 1999
Consolidated Statements of Operations
For the Three Months and Nine Months Ended
March 31, 2000 and 1999
Consolidated Statement of Changes in Shareholder's
Equity For the Nine Months Ended March 31, 2000
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
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<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.
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<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.
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<PAGE>
Cadapult Graphic Systems, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
Nine Months Ended March 31, 2000
(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.
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<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.
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<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 ("CGSI"); all of the stockholders of CGSI (the "CGSI
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 CSI became a wholly-owned
subsidiary. The Plan was treated as a recapitalization of CGSI 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 CGSI'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 authorized a Parent/Subsidiary merger of the two companies.
On June 24, 1998 we elected to change our fiscal year from a April 30
year end to a June 30 year end.
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.
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<PAGE>
NOTE 3 - PRIVATE PLACEMENT
On October 1, 1999, we entered into a Managing Dealer Agreement with a
placement agent wherein the placement agent would, on a best efforts basis,
offer up to $5,000,000 of our convertible adjustable preferred stock 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 was priced at $10.00 and
included 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 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.
We have the right to call the Series A at $15.00 per share at any time.
Holders have the right to convert upon receipt of the call notice.
We have agreed to file a registration statement 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.
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 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
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.
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.
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<PAGE>
NOTE 5 - 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.
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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following discussion and analysis in conjunction
with the information set forth in the unaudited financial statements and
notes thereto, included elsewhere herein, and the audited financial
statements and the notes thereto, included in our Form 10-KSB filed September
27, 1999.
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.
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<PAGE>
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.
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.
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 private offering of up to $5,000,000. The private
offering was of 500,000 units of our securities with a face value of $10.00
per unit, each unit consisting of one share of convertible adjustable
preferred stock and one warrant to purchase two shares of common stock at
$4.50. The preferred stock will originally be convertible at $3.25 per
share. In addition, the preferred stock will carry a dividend, paid
quarterly, of 11.5% per annum. The offering was sold to accredited investors
only in states where permitted. The use of proceeds will be targeted at
additional acquisitions, expansion of Cadapult's "No-Cap Color" printer
program and for working capital. The offering was on a "best efforts" basis,
but could ultimately raise up to $11 million for Cadapult if the included
warrants are exercised. In December 1999, our Board of Directors approved an
increase of the private offering 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.
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<PAGE>
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.
Borrowings bear interest at 2% over the lender's base rate, are payable on
demand and are collateralized by all assets of Cadapult. As of March 31,
2000 we had used $543,858 of this line.
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 its 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. In the event that
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/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 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 at this time. Because we believe our Year 2000
investigation provided reasonable assurance that we would not encounter
significant Year 2000 problems, we did not create a contingency plan.
To date, we have not experienced any Year 2000 problems that have disrupted
our business, although we cannot assure you that Year 2000 problems will not
arise in the future. We will continue to monitor how Year 2000 issues may
affect us through June 2000, and we will create a contingency plan if we
begin to encounter Year 2000 problems.
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<PAGE>
Forward Looking Statements
The foregoing management discussion and analysis contains forward-looking
statements and information that are based on management's beliefs, as well as
assumptions made by, and information currently available to, management.
These forward-looking statements are based on many assumptions and factors,
and are subject to many conditions, including our continuing ability to
obtain additional financing, dependence on contracts with suppliers,
competitive pricing for our products, demand for our products which depends
upon the condition of the computer industry, and the effects of increased
indebtedness as a result of our business acquisitions. Except for the
historical information contained in this new release, all forward-looking
information are estimates by our management and are subject to various risks,
uncertainties and other factors that may be beyond our control and may cause
results to differ from management's current expectations, which may cause our
actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 Graphic Systems, Inc. and Media Sciences Inc. 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.
As of May 1, 2000, we have not yet been served by Xerox with the motion
to intervene or the amended answer. Xerox seeks to intervene in the action
and assert counterclaims against us alleging that we may have 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 oppose the Xerox motion to intervene and to deny
all counterclaims brought against us.
The above proceeding is a separate proceeding from the August 1999 action
we instituted against Tektronix, Inc. which is presently pending in the United
States District Court for the District of New Jersey. In that 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., assets of which corporation we have since acquired.
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. Although we do
not believe that the loss of this 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.
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<PAGE>
ITEM 2. CHANGES IN SECURITIES
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 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.
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
is receiving 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 will
also receive a number of five-year warrants, exercisable at $1.65 per share,
equal to 4.3% of the total gross sales and a number of five-year warrants,
exercisable at $3.75, equal to 10% of the total gross sales 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 intend 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 a sophisticated investor with enough knowledge and experience
in business to evaluate the risks and merits of the investment.
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<PAGE>
ITEM 5. OTHER INFORMATION
In our report on Form 8-K, filed on or about July 13, 1998, we reported
that we dismissed Mantyla McReynolds & Associates as our principal
accountants. In the Form 8-K, we reported that the following:
- Mantyla McReynolds & Associates' report on the financial statements
for either of the two years ended December 31, 1996 and 1997
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 Mantyla McReynolds & Associates on
any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure; and
- we authorized Mantyla McReynolds & Associates to respond fully to
all inquires of the successor accountant concerning any matter.
As an exhibit to the Form 8-K, we filed a letter from Mantyla McReynolds
& Associates stating that it agreed with our disclosure statements with
respect to its being dismissed as our principal accountants and its audit
reports.
On or about February 7, 2000, we filed an amendment to the Form 8-K,
which includes a letter from Mantyla McReynolds & Associates, to clarify that
Mantyla McReynolds & Associates agreed with our disclosure that there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed with this report:
Exhibit Number Description of Exhibit
Exhibit 11 Statement Concerning Computation of Per Share Earnings is
hereby incorporated by reference to "Financial Statements"
of Part I - Financial Information, Item 1 - Financial
Statements, contained in this Form 10-QSB/A.
Exhibit 16 Letter on change in certifying accountant
Exhibit 27 Financial Data Schedule for the nine months ended March
31, 2000
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CADAPULT GRAPHIC SYSTEMS, INC.
Date: June 13, 2000 /s/ Michael W. Levin
-------------------------------------
Michael W. Levin
President and Chief Executive Officer
Date: June 13, 2000 /s/ Frances Blanco
-------------------------------------
Frances Blanco
Vice President and Treasurer
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