<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000
REGISTRATION NO. 333-92191
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COLORSMART.COM, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------------------------
<TABLE>
<S> <C> <C>
NEVADA 2750 62-17217446
(State or (Primary Standard (I.R.S. Employer
Jurisdiction of Incorporation Industrial Classification Identification
or Organization) Code Number Number)
</TABLE>
------------------------
537 MYATT DRIVE
MADISON, TENNESSEE 37115
615-612-4002
(Address and Telephone Number of Principal Executive Offices)
------------------------------
ROGER D. FINCHUM, SR.
CHIEF EXECUTIVE OFFICER
COLORSMART.COM, INC.
537 MYATT DRIVE
MADISON, TENNESSEE 37115
615-612-4002 (TELEPHONE)
615-612-4005 (FACSIMILE)
(Name, Address, And Telephone Number Of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
EDWARD H. BURNBAUM, ESQ. GREGORY BARTKO, ESQ. JAY M. KAPLOWITZ, ESQ.
LYNCH ROWIN NOVACK BURNBAUM & 3475 LENOX ROAD ARTHUR S. MARCUS, ESQ.
CRYSTAL, P.C. SUITE 400 GERSTEN, SAVAGE & KAPLOWITZ, LLP
300 EAST 42(ND) STREET ATLANTA, GEORGIA 30326 101 EAST 52(ND) STREET
NEW YORK, NEW YORK 10017 404-238-0550 (TELEPHONE) NEW YORK, NEW YORK 10022
(212) 682-4002 (TELEPHONE) 404-238-0551 (FACSIMILE) (212) 752-9700 (TELEPHONE)
(212) 986-2907 (FACSIMILE) (212) 980-5192 (FACSIMILE)
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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,
check the following box: [ ]
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE MAXIMUM
BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
Shares of common stock, par value $.001 per
share (2).................................. 2,300,000 $12.00 $27,600,000 $7,673
Representative's warrants (4)................ 200,000 $ .001 $ 200 --
Common stock issuable upon exercise of the
representative's warrants (3).............. 200,000 $19.80 $ 3,960,000 $1,101
Total........................................ 2,700,000 -- 31,560,200 $8,774
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act.
(2) Includes 300,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(3) Pursuant to Rule 416, we are registering additional securities as may become
issuable pursuant to the anti-dilution provisions of the representative's
warrants.
(4) No registration fee is required pursuant to Rule 457 of the Securities Act.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 17, 2000
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY 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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
[LOGO]
COLORSMART.COM, INC.
2,000,000 SHARES
COMMON STOCK
This is an initial public offering of 2,000,000 shares of
ColorSmart.com, Inc. Before this offering, there has been no public market for
any of our securities. We anticipate that the initial public offering price
range will be $10.00 to $12.00 per share.
These are speculative securities and investors will experience significant
dilution. Investing in the shares involves certain risks. See "Risk Factors"
beginning on page 6.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
- - Price to the public...................................... $12.00 $24,000,000
- - Underwriting discounts and commissions................... $ 1.08 $ 2,640,000
- - Proceeds, before expenses, to ColorSmart................. $10.92 $21,360,000
</TABLE>
The underwriters may, under certain circumstances, purchase an additional
300,000 shares from us at the initial public offering price less the
underwriting discount to cover any over-allotments.
Delivery of the securities offered hereby will be made on or about
, 2000, in New York, New York. The underwriters are offering the
shares on a firm commitment basis.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
U.S. Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and we are not soliciting an offer to buy these
securities, in any state where the offer and sale is not permitted.
NUTMEG SECURITIES, LTD.
Prospectus Dated May , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Prospectus Summary.......................................... 1
The Offering................................................ 3
Summary Financial Data...................................... 4
Risk Factors................................................ 6
Cautionary Note Regarding Forward-Looking Statements........ 9
Use Of Proceeds............................................. 9
Dividend Policy............................................. 10
Capitalization.............................................. 11
Dilution.................................................... 12
Selected Consolidated Financial Data........................ 13
Management's Discussion And Analysis Of Financial Condition
And Results Of
Operations................................................ 15
Business.................................................... 21
Management.................................................. 29
Certain Transactions........................................ 34
Principal Stockholders...................................... 35
Description Of Securities................................... 35
Shares Eligible For Future Sale............................. 38
Underwriting................................................ 39
Legal Matters............................................... 41
Experts..................................................... 41
ColorSmart.com, Inc. Financial Statements................... F-1
1199 MAC, Inc., d/b/a Magnum Digital Services Financial
Statements................................................ F-17
Display Arts, Inc. Financial Statements..................... F-29
Advertising That Works, Inc. Financial Statements........... F-41
Virtual Support CC.......................................... F-50
Virtual Colour Printing CC.................................. F-62
Virtual Colour Properties CC................................ F-74
Virtual Colour CC........................................... F-85
Stonehouse Graphics (Pty) Limited Financial Statements...... F-99
Top Copy CC Financial Statements............................ F-109
ColorSmart.com, Inc. Consolidated Pro Forma Financial
Statements................................................ F-119
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT
INVESTORS SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. INVESTORS SHOULD
READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS THAT
ARE A PART OF THIS PROSPECTUS.
OUR BUSINESS
We are positioning ourselves through a series of acquisitions to become a
leading consolidator in the digital graphics industry and we believe we will be
one of the largest digital graphics companies in the Southeastern United States
and in the Republic of South Africa. Our comprehensive electronic commerce
applications allow businesses to privately access their own virtual portfolio of
digitally created printed graphics and multimedia applications through our fully
secure web site. We believe our applications of leading edge Internet and
digital technology enables us to be price-competitive while providing customers
with the highest level of security, selection, speed and support.
Commercial digital graphics involves the production of a wide range of
marketing, advertising and media imaging and digital printing using cutting-edge
software and digital printing equipment. It is the digitizing of the input that
reduces production time, costs and errors and provides the flexibility to handle
small, specialized jobs as easily as producing simple, mass-produced jobs.
Digital printing and imaging customers include companies of all sizes and in all
industries where full-color imaging and production are required. Our digital
printing technologies enable us to receive and deliver customer services most
effectively through our Internet applications.
Key elements of our business strategy include:
- Focusing primarily on the Internet business-to-business market for digital
printing services;
- Utilizing the most current digital and multimedia technology available to
maintain a technological edge over our competition;
- Expanding beyond traditional printing products and services into
multimedia video and audio business-to-business applications primarily
tailored for the Internet and CD-ROM;
ACQUISITIONS
We have entered into agreements to purchase the stock or assets of companies
that have operating histories of up to 11 years, with strong, experienced
management teams, solid customer bases and reputations of providing the highest
levels of quality service and products. These companies further our goal of
providing a full range of digital graphic products and services to other
geographic areas and increasing our market share in the Southeastern United
States and the Republic of South Africa. We will continue to analyze future
acquisitions in the United States, Europe and South Africa. We have entered into
agreements with the following companies:
- Magnum Digital Services specializes in a process known as dye sublimation,
in which digital images are applied to a variety of mediums ranging from
paper to stone and just about any medium in between. The delicate
sublimation process heats the ink until it becomes a gas, at which time
the images are transferred in to, rather than on to, the medium. The
company is located in Coconut Creek, Florida and has been operating for
five years.
- Advertising That Works is a wholesaler, fabricator, and finisher of
banners and screen printed posters. This company expects to be 100%
digital by the third quarter of 2000. The company is located in Atlanta,
Georgia and has been operating for 10 years.
1
<PAGE>
- Stonehouse Graphics is one of two billboard and backlit fabricators in the
Republic of South Africa. The company accounts for 40% of the billboard
printing done in southern Africa. The company, which is 100% digital, is
located in Johannesburg, South Africa and has been operating for
11 years.
- Display Arts specializes in trade show graphics and trade show display
booths. They are the exclusive regional distributor for Nimlock products,
a leading display manufacturing company. The company has locations in
Nashville, Memphis, and Knoxville, Tennessee and has been operating for
10 years.
- Top Copy specializes in copying services and offset print services. They
cater to small business as well as the retail trade. The company is
located in Cape Town, South Africa and has been operating for three years.
We will be acquiring substantially all of the assets of Top Copy.
- Virtual Colour Group is one of the leaders in digital services technology
in South Africa. They are a fully digital shop offering both design and
print services for brochures, catalogs, and magazines on an international
basis. The company is located in Cape Town, South Africa and has been
operating for four years. The Virtual Colour Group consists of six
companies that are operated as a single entity. Throughout this
prospectus, we refer to the four companies whose assets we are acquiring
as a single group called Virtual Colour Group.
In addition to the acquisitions described above, we have acquired over 21%
of the outstanding common stock of Jamberry Lake Digital Media, Inc. Jamberry
specializes in producing digital products and services for use on the Internet,
as well as traditional marketing and promotional campaigns, revolving around CD
and mini CD-Rom. Jamberry is located in Summit, New Jersey and has been
operating since August 1999.
A partial list of the clients of the companies listed above include: ABSA
South Africa, Allstate, Autozone, Bank of America, Bell South, Carnival Cruise
Lines, Coca-Cola, Columbia Healthcare, Federal Express, First Union Bank, Fruit
of the Loom, Hewlett Packard, IBM, Ingram Book, McDonalds, MCI WorldCom,
Motorola, Nations Bank, Nissan Motor Corporation, Phillip Morris, RCA Music,
Saturn Corporation, Siemens, South African Breweries, Standard Bank, United
Parcel Service, U.S. Post Office, Visa, Wachovia, and Willis Corroon.
CORPORATE BACKGROUND
We were incorporated on July 18, 1997, as ColorSmart, Inc., in Nevada. On
December 29, 1998, we amended our certificate of incorporation to change our
name to ColorSmart.com, Inc. We have conducted our business under that name
since the amendment. Our executive office is located at 537 Myatt Drive,
Madison, Tennessee. Our telephone number is (615) 612-4002. Our facsimile number
is (615) 612-4005. Our web site address is www.colorsmart.com. In this
prospectus, "ColorSmart," "we", "us" and "our" refer to ColorSmart.com, Inc.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities that we are offering.................... 2,000,000 shares of our common stock.
Common stock outstanding before this offering...... 4,257,112 shares.
Common stock to be outstanding after this
offering......................................... 6,257,112 shares.
Preferred stock outstanding before this offering... 33,610 shares.
Preferred stock outstanding after the offering..... 33,610 shares.
Use of proceeds.................................... Towards the cash portion of the purchase price
for the acquisitions described above; new
equipment purchases; implementation of a
marketing program; expansion of our business
through the hiring of additional personnel; and,
general corporate purposes.
Proposed NASDAQ National Market System symbol
Common stock..................................... "COLR"
</TABLE>
Unless stated otherwise, all information in this prospectus assumes:
- an initial public offering price of $12.00 per share; and excludes
- the exercise of the underwriter's over-allotment option to purchase
300,000 shares; and
- the exercise of the 200,000 common stock purchase warrants granted
to Nutmeg Securities, Ltd., the representative of the underwriters,
to purchase 200,000 shares of our common stock exercisable at 165%
of the initial public offering price, or $19.80 per share.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to us and the securities offered by this prospectus,
reference is made to the registration statement and the exhibits and schedules
thereto. Statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement are
not necessarily complete and are qualified in their entirety by reference to the
exhibits for a complete statement of their terms and conditions.
The registration statement, including all amendments, exhibits and schedules
thereto, may be inspected without charge at the offices of the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street NW, Washington, D.C.
20549 and the Commission's regional offices located at 7 World Trade Center,
13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of this material may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street
NW, Washington, DC. 20549. The Securities and Exchange Commission also maintains
a Web site (http://www.sec.gov) through which the registration statement and
other information can be retrieved.
We intend to apply for listing of our securities on the Nasdaq National
Market System, and upon listing, investors can obtain information about us on
its Web site, (http://www.Nasdaqamex.com.)
Upon effectiveness of the registration statement, we will be subject to the
reporting and other requirements of the Securities Exchange Act of 1934 and
intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants and to make available
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business for the
years ended November 30, 1998 and 1999. The financial data summarized below on a
proforma basis assumes the consummation of all nine of the acquisitions we have
pending at the date of this prospectus on the terms included in the acquisition
agreements.
The following information is qualified by reference to, and should be read
together with, the historical financial data for the years ended November 30,
1998 and 1999 and should be read in conjunction with our audited financial
statements included elsewhere in this prospectus. The data presented below
should also be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
accompanying notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------
NOVEMBER NOVEMBER
30, 1998 30, 1999
---------- -----------
<S> <C> <C>
Statement of Operations Data:
Revenues............................................ $ 127,191 $ 57,617
Cost of revenues.................................... 63,886 40,469
Operating costs and expenses........................ 757,059 1,081,177
---------- -----------
(Loss) income from operations....................... (693,754) (1,064,029)
Interest expense (net of interest income)........... (920) (20,706)
---------- -----------
Net loss............................................ $(694,674) $(1,084,735)
---------- -----------
Basic and diluted earnings (loss) per share......... $ (.22) $ (.27)
Shares used in computing basic and diluted earnings
per share......................................... 3,110,229 4,051,971
</TABLE>
The following table includes a summary of our balance sheet at November ,
1999:
- on an actual basis;
- on a pro forma basis giving effect to the consummation of the nine
acquisitions we have pending at the date of this prospectus on the
terms included in the acquisition agreements; the issuance of 33,610
shares of our preferred stock and 33,610 common stock purchase warrants
exercisable to purchase 33,610 shares of our common stock at $5.00 per
share, which were combined and sold as units pursuant to Rule 506 of
Regulation D at $15.00 per unit in connection with our private
placement conducted from July 10, 1999 through November 15, 1999, which
resulted in our receipt of $252,075 in aggregate offering proceeds;
- as adjusted to give affect to the issuance of 2,000,000 shares of
common stock offered by us at an offering price of $12.00 per share;
the consummation of all nine of the acquisitions we have pending at the
date of this prospectus on the terms included in the acquisition
agreements; the issuance of 33,610 shares of our preferred stock and
33,610 common stock purchase warrants exercisable to purchase 33,610
shares of our common stock at $5.00 per share, which were combined and
sold as units pursuant to Rule 506 of Regulation D at $15.00 per unit
in
4
<PAGE>
connection with our private placement conducted from July 10, 1999 to
November 15, 1999, resulting in our receipt of $252,075 in aggregate
offering proceeds.
<TABLE>
<CAPTION>
NOVEMBER 30, 1999 AS
ACTUAL PRO FORMA ADJUSTED
----------------- ----------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................... $ -- $ 132,414 $13,692,414
Total working capital (deficit).................... (207,326) (272,716) 13,287,284
Total assets....................................... 958,650 9,880,198 23,439,064
Short term debt, current portion of long term
liabilities and current related party
obligations...................................... 138,845 163,587 163,587
Long term debt..................................... 75,035 -0- -0-
Total liabilities.................................. 313,361 1,541,148 1,541,148
Stockholders' equity............................... 645,289 8,339,050 21,897,916
--------- ----------- -----------
Total liabilities and stockholders' equity... $ 958,650 9,880,198 23,439,064
========= =========== ===========
</TABLE>
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS BEFORE INVESTING IN OUR SECURITIES.
WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES ENCOUNTERED BY
EARLY STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS. Although some of our
targeted acquisitions have historical operating histories, we have a limited
operating history and have only been providing our services and digital graphics
products since July 1997. Our prospects must be considered in light of the
risks, expenses, delays, problems and difficulties frequently experienced by
early stage companies.
WE HAVE INCURRED NET LOSSES SINCE COMMENCING OUR BUSINESS AND EXPECT LOSSES
FROM OPERATIONS IN THE FUTURE. We have not achieved profitability and expect to
continue to incur operating losses for the foreseeable future. We expect to
continue to incur significant operating and capital expenditures and, as a
result, we expect significant net losses in the future and we will need to
generate significant revenues to achieve and maintain profitability.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS. We may require
additional funding. We currently do not have a credit facility or any
commitments for additional financing from either our management or from other
third party sources. If adequate funds are not available on a timely basis or on
acceptable terms, we may be unable to fund our expansion, develop or enhance our
services or respond to competitive pressures.
THE FUTURE SALE OF OUR SECURITIES WILL DILUTE THE PERCENTAGE OWNERSHIP OF
STOCKHOLDERS. If we raise additional capital through the sale of equity,
including preferred stock, or convertible debt securities, the percentage of
ownership of our stockholders will be diluted.
SINCE THE E-COMMERCE DIGITAL GRAPHICS MARKET IS RELATIVELY NEW, WE DO NOT
KNOW IF OUR SERVICES WILL GENERATE MARKET ACCEPTANCE. The commercial market for
e-commerce digital graphics services and products is relatively new and we do
not know if our products and services will generate widespread market
acceptance. Several factors may contribute to our products and services not
achieving broad market acceptance, which include:
- Failure to build brand recognition of ColorSmart.com;
- Increased competition among other consolidators; and
- Failure of clientele to use our electronic commerce site.
SINCE WE UTILIZE E-COMMERCE APPLICATIONS OVER THE INTERNET, THERE ARE RISKS
TO OUR BUSINESS THAT ARE ASSOCIATED WITH ONLINE COMMERCE. We rely on encryption
and authentication technology licensed from third parties to effect secure
transmission of confidential information. If any compromise of our security
occurs, it would injure our reputation and could impact the success of our
business.
THE TECHNOLOGIES WE USE IN OUR DIGITAL GRAPHICS BUSINESS ARE SUBJECT TO
RAPID TECHNOLOGICAL CHANGE AND COULD CAUSE US TO MAKE SIGNIFICANT CAPITAL
INVESTMENT IN NEW EQUIPMENT. Newer technologies, techniques or products for the
delivery of digital graphics, and the other ancillary services we offer, could
be developed with better performance than the technologies that we use. The
availability of new and better technologies could require us to make significant
investments in technology, render our current technology obsolete and have a
significant negative impact on our business and results of operations.
OUR BUSINESS FACES RISKS ASSOCIATED WITH UNCERTAINTIES ASSOCIATED WITH THE
INTERNET AND ELECTRONIC COMMERCE. A number of legislative and regulatory
proposals under consideration by federal, state, local and foreign governmental
organizations may lead to laws or regulations concerning various aspects of the
Internet, including: online content; user privacy; taxation; access charges;
liability for third-party activities; and jurisdiction. The adoption of new laws
is uncertain. The adoption of new laws or the application of
6
<PAGE>
existing laws may decrease the use of the Internet, which would decrease the
demand for our services, increase our cost of doing business or otherwise have
an adverse effect on our business.
INCREASED INTERNET ACCESS FEES COULD LESSEN DEMAND FOR OUR
SERVICES. Certain telephone carriers claim that the increasing popularity of
the Internet has burdened the existing telecommunications infrastructure. These
carriers have petitioned the Federal Communications Commission to impose access
fees on Internet service providers. If these access fees are imposed, the costs
of using the Internet could increase, which could decrease demand for our
services and increase our cost of doing business.
THE NATURE OF OUR PRINTING AND GRAPHICS BUSINESS IS SUCH THAT OPERATING
RESULTS MAY FLUCTUATE DUE TO A NUMBER OF FACTORS, SUCH AS THE SUCCESS OF OUR
ACQUISITIONS, OUR CUSTOMER BUYING PATTERNS AND OVERALL TRENDS IN THE
ECONOMY. Our operating results have fluctuated as a result of a number of
factors, including overall trends in the economy, acquisitions of the new
businesses that we have under contract and customer buying patterns, which are
characterized by individual orders from customers rather than long-term
contracts. As such, we are not able to forecast, for more than a few months in
advance, the number, size and profitability of printing jobs in a given period.
Consequently, the timing of projects in any quarter could have a significant
impact on financial results in that quarter.
WE HAVE ENTERED INTO AGREEMENTS TO ACQUIRE THE STOCK OR ASSETS OF NINE
SEPARATE BUSINESSES PERFORMING DIGITAL PRINTING AND MULTIMEDIA SERVICES. THESE
ACQUISITIONS MAY HAVE ADVERSE EFFECTS ON OUR OPERATING RESULTS. A significant
element of our growth strategy is to expand by acquiring digital printing
companies. Initially, our strategy has been focused on targets located in the
Southeastern United States, due to our location, and in the Republic of South
Africa, due to our familiarity with business operations there. There can be no
assurance that we will be able to identify and acquire such companies, nor that
we will be able to finance significant acquisitions in the future. Any
acquisition may initially have an adverse effect upon our operating results
while the acquired businesses are adopting our management's practices. In
addition, there can be no assurance that we will be able to establish, maintain
or increase profitability of a business we acquire.
IF WE ARE UNABLE TO IMPLEMENT OUR ACQUISITION STRATEGY, WE MAY NOT SUCCEED
OR MAY BE LESS SUCCESSFUL IN THE FUTURE. Financing needed to complete
significant acquisitions may not always be available to us on satisfactory
terms. Further, our acquisition strategy presents a number of special risks to
us that we would not otherwise experience, including possible adverse effects on
our earnings, diversion of management's attention from our core business due to
special attention to the businesses acquired, our failure to retain key acquired
personnel and risks associated with unanticipated events or liabilities arising
after our acquisitions have been completed, some or all of which could have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY EXPERIENCE DIFFICULTY IN INTEGRATING THE ACQUIRED BUSINESSES AND
ASSETS INTO OUR OPERATIONS. If we are unable to manage and integrate our
pending acquisitions after we consummate the purchases, we may at some point in
the future experience difficulty in profitably managing all of the acquired
businesses or successfully integrating the acquired businesses as a whole
without substantial costs, delays or other operational or financial problems
that we had not previously experienced. We may not in all circumstances be able
to establish, maintain or increase profitability of an acquired entity.
WE MAY NOT COMPETE EFFECTIVELY WITH OTHER DIGITAL GRAPHICS COMPANIES THAT
HAVE MORE RESOURCES AND EXPERIENCE THAN US. Many of our competitors have
substantially greater financial, technical, managerial, marketing and other
resources than we do and they may compete more effectively than we can. We also
have competition from small fragmented print shops that operate in the same
geographic areas as we do. If our competitors offer digital graphics services at
lower prices than we do, we may have to lower the prices we charge, which will
adversely affect our results of operations.
7
<PAGE>
SIGNIFICANT DECREASES IN DIGITAL GRAPHICS PRICES COULD HARM OUR BUSINESS BY
MAKING IT MORE ATTRACTIVE FOR SMALLER PRINT SHOPS AND DIGITAL GRAPHICS
BUSINESSES TO BUY THEIR OWN DIGITAL GRAPHICS EQUIPMENT AND TECHNOLOGIES AND
FORCE US TO LOWER PRICES. A significant reduction in the price of our digital
graphics equipment could reduce the demand for our products and services by
making it economically more attractive for other small businesses to buy their
own digital graphics equipment instead of utilizing our services. Also,
equipment price decreases could force us to reduce our fees in response to this
reduction in demand or as a means to remain competitive with digital graphics
service providers.
OUR MANAGEMENT WILL CONTROL 62.7% OF OUR COMMON STOCK AFTER THIS OFFERING
AND THEIR INTERESTS MAY BE DIFFERENT FROM AND CONFLICT WITH YOURS. Following
this offering, our executive officers and directors will beneficially own a
total of approximately 62.7% of our outstanding common stock assuming that there
is no exercise of the underwriter's over-allotment option, and approximately 54%
if the underwriter's over-allotment option is exercised in full. Accordingly, if
our management acts together, they have the power to control the election of all
of our directors and the approval of significant corporate transactions for
which the approval of our stockholders is required. If you purchase our
securities, you may have no effective voice in our management.
THE MANNER IN WHICH WE OBTAIN OUR DIGITAL GRAPHICS EQUIPMENT INCREASES OUR
LEVERAGE AND FINANCE COSTS. We may finance the purchases of our digital
graphics equipment. The use of leverage to finance our equipment increases our
risk of loss as opposed to if we borrowed a smaller portion or none of the
purchase price of this equipment. Our risk is increased because we must satisfy
these obligations on specific dates, regardless of our revenues. If we do not
meet our debt service payments when due, we may be forced to forfeit the
equipment securing the debt.
OUR SUCCESS DEPENDS UPON THE EFFORTS OF, AND OUR ABILITY TO RETAIN, KEY
PERSONNEL, INCLUDING OUR CHIEF EXECUTIVE OFFICER. We believe that the efforts
of our senior management and key employees, particularly that of our chief
executive officer, Roger D. Finchum Sr., are essential to our operations and
growth. We have entered into a two-year employment agreement with Mr. Finchum,
and we intend to obtain key man life insurance on the life of Mr. Finchum in the
amount of $1,000,000 prior to the completion of this public offering. If we do
not succeed in retaining or motivating our current personnel or in hiring
additional qualified employees, our business will be materially adversely
affected. In addition, competition for personnel in our industry, including the
people that perform our services, is intense and there can be no assurance that
we will be able to attract and retain the necessary personnel.
THE REPRESENTATIVE OF THE UNDERWRITERS WILL CONTINUE TO HAVE INFLUENCE OVER
US FOLLOWING THE COMPLETION OF THIS PUBLIC OFFERING. We have given Nutmeg
Securities, Ltd., the representative of the underwriters, the right, for a
period of two years from the completion of this offering, to designate an
observer to our board of directors. Although this designated observer will have
no voting privileges as a director, he will have the right to receive notices of
our directors' meetings and may have some influence over decisions made by our
board of directors during the two-year period. Upon completion of this offering,
the representative will also receive, for nominal consideration, warrants to
purchase 300,000 shares of our common stock.
THERE ARE INHERENT RISKS WITH REGARD TO THE COMPANIES' OPERATIONS IN SOUTH
AFRICA. After consolidation, we will be operating three businesses in South
Africa. As with any overseas operations the presiding political and economic
climate may have an impact on our overseas operating subsidiaries. Currently,
the South African economy suffers from both high unemployment and high
inflation. Should the South African economy become severely unstable, this could
have a significant negative impact on our business and results of operations.
THERE ARE CURRENCY AND EXCHANGE RATE RISKS WITH OPERATING OUR BUSINESS IN
THE REPUBLIC OF SOUTH AFRICA. Some of the revenues we may generate in South
Africa after we consummate the purchase agreements with our South African
acquisitions will be in South African Rands, not in U.S. dollars. The value of
the currency in South Africa fluctuates as compared to the U.S. dollar, and as a
result, revenues
8
<PAGE>
that may be generated from our prospective operations in South Africa may have
more or less value from time to time as compared to the U.S. dollar. These
currency and exchange rate risks associated with our pending South African
acquisitions may have a negative effect on our overall financial condition and
results of operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts, but rather are based on our current
expectations, estimates, and projections about our industry, our beliefs and
assumptions. Words including "may," "could," "would," "will," "anticipates,"
"expects," "intends," "plans," "projects," "beliefs," "seeks," "estimates," and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties are described in "Risk Factors" and elsewhere in this
prospectus. We caution you not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. We are not obligated to update these statements or publicly release
the result of any revisions to them to reflect events or circumstances after the
date of this prospectus or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $21,360,000
from our sale of the 2,000,000 shares offered hereby, assuming an initial public
offering price of $12.00 per share and excluding expenses of the offering which
are estimated to be approximately $2,640,000. If the underwriters exercise their
over-allotment option in full, we will receive net proceeds of approximately
$25,116,000. These amounts are after deducting estimated underwriting discounts
and commissions, and after fees and expenses of approximately $500,000, payable
by us. We intend to use the net proceeds as follows:
<TABLE>
<CAPTION>
PERCENT
NET OF
PROCEEDS TOTAL
----------- --------
<S> <C> <C>
Acquisitions............................................ $ 7,800,000 40.3%
Equipment and Software Purchases and Upgrades........... 4,000,000 18.3%
Sales and Marketing..................................... 3,500,000 16.0%
Repayment of Debt....................................... 920,000 4.2%
Hiring executive personnel and technicians.............. 1,000,000 4.6%
General corporate and working capital purposes.......... 4,140,000 16.6%
----------- -----
Total............................................. $21,360,000 100.0%
=========== =====
</TABLE>
We intend to use approximately 40.3% of the net proceeds of this offering as
the cash portion of the purchase prices for completion of the nine pending
acquisitions we have under agreements, all of which should be consummated
concurrently with the completion of this offering. This public offering is not
contingent on the closing of any of our pending acquisitions. To the extent that
we do not actually close on one or more of our pending acquisitions, funds
received from this offering for targeted acquisitions that do not close will be
added to general corporate and working capital and used primarily to make one or
more acquisitions in substitute for any pending acquisition that does not
ultimately close.
Of our total net proceeds, we have allocated 18.3% of the net proceeds for
the purchase or upgrading of digital printing equipment for the companies we
intend to acquire pursuant to our pending acquisition agreements, as well as for
facilities costs associated with building improvements to be made in several
locations where we will operate the newly acquired companies and their assets.
9
<PAGE>
16.0% of the net proceeds of our offering are allocated to sales and
marketing expenditures that will include advertising and banner costs associated
with our advertising programs on the Internet, expansion and re-design of our
web-site to include descriptions of our newly acquired acquisitions, and a
marketing program intended to inform our prospective customer base of our
products and services.
A small portion of our net proceeds will be utilized for expansion of our
internal corporate operations, which include expanding our computer networks,
equipment for our corporate office facilities, software and new web-site
development costs. Approximately 4.6% of the net proceeds will be allocated for
costs associated with hiring additional personnel.
Approximately 4.2% of the net proceeds will be used to repay existing debt.
Most of these proceeds, or approximately $650,000, will be used to repay
promissory notes we have issued to our chief executive officer, Mr. Finchum, Sr.
for capital he has advanced to us during the public offering process.
The proposed allocation of the net proceeds represents our best estimate of
the allocation of the net proceeds of the offering based upon the current status
of our operations, our current plans and current economic conditions. We may
reallocate the net proceeds among the categories listed above. We also may, when
the opportunity arises, acquire or invest in complementary businesses, products
or technologies. However, we have no present understandings, commitments or
agreements with respect to any acquisition or investment other than our nine
pending acquisitions. Any net proceeds received from the sale of the
underwriter's over-allotment option will be allocated to working capital and
general corporate purposes.
We anticipate that the net proceeds of this offering along with cash
provided by operations, will be sufficient to fund our operations and capital
requirements for at least the 12 months following the date of this prospectus.
However, there can be no assurance that the net proceeds of this offering and
cash provided by operations will satisfy our requirements for any particular
period of time. To the extent capital resources are insufficient to meet future
capital requirements, we may have to raise additional funds to satisfy our
requirements. No arrangements or agreements have been made with our management
or existing stockholders to provide any additional capital for future needs.
There can be no assurance that such funds will be available on acceptable terms,
if at all.
Pending application of the net proceeds in the manner described above, we
intend to invest the net proceeds in short-term, interest bearing investment
grade securities.
DIVIDEND POLICY
We have never declared or paid any cash or stock dividends on our capital
stock. We intend to reinvest earnings, if any, to fund the growth and expansion
of our business and, therefore, we do not anticipate paying cash dividends on
our common stock in the foreseeable future. The declaration of dividends will be
at the discretion of our board of directors and will depend upon our earnings,
capital requirements, financial position, general economic conditions, and other
pertinent factors.
10
<PAGE>
CAPITALIZATION
The following table sets forth our:
- actual capitalization as of November 30, 1999;
- pro forma as adjusted capitalization giving effect to the sale of the
2,000,000 shares offered hereby at an assumed offering price of $12.00 per
share, after deducting underwriting commissions and estimated offering
expenses, and the application of the estimated net proceeds from this
offering.
The following table should be read in conjunction with our financial
statements, related notes and other financial information included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
--------------------------------------
PROFORMA
ACTUAL PROFORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Short term debt, current portion of long term
liabilities and current related party obligations.... $ 138,845 $ 163,587 $ 163,587
========== =========== ===========
Long term debt......................................... $ 75,035 $ -0- $ -0-
========== =========== ===========
Stockholders' (deficit) equity:
Preferred Stock, $.001 par value; $7.50 liquidation
preference value, 1,000,000 shares authorized;
33,610 issued and outstanding, actual; 33,610
issued and outstanding, pro forma 33,610 issued and
outstanding as adjusted............................ 34 34 34
Common stock, $.001 par value; 24,000,000 shares
authorized; 4,257,112 issued and outstanding,
actual; 4,257,112 issued and outstanding, pro
forma: 6,257,112 issued and outstanding, as
adjusted........................................... 4,257 5,391 6,257
Additional paid in capital........................... 2,507,051 10,200,615 23,758,615
Accumulated deficit.................................. (1,866,053) (1,866,990) (1,866,990)
---------- ----------- -----------
Total stockholders' (deficit) equity............... 645,289 8,339,050 21,897,916
---------- ----------- -----------
Total capitalization............................... $ 958,650 $ 8,502,637 $22,061,503
========== =========== ===========
</TABLE>
The preceding table does not include the exercise of:
- the underwriter's over-allotment option to purchase 300,000 additional
shares of our common stock;
- 200,000 representative's warrants; and
- 33,610 common stock purchase warrants exercisable at $5.00 per share.
11
<PAGE>
DILUTION
As of November 30, 1999, our net tangible book value (deficit) was $645,289,
or approximately $.15 per share of common stock. Net tangible book value
(deficit) per share represents the amount of our total tangible assets less
total liabilities divided by the number of shares of common stock.
After giving effect to the sale of the 2,000,000 shares offered hereby and
after deducting the underwriting discount and estimated offering expenses, net
tangible book value at November 30, 1999, would have been $21,897,916 or
approximately $3.50 per share of our common stock. This represents an immediate
increase in net tangible book value of $3.35 per share of common stock to our
existing stockholders and an immediate dilution in net tangible book value of
$8.50 per share of common stock, or approximately 72%, to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price....................... $12.00
Net tangible book value per share prior to the offering..... $ .15
Increase in net tangible book value per share attributable
to this offering.......................................... $ 3.35
------
Net tangible book value per share after the offering........ $ 3.50
------
Dilution of net tangible book value per share to new
investors................................................. $ 8.50
======
</TABLE>
If the over-allotment is exercised in full, our pro forma as adjusted net
tangible book value at November 30, 1999 would have been $23,957,000 or $3.82
per share of common stock. This represents an immediate increase in net tangible
book value of $3.67 per share of common stock to existing stockholders and an
immediate dilution in net tangible book value of $8.33 per share of common
stock, or approximately 69% to new investors.
The following table summarizes, as of November 30, 1999, on a pro forma
basis, the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing stockholders
and investors in this offering, and after giving effect to the sale of the
2,000,000 shares offered by this prospectus, assuming an initial offering price
of $12.00 per share. The calculations are based upon total consideration given
by new investors and existing stockholders before any deduction of underwriting
discounts, offering expenses payable by us, and does not include the purchase of
or any exercise of the redeemable common stock purchase warrants offered hereby.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------------- ------------------------- SHARE
NUMBER PERCENT AMOUNT PERCENT PER
--------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 4,257,211 68% $ 645,288 3% $ .15
New investors..................... 2,000,000 32% 24,000,000 97% $12.00
--------- ---------- ----------- ------ ------
Total........................... 6,257,211 100% $24,645,288 100% $ 3.94
========= ========== =========== ====== ======
</TABLE>
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
audited financial statements for the years ended November 30, 1998 and 1999
included elsewhere in the prospectus and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
---------------------------
1998 1999
---------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 127,191 57,617
Cost of Revenues.................................. 63,886 40,469
---------- -----------
Gross profit...................................... 63,305 17,148
Operating costs and expenses:
Sales and marketing............................. 5,776 10,035
General and administrative...................... 695,916 980,601
Depreciation.................................... 55,367 90,541
---------- -----------
Total operating costs and expenses.............. 757,059 1,081,177
---------- -----------
(Loss) income from operations..................... (693,754) (1,064,029)
Interest expense.................................. 920 20,706
---------- -----------
Net loss.......................................... $ (694,674) $(1,084,735)
========== ===========
Basic and diluted net loss per share.............. $ (.22) $ (.27)
========== ===========
Shares used in computing basic and diluted
earnings per share.............................. 3,110,229 4,051,971
========== ===========
</TABLE>
The following table includes a summary of our balance sheet at November 30,
1999:
- on an actual basis;
- on a pro forma basis giving effect to the consummation of all nine of
the acquisitions we have pending at the date of this prospectus on the
terms included in the acquisition agreements; the issuance of 33,610
shares of our preferred stock and 33,610 common stock purchase warrants
exercisable to purchase 33,610 shares of our common stock at $5.00 per
share, which were combined and sold as units in a Rule 506 Regulation D
private placement at $15.00 per unit conducted from July 10, 1999 to
November 15, 1999, which resulted in our receipt of $252,075 in
aggregate offering proceeds;
- as adjusted to give affect to the issuance of 2,000,000 shares of
common stock offered by us at an offering price of $12.00 per share;
the consummation of all nine of the acquisitions we have pending at the
date of this prospectus on the terms included in the acquisition
agreements; the issuance of 33,610 shares of our preferred stock and
33,610 common stock purchase warrants exercisable to purchase 33,610
shares of our common stock at $5.00 per share, which were combined and
sold as units in a Rule 506 Regulation D private placement at $15.00
per unit conducted from July 10, 1999 to November 15, 1999, which
resulted in our receipt of $252,075 in aggregate offering proceeds.
13
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1999
------------------------------------- YEAR ENDED
AS NOVEMBER 30,
ACTUAL PRO FORMA ADJUSTED 1998
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $ -- $ 132,414 $13,692,414 $ 408
Total working capital (deficit)............. (207,327) (272,716) 13,287,284 (86,882)
Total assets................................ 958,650 9,880,198 23,439,064 299,422
Short term debt, current portion of long
term liabilities and current related party
obligations............................... 138,845 163,587 163,587 89,060
Long term debt.............................. 75,035 -0- -0- 45,604
Total liabilities........................... 313,361 1,541,148 1,541,148 158,704
Total shareholders' (deficit) equity........ 645,289 8,339,050 21,897,916 140,718
--------- ----------- ----------- --------
Total liabilities and stockholders'
equity.................................. $ 958,650 $ 9,880,198 $23,439,064 $299,422
========= =========== =========== ========
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We were formed to engage in the consolidation of the digital imaging
reproduction industry, with additional emphasis on large format printing and
multimedia applications for the Internet and CD-ROM applications.
We were incorporated in Nevada on July 18, 1997 as ColorSmart, Inc. On
December 29, 1998 we changed our name to ColorSmart.com, Inc. primarily to
reflect our growing emphasis on marketing our products and services over the
Internet and the development of our fully-integrated electronic commerce
applications that allows businesses to privately access their own virtual
portfolio of digitally created printed graphics and multimedia applications
through our fully secure web site.
We have entered into agreements to purchase nine companies, three of which
are located in the United States and six of which are located in the Republic of
South Africa. All nine of these potential acquisitions significantly expand our
ability to offer digital imaging and color graphics reproduction to our
customers and to increase our market share in the digital imaging business.
Although our acquisition agreement with Jamberry Lakes Digital Media, Inc. has
since been terminated, at the time we entered into the acquisition agreement,
our then director-nominee Gregory E. Dukoff was a principal shareholder, officer
and director of Jamberry Lakes LLC, the sole shareholder of Jamberry Lakes
Digital Media, Inc.
This public offering is not conditioned on the closing of any of our
acquisitions under contract. However, the closing of all nine of our
acquisitions under contract is conditioned on the consummation of this public
offering. We believe that all nine of our pending acquisitions will close
shortly after the consummation of this public offering. Contract extensions on
all of our original acquisition agreements have been obtained from the companies
we plan to acquire. To the extent that we do not actually close on one or more
of our pending acquisitions, funds received from this offering for acquisitions
that do not close will be added to general corporate and working capital and
used primarily to make one or more acquisitions in substitute for any pending
acquisition that does not ultimately close.
Our corporate offices are currently located at 537 Myatt Drive, Madison,
Tennessee, 37115. Each of our acquisitions operates out of facilities that
contain a variety of digital imaging, color graphics equipment used in the
reproduction of artwork, transparencies and scanned images.
15
<PAGE>
The following table sets forth, for the periods indicated, certain operating
information expressed as a percentage of revenue.
<TABLE>
<CAPTION>
FISCAL FISCAL
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1999
------------ ------------
<S> <C> <C>
Net revenues................................................ 100% 100%
Cost of revenues............................................ 50 70
Gross margin................................................ 50 30
Sales and advertising expense............................... 4 17
General and administrative expense.......................... 547 1,702
Depreciation expense........................................ 44 157
Total operating expenses.................................... 595 (1,876)
Income (loss) from operations............................... (545) (1,846)
Interest income or expense.................................. -- 36
--------- ------
Net income (loss)........................................... (545)% (1,882)%
========= ======
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1999
REVENUES
Revenues decreased to $0 for the three months ended February 29, 2000 from
$17,321 for the three months ended February 28, 1999. This decrease in revenue
is a result of the fact that in 1999, we began focusing on the completion of
this public offering and, as a result, our efforts were focused more on our
acquisitions than our printing operations.
COST OF REVENUES
Cost of revenues decreased to $0 for the three months ended February 29,
2000 from $1,600 the three months ended February 28, 1999. As a percentage of
revenues, cost of revenues decreased 10% to 0% for the same periods. This
decrease of $1,600 is primarily due to the fact that in fiscal year 1999, we
began to spend considerable time towards the completion of our public offering
and the negotiations of our acquisitions and less time on generating revenues
from print operations.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $654,200 for the three
months ended February 29, 2000 from $140,138 for the three months ended
February 28, 1999. As a percentage of revenue, general and administrative
expenses increased from 809% to 654,200%. This, as a percentage of revenue, is a
result of the earlier year being our first full year of operations and we
generated less revenue in year 2000 over the prior year.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $15,000 for the three months
ended February 29, 2000 from $22,635 for the three months ended February 28,
1999. This decrease of $7,635 or 51% is a result of equipment becoming fully
depreciated.
16
<PAGE>
INTEREST EXPENSE
Interest expense increased to $5,521 for the three months ended
February 29, 2000 from $2,820. This increase of $2,701 or 196% is a result of
increased borrowings during the period ended February 29, 2000.
NET INCOME/LOSS
Our net loss for the three months ended February 29, 2000 increased
$532,484, or 418% from $127,237 for the three months ended February 28, 1999 to
$659,721 for the same period in 1999. This decrease in our net loss is due to
higher operating costs in all departments and slow revenue growth due to
re-focusing our business plan, and is due to the write-down on the value of our
investment in Jamberry Lakes Digital Media, Inc.
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO THE YEAR ENDED NOVEMBER 30, 1998
REVENUES
Revenues decreased to $57,617 for the fiscal year ended November 30, 1999
from 127,191 for the fiscal year ended November 30, 1998. This decrease in
revenue is a result of the fact that in 1999, we began focusing on the
completion of this public offering and, as a result, our efforts were focused
more on our acquisitions than our printing operations.
COST OF REVENUES
Cost of revenues decreased to $40,469 for the fiscal year ended November 30,
1999 from $63,886 for the fiscal year ended November 30, 1998. As a percentage
of revenues, cost of revenues increased from 50% to 70% for the same periods.
This decrease of $23,417 is primarily due to the fact that in fiscal year 1999,
we began to spend considerable time towards the completion of our public
offering and the negotiations of our acquisitions and less time on generating
revenues from print operations.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $1,081,177 for the fiscal
year ended November 30, 1999 from $757,059 for the fiscal year ended November
30, 1998. As a percentage of revenue, general and administrative expenses
increased from 595% to 1,876%. This, as a percentage of revenue, is a result of
the earlier year being our first full year of operations and we generated less
revenue in 1999 over the prior year.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased to $10,035 for the year ended
November 30, 1999 from $5,776 for the fiscal year ended November 30, 1998. This
increase of $4,259, or 73% is due to the fact that in the prior year we had
fewer marketing expenses during our shortened fiscal year.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $90,541 for the fiscal
year ended November 30, 1999 from $55,367 for the fiscal year ended November 30,
1998. This increase of $35,174, or 64% is a result of purchasing additional
equipment in 1999.
INTEREST EXPENSE
Interest expense increased to $20,706 for the year ended November 30, 1999
from $920 for the fiscal year ended November 30, 1998. This increase of $19,786,
or 2,150% is a result of increased borrowings during the period ended November
30, 1999.
17
<PAGE>
NET INCOME/LOSS
Our net loss for the fiscal year ended November 30, 1999 increased $390,061,
or 56% from $(694,674) for the fiscal year ended November 30, 1998 to
$(1,084,735) for the same period in 1999. This decrease in our net loss is due
to higher operating costs in all departments, and slow revenue growth due to
re-focusing our business plan.
PRO FORMA FINANCIAL STATEMENTS
Although actual financial results may differ from the pro forma financial
information contained elsewhere in this prospectus, we believe that the
following pro forma management's discussion and analysis of financial condition
and our pro forma results of our planned operations reflects the anticipated
financial condition of our business after the consummation of all nine of our
pending acquisitions, and upon completion of our initial public offering. The
following discussion should be read in conjunction with our pro forma financial
statements and notes thereof included elsewhere in this prospectus. The
following discussion includes forward looking statements, which are not
historical facts, but rather are based on our current expectations, estimates
and projections about our targeted acquisitions, our industry, our beliefs and
assumptions on a post-acquisition basis.
YEAR ENDED NOVEMBER 30, 1999
REVENUES
Had we completed our acquisitions on December 1, 1999, total revenues would
have been $7,921,334. We expect revenues to increase substantially due to the
integration of our customer base, addition of new equipment to serve new
customers, and increased efficiencies and economies of scale.
COST OF REVENUES
Had the acquisitions occurred on December 1, 1999, the cost of revenues
would have been $4,014,329. We expect the cost of revenues to decrease on a
percentage of sales basis due to economies of scale by updating equipment and
software, decreased cost of media and supplies due to greater purchasing power,
and the decreased cost of sales and marketing.
GENERAL AND ADMINISTRATIVE
On a pro forma basis, as of December 1, 1999, our general and administrative
expenses would have been $4,951,962. Part of this would have been additional
compensation paid to officers in the amount of $418,000 in the form of shares.
We expect to reduce some of the administrative expenses by cutting some of the
work force, consolidate accounting functions and updating our accounting
software.
DEPRECIATION AND AMORTIZATION
Depreciation for the effective date of December 1, 1999, on a pro-forma
basis, would have been $89,637. We do not expect any dramatic changes in
depreciation. On a pro-forma basis, good will would have been $372,000 and we
expect this amount to remain the same for the near term.
INTEREST EXPENSE
As of December 1, 1999, interest expense would have been $249,000 due to the
payment of various loans and leases associated with the acquisitions and we
expect interest expense to decrease for the near term.
18
<PAGE>
NET LOSS
Had the acquisitions occurred on December 1, 1999, we would have stated a
loss of $1,875,769 due to increased in General and Administrative expenses,
depreciation and amortization, interest, cost associated with the acquisitions,
and extraordinary costs of accounting and legal fees associated with the initial
public offering process. We expect to be profitable in the year 2000 as these
expenses are eliminated.
FIRST QUARTER ENDED FEBRUARY 29, 2000
REVENUE
Had the acquisitions occurred on December 1, 1999, our or revenues for first
quarter ending February 29, 2000 would have been $1,788,761. New equipment would
have been installed during this period of time and updating software, but not
yet operational on a full scale. We expect revenues to increase when new
equipment is fully operational and the customer base is integrated.
COST OF REVENUES
On a pro-forma basis, as of December 1, 1999, our cost of revenues for
February 29, 2000 would have been $942,610. We expect these costs to decrease as
our material and supply costs are reduced and new efficiencies come in to being.
GENERAL AND ADMINISTRATIVE
On a pro-forma basis, our quarter ending February 29, 2000, general and
administrative expense would have been $1,515,479, had the acquisitions occurred
on December 1, 1999.
INTEREST EXPENSE
On a pro-forma basis, our February 29, 2000 interest expense would have been
$41,618. this represents a decrease due to the elimination of certain loans and
lease expense associated with the acquisitions.
NET LOSS
Had the acquisitions occurred on December 1, 1999, our quarter ending
February 29, 2000 losses would have been $1,136,874 due to the reductions in
revenues, the down time required for installing new equipment, computer software
and systems, and integration of all operations.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through revenues and
capital raised in two private placements of our common stock and our preferred
stock with common stock purchase warrants attached. As of November 30, 1999, we
had $0 in cash. Cash flows used for operating activities was $531,882 for the
year ended November 30, 1999. Net cash used for investing activities was
$646,619 during the same period including $113,716 used in the purchase of
equipment as a result of our expanded operations, and $532,903 used in the nine
acquisitions we now have under contract and in anticipation of our acquisition
of Jamberry Lakes Digital Media, Inc.
In April 1999, we completed a private placement whereby we sold 198,050
shares of our common stock, resulting in gross proceeds of $1,000,000 and net
proceeds of approximately $924,727, after deducting offering, legal, accounting
and finders' fee expenses. From July 1999 to November 1999, we completed another
private placement whereby we sold 33,610 shares of preferred stock and 33,610
common stock purchase warrants, which were offered and sold as units, resulting
in our receipt of $214,575 in net proceeds. Net proceeds of our private
placements were used primarily for legal and accounting
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expenses incurred during the process of negotiating and documenting our nine
targeted acquisitions, an investment in Jamberry Lakes Digital Media, Inc.,
partial payments towards the purchase prices on some of our acquisitions that we
now have under definitive agreements, payment of the costs and expenses
associated with our initial public offering and general corporate expenses in
our Madison, Tennessee facility.
We anticipate that the net proceeds of this offering, together with the cash
flow from operations, will be sufficient to fund our anticipated working capital
and capital expenditures for the 12 months following completion of this
offering. Our capital requirements have grown since our inception and we expect
our capital requirements to continue to grow.
RECENTLY ISSUED ACCOUNTING STANDARDS
We believe that recently issued financial standards will not have a
significant impact on our results of operations, financial position, or cash
flows.
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BUSINESS
OUR BUSINESS
We are positioning ourselves to become a leading consolidator in the digital
graphics industry and we believe we will be one of the largest digital graphics
companies in the Southeastern United States. Our fully integrated electronic
commerce applications allow businesses to privately access their own virtual
portfolio of digitally created printed graphics and multimedia applications
through our fully secure Web site.
Our products range from graphic design, fleet graphics, 100-foot printed
billboards, trade show graphics and retail displays. Each business can receive
updated price quotes, make modifications, authorize production, and generally
manage their printing and multimedia requirements, from any Windows-based,
Internet-enabled computer. Our customers generally realize a decrease in the
entire production cycle from price quote to the delivery of their order. We
believe our applications of leading edge Internet and digital technology enables
us to be price-competitive while providing customers with the highest level of
security, selection, speed and support.
We have entered into agreements to acquire the stock or assets of nine
digital printing companies in the United States and the Republic of South
Africa. We have also purchased a 21.65% ownership interest in a United
States-based company that specializes in the design and production of multimedia
advertising, marketing and presentation applications for delivery over the
Internet and CD-ROM.
Commercial digital graphics involves the production of a wide range of
marketing, advertising and media imaging and digital printing produced by using
cutting-edge software and digital printing equipment. It is the digitizing of
the input that reduces production time, costs and errors and provides the
flexibility to handle small, specialized jobs as easily as producing simple,
mass-produced jobs. Digital printing and imaging customers include companies of
all sizes and in all industries where full-color imaging and production are
required. Our digital printing technologies enable us to receive and deliver
customer services most effectively through our Internet applications.
OUR INDUSTRY
THE GROWTH OF BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
The Internet has emerged as a revolutionary force in the way businesses
operate, having evolved from a research medium to a venue for consumer-oriented
commerce. Estimates are that Internet business-to-business commerce reached a
record $43 billion in 1998. Furthermore, they predict that business-to-business
electronic commerce will grow to a staggering $1.3 trillion by 2003 and will
represent more than 90% of the total e-commerce market.
Advances in computer technology and telecommunications have enabled
businesses to link directly to their suppliers, providing shortened lead times
for purchases and better decision-making controls. The advent of the Internet
and its commercial applications has accelerated the trend of increased
efficiency related to business purchases with a number of additional benefits,
including:
- Global reach for broader selection of products and services;
- Reduced costs and greater economies of scale;
- Ability to access suppliers from any computer with Internet access; and
- The technology to customize customer interfaces, creating greater
convenience and ease of use.
To augment our business to business strategy we have implemented an online
ordering system that will consolidate all products and services produced at all
of our newly acquired locations. This is a full e-commerce site that is entirely
secure. With our online ordering system customers will be provided with a
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one-stop solution. In addition to the easy on-line ordering process, we will
provide an individual secure folder for each client where they make, place, and
check the progress of their orders. The diagram that follows depicts graphically
how our on-line e-commerce applications works:
[GRAPHIC]
THE PRINTING INDUSTRY
According to industry statistics, United States commercial printing revenues
exceeded $55 billion in 1998. While the market is large, the industry remains
fragmented with over 40,000 local and regional printers in the United States.
Digital technology in the printing industry is being utilized in the market
place worldwide, but we believe this technology is fragmented in the digital
printing services sector. Most digital print and media operations are small and
limited to certain equipment because of the capital required and lack of
technical expertise. Most digital shops operating today are mom and pop and are
very limited. We believe a large portion of the industry has not effectively
grasped the digital opportunity. Projections are that by the year 2001, over
$18 billion in total annual revenue from all digital printing services and
products, is possible on a worldwide basis. This growth is possible because of
consolidation involving digital specialist firms such as ours, continuing
innovations in technology, along with end users' education of digital printing
technologies that provide services and products on demand.
E-commerce, also provides a tremendous opportunity for digital pringing and
multimedia companies. The Internet is uniquely suited as a medium for the
delivery of a wide variety of print, media communications, and digital graphics.
Digital printing and the Internet have synergies that will replace a large
portion of conventional marketing of digital print services and products. We
recognized the synergies between digital printing and the delivery of our
products and services on the Internet and we plan to continue to expand our
digital image library of over 10,000 images for our e-commerce customers, and
expand our technological capabilities in delivering our products and services
through the e-commerce side of our business.
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DIGITAL PRINTING
We believe digital technology in the printing and graphic design industries
is being under-utilized. Most digital print and media operations are small and
lack the requisite capital, equipment, and technical expertise to deliver the
full range of benefits offered by digital technology. We believe this growth
will be demand driven, predicated upon continued advancements in digital
technology. As a leader in the digital graphics industry, ColorSmart expects to
be well positioned to satisfy this demand
E-commerce over the Internet offers us a tremendous opportunity and provides
us with a competitive advantage. The Internet is an exceptional medium for the
delivery of digital graphics in a wide variety of formats. The synergy of
digital technology and the Internet will continue to transform, and we believe,
replace, an ever-increasing portion of conventional printing services and
products.
We believe the industry suffers from the following inefficiencies:
- Excess capacity hinders profitability;
- Production inefficiencies resulting in high error rates and increased
costs;
- Despite the technological advances in the industry, there is a serious
lack of integration through all stages of production;
- Local printers typically offer a limited range of products requiring
businesses to use several different printers to satisfy their needs;
- Many printers lack the technological resources to provide customized
products in a cost-effective manner.
OUR STRATEGY
Our objective is to be the leading Internet-based business-to-business
digital graphics and multimedia company in the world. The key elements of our
business strategy include:
- Focusing primarily on the Internet business-to-business market for digital
printing services, expected to grow to approximately $18 billion by 2001,
up from approximately $5 billion in 1998;
- Continuing to upgrade and enhance the front-end of our e-commerce
applications, while acquiring carefully targeted commercial printing
companies in this highly fragmented industry to support the back-end;
- Utilizing the most current digital graphics technology available to
maintain a technological edge over our competition;
- Expanding beyond traditional printing products and services into
multimedia video and audio business-to-business applications primarily
tailored for the Internet and CD-ROM;
- Making the process of creating, approving, ordering and fulfilling
printing jobs more efficient by allowing customers to handle much of this
process from there desktops; and
- Tailoring end-to-end business applications to our customer's needs by
integrating creative, production, and distribution services into
customer-specific solutions.
As a means of implementing our strategies, we have developed a print partner
program in which printers located throughout the United States can interact with
us and with each other. Our print partner program is designed to allow other
printers to take part in larger print jobs that they would otherwise not have
the capabilities to handle.
By networking our print jobs, each printer involved in our print partnership
program can bid on jobs in which other print partners in the network are capable
of fulfilling. As the hub partner in this program,
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we also have the opportunity to fulfill these networked print jobs. We are now
serving and will continue to serve as the hub partner in this print partner
program. This program currently includes Kelley's Place, Buglosa, Louisiana,
Post Option, Inc., Oak Park, Illinois, and Sharpe Images, Winston Salem, North
Carolina.
We plan to partner with at least one print partner in each state, and to
incorporate our print partners into our web site design.
OUR STRATEGY AND RECENT ACQUISITIONS
A key component of our growth strategy is accomplished by acquiring digital
printing companies located throughout the United States and overseas that have
the ability to fulfill product demand on large scale. We have concentrated on
acquisitions in the Southeastern United States and South Africa.
In addition to being the site of our headquarters, Nashville, Tennessee, in
the Southeastern United States is a desirable distribution hub since 65% of the
United States population resides within a 500 mile radius of Nashville. The
Southeast is the fastest growing part of the United States economy. Nashville
also has more printing companies per capita than any other city in the United
States. It also serves as one of the top five markets for advertising agencies
for test marketing of new products, which creates a large printing opportunity.
South Africa is one of the emerging markets for digital printing and
graphics. The target companies there have established themselves as leaders in
South Africa. These companies also have established business and strong ties to
the United Kingdom and continental Europe. There is an advantage of acquiring
businesses in South Africa. The United States dollar is strong against the South
African rand, making acquisitions there very attractive. Products manufactured
and sold in South Africa are done so on a dollar equivalent while labor and
other related costs are relatively less because they are paid in Rands.
Having facilities in both the Southeastern United States and South Africa is
also very attractive for doing business in South America. Distribution is easily
accomplished from either location. Additionally, some South American companies
are currently buying digital print products from both the United States and
South Africa. Being able to address emerging markets in Africa and South America
positions the company to be a potential leaders in these markets.
During fiscal year 1999, we entered into agreements to acquire ten targeted
companies for acquisition. They are described as follows:
- Jamberry Lake Digital Media, Inc., of Summit, New Jersey is an early stage
company focused on producing digital multimedia products and services for
use on the Internet, as well as traditional marketing and promotional
campaigns. Utilizing streaming video and audio, Jamberry can produce high
quality multi-media presentations for Internet advertising and
instructional purposes for e-commerce companies, as well as short, high
impact advertisements, similar to television commercials. These same
technologies also have wide applications for the consumer side of
e-commerce.
We signed an agreement on December 3, 1999 to purchase all of the
outstanding shares of Jamberry from Jamberry Lake, L.L.C., its sole
shareholder, for $1,000,000. We elected to terminate the Jamberry
acquisition on March 29, 2000 under the termination provisions in the
agreement. As a result of our termination of the Jamberry agreement, we
now own 21.65% of the outstanding shares of Jamberry Lake Digital Media,
Inc. as consideration for approximately $433,000 paid by us to Jamberry.
Under the terms of the terminated agreement, our chairman, Roger D.
Finchum, Sr., has a right to be a director of Jamberry.
- Magnum Digital Services, Inc. located in Coconut Creek, Florida. Magnum
Digital specializes in dye sublimation, which is applying digital images
in full color on fabrics, textiles and specialized substrates. This area
of digital printing is the fastest growing segment of the industry
overall. We
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signed an agreement on September 3, 1998 to purchase of all of the
outstanding shares of Magnum Digital with Robert McDowell, Magnum
Digital's sole shareholder and president. We agreed to pay $500,000 in
cash and deliver 63,333 shares of our stock to Mr. McDowell and to pay up
to $275,000 for balances due on Magnum Digital's equipment leases. By
letter agreement dated September 8, 1999, the amount of our stock to be
delivered to Mr. McDowell was adjusted to 66,667 shares. By letter
agreement dated September 7, 1999 the closing of this acquisition was
extended until we complete this public offering. The cash purchase price
will be paid from a portion of this public offering.
- Advertising That Works, Inc. located in East Point, Georgia. We acquired a
wholesaler, fabricator, and finisher of banners and screen-printed
posters. This company enjoys several national accounts and a high profile
customer base. After many years as a screen printer, this company has
begun the process of changing over to a 100% digital operation. We signed
an agreement on September 23, 1998 for the purchase of all shares of
Advertising That Works with Chris England, its sole shareholder and
president. We agreed to pay $1,000,000 in cash for the stock and $500,000
for the real estate in East Point, Georgia where the company is located.
The purchase agreement states that $300,000 of the purchase price will be
used to pay off debt of Advertising That Works, Inc. By subsequent
agreement, the closing of this acquisition has been extended until
March 31, 2000. The purchase price will be paid from a portion of this
public offering.
- Stonehouse Graphics, (Pty) Ltd., located in Johannesburg, South Africa, is
Africa's second largest producer of large format digital printing. With
12 years in the industry, Stonehouse has gone from a small screen printer
to a fully integrated digital fabricator. It accounts for almost 40% of
all billboard printing and backlit signage in Southern Africa. Stonehouse
Graphics has a full compliment of sales, design and production staff
utilizing only the latest in digital technology. We signed an agreement on
October 12, 1998 to purchase all of the outstanding shares of Stonehouse
from its sole shareholder, Nolan Weight. We agreed to pay 15,000,000 South
African Rands (presently convertible into approximately $2,450,980 U.S.
dollars) less all of the outstanding loans (including loans to
shareholders) and liabilities of Stonehouse (about 8,500,000 Rands or
approximately $1,384,522 U.S. dollars). By subsequent agreement, the
consummation of this agreement has been extended until March 31, 2000. The
purchase price will be paid from a portion of this public offering.
- Display Arts, Inc., located in Nashville, Tennessee, is a 12-year old
company specializing in trade show graphics and trade show display booths.
Display Arts is an exclusive regional distributor for Nimlok, a premier
manufacturer of these products. With locations in Nashville, Memphis, and
Knoxville, Tennessee, Display Arts brings a new dimension to the
integration of customer products and services for our entire group and our
existing customer base.
We signed an agreement on June 23, 1999 to purchase all of the outstanding
shares of Display Arts, Inc. from its sole shareholders Donovan J.
McNamee, Jr., and Pamela M. McNamee. We agreed to pay $1,300,000 at the
closing that will be used first to pay off Display Arts' debt and the
balance for the stock of the selling shareholders. The agreement called for
a closing on October 1, 1999 that was extended to December 15, 1999 in an
extension agreement dated October 1, 1999, and was further extended until
January 31, 2000 in a second extension agreement dated December 15, 1999.
By subsequent agreement, the consummation of this agreement has been
extended to March 31, 2000. The closing is contingent upon the completion
of this public offering. The purchase price will be paid from a portion of
this public offering.
- Top Copy, (Pty), Ltd., located in Cape Town, South Africa, is a small but
highly efficient digital, color copy shop that offers full offset
printing. Catering to smaller businesses as well as the retail trade, Top
Copy, which is similar to Kinko's in the U.S., provides an ideal platform
to spearhead expansion in this segment of the digital copy and printing
industry in South Africa. We signed an
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agreement on May 20, 1999 to purchase all of the assets of Top Copy. We
agreed to pay 2,560,000 South African Rands (presently convertible into
approximately $418,300 U.S. dollars). Under the agreement, the closing was
scheduled for August 25, 1999. By subsequent agreement, the date for
closing of this acquisition has been extended to March 31, 2000. At the
closing, we will also have to pay interest on the purchase price at the
rate of 6.5% per annum from August 25, 1999. The purchase price will be
paid from a portion of this public offering.
- Virtual Colour Group, (Pty), Ltd. of Cape Town, South Africa was
originally formed in 1996 and currently consists of six companies. Virtual
Colour has become the leader in digital printing technology in South
Africa. Designers work with both PC and Mac files and produce high end,
full color brochures, catalogues, and magazines. A fully integreated, 100%
digital, full color operation, Virtual Colour's forty-plus employees rely
mainly on it's Heidelberg Digital Press. This company garners
approximately 65% of its business over the Internet and has built a strong
customer base even in Western and Central Europe, as well as Africa. We
have agreed to purchase the assets of four of the Virtual Colour Group
companies, which are operated as a single entity. For purposes of this
prospectus, the assets of the four companies we are acquiring are treated
as a single entity called Virtual Colour Group.
We signed an agreement on September 11, 1999 to purchase the assets of
Virtual Colour Property and agreed to pay 920,996 South African Rands
(presently convertible into approximately $150,489 U.S. dollars). At the
closing, certain liabilities will be paid from the closing proceeds of this
public offering. We also signed an agreement to purchase the assets of
Virtual Colour Printing cc and agreed to pay 836,178 South African Rands
(presently convertible into $136,630 U.S. dollars). At the closing, certain
liabilities will be paid from the closing proceeds of this public offering.
We also signed an agreement on September 11, 1999 to purchase the assets of
Virtual Support cc and agreed to pay 200,000 South African Rands (presently
convertible into $32,679 U.S. dollars). At the closing, certain liabilities
will be paid from the closing proceeds of this public offering. We also
signed an agreement to purchase the assets of Virtual Colour cc and agreed
to pay 473,418 South African Rands (presently convertible into $77,355 U.S.
dollars). At the closing, certain liabilities will be paid from the closing
proceeds of this public offering.
The agreements with Virtual Colour Property, Virtual Colour Printing,
Virtual Support and Virtual Colour require that we enter into management
agreements with Keith Redman, Herbert Trischler and Alois Koch prior to the
closing. The agreement with Virtual Support requires us to enter into a
management agreement with Messrs. Redman, Trischler, Koch and Aardt Davidtz
prior to the closing. It is also a condition precedent to the closing of
each agreement that we become listed on the Nasdaq National Market System.
The closing date of each agreement has been extended to May 15, 2000 where
applicable. The purchase prices for all of the assets of the Virtual Color
Group being purchased, as well as the liabilities to be satisfied at the
closings, will be paid from a portion of this public offering.
We intend to pursue an acquisition strategy that seeks to consolidate the
highly fragmented digital printing industry. We believe these acquisitions will
be comprised of two types of potential target businesses: larger companies with
existing management that is well versed in the digital printing industry; and
smaller businesses that can easily be consolidated with our existing
infrastructure. Our approach in the past has been to stay in those geographical
areas that our management is familiar with, such as the Southeastern and Eastern
United States and the Republic of South Africa.
Our approach to acquiring companies in new markets will be to identify at
least one larger acquisition in that new market and then compliment it with
smaller acquisitions in areas that are in close proximity to the first
acquisition. We will be generally unwilling to enter a new market through an
acquisition unless the target company being acquired is one of the market share
leaders and provides the critical mass necessary to act as a platform for us to
build within that new market.
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We believe that there are attractively priced target acquisitions in the
Southeastern United States and abroad, and that for the foreseeable future, our
growth by acquisition strategy will be concentrated within that geographic area
as well as additional acquisitions in the Republic of South Africa.
We believe that acquisitions and consolidation of other digital printing
businesses will offer the following cost savings and synergies associated with
our business:
- Decreased operating costs through elimination of duplicative
administrative costs;
- Decreased production and distribution costs through integration with a
larger, geographically adjacent entity;
- Decreased purchasing costs through realization of economies of scale;
- Improved management control through centralized accounting and reporting
systems;
- Improved marketing and advertising efficiencies.
We are not currently negotiating any additional acquisitions, and there can
be no assurance that we can successfully negotiate any additional acquisitions
in the future.
OUR SALES AND MARKETING STRATEGY
We intend to focus our sales and marketing strategy as follows:
- We will utilize both traditional and Internet marketing approaches to
selling our digital products. Our primary means of marketing will be
focused on the Internet. We take orders on-line. While a few printers do
offer on-line ordering, they are limited to traditional business printing.
We offer a wide range of digital services not confined to printing alone.
We believe this gives us a unique marketing edge and the ability to build
a strong brand name.
- Internet and traditional marketing means will be implemented by us with an
aggressive sales staff coupled with a targeted corporate, regional, and
national marketing campaign. Our immediate focus will be primarily on
advertising agencies, large retailers, mass merchandisers, truck fleet
operators, trade show and convention organizations, municipalities,
political organizations, and large corporate customers, all of which have
many digital needs besides printing.
COMPETITION
We compete with numerous commercial digital printers, some of which are
larger, more established and have greater financial and other resources. Our
competitors include MasterGraphics, Inc., Consolidated Graphics, Inc.,
Integrated Graphics, Inc., Omni Graphics and Imagex, Inc. Our main competition
is the small to medium sized digital print shop.
We believe we can be competitive in the digital printing market by
differentiating ourselves in the areas of quality, the versatility of our
products, turnaround time, technology, full-service capability, flexibility,
service and price.
EMPLOYEES
As of May 9, 2000, we had approximately eight full-time employees, of whom
one was in sales, services and distribution, four were in our technical and
graphics design areas, and three in administration. Our employees are
non-unionized and we believe that we enjoy good relations with them. As of the
date of this prospectus, we have hired a systems administrator for our in-house
server and Internet operations. We have also hired two new designers and are
currently interviewing additional hires, including a position for a national
sales manager.
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FACILITIES
Our main executive office facility is located in Madison, Tennessee, where
we lease approximately 5,500 square feet of office space for $3,500 per month
under a lease agreement entered into in March, 1997, which lease expires in
March, 2001. We have 15 months remaining on the term of our current lease with
an option to renew the lease for an additional three-year term. We believe this
facility is satisfactory for our uses for the foreseeable future.
FACILITIES ASSOCIATED WITH OUR ACQUISITIONS
Stonehouse Graphics, one of our target acquisitions in Johannesburg, South
Africa, leases a brand new, all brick, modern business facility, which is the
subject of a lease agreement entered into by Stonehouse Graphics on October,
1999, providing for a five-year lease at R35,000 (South African Rands) per month
(US$5,800), with an option to renew the lease for an additional five-year term.
This facility consists of approximately 2,700 square feet of office space,
20,000 square feet of production area, 2,000 square feet of design area, and
5,000 square feet of covered area for vehicle and bus installations, and
billboard applications. The Stonehouse facility is adequate for current and
prospective operations.
Magnum Digital Services, Inc., located in Coconut Creek, Florida, also
leases its office and manufacturing facility under a three-year lease agreement
entered into in October 1997, which provides for a monthly rental payment of
$2,480 per month. The Magnum Digital facility is 3,000 square feet, 2,400 square
feet of which is used as a production area. The remaining 600 square feet is
used as office space. The lease agreement has two years remaining in the
original term of the lease. The facilities are adequate for current and future
operations.
Advertising That Works, Inc., located in East Point, Georgia has its
business facility located on 1.125 acres of prime commercial real estate located
near Atlanta, Georgia. The facility includes four concrete block buildings
totaling approximately 16,000 square feet of which 10,500 square feet are used
for production, with the balance used as office and design space. This entire
facility includes a one-story metal building with 6,000 square feet of space
also available. These premises are financed through a promissory note and deed
of trust with approximately 13 years remaining on the term. Monthly payments of
$2,600 per month are current.
Virtual Colour Group currently has three locations. There are two locations
in Cape Town, South Africa and one in Paarl, South Africa. The main office for
Virtual Color is owned by that company. This home office consists of
approximately 8,000 square feet of usable space. The remaining locations are
approximately 4,000 square feet each and are leased at approximately R12,000
($US 2,000) per month with approximately two years remaining on each lease. This
facility is adequate for current and prospective operations.
Top Copy is located in Cape Town, South Africa in a retail center. The lease
is for approximately 3,000 square feet with an additional 3,000 square feet
currently undergoing leasehold improvements, under a lease agreement entered
into in September 1999. There is currently three years remaining on the lease at
approximately R20,000 per month (US$3,267). This facility is adequate for
current and prospective operations.
LEGAL PROCEEDINGS
Neither we, nor the companies we intend to acquire are involved in any
material pending, or to our knowledge threatened, legal proceedings. From time
to time, we may become a party to various legal proceedings arising in the
ordinary course of business. On February 1, 2000, we received written notice
from Hewlett Packard Corporation contending that our use of the tradename
ColorSmart infringes on its trademark and tradename rights claiming that same
name. We intend to dispute Hewlett Packard's contention, although no further
claims or threats have been made.
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MANAGEMENT
DIRECTORS AND OFFICERS
Our executive officers, directors, key employees and our nominees for
directors, and their ages as of May 9, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------------------------------------------------------
<S> <C> <C>
Roger D. Finchum, Sr. ............... 52 Chairman of the Board, Chief Executive Officer,
President and Director;
Roger D. Finchum, Jr. ............... 31 Vice-President of U.S. Operations, and Director;
Lee Watson........................... 47 Chief Financial Officer;
Reginald W.H. Burrows................ 53 Vice-President of Foreign Operations; and Director;
William P. Jones..................... 53 Director-Nominee;
Richard W. Weachter.................. 59 Director-Nominee.
</TABLE>
ROGER D. FINCHUM, SR., is our founder and has served as our chief executive
officer, president and chairman of our board of directors since our formation in
July 1997. From June 1996 to July 1997, Mr. Finchum was president of Express
Signs and Graphics, Inc., a small digital printing company located in Madison,
Tennessee, and also served as a director of Media Arts & Graphics Pty, Ltd., of
Cape Town, South Africa. Between September 1994 and June 1995, Mr. Finchum
served as vice president of The Poster Factory, Inc. and Digital Arts &
Graphics, Inc., both of Hendersonville, Tennessee. Mr. Finchum has served in
several corporate positions over the years in sales, marketing and advertising
for various printing and graphic arts companies. For several years prior to
that, Mr. Finchum was involved in various management capacities with Naturskin
AG, a mineral extraction concern headquartered in Frankfurt Germany and South
Africa with hard rock mining extractions in South Africa and neighboring
countries.
ROGER D. FINCHUM, JR., has been our vice-president and a director since we
were formed in July 1997. Mr. Finchum has worked as a digital print specialist
for various companies in the Nashville, Tennessee area during the five years
prior to joining us. From January 1992 to June 1994, Mr. Finchum was a print
specialist with ColorQuick, Inc. From February 1994 to September 1995,
Mr. Finchum was a print specialist with Fast Signs, Inc., and from October 1995
to January 1996, Mr. Finchum was a print specialist with Signs Now, Inc.
Mr. Finchum served in the Marine Corps from 1987 to 1991. During which time he
served as a special operations team leader. He is also a Gulf War Veteran.
Mr. Finchum has been a part-time student at Belmont University in Nashville,
Tennessee and expects to graduate in December 2000 with Bachelor of Arts degrees
in both History and Philosophy.
LEE WATSON, is a certified public accountant and has been our chief
financial officer since joining us in January 1999. Since June 1989, Mr. Watson
has served as an independent consultant performing financial consulting services
to Tennessee-based companies with annual revenues between $5,000,000 and
$20,000,000. Prior to 1989, Mr. Watson served as the controller for Northern
Lumber, a large hardwood lumber manufacturer and exporter. From June 1973 until
September 1975, Mr. Watson was employed as an accountant with Coopers & Lybrand.
In 1973, Mr. Watson received his bachelor of science degree from Manchester
College, Detroit, Michigan, in 1973
REGINALD W. H. BORROWS, has been one of our directors since July 1999.
Mr. Burrows graduated from the South African Institute of Industrial
Engineering. After having held several positions with some of South Africa's
leading industrial companies, he founded Sigma Graphics Ltd. in 1979. After many
years of successful operations, he sold the business to the Walton Group, South
Africa's largest stationer. After selling his business Mr. Burrows was retained
as a senior manager within the group. He served on their
29
<PAGE>
board and held responsibility for operating 19 locations in the Western Cape
Region, including Namibia, where he was a major part of Walton's acquisitions in
that country. From 1993-1998 Mr. Burrows served as a senior manager for Walton
Group in South Africa.
WILLIAM P. JONES, will become a director upon completion of the public
offering. Mr. Jones has been engaged in the private practice of law in
Hendersonville, Tennessee since 1974. Mr. Jones received a bachelor of arts
degree from The Citadel in Charleston, South Carolina, in 1968 and attended
Tulane University School of Law in New Orleans, Louisiana, from 1971 through
1974 and received a doctor of jurisprudence degree in 1974. Since 1983,
Mr. Jones has owned and operated several Bonanza Restaurants in the states of
Kentucky, Georgia and Tennessee and two mortgage companies dealing in commercial
and residential lending.
RICHARD W. WEACHTER, will become a director upon completion of the public
offering. From March 1997 to December 1999, Mr. Weachter served as the chief
financial officer and a director of Northstar Environmental Group, Inc. From
January 1995 to March 1997, Mr. Weachter was the president of Nationwide
Studios, Inc. Mr. Weachter received his bachelor of science in business
administration from Youngstown University in 1963 and attended graduate school
in business administration at the University of Detroit in Detroit, Michigan.
DIRECTORS' COMPENSATION
Any non-employee directors will receive $1,000 for attendance at each
meeting of the board of directors or any committee thereof and will be
reimbursed for their out-of-pocket expenses in connection with their attendance
at any such meeting. We anticipate that our board will meet at least twice each
year. No directors' fees have been paid to date.
BOARD COMPOSITION
Our board of directors presently consists of three members who serve as
directors for one-year terms or until their successors are duly elected by our
shareholders and then qualify as directors. We anticipate expanding the board of
directors to six members at the time that we complete our initial public
offering. We have three nominees that we intend to elect as directors at the
time our public offering is completed and our pending acquisitions consummated.
Two of our board members are related as father and son. Vacancies in the office
of any director may be filled by a majority of the directors then in office.
Our board appoints our chief executive officer, and all other executive
officers, including our president, are appointed by our chief executive officer.
We have agreed that for two years from the completion of this offering, that
Nutmeg Securities, Ltd. may appoint Daniel T. Guilfoile as an observer to our
board of directors, without any voting rights or privileges that our directors
have. If the representative chooses to designate Mr. Guilfoile to attend our
directors' meetings as an observer, we have agreed to reimburse him for
out-of-pocket expenses in connection with his attendance.
COMMITTEES OF THE BOARD
Upon completion of this offering, the board of directors will establish two
standing committees; an audit committee and a compensation committee. Our audit
committee will recommend to our entire board of directors the independent public
accountants to be engaged by us, review the plan and scope of our annual audit,
review our internal controls and financial management policies with our
independent public accountants and review all related party transactions. The
compensation committee will review and recommend to our board, the compensation
and benefits to be paid to our officers and directors, administer the stock
option plan we intend to put in place, approve the grant of options under the
stock
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<PAGE>
option plan and establish and review general policies relating to compensation
and benefits of our employees.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid during our two
most recent fiscal years ended November 30, 1999 to our chief executive officer,
Roger D. Finchum, Sr. No other executive officer received a salary and bonus in
excess of $100,000 during either fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL OTHER COMPENSATION
COMPENSATION -----------------------------------------
------------------- OTHER ANNUAL ALL OTHER
SALARY($) BONUS($) COMPENSATION COMPENSATION
------------------- ------------------- ------------------- -------------------
NAME AND POSITION 1998 1999 1998 1999 1998 1999 1998 1999
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger D. Finchum, Sr.,
chief executive
officer.................. -0- -0- -0- -0- $150,000 $416,670 -0- -0-
</TABLE>
The aggregate compensation paid to all persons who served in the capacity of
a director or executive officer during the fiscal years that ended November 30,
1999 (5 persons) and 1998, (3 persons), was $669,202 in 1999, and $287,700 in
1998.
OPTION GRANTS DURING THE YEARS
ENDED NOVEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
----------------------------------------------------------------------------
NUMBER OF SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL
GRANTED YEAR
----------------------- ----------------------- EXERCISE EXPIRATION
NAME 1998 1999 1998 1999 PRICE($/SH) DATE
- ---- -------- -------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Roger D. Finchum, Sr., chief
executive officer............... 300,000 -0- -0- -0- $1.00 May 2008
</TABLE>
In fiscal year 1998, a total of 400,000 options exercisable at $1.00 per
share were granted to all officers and directors in the aggregate (3 persons).
In fiscal year 1999 no options were granted to any officers or directors.
EMPLOYMENT AGREEMENTS
On September 16, 1999, we entered into a series of employment agreements
with the following people:
Roger D. Finchum, Sr. was employed as our chief executive officer and
president for a term of two years. Mr. Finchum's employment will automatically
be extended for additional two year periods unless he is terminated according to
the terms of his employment agreement. Mr. Finchum will have a base salary in
2000 of $160,000 per year. The following year his salary shall increase by 10%.
Subsequent increases in Mr. Finchum's salary are subject to review by our
compensation committee which will be established after we receive the full
proceeds of this public offering. Mr. Finchum is eligible for both cash and
stock bonuses within the discretion of our board of directors. The agreement
also has provisions that, for a period of one year after the termination of his
employment, Mr. Finchum will not compete with us, nor solicit our employees or
customers.
Roger D. Finchum, Jr. was employed as the vice president for our U.S.
operations for a term of two years. Mr. Finchum's employment will automatically
be extended for additional two year periods unless he is terminated according to
the terms of his employment agreement. Mr. Finchum will have a base salary in
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<PAGE>
2000 of $78,000 per year. The following year his salary shall increase by 10%.
Subsequent increases in Mr. Finchum's salary are subject to review by our
compensation committee which will be established after we receive the full
proceeds of this public offering. Mr. Finchum is eligible for both cash and
stock bonuses within the discretion of our board of directors. The agreement
also has provisions that, for a period of one year after the termination of his
employment, Mr. Finchum will not compete with us, nor solicit our employees or
customers.
Lee Watson was employed as our chief financial officer for a term of two
years. Mr. Watson's employment will automatically be extended for additional two
year periods unless he is terminated according to the terms of his employment
agreement. Mr. Watson will have a base salary in 2000 of $72,000 per year. The
following year his salary shall increase by 10%. Subsequent increases in
Mr. Watson's salary are subject to review by our compensation committee which
will be established after we receive the full proceeds of this offering.
Mr. Watson is eligible for both cash and stock bonuses within the discretion of
our board of directors. The agreement also has provisions that, for a period of
one year after the termination of his employment, Mr. Watson will not compete
with us, nor solicit our employees or customers.
The following employment agreements are to become effective on the
completion of this public offering and the closing of the stock and assets
acquisitions described in this prospectus:
Chris England is to be employed as president of Advertising That Works, Inc.
for a term of two years. Mr. England's employment will automatically be extended
for additional two year periods unless he is terminated according to the terms
of his employment agreement. Mr. England will be paid $100,000 per year
commencing from the closing of the purchase of the outstanding stock of the
company. The $100,000 is divided into $80,000 for salary and $20,000 as advance
compensation for not competing with us should Mr. England's agreement not be
renewed or extended, or should his agreement be terminated according to its
provisions. Mr. England is eligible for both cash and stock bonuses within the
discretion of our board of directors. The agreement also has provisions that,
for a period of two years after the termination of his employment, Mr. England
will not compete with us, nor solicit our employees or customers.
Stonehouse Graphics (Pty) Limited entered into an agreement to employ Nolan
Weight as its general manager for a term of two years. Mr. Weight's employment
will automatically be extended for additional two year periods unless he is
terminated according to the terms of his employment agreement. Mr. Weight will
be paid a base salary of South African Rands 200,000 per year, commencing from
the closing of the purchase of the outstanding stock of Stonehouse.
Mr. Weight's base salary will be reviewed after one year. Additionally,
Mr. Weight will be paid South African Rands 100,000 per year, for not competing
with us should Mr. Weight's agreement not be renewed or extended, or should his
agreement be terminated according to its provisions. Mr. Weight is eligible for
cash bonuses within the discretion of our board of directors. The agreement also
has provisions that, for a period of two years after the termination of his
employment, Mr. Weight will not compete with us, nor solicit our employees or
customers.
Reginald Burrows is to be employed as our vice-president of foreign
operations for a term of two years. Mr. Burrows's employment will automatically
be extended for additional two year periods unless he is terminated according to
the terms of his employment agreement. Mr. Burrows will have a base salary in
2000 of $96,000 per year. The following year his salary shall increase by 10%.
Subsequent increases in Mr. Burrows's salary are subject to review by our
compensation committee which will be established after we receive the full
proceeds of this offering. Mr. Burrows is eligible for both cash and stock
bonuses within the discretion of our board of directors. The agreement also has
provisions that, for a period of one year after the termination of his
employment, Mr. Burrows will not compete with us, nor solicit our employees or
customers.
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<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation and our by-laws contain provisions that
eliminate the personal liability of our directors to us or our stockholders for
monetary damages for breach of their fiduciary duty as a director to the fullest
extent permitted by the Nevada General Statutes, except for liability for:
- any breach of their duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions;
- any act or omission occurring prior to the date of our incorporation; and
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and by-laws also contain provisions that
require us to indemnify our directors and permits us to indemnify our
incorporators, directors and officers to the fullest extent permitted by Nevada
law, including circumstances where indemnification would be discretionary.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, and persons controlling us pursuant to the
foregoing provisions, or otherwise, we have 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.
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<PAGE>
CERTAIN TRANSACTIONS
Since inception, we have borrowed working capital from time to time from our
founding shareholder, Roger D. Finchum, Sr. During our fiscal year ended
November 30, 1997, Mr. Finchum advanced the sum of $7,500 for working capital.
During our fiscal year ended November 30, 1998, Mr. Finchum advanced a total of
$580,975 in working capital. During that same fiscal year, we repaid a total of
$510,470 of the advances made for that year to Mr. Finchum from the proceeds of
our private placements and from our revenues during that period.
These advances to us for working capital by Mr. Finchum were unsecured
borrowings by us. At the end of each of the fiscal years we borrowed money, we
entered into a form of promissory note in the amount of the advances outstanding
at the end of each year. We entered into a promissory note dated November 30,
1997 in the amount of the advances due to Mr. Finchum at that date. We also
entered into a promissory note dated November 30, 1998 in the amount of the
cumulative advances due to Mr. Finchum at that date. Each note accrued interest
at the rate of 7% per annum and are due on demand by the note holder.
Beginning in October 1999, we issued three promissory notes to
Roger D. Finchum, Sr., our chief executive officer, representing our agreement
to repay a total of $820,000 to Mr. Finchum, Sr. for capital advances
Mr. Finchum has made to us during our initial public offering process. These
three promissory notes are dated October 26, 1999 in the amount $170,000,
December 28, 1999 in the amount of $350,000 and February 29, 2000 in the amount
of $350,000. All of these promissory notes are unsecured, accrue interest at the
rate of 10% per annum, and are due on July 1, 2000.
We believe these promissory notes are on terms no less favorable to us than
we could have obtained from third party sources other than our management. It is
our intention to use net proceeds from our initial public offering for the
repayment of these three promissory notes.
In May 1998, Roger D. Finchum, Sr. was granted common stock options to
purchase 300,000 shares of our common stock, at that time valued at $1.00 per
share, exercisable at $1.00 per share. These options are now outstanding. In
addition, Roger D. Finchum, Sr. was issued 150,000 shares of our common stock at
that same time.
In May 1998, Roger D. Finchum, Jr. was granted common stock options to
purchase 100,000 shares of our common stock, at that time valued at $1.00 per
share, exercisable at $1.00 per share. These options are now outstanding. In
addition, Roger D. Finchum, Jr. was issued 100,000 shares of our common stock at
that same time.
The options and shares granted to Messrs. Finchum, Sr. and Finchum, Jr. were
granted as additional compensation in exchange for their efforts to locate a
suitable securities underwriter for this public offering.
On December 3, 1999 we entered into an agreement for our acquisition of
Jamberry Lakes Digital Media, Inc. with its sole shareholder, Jamberry Lakes,
LLC., Gregory E. Dukoff, one of our director-nominees at the time of our
agreement, is an officer and director of Jamberry Lakes Digital Media, Inc. and
is the managing member of Jamberry Lake, LLC, the sole shareholder of Jamberry
Lakes Digital Media, Inc.
In our agreement to acquire Jamberry Lakes Digital Media, Inc., we agreed to
pay $1,000,000 as follows: 125,000 of our shares of common stock at the
completion of this public offering and an additional number of our shares having
a value equal to 10% of the amount by which the average equity market
capitalization exceeds $75,000,000 on each of the 30th, 60th and 90th day after
the completion of this public offering. We also agreed to make a monthly capital
contribution to Jamberry Lakes Digital Media, Inc. of $100,000 from August 15,
1999 until we close this public offering. At the date of this prospectus we have
paid approximately $433,000 to Jamberry under this agreement. On March 29, 2000,
we elected to
34
<PAGE>
terminate the agreement with Jamberry under the termination provisions of the
agreement. As of the date of termination, we have no further obligation to
Jamberry.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of the date of this prospectus. The information
in this table provides the beneficial ownership for:
- each person known by us to be the beneficial owner of more than 5% of the
outstanding shares of our common stock;
- each of our directors and director-nominees and executive officers; and
- our executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner is the same
as our principal office location at 537 Myatt Drive, Madison, Tennessee 37115.
Unless otherwise indicated, the individuals in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
Beneficial ownership is determined in accordance with the rules and regulations
of the Securities and Exchange Commission.
The number of shares beneficially owned by a person and the percentage
ownership of that person includes shares of our common stock issuable upon
exercise of warrants held by that person, but not those held by any other
person, that are currently exercisable or exercisable within 60 days from the
date of this prospectus.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NAMES AND ADDRESS OF NUMBER OF SHARES ---------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING*
- -------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Roger D. Finchum, Sr.............................. 2,961,668 69.6% 47.3%
Roger D. Finchum, Jr.............................. 303,334 7.1% 4.9%
Lee Watson........................................ 33,333 0.78% .54%
William P. Jones.................................. 166,667 3.9% 2.7%
Richard W. Weachter............................... -0- -0- -0-
Reginald W.H. Burrows............................. 50,000 1.0% .79%
Max Herzog........................................ 408,000 9.6% 6.5%
SchlobPlatz 1
D-83684
Tegerrsee, Germany
All directors and executive officers as a group
(6) persons).................................... 3,515,002 82.4% 62.75%
</TABLE>
- Roger D. Finchum, Sr.'s beneficial ownership includes 300,000 immediately
exercisable options to purchase 300,000 shares of our common stock at
$1.00 per share. This option expires May, 2008.
- Roger D. Finchum, Jr.'s beneficial ownership includes 100,000 immediately
exercisable options to purchase 100,000 shares of our common stock at
$1.00 per share. This option expires May, 2008.
- ------------------------
* After Offering Assumes 6,257,112 shares.
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 24,000,000 shares of common stock,
$.001 par value per share and 1,000,000 shares of preferred stock, $.001 par
value per share, the rights and preferences of which may
35
<PAGE>
be established from time to time by our board of directors. As of May 9, 2000,
there were 4,257,112 shares of our common stock issued and outstanding, and
33,610 shares of our preferred stock outstanding.
The description of our securities are summaries and do not contain all the
information that may be important to you. For more complete information, you
should read our certificate of incorporation and all amendments, which are all
filed as exhibits to the registration statement of which this prospectus forms a
part.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and there are no cumulative voting
rights. Accordingly, holders of a majority of the shares of our common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by our board of directors out of
funds legally available therefore, subject to any preferential dividend rights
of any outstanding shares of preferred stock. Upon the liquidation, dissolution
or winding up of us, holders of our common stock are entitled to share in our
assets remaining after the payment of all liabilities and liquidation
preferences on any outstanding shares of preferred stock.
Holders of our common stock have no preemptive, subscription, redemption or
conversion rights, and there are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common stock are, and
the shares offered by us in this offering will be, when issued and paid for,
duly authorized, validly issued, fully paid and non-assessable. The rights,
preferences and privileges of holders of our common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any series
of preferred stock that we may designate and issue in the future.
PREFERRED STOCK
We have 33,610 shares of preferred stock outstanding. Our board of directors
has the authority, without stockholder approval, to issue up to an aggregate of
1,000,000 shares of preferred stock, in one or more series. The board may fix
the rights, preferences, privileges and restrictions of the shares of each
series, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, and to fix the number of shares
constituting any series and the designations of these series. These shares may
have rights senior to our common stock.
The issuance of preferred stock may have the effect of delaying or
preventing a change of control of us. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the
holders of our common stock or could adversely affect the rights and powers,
including voting rights, of the holders of our common stock. We have no present
plans to issue any shares of preferred stock.
The holders of the issued and outstanding shares of preferred stock are
entitled to receive dividends only as declared on a discretionary basis by the
board of directors. Dividends, if any, payable on the preferred stock are in
preference to dividends payable on the common stock and are non-cumulative. The
holders of the outstanding preferred stock have a liquidation preference to
holders of our common stock, which is an amount equal to $7.50 per share plus
any declared but unpaid dividends.
Two years after the date we issued our preferred stock, we may elect to
redeem the outstanding preferred stock by paying the amount of the liquidation
preference. Our outstanding preferred stock is automatically converted, on a
one-for-one basis, in the event that we conduct and underwritten public offering
of our common stock equal to or greater than $11.25 per share and the amount of
the public offering exceeds $7,500,000. Holders of our outstanding preferred
stock have voting rights in parity with our common stockholders.
36
<PAGE>
The holders of our outstanding preferred stock are entitled to piggyback
registration rights on any registration statement filed by us after this public
offering, subject to the right of our underwriters, in view of market
conditions, to reduce the number of shares proposed to be registered in our
subsequent public offerings. We have agreed to pay the expenses of two piggyback
registrations, exclusive of underwriting discounts and special fees of counsel
representing the selling shareholders. Expenses associated with any other
registrations are to be borne pro rata among the selling shareholders and us, if
we participate in the offering.
COMMON STOCK PURCHASE WARRANTS
We issued 33,610 common stock purchase warrants to our private placement
investors, which are exercisable for a five-year term at a price of $5.00 per
share of common stock. None of these warrants have been exercised as of the date
of this prospectus. These warrants include provisions requiring an adjustment in
the exercise price and the number in the event that we have a stock split,
recapitalization or a similar event that alters our outstanding capitalization.
THE UNDERWRITER'S WARRANTS
In connection with the offering, we have agreed to issue and sell to the
representative and/or its designees, at the closing of this offering, for
nominal consideration, five year warrants to purchase 200,000 shares of common
stock. The representative's warrants are exercisable at any time during a period
of four years commencing at the beginning of the second year after their
issuance and they are exercisable at a price that is equal to 165% of the
initial public offering price of the common stock in this offering. The shares
of common stock issuable upon exercise of the representative's warrants are
identical to those offered to the public. The warrants will be accounted for in
accordance with SFAS No. 123, and the resulting expense will be charged to
additional paid-in capital as stock issuance costs.
The representative's warrants contain anti-dilution provisions providing for
adjustment of the number of securities issuable upon the exercise of the
warrants under certain circumstances, including stock dividends, stock splits,
mergers, acquisitions and re-capitalization's. The holders of the
representative's warrants will have no voting, dividend or other stockholder
rights with respect to the warrants.
We have agreed to provide the holders of the representative's warrants
certain registration privileges. During the four year period beginning one year
after the effective date of our registration statement, we have agreed to use
our best efforts to register, on one occasion, all of the representative's
warrants and all of the common stock to be issued upon exercise of the
representative's warrants, when and if requested by the representative. Our
agreement includes granting to the representative a one-time demand registration
right covering the common stock during the four year period and maintaining the
effectiveness of the registration statement for at least nine months, at our
sole expense, except for commissions and selling brokers' costs.
In addition to this one time demand registration right, we agreed to
piggyback registration rights if requested by the representative, during the
term of the representative's warrants, to include in our registration statement
next filed, the shares of common stock underlying the representative's warrants
for registration, and to maintain a current registration statement covering
those shares for a 12 month period.
TRANSFER AGENT AND REGISTRAR
We intend to make application to appoint American Stock Transfer & Trust
Company, New York, New York as our transfer agent and registrar.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for any of our
securities and there can be no assurance that a significant public market for
any of our securities will be developed or sustained after this offering. Sales
of substantial amounts of our common stock in the public market after this
offering, or the possibility of those sales occurring could adversely affect the
prevailing market price for our securities and our ability to raise equity
capital in the future.
Upon completion of this offering, there will be 6,557,112 shares of our
common stock outstanding, assuming the full exercise of the underwriter's
over-allotment option. The 2,000,000 shares of common stock being offered by
this prospectus, plus the 300,000 shares of our common stock if the
overallotment option is exercised, will be freely tradable without restriction
under the Securities Act, unless purchased by an affiliate of ours, as that term
is defined under the rules and regulations of the Securities Act, which will be
subject to the resale limitations of Rule 144 under the Securities Act.
The remaining 4,257,111 shares of our common stock are considered
"restricted securities" as defined in Rule 144. These shares were issued in
private transactions and have not been registered under the Securities Act and,
therefore, may not be sold unless registered under the Securities Act or sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144.
In general, under Rule 144, beginning 90 days after the completion of this
offering, a person, or persons whose shares are aggregated, who has beneficially
owned restricted shares for at least one year, including the holding period of
any prior owner who is not an affiliate of ours, would be entitled to sell
within any three-month period, a number of shares that does not exceed the
greater of:
- one percent, or approximately 650,000 shares following this offering, of
the number of shares of our common stock then outstanding; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
ours at any time during the 90 days preceding a sale, and who has beneficially
owned the shares for at least two years, including the holding period of any
prior owner who is not an affiliate of ours, would be entitled to sell those
shares under Rule 144(k) without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Beginning 90 days after the completion of this offering, shares of common
stock issuable upon exercise of options granted by us prior to the effective
date of the registration statement will be eligible for sale in the public
market pursuant to Rule 701 under the Securities Act, subject to the lock-up
agreements described below. In general, Rule 701 permits re-sales of shares
issued under certain compensatory benefit plans commencing 90 days after the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act in reliance upon Rule 144, but without compliance with restrictions,
including the holding period requirements, contained in Rule 144.
Our existing stockholders, our executive officers and directors, have agreed
that, for a period of 180 days from the completion of this offering, they will
not, without the prior written consent of Nutmeg Securities, Ltd.:
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible
into or exercisable or exchangeable for our common stock.
38
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the form
of which is filed as an exhibit to the registration statement filed with the
Commission of which this prospectus is a part, the underwriters named below,
severally and not jointly, have agreed through Nutmeg Securities, Ltd. as the
representative of the underwriters, to purchase from us, and we have agreed to
sell to the underwriters, the aggregate number of shares set forth opposite
their respective names:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Nutmeg Securities, Ltd......................................
Total:.................................................. 2,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters under that agreement are subject to certain conditions precedent,
including the absence of any material adverse change in our business and the
receipt of certain certificates, opinions and letters from our counsel and our
independent public accountants. The underwriters are committed to take and to
pay for all of the shares offered hereby, if any are purchased. In the event of
a default by any of the underwriters, the purchase commitments of the
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated.
The underwriters will offer the shares to the public at the public offering
price set forth on the cover page of this prospectus. The underwriters may allow
some dealers concessions of not more than $ per share. The underwriters also
may allow, and those dealers may re-allow, a concession of not more than $ per
share to some other dealers. The public offering price, concessions, and
re-allowances may be changed after the completion of this offering.
We granted to the underwriters an option, exercisable within 45 days after
the effective date of the registration agreement, to purchase up to an
additional 300,000 shares of common stock at the initial public offering price
less the underwriting discounts and non-accountable expenses allowance. The
underwriters may exercise this option only to cover over-allotments, if any. If
any shares and/or warrants are purchased pursuant to this option, the
underwriters will severally purchase the shares and/or warrants in approximately
the same proportion as set forth above.
We agreed to indemnify the underwriters and their controlling persons
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments the underwriters and their controlling persons may be
required to make in respect thereof.
We also agreed to pay to the representative, a non-accountable expense
allowance equal to three percent of the gross proceeds of this offering, $25,000
of which has been paid to date.
We also agreed to pay all expenses in connection with qualifying the
securities under the laws of those states that the representative may designate,
including fees and expenses of counsel retained for these purposes by the
representative, and the costs and expenses in connection with qualifying the
offering with the National Association of Securities Dealers, Inc.
The representative of the underwriters has informed us that the underwriters
do not expect sales of the shares offered by this prospectus to be made to
discretionary accounts to exceed five percent of the total number of shares
offered.
Our existing stockholders, our executive officers and directors, have agreed
that, for a period of 180 days from the completion of this offering, they will
not, without the prior written consent of Nutmeg Securities, Ltd.:
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of,
39
<PAGE>
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock.
We have agreed to issue and sell to the representative of the underwriters
and/or its designees, for nominal consideration, five-year warrants to purchase
200,000 shares of our common stock. The representative's warrants are
exercisable for a period of four years commencing one-year after the date of
issuance at a price equal to 165% of the initial public offering price per share
of common stock. The representative's warrants contain anti-dilution provisions
providing for adjustments of the exercise price and the number of shares
issuable upon exercise, upon the occurrence of certain events, including stock
dividends, stock splits, and recapitalizations.
The representative's warrants contain certain demand and piggyback
registration rights relating to the shares of common stock issuable thereunder.
For the life of the representative's warrants, the representative will have the
opportunity to profit from a rise in the market price of our shares of common
stock. The representative's warrants are restricted from sale, transfer,
assignment or hypothecation for the one year period from the date of this
prospectus, except to officers or partners of the underwriters and members of
the selling group and/or their officers or partners.
We agreed to grant the representative a right of first refusal to act as
underwriter, placement agent or investment banker for a period of 12 months
after the completion of this offering for any sale of securities made by us in
transactions which are valued equal to or greater than $5,000,000 in the
aggregate.
We agreed that for two years from the completion of this offering, the
representative may designate Daniel F. Guilfoile of Nutmeg Securities, Ltd. as
an observer to the board of directors. This observer will have no voting
privileges as a director but will be entitled to receive notice of our
directors' meetings and a right to receive information considered by our board.
The representative has not yet exercised this right to designate this observer.
We have agreed to reimburse the board observer for all out-of-pocket expenses
incurred in connection with the observer's attendance at meetings of our board
of directors.
Prior to this offering, there has been no public market for any of our
securities. The initial public offering price of the shares offered hereby will
be determined by negotiations between the representative and us. Among the
factors considered in determining the price, include the prevailing market
conditions, including the history of and the prospects for the industry in which
the company competes, an assessment of our management, our prospects, and our
capital structure. The offering price does not necessarily bear any relationship
to our assets, results of operations or net worth. There can be no assurance
that an active trading market will develop for any of the securities offered by
this prospectus, or that such securities will trade in the public market at or
above the initial public offering price.
The representative, on behalf of the underwriters, may engage in
over-allotments, stabilizing transactions, syndicate covering transactions and
penalty bids. An over-allotment involves syndicate sales in excess of this
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the shares of common stock and/or warrants
being offered so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the shares of common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from
a syndicate member when the shares of common stock and warrants originally sold
by the syndicate member are purchased in a syndicate covering transaction and
penalty bids may cause the price of the shares of common stock to be higher than
it would otherwise be in the absence of such transactions. These transactions
may be effected on the Nasdaq National Market System or otherwise, and if
commenced, may be discontinued at any time. In addition, the underwriters may
engage in passive market making transactions in our securities on the Nasdaq
National Market System in accordance with Rule 103 of Regulation M. Neither the
underwriters
40
<PAGE>
nor we make any representation or prediction as to the direction or magnitude of
any effect that the transactions described above may have on the price of the
securities offered by this prospectus.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of our securities offered
in this prospectus. These actions include purchasing the securities to cover
some or all of a short position of any of the securities maintained by the
representative and the imposition of penalty bids.
LEGAL MATTERS
The validity of the shares of common stock being offered by this prospectus
will be passed upon for us by Gregory Bartko, Esq., of the Law Offices of
Gregory Bartko, Atlanta, Georgia, and Novack Burnbaum & Crystal, P.C., New York,
New York our legal counsel. Certain legal matters will be passed upon for the
underwriters by Gersten, Savage & Kaplowitz, LLP, New York, New York.
EXPERTS
Our financial statements as of November 30, 1999 and for the two years ended
November 30, 1999 included in this prospectus have been so included in reliance
on the report of Daszkal, Bolton, Manela, Devlin & Co. Certified Public
Accountants, A Partnership of Professional Associations, Boca Raton, Florida
independent auditors, given on the authority of such firm as experts in auditing
and accounting.
The financial statements for Advertising That Works, Inc., 1199 MAC, Inc.
d/b/a Magnum Digital Services, Inc., and Display Arts, Inc. for the two year
period ended December 31, 1999 included in this prospectus have been so included
in reliance on the report of Daszkal, Bolton, Manela, Devlin & Co. Certified
Public Accountants, A Partnership of Professional Associations, Boca Raton,
Florida independent auditors, given on the authority of such firm as experts in
auditing and accounting.
The audited financial statements for Stonehouse Graphics (Pty), Ltd. for the
two-year period ended February 28, 1998 and 1999 and the unaudited interim
financial statements for the nine months ended November 30, 1999 included in
this prospectus have been so included in this prospectus in reliance on the
report of Snyders & Co., Chartered Accounts S.A., independent public
accountants, given on the authority of such firm as experts in auditing and
accounting.
The audited financial statements for Top Copy CC for the two-year period
ended February 28, 1998 and 1999 and the unaudited interim financial statements
for the nine months ended November 30, 1999 included in this prospectus have
been so included in this prospectus in reliance on the report by H J Hugo and
Associates, Chartered Accountants S.A., independent public accountants, given on
the authority of such firm as experts in auditing and accounting.
The audited financial statements for the Virtual Color Group for the
two-year period ended February 28, 1998 and 1999 and the unaudited interim
financial statements for the nine months ended November 30, 1999 included in
this prospectus have been so included in this prospectus in reliance on the
report by PricewaterhouseCoopers, independent public accountants, given on the
authority of such firm as experts in auditing and accounting.
The audited financial statements for Jamberry Lake Digital Media, Inc. for
the period from inception to December 31, 1999 included in this prospectus have
been so included in this prospectus in reliance on the report by Daszkal,
Bolton, Manela, Devlin & Co. Certified Public Accountants, A Partnership of
Professional Associations, Boca Raton, Florida independent auditors, given on
the authority of such firm as experts in auditing and accounting.
41
<PAGE>
COLORSMART.COM, INC.
FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1999 AND 1998
F-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets at November 30, 1999 and 1998 and unaudited
at February 29/28, 2000
and 1999................................................ 2
Statements of Operations for the years ended November 30,
1999 and 1998 and unaudited for the three months ended
February 29/28, 2000 and 1999........................... 3
Statements of Changes in Stockholders' Equity (deficit)
for the years ended November 30, 1999 and 1998 and
unaudited for the three months ended February 29/28,
2000 and 1999........................................... 4
Statements of Cash Flows for the years ended November 30,
1999 and 1998 and unaudited for the three months ended
February 29/28, 2000 and 1999........................... 5
Notes to Financial Statements............................... 6-14
</TABLE>
F-2
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100 BOCA RATON, FLORIDA 33431
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN. CPA, P.A.
MICHAEL S. KRIDEL, CPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Colorsmart.com, Inc.
We have audited the accompanying balance sheets of Colorsmart.com, Inc. as
of November 30, 1999 and 1998, and the related statements of operations, changes
in stockholders' equity (deficit) 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 Colorsmart.com, Inc., as of
November 30, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ DASZKAL BOLTON MANELA DEVLIN & CO.
Boca Raton, Florida
January 21, 2000
F-3
<PAGE>
COLORSMART.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29/28,
NOVEMBER 30, NOVEMBER 30, ------------------------
1999 1998 2000 1999
------------ ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ -- $ 408 $ 23,936 $ --
Accounts receivable.............................. -- 10,910 -- 10,910
Inventories...................................... -- 15,500 -- 15,500
Prepaid expenses................................. 31,000 -- 31,000 35,035
----------- --------- ----------- ----------
Total current assets........................... 31,000 26,818 54,936 61,445
----------- --------- ----------- ----------
Property and equipment, net:....................... 350,683 268,729 335,683 246,094
----------- --------- ----------- ----------
Other assets:
Deposits and other............................... 10,730 3,875 10,730 3,875
Advances for acquisitions........................ 566,237 -- 401,284 --
----------- --------- ----------- ----------
Total other assets............................. 576,967 3,875 412,014 3,875
----------- --------- ----------- ----------
Total assets................................... $ 958,650 $ 299,422 $ 802,633 $ 311,414
=========== ========= =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 69,425 $ 3,000 $ 143,766 $ --
Checks outstanding in excess of bank balance..... 25,859 8,410 -- 47,580
Accrued expenses................................. 4,197 12,631 9,804 19,737
Current maturities of notes payable.............. 103,298 3,489 103,298 3,489
Current maturities of capital leases............. 15,456 7,566 15,456 7,566
Note payable, stockholder........................ -- -- 300,000 --
Note payable, stockholder/officer................ 20,091 78,005 260,893 36,574
----------- --------- ----------- ----------
Total current liabilities...................... 238,326 113,101 833,217 114,946
----------- --------- ----------- ----------
Long-term liabilities:
Note payable, net of current portion............. 14,744 10,174 14,168 12,718
Capital lease obligations, net of current
portion........................................ 60,291 35,430 57,680 29,769
----------- --------- ----------- ----------
Total long term liabilities.................... 75,035 45,604 71,848 42,487
----------- --------- ----------- ----------
Stockholders' equity (deficit):
Preferred stock, $.001 par value; $7.50
liquidation preference value; authorized
1,000,000 shares, 33,610 shares and -0- shares
issued and outstanding in 1999 and 1998,
respectively................................... 34 -- 34 --
Common stock, $.001 par value; authorized
24,000,000 shares; 4,257,112 and 3,799,226
shares issued and outstanding in 1999 and 1998,
respectively................................... 4,257 3,799 4,257 3,911
Additional paid-in capital....................... 2,507,051 918,236 2,419,051 1,058,625
Accumulated deficit.............................. (1,866,053) (781,318) (2,525,774) (908,555)
----------- --------- ----------- ----------
Total stockholders' equity..................... 645,289 140,717 (102,432) 153,981
----------- --------- ----------- ----------
Total liabilities and stockholders' equity
(deficit).................................... $ 958,650 $ 299,422 $ 802,633 $ 311,414
=========== ========= =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
COLORSMART.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 29/28
YEAR ENDED YEAR ENDED (UNAUDITED)
NOVEMBER 30, NOVEMBER 30, -------------------------
1999 1998 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................. $ 57,617 $ 127,191 $ -- $ 17,321
Costs of goods sold........................ 40,469 63,886 -- 1,600
----------- ----------- ----------- -----------
Gross profit............................... 17,148 63,305 -- 15,721
General and administrative expenses:
Salaries and wages....................... 640,578 501,808 64,338 30,133
Depreciation and amortization............ 90,541 55,367 15,000 22,635
Other general and administrative
expenses............................... 350,058 199,884 149,862 87,370
Write down of investment................. -- -- 425,000 --
----------- ----------- ----------- -----------
Total general and administrative
expenses............................. 1,081,177 757,059 654,200 140,138
----------- ----------- ----------- -----------
Loss from operations....................... (1,064,029) (693,754) (654,200) (124,417)
----------- ----------- ----------- -----------
Other income (expense):
Interest income.......................... -- 1,140 -- --
Interest expense......................... (20,706) (2,060) (5,521) (2,820)
----------- ----------- ----------- -----------
Total other expense.................... (20,706) (920) (5,521) (2,820)
----------- ----------- ----------- -----------
Net loss................................... $(1,084,735) $ (694,674) $ (659,721) $ (127,237)
=========== =========== =========== ===========
Net loss per share (basic and diluted)..... $ (0.27) $ (0.22) $ (0.15) $ (0.03)
=========== =========== =========== ===========
Weighted average common shares
outstanding.............................. 4,051,971 3,110,229 4,257,112 3,854,927
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COLORSMART.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
-------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- -------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1997..... 2,492,288 $2,492 -- $ -- $ 228,165 $ (86,644) $ 144,013
Issuance of common stock....... 836,295 837 -- -- 357,382 -- 358,219
Stock issuance costs........... -- (53,595) (53,595)
Net loss, 1998................. -- -- -- -- -- (307,919) (307,919)
--------- ------ ------ --------- ---------- ----------- ----------
Balance, November 30, 1998..... 3,328,583 3,329 -- -- 531,952 (394,563) 140,718
Prior period adjustment........ 470,643 470 -- -- 386,285 (386,755) --
--------- ------ ------ --------- ---------- ----------- ----------
Balance, November 30, 1998 (as
restated).................... 3,799,226 3,799 -- -- 918,237 (781,318) 140,718
Issuance of common stock....... 257,551 258 -- -- 1,099,742 -- 1,100,000
Common stock issued in
acquisition.................. 33,334 33 -- -- 33,301 -- 33,334
Issuance of preferred stock.... -- -- 33,610 34 252,041 -- 252,075
Common stock issued for
services..................... 167,001 167 -- -- 834,838 -- 835,005
Stock issuance costs........... -- -- -- -- (631,108) -- (631,108)
Net loss--November 30, 1999.... -- -- -- -- -- (1,084,735) (1,084,735)
--------- ------ ------ --------- ---------- ----------- ----------
Balance, November 30, 1999..... 4,257,112 4,257 33,610 34 2,507,051 (1,866,053) 645,289
Stock issusance costs.......... -- -- -- -- (88,000) -- (88,000)
Net loss--February 2000
(Unaudited).................. -- -- -- -- -- (659,721) (659,721)
--------- ------ ------ --------- ---------- ----------- ----------
Balance--February 2000
(Unaudited).................. 4,257,112 $4,257 33,610 $ 34 $2,419,051 $(2,525,774) $ (102,432)
========= ====== ====== ========= ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
COLORSMART.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 29/28
YEAR ENDED YEAR ENDED (UNAUDITED)
NOVEMBER 30, NOVEMBER 30, ---------------------
1999 1998 2000 1999
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(1,084,735) $(694,674) $(659,721) $(127,237)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization........... 90,541 55,367 15,000 22,635
Common stock issued for services........ 416,670 386,755 -- --
Write down in investment................ -- -- 235,000 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable......................... 10,910 (10,910) -- --
Inventory................................... 15,500 (7,735) -- --
Prepaid expenses............................ (31,000) -- -- (35,035)
Deposits and other.......................... (7,760) (3,624) -- --
Advances for acquisitions................... -- -- (70,049) --
Increase (decrease) in:
Accounts payable............................ 66,425 (62,204) 74,342 (3,000)
Accrued expenses............................ (8,433) 10,670 5,609 7,106
----------- --------- --------- ---------
Net cash used by operating activities......... (531,882) (326,355) (399,819) (135,531)
----------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment...... (113,716) (86,778) -- --
Advances for acquisitions............... (532,903) -- -- --
----------- --------- --------- ---------
Net cash used by investing activities......... (646,619) (86,778) -- --
----------- --------- --------- ---------
Cash flows from financing activities:
Checks in excess of bank balances....... 17,449 8,410 (25,859) 39,170
Issuance of common stock................ 1,100,000 358,219 -- 140,501
Issuance of preferred stock............. 252,075 -- -- --
Repayment of capital leases............. (8,043) (587) (2,611) --
Proceeds from capital leases............ 3,020 -- -- 23,672
Repayment of note payable............... (15,721) (2,940) -- (26,789)
Proceeds from notes payable............. 100,000 -- -- --
Payments on notes payable............... -- -- (577)
Proceeds from note payable,
stockholder........................... -- -- 300,000
Increase (decrease) in note payable,
stockholder/officer................... (57,914) 70,505 240,802 (41,431)
Stock issuance costs.................... (212,773) (53,595) (88,000) --
----------- --------- --------- ---------
Net cash provided by financing activities..... 1,178,093 380,012 423,755 135,123
----------- --------- --------- ---------
Net (decrease) increase in cash............... (408) (33,121) 23,936 (408)
Cash at beginning of period................... 408 33,529 -- 408
----------- --------- --------- ---------
Cash at end of period......................... $ -- $ 408 $ 23,936 $ --
=========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Colorsmart.com, Inc. (the "Company") specializes in digital imaging, the
sale of stock photographic images and large format digital printing. The Company
is focusing on Internet commerce, but also provides textile-printing services.
Customers are primarily wholesale to the trade. The Company has been in this
business since 1997. Prior to its formation as a corporation in July 1997, the
Company existed as a partnership that began operations on February 2, 1997.
The Company has entered into agreements to acquire the stock or the assets
of ten (10) companies in the digital printing and multimedia businesses. One of
these companies specializes in the design and production of multimedia
advertising, marketing and presentation applications for delivery over the
Internet and CD-ROM. The others are commercial digital printing companies
located in the United States and the Republic of South Africa. See notes 13 and
17.
These acquisitions are contingent upon the completion of a successful
initial public offering. There can be no assurance that the initial public
offering will be successful, and failure to complete the initial public offering
would have a material adverse effect on the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated using
the straight-line method, over the estimated useful lives of three to seven
years. Leasehold improvements are stated at cost and are being amortized over
the lesser of the term of the lease or the estimated useful life of the asset.
Depreciation expense includes the amortization of capital lease assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped. Revenue from services are recognized when the services are performed.
INVENTORY
Inventory consists primarily of materials used in the digital printing
process, and is stated at the lower of cost or market, with cost determined on
the first-in, first-out (FIFO) method.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred
approximately $10,035 and $5,776 in advertising costs during the years ended
November 30, 1999 and November 30, 1998, respectively.
F-8
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages the
use of a fair-value-based method of accounting for stock-based awards under
which the fair value of stock option is determined on the date of grant and
expensed over the vesting period. Under SFAS 123, companies may, however,
measure compensation costs for those plans using the method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Companies that apply APB No. 25 are required to include
pro forma disclosures of net earnings and earning per share as if the
fair-value-based method of accounting had been applied. The Company elected to
account for such plans under the provisions of APB No. 25.
UNAUDITED INTERIM INFORMATION
The information presented as of February 29/28, 2000 and 1999, and for the
three month periods ended February 29/28, 2000 and 1999, has not been audited.
In the opinion of management, the unaudited interim financial statements include
all adjustments necessary to present fairly the Company's financial position as
of February 29/28, 2000 and 1999, and the results of its operations and its cash
flows for the three months ended February 29/28, 2000 and 1999, and the
stockholder's deficit for the three months ended February 29/28, 2000.
NOTE 3--MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As shown in the accompanying financial statements, the Company incurred net
losses of $1,084,735 and $694,674 during the years ended November 30, 1999 and
1998, respectively. The ability of the Company to continue as a going concern is
dependent on the successful completion of the proposed acquisitions and its
ability to generate sufficient revenues to achieve and maintain profitability.
In order to successfully complete the acquisitions and to generate sufficient
revenues, the Company is dependent upon the successful completion of its initial
public offering. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Software.............................................. $ 29,814 $ 9,139
Leasehold improvements................................ 5,100 5,100
Equipment............................................. 280,732 242,263
Equipment under capital leases........................ 124,378 43,584
Automobile............................................ 55,663 24,010
--------- ---------
Total property and equipment...................... $ 495,687 $ 324,096
Less: accumulated depreciation........................ (145,004) (55,367)
--------- ---------
Property and equipment, net....................... $ 350,683 $ 268,729
========= =========
</TABLE>
F-9
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the years ended November 30, 1999 and 1998 was
$89,637 and $55,367, respectively.
NOTE 5--RELATED PARTY TRANSACTIONS
At November 30, 1999, the Company had an outstanding payable to a
stockholder/officer in the amount of $20,091, payable on demand.
The transactions involving the stockholder/officer are summarized below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Balance at December 1, 1998........................... $ 78,005 $ 7,500
Advances to company................................... 196,500 580,975
Repayment to stockholder/officer...................... (254,414) (510,470)
--------- ---------
Balance at November 30, 1999.......................... $ 20,091 $ 78,005
========= =========
</TABLE>
NOTE 6--BORROWINGS
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Revolving line of credit with borrowings up to $100,000,
interest accrues at 8.5% and is payable monthly,
collateralized by the Company's furniture, fixtures and
equipment, personally guaranteed by shareholder........... $ 100,000 $ --
Loan payable for automobile, requiring monthly payments of
$379, including interest at 8.75%......................... -- 13,663
Loan payable for automobile, requiring monthly payments of
$408, including interest at 7.95%, due May, 2004.......... 18,042 --
--------- --------
118,042 13,663
Less: current portion....................................... (103,298) (3,489)
--------- --------
Total................................................... $ 14,744 $ 10,174
========= ========
</TABLE>
Maturities of the notes payable are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
NOVEMBER 30,
- ------------
<S> <C>
2000.............................. $103,298
2001.............................. 3,882
2002.............................. 4,282
2003.............................. 4,547
2004.............................. 2,033
--------
Total......................... $118,042
========
</TABLE>
F-10
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LEASE COMMITMENTS
Certain non-cancelable leases are classified as capital leases, and the
leased assets are included as part of "Property and equipment." Other leases are
classified as operating leases and are not capitalized. Details of the
capitalized leased assets are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment................................................ $124,378 $43,584
Less: accumulated amortization........................... (16,795) (4,358)
-------- -------
Total................................................ $107,583 $39,226
======== =======
</TABLE>
The Company leases its corporate offices under an operating lease with a
term of three years, payable in monthly installments. Total lease expense for
the years ended November 30, 1999 and 1998, was $45,916 and $38,454,
respectively.
The future minimum lease payments under operating and capital leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
NOVEMBER 30, LEASES LEASES
- ------------ -------- ---------
<S> <C> <C>
2000.................................................... $ 32,121 $42,000
2001.................................................... 30,343 14,000
2002.................................................... 30,343 --
2003.................................................... 22,501 --
-------- -------
Total minimum lease payments............................ $115,308 $56,000
=======
Less: amount representing interest...................... (39,561)
--------
Present value of net minimum lease payments............. 75,747
Less: current maturities................................ (15,456)
--------
Long-term obligation.................................... $ 60,291
========
</TABLE>
NOTE 8--STOCKHOLDERS' EQUITY
COMMON STOCK ISSUED FOR CASH
During the year ended November 30, 1999, the Company issued 257,551 shares
of common stock for cash. The total amount obtained from the issuance of these
common shares was $924,727, net of $175,273 cost of issuance. In May of 1999,
the Company also issued 33,334 shares of common stock in an acquisition and
167,001 shares for services. These services were for officer compensation
($416,670) and stock issuance cost ($418,335) and are valued at $5.00 per share.
The 33,334 shares issued as part of the acquisition of Magnum Digital were
valued at $1.00 per share based on the asset purchase agreement.
During the year ended November 30, 1998, the Company issued 920,268 shares
(after reverse split) of common stock. The price of the stock ranged from $0.10
per share to $1.00 per share. The total amount obtained from the issuance of
these common shares was $304,624, net of $53,595 cost of issuance. Also, during
the year ended November 30, 1998, the Company issued 386,668 common shares to
employees as compensation for services. These shares were valued at $386,668.
See note 15.
F-11
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK ISSUED FOR CASH
During the year ended November 30, 1999, the Company sold 16,805 units; each
unit consisting of two shares of preferred stock and two purchase warrants for
two additional shares of common stock. Each purchase warrant entitles the holder
to purchase a share of common stock for $5.00 per share. The Company issued
33,610 shares of preferred stock during the year. The total amount obtained from
the issuance of these preferred shares was $214,575, net of $37,500 of cost of
issuance.
The holders of the issued and outstanding shares of preferred stock are
entitled to receive dividends only as declared on a discretionary basis by the
board of directors. Dividends, if any, payable on the preferred stock are in
preference to dividends payable on the common stock and are non-cumulative. The
holders of the outstanding preferred stock have a liquidation preference to
holders of the common stock, which is an amount equal to $7.50 per share plus
any declared but unpaid dividends.
Two years after the date of issuance of the preferred stock, the Company, at
its sole election, may redeem the preferred stock at the liquidation amount. In
addition, the preferred stock is automatically converted to common stock, on a
one-for-one basis, in the event the Company has an underwritten public offering
of the Company's common stock equal to or greater than $11.25 per share and the
amount of the offering exceeds $7,500,000. The preferred stock has the same
voting rights as the common stock.
REVERSE STOCK SPLIT
On December 28, 1998, the Company's Board of Directors authorized a 1-for-3
reverse stock split effective December 28, 1998, for stockholders of record on
December 28, 1998. This resulted in a reduction in the number of shares of
common stock. The accompanying financial statements have been restated to
reflect the reverse stock split as if it had occurred on November 30, 1997.
NOTE 9--CONCENTRATION OF CREDIT RISK
The Company maintains its cash in what it believes to be credit worthy
financial institutions. The balances, at times, may exceed federally insured
limits. At November 30, 1999 and 1998, the Company was within the insured limit.
The Company routinely assesses the financial strength of its customers, and, as
a consequence, believes its trade accounts receivable exposure is limited.
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximates the
fair market value, due to their short-term maturities and interest rates.
NOTE 11--INCOME TAXES
Deferred income (taxes) benefits are provided for on certain income and
expenses which are recognized in different periods for tax and financial
reporting purposes. There are no significant temporary or permanent differences
between the financial statement income and taxable income.
F-12
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
Sources of temporary differences and the resulting tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSETS
------------
<S> <C>
Net operating loss carryforwards
Federal and State......................................... $1,779,409
Applicable tax rate
(34% Federal, 6% State)................................... 40%
----------
711,764
Valuation allowance......................................... (711,764)
----------
Net deferred tax asset...................................... $ --
==========
</TABLE>
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current..................................................... $ -- $ --
Deferred.................................................... -- --
----------- -----------
Total................................................... $ -- $ --
=========== ===========
</TABLE>
The Company has net operating loss carryovers of $1,084,735 and $694,674,
which expire in 2014 and 2013, respectively.
NOTE 12--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is supplemental information of cash flow information for the
periods ended November 30, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash paid during the year for:
Interest.......................................... $ 20,706 $ 2,060
======== ========
Non cash transactions affecting investing and
financing activities:
Equipment acquired under capital lease............ $ 40,794 $ 43,584
======== ========
Equipment acquired under note payable............. $ 20,100 $ --
======== ========
Common stock issued for services.................. 167,001 386,668
======== ========
Common stock issued for acquisitions.............. 35,334 --
======== ========
</TABLE>
NOTE 13--ACQUISITIONS
The Company has entered into ten (10) separate agreements to acquire
unrelated corporations within the printing and multimedia industries. These
acquisitions are contingent upon the successful completion
F-13
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACQUISITIONS (CONTINUED)
of the Company's initial public offering, which is planned for fiscal year
ending November 30, 2000. There can be no assurance that the initial public
offering will be successful, which would materially adversely affect the
Company's ability to complete these acquisitions.
1999
In January, 1999, the Company agreed to acquire four (4) companies; Virtual
Colour and its affiliates, a South African printing company for approximately
$1,800,000 in cash of which approximately $800,000 will be used to pay off
Virtual Colour and Subsidiaries outstanding liabilities and is contingent upon
the initial public offering. The acquisition will be accounted for as a
purchase, and the results of operations and goodwill will be included in the
consolidated financial statements at the date of closing.
In May, 1999, the Company agreed to acquire Top Copy CC, a South African
printing company for approximately $430,000 in cash of which approximately
$30,000 will be used to pay off Top Copy CC's outstanding liabilities and is
contingent upon the initial public offering. The acquisition will be accounted
for as a purchase, and the results of operations and goodwill will be included
in the consolidated financial statements at the date of closing.
In June, 1999, the Company agreed to acquire Display Arts, Inc., for
approximately $1,300,000 in cash, of which approximately $300,000 will be used
to retire the outstanding liabilities of Display Arts, Inc., and the purchase is
contingent upon the initial public offering. The acquisition will be accounted
for as a purchase, and the results of operations and goodwill will be included
in the consolidated financial statements at the date of closing.
In December, 1999, the Company agreed to acquire Jamberry Lake Digital
Media, Inc., for $1,000,000 in cash and 125,000 shares of Colorsmart.com, Inc.,
common stock. The purchase is contingent upon the initial public offering. The
acquisition will be accounted for as a purchase, and the results of operations
and goodwill will be included in the consolidated financial statements at the
date of closing.
1998
In September, 1998, the Company entered into an agreement to purchase all of
the outstanding common shares of Advertising That Works, Inc. As consideration,
the Company will pay $1,500,000 in cash to the shareholder of Advertising That
Works, Inc. The agreement calls for $500,000 of the purchase price to be used to
purchase the land and building, which is owned by the sole stockholder. The
acquisition will be accounted for as a purchase and the results of operations
and goodwill will be included in the consolidated financial statements beginning
with the date of closing.
Additionally, in September, 1998, the Company entered into an agreement to
purchase all of the common stock of Magnum Digital Services Corporation. As
consideration, the Company will pay $500,000 in cash and issue 66,667 shares of
Colorsmart.com, Inc. common stock. The value of the stock will be determined
when the transaction is closed and is contingent on the Company completing the
initial public offering. In addition, approximately $275,000 of the cash will be
used to reduce the outstanding liabilities of Magnum Digital Services
Corporation. The acquisition will be accounted for as a purchase and the results
of operations and goodwill will be included in the consolidated financial
statements beginning at the date of closing.
F-14
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACQUISITIONS (CONTINUED)
In October, 1998, the Company entered into an agreement to purchase all of
the common stock of Stonehouse Graphics (Pty), Ltd., a South African graphics
printing company. In consideration, the Company will pay approximately
$2,500,000 and is contingent upon the completion of the initial public offering.
Approximately $1,300,000 of the cash paid to acquire Stonehouse Graphics
(Pty), Ltd. will be used to retire certain liabilities of Stonehouse Graphics
(Pty), Ltd. The acquisition will be accounted for as a purchase and the results
of operations and goodwill will be included in the consolidated financial
statements beginning with the date of closing.
NOTE 14--ADVANCES FOR ACQUISITIONS
The Company advanced $566,237 to Stonehouse Graphics, Jamberry Lakes and
Magnum Digital Services. These advances will be used to reduce any additional
payments due the sellers upon the completion of the various acquisitions. In the
event the acquisitions are not successfully completed, these amounts will be
charged to operations. See note 17.
NOTE 15--PRIOR PERIOD ADJUSTMENT
During 1998, an adjustment was made to correct the Company's common stock.
In 1998, the Company should have issued $386,668 shares to its officers and
employees in lieu of cash compensation. This error was corrected and common
stock is now properly stated. The effect of this adjustment, when reported in
the proper year (November 30, 1998), was to increase common stock and additional
paid-in capital by $386,668, and increase the net loss by $386,668.
In addition the Company should have record the issuance of an additional
83,975 shares of common stock in 1998. This correction increased common stock
and the net loss by $87.
NOTE 16--STOCK OPTION PLAN
Under the Company's stock option plan, 400,000 shares of common stock were
reserved for issuance upon exercise of options granted to officers and employees
of the Company. Options issued through November 30, 1999 carry exercise prices
equal to that of the far market value on the date of the grant. The options vest
immediately following the date of grant, and the unexercised portion of the
options expires and ceases to be exercisable on the earlier of the tenth year
after the date of the grant or specified date following termination of
employment.
The Company has elected to account for the stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized on the stock options.
Had compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for Stock
Based Compensation," the Company's 1998 net loss would have
F-15
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--STOCK OPTION PLAN (CONTINUED)
increased by $126,270. The fair value of each option is estimated on the date of
grant using fair market option pricing model with the following assumption:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6.5%
Expected life (years)....................................... 10
Expected volatility......................................... n/a
Expected dividends.......................................... None
Weighted average remaining contractual life................. 10
</TABLE>
A summary of option transactions during the years ended November 30, 1999 and
1998 is shown below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER OPTION
--------- --------------
<S> <C> <C>
Outstanding at November 30, 1998..................... 400,000 $1.00
Granted.............................................. -- --
Exercised............................................ -- --
Forfeited............................................ -- --
-------- -----
Outstanding at November 30, 1999..................... 400,000 $1.00
======== =====
</TABLE>
NOTE 17--SUBSEQUENT EVENTS (UNAUDITED)
On March 29, 2000, the Company terminated its agreement with Jamberry
Lakes, Inc., in accordance with article 2.2 of the agreement. The Company will
receive approximately 21.65% of Jamberry common stock. Consequently, the Company
charged to operations $425,000 in the first quarter of fiscal year 2000. The
Company charged an additional $7,911 to operations during March 2000.
F-16
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-17
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 and
unaudited at March 31, 2000
and 1999................................................ 2
Statements of Operations for the Years Ended December 31,
1999 and 1998 and unaudited for the three months ended
March 31, 2000 and 1999................................. 3
Statements of Changes in Stockholder's Deficit for the
Years Ended December 31, 1999 and 1998 and unaudited for
the three months ended March 31, 2000 and 1999.......... 4
Statements of Cash Flows for the Years Ended December 31,
1999 and 1998 And unaudited for the three months ended
March 31, 2000 and 1999................................. 5
Notes to Financial Statements............................... 6-9
</TABLE>
F-18
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100 BOCA RATON, FLORIDA 33431
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN. CPA, P.A.
MICHAEL S. KRIDEL, CPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
1199 MAC, Inc.
d/b/a Magnum Digital Services
Coconut Creek, Florida
We have audited the accompanying balance sheets of 1199 MAC, Inc. d/b/a
Magnum Digital Services (a Florida corporation) as of December 31, 1999 and
1998, and the related statements of operations, changes in stockholder's deficit
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 1199 MAC, Inc. d/b/a Magnum
Digital Services, as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has experienced substantial losses from
operations since its inception, as well as negative cash flows from operations.
These conditions raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 8. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DASZKAL BOLTON MANELA DEVLIN & CO.
Boca Raton, Florida
January 26, 2000
F-19
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- -------------------------
1999 1998 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................... $ 276 $ 3,942 $ -- $ 2,981
Accounts receivable, net of allowance of
$3,383 and $1,520...................... 58,530 71,614 47,455 47,833
Inventories.............................. 8,000 8,000 8,000 8,000
----------- ----------- ----------- -----------
Total current assets................... 66,806 83,556 55,455 58,814
----------- ----------- ----------- -----------
Property and equipment, net................ 198,307 287,258 180,860 263,093
----------- ----------- ----------- -----------
Other assets:
Note receivable.......................... -- 12,538 -- 12,538
Security deposits........................ 6,127 3,977 6,127 3,842
----------- ----------- ----------- -----------
Total other assets..................... 6,127 16,515 6,127 16,380
----------- ----------- ----------- -----------
Total assets........................... $ 271,240 $ 387,329 $ 242,442 $ 338,287
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... $ 147,319 $ 138,200 $ 127,596 $ 120,364
Obligations under capital leases......... 135,454 107,548 100,347 106,257
Current maturities of long-term debt..... -- 4,538 -- 4,617
Note payable............................. 14,200 -- 14,106 --
Related party notes payable.............. 25,000 -- 25,000 --
Cash overdraft........................... -- -- 7,121 --
----------- ----------- ----------- -----------
Total current liabilities.............. 321,973 250,286 274,170 231,238
----------- ----------- ----------- -----------
Long-term liabilities:
Obligations under capital leases......... 179,788 278,618 206,875 254,470
Note payable............................. -- 5,247 3,000 3,672
----------- ----------- ----------- -----------
Total long term liabilities............ 179,788 283,865 209,875 258,142
----------- ----------- ----------- -----------
Stockholder's deficit:
Common stock, $1.00 par value; 7,000
shares authorized; 1,000 shares issued
and outstanding........................ 1,000 1,000 1,000 1,000
Additional paid-in capital............... 1,960,009 1,854,050 1,956,725 1,871,277
Accumulated deficit...................... (2,191,530) (2,001,872) (2,199,328) (2,023,370)
----------- ----------- ----------- -----------
Total stockholder's deficit............ (230,521) (146,822) (241,603) (151,093)
----------- ----------- ----------- -----------
Total liabilities and stockholder's
deficit.............................. $ 271,240 $ 387,329 $ 242,442 $ 338,287
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
--------------------- -------------------
1999 1998 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 563,717 $ 608,891 $164,715 $172,941
Costs of goods sold................................ 376,807 454,976 104,767 106,221
--------- --------- -------- --------
Gross profit....................................... 186,910 153,915 59,948 66,720
--------- --------- -------- --------
General and administrative expenses................ 354,311 484,325 63,229 81,765
Loss from operations............................... (167,401) (330,410) (3,281) (15,045)
--------- --------- -------- --------
Other income (expense):
Interest income.................................. 1,117 351 -- --
Interest expense................................. (14,927) (24,521) (4,517) (6,453)
Loss on disposal of equipment.................... (8,447) -- -- --
--------- --------- -------- --------
Total other expense.......................... (22,257) (24,170) (4,517) (6,453)
Loss before income taxes........................... (189,658) (354,580) (7,798) (21,498)
Provision for income taxes......................... -- -- -- --
--------- --------- -------- --------
Net loss........................................... $(189,658) $(354,580) $ (7,798) $(21,498)
========= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997................ 1,000 $1,000 $1,701,178 $(1,647,292) $ 54,886
Capital contribution...................... -- -- 152,872 -- 152,872
Net loss--1998............................ -- -- -- (354,580) (354,580)
----- ------ ---------- ----------- ---------
Balance, December 31, 1998................ 1,000 1,000 1,854,050 (2,001,872) (146,822)
Net loss--1999............................ -- -- -- (189,658) (189,658)
Capital contribution...................... -- -- 105,959 -- 105,959
----- ------ ---------- ----------- ---------
Balance--December 31, 1999................ 1,000 1,000 1,960,009 (2,191,530) (230,521)
Net loss--March 2000 (Unaudited).......... -- -- -- (7,798) (7,798)
Capital contribution (Unaudited).......... -- -- (3,284) -- (3,284)
----- ------ ---------- ----------- ---------
Balance--March 2000 (Unaudited)........... 1,000 $1,000 $1,956,725 $(2,199,328) $(241,603)
===== ====== ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
--------------------- -------------------
1999 1998 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(189,658) $(354,580) $(7,798) $(21,498)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization................. 101,504 152,097 17,447 24,166
Net loss on disposal of fixed assets.......... 8,447 -- -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable........................... 13,084 66,407 11,075 23,781
Notes receivable.............................. 12,538 (8,980) -- --
Security deposits............................. (2,150) (924) -- 135
Increase (decrease) in:
Accounts payable.............................. 9,119 101,695 (19,723) (17,837)
Cash overdraft.................................... -- -- 7,121 --
--------- --------- ------- --------
Net cash used by operating activities............... (47,116) (44,285) 8,122 8,747
--------- --------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment................ (6,800) (2,961) -- --
--------- --------- ------- --------
Cash flows from financing activities:
Capital contribution.............................. 105,959 152,872 -- 17,227
Capital distribution.............................. -- -- (3,284) --
Repayment of capital leases....................... (70,924) (103,809) (8,020) (25,439)
Repayment of long-term debt....................... (15,585) (5,007) -- (1,496)
Proceeds from note payable........................ 5,800 -- 2,906 --
Proceeds from related party note payable.......... 25,000 -- -- --
--------- --------- ------- --------
Net cash provided by financing activities:.......... 50,250 44,056 (8,398) (9,708)
--------- --------- ------- --------
Net decrease in cash................................ (3,666) (3,190) (276) (961)
Cash at beginning of period......................... 3,942 7,132 276 3,942
--------- --------- ------- --------
Cash at end of period............................... $ 276 $ 3,942 $ -- $ 2,981
========= ========= ======= ========
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
1199 MAC, Inc. d/b/a Magnum Digital Services (the "Company") specializes in
large format digital printing worldwide. The Company also provides
textile-printing services. Customers are primarily wholesale to the trade. The
Company has been in this business since 1996.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are being depreciated using
the straight-line and accelerated methods over the estimated useful lives of two
to seven years. Leasehold improvements are stated at cost, and are being
amortized over the lesser of the term of the lease or the estimated useful life
of the asset. Depreciation expense includes the amortization of capital lease
assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped. Revenue from services are recognized when the services are performed.
INVENTORY
Inventory consists primarily of materials used in the digital printing
process, and is stated at the lower of cost or market, with cost determined on
the first-in, first-out (FIFO) method.
UNAUDITED INTERIM INFORMATION
The information presented as of March 31, 2000 and 1999, and for the three
month periods ended March 31, 2000 and 1999, has not been audited. In the
opinion of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of March 31, 2000 and 1999,
and the results of its operations and its cash flows for the three months ended
March 31, 2000 and 1999, and the stockholder's deficit for the three months
ended March 31, 2000.
F-24
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Leasehold improvements................................ $ 27,517 $ 27,517
Equipment............................................. 170,422 137,987
Equipment under capital lease......................... 470,575 483,388
Automobile............................................ -- 16,190
--------- ---------
Total property and equipment.................... 668,514 665,082
Less: accumulated depreciation........................ (470,207) (377,824)
--------- ---------
Property and equipment, net..................... $ 198,307 $ 287,258
========= =========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1999
and 1998 was $101,504 and $152,097, respectively.
NOTE 4--LEASE COMMITMENTS
Certain non-cancelable leases are classified as capital leases, and the
leased assets are included as part of "Property and equipment." Other leases are
classified as operating leases and are not capitalized. Details of the
capitalized leased assets are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment............................................... $470,575 $483,388
Less: accumulated amortization.......................... 312,108 260,154
-------- --------
Total............................................. $158,467 $223,234
======== ========
</TABLE>
The Company leases its facility under an operating lease with a term of
three years, payable in monthly installments. Total lease expense for the years
ended December 31, 1999 and 1998, was $28,442 and $27,104, respectively.
F-25
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LEASE COMMITMENTS (CONTINUED)
At December 31, 1999, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ --------- ---------
<S> <C> <C>
2000.................................................... $ 156,418 $28,668
2001.................................................... 112,379 --
2002.................................................... 77,342 --
--------- -------
Total minimum lease payments............................ 346,139 $28,668
--------- =======
Less: amount representing interest...................... (30,897)
---------
Present value of net minimum lease payments............. 315,242
Less: current maturities................................ (135,454)
---------
Long-term obligation.................................... $ 179,788
=========
</TABLE>
NOTE 5--INCOME TAXES
The Company has an unused net operating loss carryforward of $2,099,702
available for use on its future corporate federal and state income tax returns.
The net operating loss carryforward originated from December 31, 1987 to
December 31, 1999. Expiration occurs from 2002 through 2014. The Company's
evaluation of the tax benefit of its net operating loss carryforward is
presented in the following table. The tax amounts have been calculated using the
34% federal and 5.5% state income tax rates.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax asset:
Tax benefit of net operating loss................... $ 829,382 $ 754,467
Less: valuation allowance........................... (829,382) (754,467)
--------- ---------
Deferred tax asset.................................... $ -- $ --
========= =========
</TABLE>
NOTE 6--RELATED PARTIES
At December 31, 1999, the Company has a non-interest-bearing note payable,
due on demand, to Colorsmart.com, Inc. in the amount of $25,000.
NOTE 7--NOTE PAYABLE
At December 31, 1999, the Company has a non-interest bearing note payable,
due on demand, to an individual in the amount of $14,200, for the purchase of
certain equipment.
F-26
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--GOING CONCERN AND CONTRACT FOR SALE OF COMMON STOCK
As shown in the accompanying financial statements, the Corporation incurred
a net loss of $189,658 during the year ended December 31, 1999, and $354,580 for
the year ended December 31, 1998. The ability of the corporation to continue as
a going concern is dependent on the Company being successfully acquired by
Colorsmart.com, Inc. The Company has entered into a stock and asset purchase
agreement with Colorsmart.com, Inc. Colorsmart.com, Inc. shall deliver at
closing the sum of $500,000 to the sole shareholder, and Colorsmart.com, Inc.
will pay the balances due on all outside equipment leases, not to exceed
$275,000. Further, Colorsmart.com, Inc. shall also deliver 66,667 of Colorsmart
common stock to the sole shareholder of 1199 MAC, Inc. d/b/a Magnum Digital
Services, Inc.
NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the year ended December 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash payment for interest................................. $14,927 $24,571
======= =======
</TABLE>
Non-cash transactions affecting investing and financing activities:
<TABLE>
<S> <C> <C>
Equipment acquired under note payable..................... $20,000 $ --
======= =======
Refinancing of note payable............................... $ -- $13,525
======= =======
</TABLE>
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximates the
fair market value, due to their short-term maturities and interest rates.
F-27
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets at November 30, 1999 and 1998 and unaudited
at February 29/28, 2000
and 1999................................................ 2
Statements of Operations for the years ended November 30,
1999 and 1998 and unaudited for the three months ended
February 29/28, 2000 and 1999........................... 3
Statements of Changes in Stockholders' Equity (deficit)
for the years ended November 30, 1999 and 1998 and
unaudited for the three months ended February 29/28,
2000 and 1999........................................... 4
Statements of Cash Flows for the years ended November 30,
1999 and 1998 and unaudited for the three months ended
February 29/28, 2000 and 1999........................... 5
Notes to Financial Statements............................... 6-14
</TABLE>
F-28
<PAGE>
DISPLAY ARTS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-29
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 and
unaudited at March 31, 2000
and 1999................................................ 2
Statements of Operations for the years ended December 31,
1999 and 1998 and unaudited for the three months ended
March 31, 2000 and 1999................................. 3
Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1999 and 1998 and
unaudited for the three months ended March 31, 2000 and
1999.................................................... 4
Statements of Cash Flows for the years ended December 31,
1999 and 1998 and unaudited for the three months ended
March 31, 2000 and 1999................................. 5
Notes to Financial Statements............................... 6-10
</TABLE>
F-30
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100 BOCA RATON, FLORIDA 33431
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN. CPA, P.A.
MICHAEL S. KRIDEL, CPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Display Arts, Inc.
Nashville, Tennessee
We have audited the accompanying balance sheets of Display Arts, Inc., as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' equity (deficit) 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 Display Arts, Inc., as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ DASZKAL BOLTON MANELA DEVLIN & CO.
Boca Raton, Florida
January 21, 2000
F-31
<PAGE>
DISPLAY ARTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
-------------------- --------------------
1999 1998 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ -- $ 25,139 $ -- $ 25,442
Accounts receivable, less allowance of $52,900
and $31,900 in 1999 and 1998................... 144,324 249,728 152,560 238,341
Inventories...................................... 19,385 19,385 19,385 29,385
--------- -------- --------- --------
Total current assets........................... 163,709 294,252 171,945 293,168
--------- -------- --------- --------
Property and equipment, net........................ 186,038 243,276 174,734 236,067
--------- -------- --------- --------
Other assets:
Security deposits................................ 18,295 15,414 8,320 17,965
Deferred income taxes............................ 20,031 20,031 20,031 13,107
--------- -------- --------- --------
Total other assets............................. 38,326 35,445 28,351 31,072
--------- -------- --------- --------
Total assets................................... $ 388,073 $572,973 $ 375,030 $560,307
========= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Due to shareholder............................... $ 267,209 $187,542 $ 267,209 $195,927
Due to customer.................................. 11,000 -- -- --
Cash overdraft................................... 18,801 -- 20,094 --
Obligations under capital leases................. 5,767 55,495 4,369 57,746
Notes payable.................................... 40,802 27,621 41,818 28,317
Line of credit................................... -- 31,774 34,000 26,351
Accounts payable................................. 141,463 82,738 179,452 66,543
Accrued expenses................................. 11,185 3,237 13,439 6,825
--------- -------- --------- --------
Total current liabilities...................... 496,227 388,407 560,381 381,709
--------- -------- --------- --------
Long-term liabilities:
Obligations under capital leases................. 6,804 813 5,222 --
Notes payable.................................... 111,318 128,334 99,689 121,015
Deferred rent.................................... 4,533 7,397 -- --
--------- -------- --------- --------
Total long term liabilities.................... 122,655 136,544 104,911 121,015
--------- -------- --------- --------
Stockholders' equity (deficit):
Common stock, $.10 par value; 100 shares
authorized, issued and outstanding............. 10 10 10 10
Additional paid-in capital....................... 990 990 990 990
Retained earnings (deficit)...................... (231,809) 47,022 (291,262) 56,583
--------- -------- --------- --------
Total stockholders' equity (deficit)........... (230,809) 48,022 (290,262) 57,583
--------- -------- --------- --------
Total liabilities and stockholders' equity
(deficit).................................... $ 388,073 $572,973 $ 375,030 $560,307
========= ======== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
DISPLAY ARTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
----------------------- -------------------
1999 1998 2000 1999
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net sales........................................ $1,495,135 $1,665,517 $391,806 $424,010
Costs of goods sold.............................. 833,902 812,563 172,525 216,785
---------- ---------- -------- --------
Gross profit..................................... 661,233 852,954 219,281 207,225
General and administrative expenses.............. 922,181 770,986 275,184 187,941
---------- ---------- -------- --------
Income (loss) from operations.................... (260,948) 81,968 (55,903) 19,284
---------- ---------- -------- --------
Other expense:
Interest expense............................... (17,883) (25,635) (3,550) (2,799)
---------- ---------- -------- --------
Income (loss) before income taxes................ (278,831) 56,333 (59,453) 16,485
Provision (benefit) for income taxes............. -- 26,408 -- 6,924
---------- ---------- -------- --------
Net income (loss)................................ $ (278,831) $ 29,925 $(59,453) $ 9,561
========== ========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
DISPLAY ARTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, Janurary 31, 1998.................... 100 $10 $990 $ 17,097 $ 18,097
Net income--1998.............................. -- -- -- 29,925 29,925
--- --- ---- --------- ---------
Balance, December 31, 1998.................... 100 10 990 47,022 48,022
Net loss--1999................................ -- -- -- (278,831) (278,831)
--- --- ---- --------- ---------
Balance, December 31, 1999.................... 100 10 990 (231,809) (230,809)
Net loss--March 2000 (Unaudited).............. -- -- -- (59,453) (59,453)
--- --- ---- --------- ---------
Balance--March 2000 (Unaudited)............... 100 $10 $990 $(291,262) $(290,262)
=== === ==== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
DISPLAY ARTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
-------------------- -------------------
1999 1998 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(278,831) $ 29,925 $(59,453) $ 9,561
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization................. 78,896 79,303 12,224 19,004
Deferred income taxes......................... -- 26,408 -- 6,924
Changes in assets and liabilities:
(Increase) decrease in:
Inventory..................................... -- (910) -- (10,000)
Accounts receivable........................... 105,404 (4,657) (8,236) 11,387
Security deposits............................. (2,881) (9,339) 9,975 (2,551)
Increase (decrease) in:
Accounts payable.............................. 58,725 35,303 37,989 (16,195)
Accrued expenses.............................. 7,948 (13,145) 2,254 3,588
Due to customer............................... 11,000 -- (11,000) --
Deferred rent................................. (2,864) (2,864) (4,533) (7,397)
--------- -------- -------- --------
Net cash provided (used) by operating activities.... (22,603) 140,024 (20,780) 14,321
--------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment................ (10,703) (25,983) (920) (11,795)
--------- -------- -------- --------
Cash flows from financing activities:
Due to shareholder................................ 79,667 9,007 -- 8,385
Cash overdraft.................................... 18,801 -- 1,293 --
Repayment of line of credit....................... (31,774) (16,564) -- (5,423)
Proceeds from line of credit...................... -- -- 34,000 --
Repayment of capital leases....................... (56,585) (56,804) (2,980) (13,601)
Proceeds from capital leases...................... 1,893 -- -- 15,039
Repayment of notes payable........................ (35,985) (24,963) (10,613) (6,623)
Proceeds from notes payable....................... 32,150 -- -- --
--------- -------- -------- --------
Net cash provided (used) by financing activities:... 8,167 (89,324) 21,700 (2,223)
--------- -------- -------- --------
Net increase (decrease) in cash..................... (25,139) 24,717 -- 303
--------- -------- -------- --------
Cash, beginning of period........................... 25,139 422 -- 25,139
--------- -------- -------- --------
Cash, end of period................................. $ -- $ 25,139 $ -- $ 25,442
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Display Arts, Inc., is a Nashville, Tennessee based design firm and digital
service bureau that serves clients with a balance of management, creative and
technical skills. The Company specializes in the creation of high impact,
affordable graphics and displays utilizing state-of-the-art methods and
equipment.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred
approximately $24,975 and $35,216 in advertising costs for the years ended 1999
and 1998, respectively.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated using
the straight-line and accelerated methods over the estimated useful lives of two
to seven years. Leasehold improvements are stated at cost and are being
amortized over the lesser of the term of the lease or the estimated useful life
of the asset. Depreciation expense includes the amortization of capital lease
assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped.
INVENTORY
Inventory consists primarily of materials used in the digital printing
process, and is stated at the lower of cost or market, with cost determined on
the first-in, first-out (FIFO) method.
UNAUDITED INTERIM INFORMATION
The information presented as of March 31, 2000 and 1999, and for the three
month periods ended March 31, 2000 and 1999, has not been audited. In the
opinion of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of March 31, 2000 and 1999,
and the results of its operations and its cash flows for the three months ended
March 31, 2000 and 1999, and the stockholder's deficit for the three months
ended March 31, 2000.
F-36
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under SFAS 109, ACCOUNTING FOR INCOME
TAXES, which requires that deferred income taxes be recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting basis at rates based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Current income tax expense
represents the tax payable for the period. The deferred income tax expense
(benefit) represents the change during the period in the balance of deferred
taxes.
RECLASSIFICATIONS
Certain amounts previously reported for 1998 have been reclassified to
conform to the classifications used in 1999. Such reclassifications had no
effect on reported income.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Leasehold improvements................................ $ 19,745 $ 19,145
Equipment............................................. 517,019 350,601
Equipment under capital lease......................... 42,664 188,027
Automobile............................................ 13,990 13,990
--------- ---------
Total property and equipment.................... 593,418 571,763
Less: accumulated depreciation and amortization....... (407,380) (328,487)
--------- ---------
Property and equipment, net..................... $ 186,038 $ 243,276
========= =========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1999
and 1998, was $78,896 and 79,303, respectively.
NOTE 4--LEASE COMMITMENTS
Certain non-cancelable leases are classified as capital leases, and the
leased assets are included as part of "Property and equipment." Other leases are
classified as operating leases and are not capitalized.
Details of the capitalized leased assets are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment................................................ $42,664 $188,027
Less: accumulated amortization........................... (27,772) (79,024)
------- --------
Total.................................................. $14,892 $109,003
======= ========
</TABLE>
F-37
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LEASE COMMITMENTS (CONTINUED)
The Company has four facilities located throughout Tennessee. The Company
leases its facilities under operating leases with terms of three to five years,
payable in monthly installments. Total lease expense for the years ended
December 31, 1999 and 1998, was $139,952 and $80,674, respectively.
At December 31, 1999, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ -------- ---------
<S> <C> <C>
2000..................................................... 7,525 117,751
2001..................................................... 5,466 117,751
2002..................................................... 2,283 103,433
2003..................................................... 166 57,607
------- --------
Total minimum lease payments............................. $15,440 $396,542
========
Less: amount representing interest....................... 2,869
-------
Present value of net minimum
lease payments........................................... 12,571
Less: current maturities................................. (5,767)
-------
Long-term obligation..................................... $ 6,804
=======
</TABLE>
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Taxes currently payable................................. $ -- $ --
Deferred income tax benefit............................. 84,741 26,408
Change in beginning valuation allowance................. (84,741) --
-------- --------
Provision (benefit) for income taxes.................... $ -- $ 26,408
======== ========
</TABLE>
F-38
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
The components of the deferred tax asset were as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforward......................... $108,911 $ 18,137
Allowance for bad debts................................. 7,902 13,398
-------- --------
Total deferred tax asset................................ 116,813 31,535
Deferred tax liabilities:
Depreciation expense.................................... (12,041) (11,504)
-------- --------
Net deferred tax asset.................................. 104,772 20,031
-------- --------
Valuation allowance:
Beginning of year....................................... -- --
Decrease (increase) during year......................... (84,741) --
Ending balance.......................................... -- --
-------- --------
Net deferred taxes...................................... $ 20,031 $ 20,031
======== ========
</TABLE>
At December 31, 1999 and 1998, the Company has unused net operating loss
carryforwards of approximately $294,000 and $52,000, respectively, expiring
primarily in 2013 and 2012, which is available for use on its future corporate
Federal and State tax returns.
NOTE 6--BORROWINGS
A note payable of $125,399 and $155,955 at December 31, 1999 and 1998,
respectively, consists of a note payable to a financial institution with monthly
payments of $3,498 including interest at 10% until August, 2003. This note is
personally guaranteed by a shareholder of the corporation, and this note is
secured by all of the Company's assets.
A note payable of $26,721 and $--0- at December 31, 1999 and 1998
respectively, consists of a note payable to a financial institution with monthly
payments of $1,032 including interest at 9.5% until June, 2002.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 40,802
2001........................................................ 42,058
2002........................................................ 42,360
2003........................................................ 26,900
--------
Total:................................................ $152,120
========
</TABLE>
NOTE 7--CONTRACT FOR SALE OF STOCK
The Company has entered in to a stock and asset purchase agreement with
Colorsmart.com, Inc., whereas Colorsmart.com, Inc. shall acquire 100% of the
Company's stock. Colorsmart.com, Inc. shall
F-39
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CONTRACT FOR SALE OF STOCK (CONTINUED)
deliver at closing approximately $1,300,000. The closing of the transaction is
contingent upon the successful initial public offering by Colorsmart.com, Inc.
NOTE 8--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the year ended December 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash payment for interest................................. $17,883 $25,635
======= =======
</TABLE>
Non-cash transactions affecting investing and financing activities:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment acquired under capital lease................... $12,848 $121,028
======= ========
</TABLE>
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximates the
fair market value, due to their short-term maturities and interest rates.
NOTE 10--DUE TO SHAREHOLDER
The majority shareholder has lent money to the Company as needed. At
December 31, 1999 and 1998, the Company owes the shareholder $267,209 and
$187,542, respectively. The note is due on demand and bears interest at 10%. In
1998, interest on this note was deferred.
NOTE 11--LITIGATION
The Company is party from time to time to various legal proceedings. None of
these proceedings are expected to have a material impact on its financial
position or results of operations.
F-40
<PAGE>
ADVERTISING THAT WORKS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-41
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 and
unaudited at March 31, 2000
and 1999................................................ 2
Statements of Operations for the years ended December 31,
1999 and 1998 and unaudited for the three months ended
March 31, 2000 and 1999................................. 3
Statements of Changes in Stockholder's Equity for the
years ended December 31, 1999 and 1998 and unaudited for
the three months ended March 31, 2000 and 1999.......... 4
Statements of Cash Flows for the years ended December 31,
1999 and 1998 and unaudited for the three months ended
March 31, 2000 and 1999................................. 5
Notes to Financial Statements............................... 6-7
</TABLE>
F-42
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100 BOCA RATON, FLORIDA 33431
TELEPHONE (561) 367-1040 FAX (561) 750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN. CPA, P.A.
MICHAEL S. KRIDEL, CPA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Advertising That Works, Inc.
East Point, Georgia
We have audited the accompanying balance sheets of Advertising That
Works, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, changes in stockholder's equity 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 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 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 Advertising That
Works, Inc. as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ DASZKAL BOLTON MANELA DEVLIN & CO.
Boca Raton, Florida
January 14, 2000
F-43
<PAGE>
ADVERTISING THAT WORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -------------------
1999 1998 2000 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 1,605 $ 8,384 $ 19,435 $ 8,308
Accounts receivable, net of allowance for doubtful
accounts of $7,431 and $0....................... 64,722 65,270 82,703 93,931
Inventories....................................... 50,054 47,085 31,995 41,828
-------- -------- -------- --------
Total current assets............................ 116,381 120,739 134,133 144,067
-------- -------- -------- --------
Property and equipment, net......................... 26,760 25,357 27,561 34,323
-------- -------- -------- --------
Total assets.................................... $143,141 $146,096 $161,694 $178,390
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 62,104 $ 61,138 $ 29,005 $ 52,500
Due to stockholder................................ 7,127 44,962 21,610 44,985
-------- -------- -------- --------
Total current liabilities....................... 69,231 106,100 50,615 97,485
-------- -------- -------- --------
Stockholder's equity:
Common stock, no par value; 100,000 shares
authorized; 500 shares issued and outstanding... 15,574 15,574 15,574 15,574
Retained earnings................................. 58,336 24,422 95,505 65,331
-------- -------- -------- --------
Total stockholder's equity...................... 73,910 39,996 111,079 80,905
-------- -------- -------- --------
Total liabilities and stockholder's equity...... $143,141 $146,096 $161,694 $178,390
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
ADVERTISING THAT WORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDING
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
--------------------- -------------------
1999 1998 2000 1999
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales......................................... $756,007 $972,822 $212,696 $218,191
Costs of goods sold............................... 387,799 594,211 90,152 100,870
-------- -------- -------- --------
Gross profit...................................... 368,208 378,611 122,544 117,321
General and administrative expenses............... 331,637 390,438 85,291 76,034
-------- -------- -------- --------
Income (loss) from operations..................... 36,571 (11,827) 37,253 41,287
-------- -------- -------- --------
Other income (expense):
Interest income................................. -- 111 -- 1,245
Interest expense................................ (2,657) (411) (84) (1,623)
-------- -------- -------- --------
Total other income (expense)................ (2,657) (300) (84) (378)
-------- -------- -------- --------
Net income (loss)................................. $ 33,914 $(12,127) $ 37,169 $ 40,909
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
ADVERTISING THAT WORKS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1997.............................. 500 $15,574 $ 36,549 $ 52,123
Net loss--1998.......................................... -- -- (12,127) (12,127)
--- ------- -------- --------
Balance, December 31, 1998.............................. 500 15,574 24,422 39,996
Net income--1999........................................ -- -- 33,914 33,914
--- ------- -------- --------
Balance, December 31, 1999.............................. 500 $15,574 $ 58,336 $ 73,910
Net income--March 2000 (Unaudited)...................... -- -- 37,169 37,169
--- ------- -------- --------
Balance--March 2000 (unaudited)......................... 500 $15,574 $ 95,505 $111,079
=== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
ADVERTISING THAT WORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
------------------- -------------------
1999 1998 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................. $ 33,914 $(12,127) $ 37,169 $ 40,909
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation................................... 11,586 17,513 1,703 2,796
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.......................... 548 79,777 (17,981) (28,661)
Inventory.................................... (2,969) (47,085) 18,059 5,257
Increase (decrease) in:
Accounts payable............................... 966 11,868 (33,099) (8,639)
-------- -------- -------- --------
Net cash provided (used) by operating activities:.... 44,045 49,946 5,851 11,662
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment................. (12,989) (36,348) (2,504) (11,760)
-------- -------- -------- --------
Cash flows from financing activities:
Due to stockholder--proceeds....................... 20,942 -- 14,483 --
Due to stockholder--repayments..................... (58,777) (14,445) -- 22
-------- -------- -------- --------
Net cash provided (used) by financing activities..... (37,835) (14,445) 14,483 22
-------- -------- -------- --------
Net cash increase (decrease)......................... (6,779) (847) 17,830 (76)
-------- -------- -------- --------
Cash, beginning of period............................ 8,384 9,231 1,605 8,384
-------- -------- -------- --------
Cash, end of period.................................. $ 1,605 $ 8,384 $ 19,435 $ 8,308
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest....................................... $ 2,657 $ 411 $ 84 $ 1,623
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
ADVERTISING THAT WORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Advertising That Works, Inc. (the "Company") specializes in finishing custom
and blank banners, and screen and digital printing, worldwide. The Company
derives a majority of its revenue through the sale of materials and blank
banners to retail sign stores. Their customers are primarily wholesale to the
trade.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated using
accelerated methods over the estimated useful lives of two to seven years.
Leasehold improvements are stated at cost and are being amortized over the
lesser of the term of the lease or the estimated useful life of the asset.
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped. Revenues from services are recognized when the services are performed.
INVENTORY
Inventory consists primarily of materials used in the production of banners,
and is stated at the lower of cost or market, with cost determined on the
first-in, first-out (FIFO) method.
INCOME TAXES
Advertising That Work, Inc., with the consent of its stockholder, has
elected to be taxed under S corporation provisions of the Internal Revenue Code.
Under these provisions, the taxable income of this entity is reflected by the
stockholder on his personal income tax return.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred
approximately $9,100 and $6,000 in advertising costs for the years ended 1999
and 1998, respectively.
UNAUDITED INTERIM INFORMATION
The information presented as of March 31, 2000 and 1999, and for the three
month periods ended March 31, 2000 and 1999, has not been audited. In the
opinion of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of March 31, 2000 and 1999,
and the results of its
F-48
<PAGE>
ADVERTISING THAT WORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operations and its cash flows for the three months ended March 31, 2000 and
1999, and the stockholder's deficit for the three months ended March 31, 2000.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Leasehold improvements.................................. $ 595 $ 595
Equipment............................................... 61,433 53,219
Automobile.............................................. 5,500 5,500
-------- --------
Total property and equipment............................ 67,528 59,314
Less: accumulated depreciation.......................... (40,768) (33,957)
-------- --------
Property and equipment, net............................. $ 26,760 $ 25,357
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was
$11,568 and $17,513, respectively.
NOTE 4--CONTRACT FOR SALE OF STOCK AND ASSETS
The Company has entered in to a stock and asset purchase agreement with
Colorsmart.com, Inc. Colorsmart.com, Inc. shall deliver the sum of $1,500,000 to
the sole stockholder at closing.
NOTE 5--DUE TO STOCKHOLDER AND RELATED PARTY
The stockholder has lent money to the Company throughout the year as needed.
At December 31, 1999 and 1998, the Company owes the stockholder $7,121 and
$44,962, respectively. The note is due on demand and bears interest at
9 percent.
The Company leases its operating facility from the stockholder; the term of
the lease is one year, payable in monthly installments of $2,700. At
December 31, 1999 and 1998, rent expense was $34,659 and $33,402, respectively.
F-49
<PAGE>
VIRTUAL SUPPORT CC
FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-50
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Declaration by the Members.................................. 2
Financial Statements:
Balance Sheets as of February 29, 2000 and 1999........... 3
Statements of Operations for the years ended February 29,
2000 and 1999........................................... 4
Statements of Changes in Members' Equity for the years
ended February 29, 2000 and 1999........................ 5
Statements of Cash Flows for the years ended February 29,
2000 and 1999........................................... 6
Notes to Financial Statements............................... 7-10
</TABLE>
F-51
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Virtual Support CC
Cape Town, South Africa
We have audited the accompanying balance sheets of Virtual Support CC as of
February 29, 2000 and 1999, and the related statements of operations, changes in
members' interest and cash flows for the years then ended. These financial
statements are the responsibility of the Close Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with United States of America generally
accepted auditing standards. These 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 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 Virtual Support CC as of
February 29, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with United States of America generally
accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS, INC.
- ------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town, South Africa
April 17, 2000
- ----------------
F-52
<PAGE>
DECLARATION BY THE MEMBERS OF
VIRTUAL COLOUR SUPPORT CC
The financial statements set out on pages 3 to 10 are the responsibility of
the members. We have determined that the financial statements are in agreement
with the accounting records and have done so by adopting such procedures and
conducting such enquiries in relation to the books of account and records as we
considered necessary in the circumstances. We have also reviewed the accounting
policies which have been represented to us as having been applied in the
preparation of the annual financial statements and we consider that they are
appropriate to the business.
<TABLE>
<S> <C>
- ------------------------ ------------------------
MEMBER MEMBER
- ------------------------ ------------------------
MEMBER MEMBER
</TABLE>
F-53
<PAGE>
VIRTUAL SUPPORT CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
FEBRUARY 29
-------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... 142 199
Accounts receivable....................................... 306,552 279,996
Inventories............................................... -- 454
------- -------
Total current assets.................................... 306,694 280,649
------- -------
Fixed assets................................................ 51,376 1,605
------- -------
Loan to member.............................................. 63,822 47,523
------- -------
Total assets............................................ 421,892 329,777
======= =======
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable.......................................... 170,762 298,483
Short term borrowings..................................... 186,692 9,721
Short term portion of long term liability................. 11,474 --
Receiver of Revenue--Income tax........................... 3,636 4,608
------- -------
Total current liabilities............................... 372,564 312,812
------- -------
Long Term Liability......................................... 26,897 --
------- -------
Members' Interest
Members' contributions.................................... 100 100
Retained earnings......................................... 22,331 16,865
------- -------
Total Members' Interest................................. 22,431 16,965
------- -------
Total liabilities and members' interest................. 421,892 329,777
======= =======
</TABLE>
See accompanying notes to the financial statements.
F-54
<PAGE>
VIRTUAL SUPPORT CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29/28
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales................................................... 2,495,532 1,890,027
Costs of goods sold......................................... 2,113,087 1,684,071
--------- ---------
Gross profit................................................ 382,445 205,956
--------- ---------
Depreciation................................................ 15,478 4,000
General and administrative expenses......................... 127,788 92,461
Members' remuneration....................................... 101,755 75,396
Staff costs................................................. 129,504 23,553
Income from operations...................................... 7,920 10,546
--------- ---------
Other income
Interest Income........................................... 687 489
Interest expense.......................................... 197 390
--------- ---------
Total other income.................................... 490 99
--------- ---------
Net income before tax....................................... 8,410 10,645
--------- ---------
Tax......................................................... 2,944 3,726
Net income for the year..................................... 5,466 6,919
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-55
<PAGE>
VIRTUAL SUPPORT CC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
MEMBERS'
INTEREST RETAINED
AMOUNT EARNINGS TOTAL
-------- -------- --------
RAND RAND RAND
<S> <C> <C> <C>
Balance, March 1, 1998...................................... 100 9,946 9,946
Net income--1999............................................ -- 6,919 6,919
--- ------ ------
Balance, February 28, 1999.................................. 100 16,865 16,865
Net income--2000............................................ -- 5,466 5,466
--- ------ ------
Balance, February 29, 2000.................................. 100 22,331 22,331
=== ====== ======
</TABLE>
See accompanying notes to the financial statements.
F-56
<PAGE>
VIRTUAL SUPPORT CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income after tax...................................... 5,466 6,919
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 15,478 4,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................... (26,556) (229,545)
Inventory............................................. 454 18,844
(Decrease) increase in:
Accounts payable...................................... (128,693) 257,466
-------- --------
Net cash (used) provided by operating activities............ (133,851) 57,684
Cash flows from investing activities:
Purchase of fixed assets.................................. (65,249) --
Cash flows from financing activities:
Members' advances......................................... -- (67,478)
Suspensive sale agreement................................. 38,371 --
Loan to member............................................ (16,299) --
Bank overdraft............................................ 176,971 9,721
Members' contributions.................................... -- --
-------- --------
Net cash provided (used) by financing activities............ 199,043 (57,757)
-------- --------
Net cash decrease........................................... (57) (73)
-------- --------
Cash, beginning of period................................... 199 272
-------- --------
Cash, end of period......................................... 142 199
======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for Interest................ 197 390
======== ========
</TABLE>
F-57
<PAGE>
VIRTUAL SUPPORT CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Virtual Support CC (the "Close Corporation") specialises in computer systems
sales and support.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are presented on the historical cost basis and
incorporate the following principal accounting principles.
CASH EQUIVALENTS
The Close Corporation considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
FIXED ASSETS
Fixed Assets are stated at cost and are being depreciated using the
straightline method over the estimated useful lives of the assets
<TABLE>
<S> <C>
Computer equipment.......................................... 33.3%
Motor vehicles.............................................. 20%
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales are recognised when products are shipped or
services are provided.
INVENTORY
Inventory consists primarily of computer system consumables and is stated at
the lower of cost or market, with cost determined on the first-in, first-out
(FIFO) method.
INCOME TAXES
Virtual Support CC is currently subject to South African Normal Company
taxation and is taxed at a rate of 35% of taxable income up to 29 February 1999
and 30% thereafter. Value Added Tax at a rate of 14% is levied on the net
difference between revenue output and certain input expenses.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at anticipated realisable value. An estimate
is made for doubtful receivables based on a review of all outstanding amounts at
year-end. Bad debts are written off during the year in which they are
identified.
F-58
<PAGE>
VIRTUAL SUPPORT CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 3--FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Computer equipment.......................................... 18,859 11,938
Motor vehicle............................................... 58,328 --
Total fixed assets........................................ 77,187 11,938
Less: Accumulated depreciation.............................. 25,811 10,333
------ ------
Fixed assets, net......................................... 51,376 1,605
====== ======
</TABLE>
Depreciation expense for the years ended February 29, 2000 and 1999 was R15
478 and R4 000 respectively.
(Encumbered as per note 5)
NOTE 4--ACQUISITION AND POST BALANCE SHEET EVENTS
The Close Corporation and other close corporations in the group have entered
into a stock and asset purchase agreement with Colorsmart.com Inc. for a total
purchase price of R7 430 892. Colorsmart.com shall deliver the purchase price to
the members at closing. An amount of R2 708 000 will be retained in trust by
Colorsmart.com's attorneys to meet all liabilities in respect of taxation as
well as the contingent liabilities for penalties.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--LONG TERM LIABILITY
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Secured by an instalment sale agreement over a motor vehicle
with a book value of R34 959.............................. 26,897 --
Repayable in monthly instalments of R1 650 which include
interest (25%) and capital................................ 38,371 --
Less: Instalments payable within 12 months transferred to
current liabilities.......................................
Subsequent repayments are:.................................. (11,474) --
</TABLE>
<TABLE>
<S> <C>
2002...................................................... R16,138
2003...................................................... R10,759
Total..................................................... R26,897
</TABLE>
F-59
<PAGE>
VIRTUAL SUPPORT CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 6--LOAN TO MEMBER
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Loans bearing interest at 18.25% (1999: 19.25%)
The loan will be cancelled during the next financial year
with a tax free distribution from the capital surplus
arising from the sale of stock and assets as set out in
note 4.................................................... 63,822 47,523
====== ======
</TABLE>
NOTE 7--RELATED PARTY
Group close corporations:
Virtual Colour CC (1)
Virtual Printing CC (2)
Virtual Properties CC (3)
The group close corporation (1) has lent money to the close corporation as
required. At February 29, 2000 and 1999, the close corporation owes the group
close corpora-tion R63 822 and R47 523, respectively. No repayment terms have
been deter-mined and the loan is currently non-interest bearing. Related party
transactions consist of payment of administration fees and market related rent.
There were sales of R175 867 with a related close corporation, Mega Pre-Press
CC, and a related company, Virtual Colour Paarl (Pty) Ltd, engaged in a similar
business, and in which the members of the close corporation have an interest.
Imputed interest (19.25%) relating to the above
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Before tax.................................................. 10,717 4,574
After tax................................................... 7,502 3,202
</TABLE>
NOTE 8--SHORT TERM BORROWINGS
<TABLE>
<S> <C> <C>
Bank overdraft.............................................. 186,692 9,721
======= =====
</TABLE>
No repayment terms have been determined. Interest is calculated monthly at
16.5%. The accounts receivable are ceded to the bank as security for bank
overdraft purposes.
F-60
<PAGE>
VIRTUAL SUPPORT CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 9--RECEIVER OF REVENUE--INCOME TAX
Income tax liability relating to the following tax years:
<TABLE>
<S> <C> <C>
1998........................................................ -- 882
1999........................................................ 692 3,726
2000........................................................ 2,944 --
----- -----
3,636 4,608
===== =====
</TABLE>
NOTE 10--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
The latest quarterly currency exchange rates are as follows:
<TABLE>
<CAPTION>
$1 = RANDS
----------
<S> <C>
1 July 1998................................................. 6.2891
31 August 1998.............................................. 6.5620
30 November 1998............................................ 5.8134
28 February 1999............................................ 6.3261
31 May 1999................................................. 6.3000
31 August 1999.............................................. 6.1675
30 November 1999............................................ 6.2576
29 February 2000............................................ 6.1576
</TABLE>
F-61
<PAGE>
VIRTUAL COLOUR PRINTING CC
FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-62
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Declaration by the Members.................................. 2
Financial Statements:
Balance Sheets as of February 29, 2000 and 1999........... 3
Statements of Operations for the years ended February 29,
2000 and 1999........................................... 4
Statements of Changes in Members' Equity for the years
ended February 29, 2000 and 1999........................ 5
Statements of Cash Flows for the years ended February 29,
2000, and 1999.......................................... 6
Notes to Financial Statements............................... 7-10
</TABLE>
F-63
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Virtual Colour Printing CC
Cape Town, South Africa
We have audited the accompanying balance sheets of Virtual Colour Printing
CC as of 29 February, 2000 and 1999, and the related statements of operations,
changes in members' interest and cash flows for the years then ended. These
financial statements are the responsibility of the Close Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with United States of America 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 policies 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 Virtual Colour Printing CC
as of February 29, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with United States of America
generally accepted accounting principles.
Without qualifying our opinion we draw attention to Note 12 in the financial
statements. Should the taxation penalties of R177 616 not be waived, then the
close corporation's current liabilities will exceed its current assets by R683
559 and total liabilities exceed its total assets by R486 129. These factors
raise substantial doubt that the close corporation will be able to continue as a
going concern, in the event that the sale of the business referred to in Note 4
is not proceeded with.
/s/ PRICEWATERHOUSECOOPERS, INC.
- ------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town, South Africa
April 17, 2000
- ----------------
Date
F-64
<PAGE>
DECLARATION BY THE MEMBERS OF
VIRTUAL COLOUR PRINTING CC
The financial statements set out on pages 3 to 10 are the responsibility of
the members. We have determined that the financial statements are in agreement
with the accounting records and have done so by adopting such procedures and
conducting such enquiries in relation to the books of account and records as we
considered necessary in the circumstances. We have also reviewed the accounting
policies which have been represented to us as having been applied in the
preparation of the annual financial statements and we consider that they are
appropriate to the business.
<TABLE>
<S> <C>
- ------------------------ ------------------------
MEMBER MEMBER
- ------------------------ ------------------------
MEMBER MEMBER
</TABLE>
F-65
<PAGE>
VIRTUAL COLOUR PRINTING CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29,
--------------------
2000 1999
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... 8 --
Accounts receivable....................................... 513,647 680,382
Inventories............................................... 65,000 80,000
-------- ---------
Total current assets.................................. 578,655 760,382
-------- ---------
Fixed Assets................................................ 299,700 376,538
-------- ---------
Loan to member.............................................. 70,273 --
-------- ---------
Total assets.......................................... 948,628 1,136,920
======== =========
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable.......................................... 243,099 265,938
Short term borrowings..................................... 136,507 139,844
Short term portion of long term liability................. 31,954 28,041
Short term loan........................................... 407,364 419,250
Receiver of Revenue--Value Added Tax...................... 68,032 66,828
Receiver of Revenue--Income tax........................... 57,312 47,822
-------- ---------
Total current liabilities............................. 944,268 967,723
-------- ---------
Long Term Liability......................................... 172,543 188,188
-------- ---------
Member's Interest
Members' contributions.................................... 400 400
(Accumulated loss)/Retained earnings...................... (168,583) (19,391)
-------- ---------
Total members' (deficit)/interest..................... (168,183) (18,991)
-------- ---------
Total liabilities and members' interest............... 948,628 1,136,920
======== =========
</TABLE>
See accompanying notes to the financial statements.
F-66
<PAGE>
VIRTUAL COLOUR PRINTING CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales................................................... 3,233,000 3,049,171
Costs of goods sold......................................... 1,508,380 1,507,108
--------- ---------
Gross profit................................................ 1,724,620 1,542,063
--------- ---------
General and administrative expenses......................... 1,808,388 1,620,810
Loss from operations........................................ (83,768) (78,747)
--------- ---------
Other expenses
Interest Income........................................... 861 449
Interest expense.......................................... 66,285 22,252
--------- ---------
Total other expenses.................................. (65,424) (21,803)
--------- ---------
Net loss before tax......................................... (149,192) (100,550)
--------- ---------
Tax......................................................... -- --
Net loss for the year....................................... (149,192) (100,550)
========= =========
Earnings per share (in Rand)................................ (373) (251)
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-67
<PAGE>
VIRTUAL COLOUR PRINTING CC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
MEMBERS'
INTEREST RETAINED
AMOUNT EARNINGS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance, March 1, 1998...................................... 400 81,159 81,159
Net loss--1999.............................................. -- (100,550) (100,550)
-------- -------- --------
Balance, February 28, 1999.................................. 400 (19,391) (19,391)
Net loss--2000
-- (149,192) (149,192)
-------- -------- --------
Balance, February 29, 2000.................................. 400 (168,583) (168,583)
======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-68
<PAGE>
VIRTUAL COLOUR PRINTING CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss after tax........................................ (289,522) (100,550)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................ 77,560 18,939
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable..................................... 297,808 (206,188)
Inventory............................................... 35,000 (52,500)
Increase in:
Accounts payable........................................ 132,679 147,606
======== ========
Net cash provided (used) by operating activities............ 253,525 (192,693)
======== ========
Cash flows from investing activities:
Purchase of fixed assets.................................. (722) (378,777)
Cash flows from financing activities:
Acquisition of long term loan............................. -- 216,229
Acquisition of short term loan............................ -- 340,740
Repayment of long term loan............................... (11,732) --
Repayment of short term loan.............................. (167,453) --
Bank overdraft............................................ (3,337) 14,501
Loan to member............................................ (70,273) --
Member's contributions.................................... -- --
-------- --------
Net cash (used) provided by financing activities............ (252,795) 571,470
-------- --------
Net cash increase........................................... 8 --
-------- --------
Cash, beginning of period................................... -- --
-------- --------
Cash, end of period......................................... 8 --
-------- --------
Supplemental disclosure of cash flow information
Cash paid during the year for Interest.................... 66,285 22,252
======== ========
</TABLE>
See accompanying notes to financial statements
F-69
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Virtual Colour Printing CC (the "Close Corporation") specialises in digital
printing.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are presented on the historical cost basis and
incorporate the following principal accounting principles.
CASH EQUIVALENTS
The Close Corporation considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
FIXED ASSETS
Fixed assets are stated at cost and are being depreciated using the reducing
balance method over the estimated useful lives of:
<TABLE>
<S> <C>
Furniture, fixtures and fittings............................ 10%
Machinery................................................... 20%
Motor vehicle............................................... 20%
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales are recognised when products are shipped or
services are provided.
INVENTORY
Inventory consists primarily of materials and work in progress, and is
stated at the lower of cost or market, with cost determined on the first-in,
first-out (FIFO) method. The value of work in progress includes direct costs and
a proportion of manufacturing overheads.
INCOME TAXES
Virtual Colour Printing CC is currently subjected to South African Normal
Company taxation and is taxed at a rate of 35% of taxable income up to 28
February 1999 and 30% thereafter.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at anticipated realisable value. An estimate
is made for doubtful receivables based on a review of all outstanding amounts at
year-end. Bad debts are written off during the year in which they are
identified.
F-70
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Furniture, fixtures and fittings.......................... 18,299 17,579
Machinery................................................. 156,500 156,500
Motor vehicle............................................. 222,277 222,277
------- -------
Total fixed assets.................................. 397,076 396,356
Less: accumulated depreciation............................ 97,376 19,818
------- -------
Fixed assets, net................................... 299,700 376,538
======= =======
</TABLE>
Depreciation expense for the years ended February 29, 2000 and 1999 was R77
560 and R18 939 respectively.
A motor vehicle with a book value of R166 707 is encumbered as security for
a hire purchase creditor.
NOTE 4--ACQUISITION
The Close Corporation and other close corporations in the group have entered
into a stock and asset purchase agreement with Colorsmart.com Inc. for a total
purchase price of R7 430 892. Colorsmart.com shall deliver the purchase price to
the members at closing. An amount of R2 708 000 will be retained in trust by
Colorsmart.com's attorneys to meet all liabilities in respect of taxation as
well as the contingent liabilities for penalties as per note 12.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--RELATED PARTY
Group close corporations:
Virtual Colour CC (1)
Virtual Properties CC (2)
Virtual Support CC (3)
A group close corporation (1) has lent money to the Close Corporation as
required. At February 29, 2000 and 1999, the Close Corporation owes the group
close corporation R251 797 and R419 250 respectively. No repayment terms have
been determined and the loan is currently non-interest bearing. Related party
transactions consist of payment of administration fees and market related rent.
There were no transactions with a related close corporation, Mega Pre-Press CC,
engaged in a similar business, and in which the members of the close corporation
have a interest.
F-71
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 5--RELATED PARTY (CONTINUED)
IMPUTED INTEREST (19.25%) RELATING TO THE ABOVE
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Before tax.................................................. 79,562 45,421
After tax................................................... 55,693 29,524
</TABLE>
NOTE 6--LONG TERM LIABILITY
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Secured by instalment sale agreements over vehicles with a
book value of R166 707.................................. 172,543 188,188
Repayable in monthly instalments of R5 044 which include
interest (24%) and capital.............................. 204,497 216,229
Less: Instalments payable within 12 months transferred to
current liabilities..................................... (31,954) (28,041)
</TABLE>
Subsequent repayments are:
<TABLE>
<S> <C> <C>
2002................................................... R62,743
2003................................................... R62,743
2004................................................... R47,057
Total.................................................. R172,543
</TABLE>
NOTE 7--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
The latest quarterly currency exchange rates are as follows:
<TABLE>
<CAPTION>
$1 = RANDS
-----------
<S> <C>
1 July 1998................................................. 6.2891
31 August 1998.............................................. 6.5620
30 November 1998............................................ 5.8134
28 February 1999............................................ 6.3261
31 May 1999................................................. 6.3000
31 August 1999.............................................. 6.1675
30 November 1999............................................ 6.2576
29 February 2000............................................ 6.1576
</TABLE>
NOTE 8--LOAN TO MEMBER
<TABLE>
<S> <C> <C>
Loan bearing interest at 18.25% (1999: 19.25%).............. 70,273 --
====== ======
</TABLE>
F-72
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 8--LOAN TO MEMBER (CONTINUED)
The loan will be cancelled during the next financial year with a tax free
distribution from the capital surplus arising from the sale of stock and assets
as set out in note 4.
NOTE 9--SHORT TERM BORROWINGS
<TABLE>
<S> <C> <C>
Bank overdraft............................................ 136,507 139,844
======= =======
</TABLE>
No repayment terms have been determined. Interest is calculated monthly at
16.5%. The accounts receivable are ceded to the bank as security for bank
overdraft purposes.
NOTE 10--RECEIVER OF REVENUE--INCOME TAX
Income tax liability relating to the following tax years:
<TABLE>
<S> <C> <C>
1998 (Including interest)................................... 57,312 47,822
1999........................................................ -- --
2000........................................................ -- --
------ ------
57,312 47,822
====== ======
</TABLE>
NOTE 11--RECEIVER OF REVENUE--VALUE ADDED TAX
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Income tax liability relating to the following tax years:
1998 (Including interest)................................... 43,168 38,316
1999 (Including interest)................................... 7,454 28,512
2000........................................................ 17,410 --
------ ------
68,032 66,828
====== ======
</TABLE>
NOTE 12--CONTINGENT LIABILITY
There is a contingent liability for penalties arising from the underpayment
of S A Normal Company tax and Value Added Tax (VAT). The maximum potential
penalties are R25 680 in respect of the 1999 financial year and R151 936 in
respect of the 1998 financial year. It is expected that the penalties will be
waived but the members (P Petersen, H Trischler, K Redman and A Koch) have
effectively indemnified the close corporation for any penalties that may arise
and therefore no provision were made in the financial statements for such
penalties.
F-73
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-74
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Declaration by the Members.................................. 2
Financial Statements:
Balance Sheets as of February 29, 2000 and 1999........... 3
Statements of Operations for the years ended February 29,
2000 and 1999........................................... 4
Statements of Changes in Members' Interest for the years
ended February 29, 2000 and 1999........................ 5
Statements of Cash Flows for the years ended February 29,
2000 and 1999........................................... 6
Notes to Financial Statements............................... 7--9
</TABLE>
F-75
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Virtual Colour Properties CC
Cape Town, South Africa
We have audited the accompanying balance sheets of Virtual Colour Properties
CC as of February 29, 2000 and 1999, and the related statements of operations,
changes in members' interest and cash flows for the years then ended. These
financial statements are the responsibility of the Close Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with United States of America 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 policies 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 Virtual Colour Properties CC
as of February 29, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with United States of America
generally accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS, INC.
- ------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town, South Africa
April 17, 2000
- ------------------------
Date
F-76
<PAGE>
DECLARATION BY THE MEMBERS OF
VIRTUAL COLOUR PROPERTIES CC
The financial statements set out on pages 3 to 9 are the responsibility of
the members. We have determined that the financial statements are in agreement
with the accounting records and have done so by adopting such procedures and
conducting such enquiries in relation to the books of account and records as we
considered necessary in the circumstances. We have also reviewed the accounting
policies which have been represented to us as having been applied in the
preparation of the annual financial statements and we consider that they are
appropriate to the business.
<TABLE>
<S> <C>
- ------------------------ ------------------------
MEMBER MEMBER
- ------------------------ ------------------------
MEMBER MEMBER
</TABLE>
F-77
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29
-------------------
2000 1999
-------- --------
<S> <C> <C>
Current assets:
Cash...................................................... 17,876 --
Accounts receivable....................................... 34,893 21,649
------- -------
Total current assets.................................. 52,769 21,649
------- -------
Property.................................................... 813,353 706,643
------- -------
Total assets.......................................... 866,122 728,292
======= =======
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable.......................................... 8,043 16,849
Receiver of Revenue--Income tax........................... 7,851 --
Short term loan........................................... 382,828 267,016
Short term borrowings..................................... -- 146
------- -------
Total current liabilities............................. 398,722 284,011
------- -------
Long term liability......................................... 455,497 472,415
------- -------
Members' interest
Members' contributions.................................... 400 400
Retained earnings/(Accumulated loss)...................... 11,503 (28,534)
------- -------
Total members' interest/(deficit)..................... 11,903 (28,134)
------- -------
Total liabilities and members' interest............... 866,122 728,292
======= =======
</TABLE>
See accompanying notes to the financial statements.
F-78
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29/28
-------------------
2000 1999
-------- --------
<S> <C> <C>
Rent received............................................... 170,639 136,441
General and administrative expenses......................... 49,231 44,195
------- --------
Income from operations...................................... 121,408 92,246
------- --------
Other expenses
Interest Income........................................... 150 1
Interest expense.......................................... (73,670) (106,155)
------- --------
Total other expenses.................................. (73,520) (106,154)
------- --------
Net income (loss) before tax................................ 47,888 (13,908)
Tax......................................................... 7,851 --
------- --------
Net income (loss) for the year.............................. 40,037 (13,908)
======= ========
</TABLE>
See accompanying notes to the financial statements.
F-79
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
STATEMENTS OF CHANGES IN MEMBERS' INTEREST
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
MEMBERS'
INTEREST RETAINED
AMOUNT EARNINGS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance, March 1, 1998...................................... 400 (14,626) (14,626)
Net loss--1999.............................................. -- (13,908) (13,908)
--- ------- -------
Balance, February 28, 1999.................................. 400 (28,534) (28,534)
Net income--2000............................................ -- 40,037 40,037
--- ------- -------
Balance, February 29, 2000.................................. 400 11,503 11,503
=== ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-80
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) after tax............................... 40,037 (13,908)
Changes in assets and liabilities:
Increase in:
Accounts receivable..................................... (13,244) (15,871)
Increase in:
Accounts payable........................................ 114,857 42,241
-------- -------
Net cash used by operating activities....................... 141,650 12,462
-------- -------
Cash flows from investing activities:
Purchase of property........................................ (106,710) --
Cash flows from financing activities:
Members' contributions.................................... -- --
Bank overdraft............................................ (146) (6,777)
Long term liability....................................... (16,918) (5,685)
-------- -------
Net cash (used) provided by financing activities............ (17,064) (12,462)
-------- -------
Net cash increase........................................... 17,876 --
-------- -------
Cash, beginning of period................................... -- --
-------- -------
Cash, end of period......................................... 17,876 --
======== =======
Supplemental disclosure of cash flow information
Cash paid during the year for Interest.................... 73,670 106,155
======== =======
</TABLE>
See accompanying notes to financial statements
F-81
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANISATION AND DESCRIPTION OF BUSINESS
Virtual Colour Properties CC (the "Close Corporation") specialises in
renting out its fixed property. The Close Corporation derives its revenue from
rent received from group close corporations.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are presented on the historical cost basis and
incorporate the following principal accounting principles.
CASH EQUIVALENTS
The Close Corporation considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property is stated at cost and is not depreciated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Generally, revenue from rental income is recognised on a monthly basis.
INCOME TAXES
Virtual Colour Properties CC is currently subject to South African Normal
Company taxation and is taxed at a rate of 35% of taxable income up to 28
February 1999 and 30% thereafter. Value Added Tax at a rate of 14% is levied on
the net difference between revenue output and certain input expenses.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at anticipated realizable value. An estimate
is made for doubtful receivables based on a review of all outstanding amounts at
year-end. Bad debts are written off during the year in which they are
identified.
NOTE 3--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
Property consists of the following: -------- --------
<S> <C> <C>
Office building............................................. 813,353 706,643
(Mortgaged as per note 5)
</TABLE>
F-82
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 4--ACQUISITION AND POST BALANCE SHEET EVENTS
The Close Corporation and other close corporations in the group have entered
into a stock and asset purchase agreement with Colorsmart.com Inc. for a total
purchase price of R7 430 892. Colorsmart.com shall deliver the purchase price to
the members at closing. An amount of R2 708 000 will be retained in trust by
Colorsmart.com's attorneys to meet all liabilities in respect of taxation as
well as the contingent liabilities for penalties.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--LONG TERM LIABILITY
Loan from First National Bank payable in 190 monthly installments of R9 485
at an interest rate of 20%. Secured by a first mortgage bond over the office
building. The last installment will be payable November 2015. Capital is
repayable as follows:
<TABLE>
<S> <C>
2001........................................................ R30,881
2002........................................................ R30,881
2003........................................................ R30,881
2004........................................................ R30,881
2005........................................................ R30,881
</TABLE>
NOTE 6--RELATED PARTY
Group close corporations:
Virtual Colour CC (1)
Virtual Printing CC (2)
Virtual Support CC (3)
A group close corporation (1) has lent money to the Close Corporation as
required. At February 29, 2000 and 1999, the Close Corporation owes the group
close corporation R382 828 and R267 016 respectively. No repayment terms have
been determined and the loan is currently non- interest bearing. Related party
transactions consist of market related rent received.
<TABLE>
<CAPTION>
2000 1999
Imputed interest (19.25%) relating to the above -------- --------
<S> <C> <C>
Before tax.................................................. 59,298 47,688
After tax................................................... 41,509 30,997
</TABLE>
F-83
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 7--SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Bank overdraft.............................................. -- 146
=== ===
</TABLE>
No repayment terms have been determined. Interest is calculated monthly at
16.5%. The accounts receivable are ceded to the bank as security for bank
overdraft purposes.
NOTE 8--RECEIVER OF REVENUE--INCOME TAX
Income tax liability relating to the following tax years:
<TABLE>
<S> <C> <C>
1998........................................................ -- --
1999........................................................ -- --
2000........................................................ 7,851 --
----- -----
7,851 --
===== =====
</TABLE>
NOTE 9--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
The latest quarterly currency exchange rates are as follows:
<TABLE>
<CAPTION>
$1=
RANDS
------
<S> <C>
1 July 1998....................... 6.2891
31 August 1998.................... 6.5620
30 November 1998.................. 5.8134
28 February 1999.................. 6.3261
31 May 1999....................... 6.3000
31 August 1999.................... 6.1675
30 November 1999.................. 6.2576
29 February 2000.................. 6.1576
</TABLE>
NOTE 9--CONTINGENT LIABILITY
The close corporation gave additional security of R200 000 to the Cape of
Good Hope Bank for a finance lease of a related close corporation.
F-84
<PAGE>
VIRTUAL COLOUR CC
FINANCIAL STATEMENTS
FEBRUARY 29, 2000 AND 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-85
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Declaration by the Members.................................. 2
Financial Statements:
Balance Sheets as of February 29, 2000 and 1999........... 3
Statements of Operations for the years ended February 29,
2000 and 1999........................................... 4
Statements of Changes in Members' Interest for the years
ended February 29, 2000 and 1999........................ 5
Statements of Cash Flows for the years ended February 29,
2000 and 1999........................................... 6
Notes to Financial Statements............................... 7-10
</TABLE>
F-86
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Virtual Colour CC
Cape Town, South Africa
We have audited the accompanying balance sheets of Virtual Colour CC as of
February 29, 2000 and 1999, and the related statements of operations, changes in
members' interest and cash flows for the years then ended. These financial
statements are the responsibility of the Close Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with United States of America 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 policies 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 Virtual Colour CC as of
February 29, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with United States of America generally
accepted accounting principles.
Without qualifying our opinion we draw attention to Note 9 in the financial
statements. Should the taxation penalties of R1 500 038 not be waived, then the
close corporation's current liabilities will exceed its current assets by
R2 571 852 and total liabilities exceed its total assets by R863 307.
These factors raise substantial doubt that the close corporation will be
able to continue as a going concern, in the event that the sale of the business
referred to in Note 4 is not proceeded with.
/s/ PRICEWATERHOUSECOOPERS, INC.
- --------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town, South Africa
April 17, 2000
- --------------------------------------
Date
F-87
<PAGE>
DECLARATION BY THE MEMBERS OF
VIRTUAL COLOUR CC
The financial statements set out on pages 3 to 10 are the responsibility of
the members. We have determined that the financial statements are in agreement
with the accounting records and have done so by adopting such procedures and
conducting such enquiries in relation to the books of account and records as we
considered necessary in the circumstances. We have also reviewed the accounting
policies which have been represented to us as having been applied in the
preparation of the annual financial statements and we consider that they are
appropriate to the business.
<TABLE>
<S> <C>
- ------------------------ ------------------------
MEMBER MEMBER
- ------------------------ ------------------------
MEMBER MEMBER
</TABLE>
F-88
<PAGE>
VIRTUAL COLOUR CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... 52 320,341
Accounts receivable....................................... 1,381,858 1,339,225
Inventories............................................... 45,000 55,000
--------- ---------
Total current assets.................................. 1,426,910 1,714,566
--------- ---------
Fixed assets................................................ 1,203,519 1,275,499
Loans to associated corporations............................ 790,192 686,266
Loans to members............................................ 830,935 563,177
--------- ---------
Total assets.......................................... 4,251,556 4,239,508
========= =========
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable.......................................... 331,165 390,215
Receiver of Revenue--Income tax........................... 679,857 811,365
Receiver of Revenue--Value Added Tax...................... 637,945 498,848
Short term borrowings..................................... 148,112 72,592
Current portion of long term liabilities.................. 500,866 530,424
--------- ---------
Total current liabilities............................. 2,297,945 2,303,444
--------- ---------
Long term liabilities....................................... 960,534 775,746
--------- ---------
Members' interest
Members' contributions.................................... 100 100
Retained earnings......................................... 992,977 1,160,218
--------- ---------
Total members' interest............................... 993,077 1,160,318
--------- ---------
Total liabilities and members' interest............... 4,251,556 4,239,508
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-89
<PAGE>
VIRTUAL COLOUR CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales................................................... 7,007,258 6,568,456
Cost of goods sold.......................................... 2,406,960 2,147,757
--------- ---------
Gross profit................................................ 4,600,298 4,420,699
--------- ---------
General and administrative expenses......................... 4,744,344 3,459,056
(Loss) Income from operations............................... (144,046) 961,643
--------- ---------
Other expenses
Interest income........................................... 124,233 51,962
Interest expense.......................................... (147,428) (83,922)
--------- ---------
Total other expenses.................................... (23,195) (31,960)
--------- ---------
Net (loss) income before tax................................ (167,241) 929,683
Tax......................................................... 356,779
--------- ---------
Net (loss) income for the year.............................. (167,241) 572,904
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-90
<PAGE>
VIRTUAL COLOUR CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales................................................... 7,007,258 6,568,456
Costs of goods sold......................................... 2,406,960 2,147,757
--------- ---------
Gross profit................................................ 4,600,298 4,420,699
--------- ---------
General and administrative expenses......................... 4,744,344 3,459,056
(Loss) Income from operations............................... (144,046) 961,643
--------- ---------
Other expenses
Interest Income........................................... 124,233 51,962
Interest expense.......................................... (147,428) (83,922)
--------- ---------
Total other expenses.................................. (23,195) (31,960)
--------- ---------
Net (loss) income before tax................................ (167,241) 929,683
Tax......................................................... -- 356,779
--------- ---------
Net (loss) income for the year.............................. (167,241) 572,904
========= =========
Earnings per share (in Rand)................................ (1,672) 9,297
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-91
<PAGE>
VIRTUAL COLOUR CC
STATEMENTS OF CHANGES IN MEMBERS' INTEREST
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
MEMBERS'
INTEREST RETAINED
AMOUNT EARNINGS TOTAL
-------- --------- ---------
<S> <C> <C> <C>
Balance, March 1, 1998...................................... 100 587,314 587,314
Net income--1999............................................ -- 572,904 572,904
--- --------- ---------
Balance, February 28, 1999.................................. 100 1,160,218 1,160,218
Net loss--2000.............................................. -- (167,241) (167,241)
--- --------- ---------
Balance, February 29, 2000.................................. 100 992,977 992,977
=== ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-92
<PAGE>
VIRTUAL COLOUR CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29/28
--------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax............................... (167,241) 572,904
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 787,849 326,652
Profit on sale of fixed assets.......................... (5,871) --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable..................................... (42,633) (351,835)
Inventory............................................... 10,000 (3,276)
(Decrease) increase in:
Accounts payable........................................ (51,461) 945,624
-------- ---------
Net cash provided by operating activities................... 530,643 1,490,069
-------- ---------
Cash flows from investing activities:
Purchase of fixed assets.................................. (874,998) (794,270)
Sale of fixed assets...................................... 165,000 --
-------- ---------
Net cash used by investing activities....................... (709,998) (794,270)
-------- ---------
Cash flows from financing activities:
Bank overdraft............................................ 148,112 --
Increase in loans to associated corporations.............. (103,926) (379,316)
Increase in loans to members.............................. (267,758) (521,606)
Increase in long term liabilities......................... 155,230 315,726
-------- ---------
Net cash provided by financing activities................... (68,342) (585,196)
-------- ---------
Net cash increase (decrease)................................ (247,697) 110,603
-------- ---------
Cash, beginning of period................................... 247,749 137,146
-------- ---------
Cash, end of period......................................... 52 247,749
======== =========
Supplemental disclosure of cash flow information
Cash paid during the year for Interest.................... 147,428 83,922
======== =========
</TABLE>
See accompanying notes to financial statements
F-93
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANISATION AND DESCRIPTION OF BUSINESS
Vitual Colour CC (the "Close Corporation") specialises in desk top
publishing and reproduction.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are presented on the historical cost basis and
incorporate the following principal accounting policies. There is no material
difference with the United States of America and international accounting
principles.
CASH EQUIVALENTS
The Close Corporation considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
FIXED ASSETS
Fixed assets are stated at cost and are being depreciated using the
straight-line and reducing balance methods over the estimated useful lives of:
<TABLE>
<S> <C>
Motor vehicle............................................... 20%
Furniture, fixtures and fittings............................ 10%
Computer hardware........................................... 33%
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales are recognised when products are shipped or
services are performed.
INVENTORY
Inventory consists primarily of materials and work in progress, and is
stated at the lower of cost or market, with cost determined on the first-in,
first-out (FIFO) method. The value of work in progress includes direct costs and
a proportion of manufacturing overheads.
INCOME TAXES
Virtual Colour CC is currently subject to South African Normal Company
taxation and is taxed at a rate of 35% of taxable income up to 28 February 1999
and 30% thereafter.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at anticipated realizable value. An estimate
is made for doubtful receivables based on a review of all outstanding amounts at
year-end. Bad debts are written off during the year in which they are
identified.
F-94
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 3--FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Furniture, fixtures and fittings............................ 135,753 121,209
Motor vehicles.............................................. 496,555 482,783
Computer hardware........................................... 2,190,744 1,685,052
--------- ---------
Total fixed assets.................................... 2,823,052 2,289,044
Less: Accumulated depreciation.............................. 1,619,533 1,013,545
--------- ---------
Fixed assets, net..................................... 1,203,519 1,275,499
========= =========
</TABLE>
Motor vehicles and computer equipment with a book value of R1 096 118 are
encumbered as security for hire purchase creditors.
Depreciation expense for the years ended February 28, 2000 and 1999 was R787
849 and R326 652 respectively.
NOTE 4--ACQUISITION AND POST BALANCE SHEET EVENTS
The Close Corporation and other close corporations in the group have entered
into a stock and asset purchase agreement with Colorsmart.com Inc. for a total
purchase price of R7 430 892. Colorsmart.com shall deliver the purchase price to
the members at closing. An amount of R2 708 000 will be retained in trust by
Colorsmart.com's attorneys to meet all liabilities in respect of taxation as
well as the contingent liabilities for penalties as per note 9.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--RELATED PARTY
Group close corporations:
Virtual Printing CC (1)
Virtual Properties CC (2)
Virtual Support CC (3)
The close corporation has lent money to the group close corporations (1 &
2) as required. At February 29, 2000 and 1999, the close Corporations owe the
Close Corporation R634 625 and R686 266, respectively. No repayment terms have
been determined and the loan is currently non-interest bearing. Related party
transactions consist of administration fees received and payment of market
related rent. There were no transactions with a related close corporation, Mega
Pre-Press CC, engaged in a similar business, and in which the members of the
corporation have an interest.
<TABLE>
<CAPTION>
2000 1999
Imputed interest (19.25%) relating to the above -------- --------
<S> <C> <C>
Before tax.................................................. 138,860 93,109
After tax................................................... 97,202 60,521
</TABLE>
F-95
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 6--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
The latest quarterly current exchange rates are as folows:
<TABLE>
<CAPTION>
$1 = RANDS
<S> <C>
1 July 1998................................................. 6.2891
31 August 1998.............................................. 6.5620
30 November 1998............................................ 5.8134
28 February 1999............................................ 6.3261
31 May 1999................................................. 6.3000
31 August 1999.............................................. 6.1675
30 November 1999............................................ 6.2576
29 February 2000............................................ 6.1576
</TABLE>
NOTE 7--SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Bank overdraft.............................................. 148,112 72,592
======= ======
</TABLE>
No repayment terms have been determined. Interest is calculated monthly at
16.5%.
The accounts receivable are ceded to the bank as security for bank overdraft
purposes.
NOTE 8--CAPITALIZATION OF LEASING CHARGES
An immaterial financial lease contract has not been capitalised.
NOTE 9--CONTINGENT LIABILITY
There is a contingent liability for penalties arising from the underpayment
of S A Normal Company tax and Value Added Tax (VAT). The maximum potential
penalties are R215 000 in respect of the 1999 financial year, R846 278 in
respect of the 1998 financial year and R438 760 in respect of the 1997 financial
year. It is expected that the penalties will be waived but the members (P
Petersen, H Trischler, K Redman and A Koch) have effectively indemnified the
close corporation for any penalties that may arise and therefore no provision
were made in the financial statements for such penalties.
F-96
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 10--LONG TERM LIABILITIES
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Secured..................................................... 1,461,400 1,306,170
Secured in terms of instalment sale agreements over motor
vehicles and computer equipment. The rate of interest is
linked to the prime bank overdraft rate. Repayable in
montly instalments of R44 202, inclusive of interest
(25%).
Less: Amounts payable within one year reflected under
current liabilities....................................... 500,866 530,424
--------- ---------
960,534 775,746
========= =========
</TABLE>
Subsequent repayments are:
<TABLE>
<S> <C>
2002........................................................ R423,469
2003........................................................ R361,784
2004........................................................ R175,281
Total................................................. R960,534
</TABLE>
NOTE 11--LOANS TO MEMBERS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Loans bearing interest at 18.25% (1999: 19.25%)........... 830,935 563,177
======= =======
</TABLE>
The loans will be cancelled during the next financial year with a tax free
distribution from the capital surplus arising from the sale of stock and assets
as set out in note 4.
NOTE 12--RECEIVER OF REVENUE--INCOME TAX
Income tax liability relating to the following tax years:
<TABLE>
<S> <C> <C>
1997 (Including interest)................................... 219,790 195,085
1998 (Including interest)................................... 296,533 259,501
1999 (Including interest)................................... 163,534 356,779
2000........................................................ -- --
------- -------
679,857 811,365
======= =======
</TABLE>
F-97
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 13--RECEIVER OF REVENUE--VALUE ADDED TAX
Income tax liability relating to the following tax years:
<TABLE>
<S> <C> <C>
1997 (Including interest)................................... 81,540 72,375
1998 (Including interest)................................... 344,133 318,953
1999 (Including interest)................................... 123,110 107,520
2000........................................................ 89,172 --
------- -------
637,955 498,848
======= =======
</TABLE>
F-98
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
FINANCIAL STATEMENTS
FEBRUARY 28/29, 2000, 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-99
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of February 28/29, 2000 and 1999........ 2
Statements of Operations for the years ended
February 28/29, 2000 and 1999........................... 3
Statements of Changes in Member's Interest for the years
ended February 28/29, 2000 and 1999..................... 4
Statements of Cash Flows for the years ended
February 28/29, 2000 and 1999........................... 5
Notes to Financial Statements............................... 6-8
</TABLE>
F-100
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
STONEHOUSE GRAPHICS (PTY) LTD
Johannesburg
We have audited the accompanying balance sheets of STONEHOUSE GRAPHICS
(PTY) LTD as of 28/29 February, 2000 and 1999, and the related statements of
operations, changes in member's interest and cash flows for the years then
ended. These financial statements are the responsibility of the members of the
close corporation. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with United States of America 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 policies used and significant
estimates made by management, as well as evaluating the overall financial
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 STONEHOUSE GRAPHICS
(PTY) LTD as of February 28/29, 2000 and 1999, and the results of its operations
and its cash flows for the years then ended in conformity with United States of
America generally accepted accounting principles.
/s/ SNYDERS & COMPANY
- --------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Johannesburg
April 17, 2000
- --------------------------------------
Date
F-101
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28/29
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... 602,000 788
Accounts receivable....................................... 2,461,807 1,413,125
Inventories............................................... 629,000 457,515
--------- ---------
Total current assets.................................. 3,692,807 1,871,428
--------- ---------
Fixed Assets................................................ 4,857,532 5,256,426
--------- ---------
Total assets.......................................... 8,550,339 7,127,854
========= =========
LIABILITIES AND MEMBER'S INTEREST
Current liabilities:
Accounts payable.......................................... 1,641,105 1,093,628
Short term borrowings..................................... 2,076,199 1,061,048
Short term portion of long term liability................. 901,618 828,195
Receiver of Revenue--Income tax........................... 4,406 20,272
--------- ---------
Total current liabilities............................. 4,623,328 3,003,143
--------- ---------
Loan from member.......................................... 752,878 306,125
Long Term Liability......................................... 3,401,666 4,398,683
Member's Interest
Member's contribution..................................... 100 100
(Accumulated loss)/Retained earnings...................... (227,633) (580,198)
--------- ---------
Total Member's Interest............................... (227,533) (580,098)
--------- ---------
Total liabilities and members' interest............... 8,550,339 7,127,853
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-102
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28/29
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net sales................................................... 16,262,317 10,978,829
Costs of goods sold......................................... 6,508,004 4,133,527
---------- ----------
Gross profit................................................ 9,754,313 6,845,302
---------- ----------
General and administrative expenses......................... 8,393,661 5,945,984
Income (loss) from operations............................... 1,360,652 899,318
---------- ----------
Other income (expenses)
Interest Income........................................... -- --
Interest expense.......................................... (911,668) (903,210)
---------- ----------
Total other income (expenses)......................... (911,668) (903,210)
---------- ----------
Net income (loss) before tax................................ 448,984 (3,892)
---------- ----------
Tax......................................................... (96,419) --
Net profit (loss) for the year.............................. 352,565 (3,892)
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-103
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
MEMBER'S
INTEREST RETAINED
AMOUNT EARNINGS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance, February 28, 1998.................................. 100 (576,306) (576,206)
Net loss--1999.............................................. -- (3,892) (3,892)
======= ======== ========
Balance, February 28, 1999.................................. 100 (580,198) (580,098)
Net income 2000............................................. -- 352,565 352,565
======= ======== ========
Balance, February 29, 2000.................................. 100 (227,633) (227,533)
======= ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-104
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29/28,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax............................... 352,565 (3,892)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 1,510,908 1,058,403
Goodwill written off.................................... -- 50,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable....................................... (1,048,682) (892,321)
Inventory................................................. (171,485) (321,715)
Increase (decrease) in:
Accounts payable.......................................... 547,476 585,003
Taxation.................................................... 80,553
---------- ----------
Net cash provided (used) by operating activities............ 1,271,335 475,478
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets.................................. (1,137,360) (5,630,910)
Return on sale of fixed assets............................ 25,346 69,968
---------- ----------
Net cash used by investing activities....................... (1,112,014) (5,560,942)
Cash flows from financing activities:
Acquisition of Long term loan............................. (1,020,013) 4,504,611
Acquisition of Short term loan............................ 446,753 (66,622)
Bank overdraft............................................ 1,015,151 647,283
---------- ----------
Net cash provided (used) by financing activities............ 441,891 5,085,272
---------- ----------
Net cash increase (decrease)................................ 601,212 (192)
---------- ----------
Cash, beginning of period................................... 788 980
---------- ----------
Cash, end of period......................................... 602,000 788
========== ==========
Supplemental disclosure of cash flow information
Cash paid during the year for Interest.................... 911,668 903,210
========== ==========
</TABLE>
See accompanying notes to financial statements
F-105
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Stonehouse Graphics (Pty) Ltd (the "Company") specializes in large format
and mobile signage, digital printing, screenprinting and signage production.
Their customers are primarily end users.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
FIXED ASSETS
Fixed Assets are stated at cost and are being depreciated using the
straight-line and accelerated methods over the estimated useful lives of three
to five years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped.
INVENTORY
Inventory consists primarily of materials used in the production of banners,
and is stated at the lower of cost or market, with cost determined on the
first-in, first-out (FIFO) method.
INCOME TAXES
The Company, is currently subjected to South African Normal company taxation
and is taxed at a rate of 35% of taxable income up to 28 February 1999 and 30%
thereafter.
F-106
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 3--FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Furniture, fixtures and fittings....................... 124,533 114,832
Machinery.............................................. 7,176,965 6,243,676
Motor vehicle.......................................... 403,564 296,784
--------- ---------
Total fixed assets............................... 7,705,062 6,655,292
Less: accumulated depreciation......................... 2,847,530 1,398,866
--------- ---------
Fixed assets, net................................ 4,857,532 5,256,426
========= =========
</TABLE>
Depreciation expense for the years ended February 28/29, 2000 and 1999 was R
1 510 908 and R1 058 403 respectively.
NOTE 4--ACQUISITION AND POST BALANCE SHEET EVENTS
The Company has entered into a stock and asset purchase agreement with
Colorsmart Inc. Colorsmart shall deliver the sum of R15 000 000 to the sole
shareholder at closing.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--DUE TO STOCKHOLDER
The stockholder has lent money to the Company as required. At February 29,
2000 and 1999, the Company owes the stockholder R 752 878 and R 306 125,
respectively. The note is due on demand and is currently non-interest bearing.
The imputed interest for 2000 at 18.25% would have been R 60 786 and for 1999 at
19.25%, R 78 278. The effect on the after taxation income/loss would have been
in 2000, R 42 550 and in 1999, the after tax loss would have increased by R 78
278.
NOTE 6--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
The latest currency exchange rates at year end are as follows:
<TABLE>
<CAPTION>
$1 = RANDS
----------
<S> <C>
28 February 1999............................................ 6.3261
29 February 2000............................................ 6.1379
</TABLE>
NOTE 7--LEASING CHARGES
Sundry leasing charges, being not material, are not capitalized.
F-107
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 8--LONG TERM LIABILITIES
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Secured..................................................... 4,206,865 5,226,878
Secured in terms of installment agreements over motor
vehicles and computer equipment. The rate of interest is
linked to the prime bank overdraft rate. Repayable in
monthly installments of R 160 404, inclusive of interest.
Less: Amounts payable within one year reflected under
current liabilities....................................... 901,618 828,195
--------- ---------
3,305,247 4,398,683
========= =========
</TABLE>
At 28/29 February the future minimum lease payments are as follows:
<TABLE>
<S> <C>
2001........................................................ 901,618
2002........................................................ 901,618
2003........................................................ 901,618
2004........................................................ 901,618
2005........................................................ 600,393
---------
4,206,865
=========
</TABLE>
NOTE 9--SHORT TERM BORROWINGS
Short term borrowings represent bank overdrafts which are secured by way of
personal surety from the member.
NOTE 10--INCOME TAX PAYABLE
The income tax payable is payable to the South African Revenue Services and
is payable within 60 days
F-108
<PAGE>
H J HUGO AND ASSOCIATES
TOPCOPY CC
FINANCIAL STATEMENTS
FEBRUARY 29/28, 2000 AND 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-109
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of February 28/29, 2000 and 1999........ 2
Statements of Operations for the years ended
February 28/29, 2000 and 1999........................... 3
Statements of Changes in Member's Interest for the years
ended February 28/29, 2000 and 1999..................... 4
Statements of Cash Flows for the years ended February
28/29, 2000 and 1999.................................... 5
Notes to Financial Statements............................... 6-8
</TABLE>
F-110
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
TOPCOPY CC
Cape Town
We have audited the accompanying balance sheets of TOPCOPY CC as of 28/29
February, 2000 and 1999, and the related statements of operations, changes in
member's interest and cash flows for the years then ended. These financial
statements are the responsibility of the members of the close corporation. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with United States of America 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 policies used and significant
estimates made by management, as well as evaluating the overall financial
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 TOPCOPY CC as of February
28/29, 2000 and 1999, and the results of its operations and its cash flows for
the years then ended in conformity with United States of America generally
accepted accounting principles.
/s/ HJ HUGO & ASSOCIATES
- ------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town
April 17, 2000
- ------------------------
Date
F-111
<PAGE>
TOPCOPY CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29/28
-------------------
2000 1999
-------- --------
<S> <C> <C>
Current assets:
Cash...................................................... 207,512 232,814
Accounts receivable....................................... 190,841 139,570
Inventories............................................... 25,094 21,565
-------- --------
Total current assets.................................. 423,447 393,949
-------- --------
Fixed Assets................................................ 416,386 441,386
-------- --------
Total assets.......................................... 839,833 835,335
======== ========
LIABILITIES AND MEMBERS INTEREST
Current liabilities:
Accounts payable.......................................... 193,392 175,177
Short term portion of long term liability................. 97,299 100,800
Receiver of Revenue--Vat payable.......................... 12,431 9,900
-------- --------
Total current liabilities............................. 303,122 285,877
-------- --------
Loan from member.......................................... 651,319 676,319
Long Term Liability......................................... 18,227 23,227
Member's Interest
Member's contribution..................................... 1,000 1,000
(Accumulated loss)/Retained earnings...................... (133,835) (151,088)
-------- --------
Total Member's Interest............................... (132,835) (150,088)
-------- --------
Total liabilities and members' interest............... 839,833 835,335
======== ========
</TABLE>
See accompanying notes to the financial statements.
F-112
<PAGE>
TOPCOPY CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28/29
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales................................................... 2,949,445 2,506,408
Costs of goods sold......................................... 1,842,866 1,722,615
--------- ---------
Gross profit................................................ 1,106,579 783,793
--------- ---------
General and administrative expenses......................... 1,086,467 847,831
Income (loss) from operations............................... 20,112 (64,038)
--------- ---------
Other income (expenses)
Interest Income........................................... 20,722 18,572
Interest expense.......................................... (23,580) (20,552)
--------- ---------
Total other income (expenses)......................... (2,858) (1,980)
--------- ---------
Net income (loss) before tax................................ 17,254 (66,018)
--------- ---------
Tax......................................................... -- --
Net profit (loss) for the year.............................. 17,254 (66,018)
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-113
<PAGE>
TOPCOPY CC
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
MEMBER'S
INTEREST RETAINED
AMOUNT EARNINGS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance, February 28, 1998.................................. 1,000 (85,070) (85,070)
Net loss--1999.............................................. -- (66,018) (66,018)
----- -------- --------
Balance, February 28, 1999.................................. 1,000 (151,089) (151,089)
Net profit 2000............................................. 17,254 17,254
----- -------- --------
Balance, February 29, 2000.................................. 1,000 (133,835) (133,835)
</TABLE>
See accompanying notes to the financial statements.
F-114
<PAGE>
TOPCOPY CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 28,29
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax............................... 17,254 (66,018)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 114,151 160,199
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable..................................... (51,271) (25,051)
Inventory............................................... (2,530) 20,051
Increase (decrease) in:
Accounts payable........................................ 20,745 (16,149)
------- --------
Net cash provided (used) by operating activities............ 98,349 73,032
------- --------
Cash flows from investing activities:
Purchase of fixed assets.................................. (90,150) (140,911)
Return on sale of fixed assets............................ -- --
------- --------
Net cash used by investing activities....................... (90,150) (140,911)
------- --------
Cash flows from financing activities:
Repayment of Long term loan............................... (30,000) 269,931
Repayment of Short term loan.............................. (3,501) --
Member's contributions.................................... -- --
------- --------
Net cash provided (used) by financing activities............ (33,501) 269,931
------- --------
Net cash increase (decrease)................................ (25,302) 202,052
------- --------
Cash, beginning of period................................... 232,814 30,762
------- --------
Cash, end of period......................................... 207,512 232,814
------- --------
Supplemental disclosure of cash flow information
Cash paid during the year for Interest.................... 27,335 20,552
======= ========
</TABLE>
See accompanying notes to financial statements
F-115
<PAGE>
TOPCOPY CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Topcopy CC (the "Close Corporation") specializes in small format black&white
analogue copying, book binding, plan copying, digital full colour copying,
graphic design, offset printing and paper sales to the trade and retail.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Close Corporation considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
FIXED ASSETS
Fixed Assets are stated at cost and are being depreciated using the
straight-line and accelerated methods over the estimated useful lives of three
to five years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped.
INVENTORY
Inventory consists primarily of materials used in the production of banners,
and is stated at the lower of cost or market, with cost determined on the
first-in, first-out (FIFO) method.
INCOME TAXES
Topcopy CC, is currently subjected to South African Normal company taxation
and is taxed at a rate of 35% of taxable income up to 28 February 1999 and 30%
thereafter.
F-116
<PAGE>
TOPCOPY CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 3--FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Machinery................................................. 554,112 173,010
Motor vehicle............................................. 220,797 220,797
------- -------
Total fixed assets.................................. 774,909 393,807
Less: accumulated depreciation............................ 358,523 160,000
------- -------
Fixed assets, net................................... 416,386 233,807
======= =======
</TABLE>
Depreciation expense for the years ended February 28/29, 2000, and 1999 was
R114 151 and R160 199 respectively.
NOTE 4--ACQUISITION AND POST BALANCE SHEET EVENTS
The Close Corporation has entered into a stock and asset purchase agreement
with Colorsmart Inc. Colorsmart shall deliver the sum of R2 580 000 to the
member at closing.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--DUE TO STOCKHOLDER
The stockholder has lent money to the Close Corporation as required. At
February 28/29 2000 and 1999, the Close Corporation owes the stockholder R 651
319 and R 676 319, respectively.
The note is due on demand and is currently non-interest bearing. The imputed
interest for 2000 at 18.25% would have been R 134 294 and for 1999 at 19.25%, R
79 154. The effect on the after tax loss would have increased in 2000, R 134 294
and in 1999, the after tax loss would have increased by R 79 154.
NOTE 6--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
The latest currency exchange rates at year end are as follows:
<TABLE>
<CAPTION>
$1 = RANDS
-----------
<S> <C>
28 February 1999............................................ 6.3261
29 February 2000............................................ 6.1379
</TABLE>
NOTE 7--LEASING CHARGES
Sundry leasing charges, being not material, are not capitalized.
F-117
<PAGE>
TOPCOPY CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 8--LONG TERM LIABILITIES
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Secured..................................................... 115,526 124,027
Secured in terms of installment agreements over motor
vehicles and computer equipment. The rate of interest is
linked to the prime bank overdraft rate. Repayable in
monthly installments of R 8 400, inclusive of interest.
Less: Amounts payable within one year reflected under
current liabilities....................................... 97,299 100,800
------- -------
18,227 23,227
======= =======
</TABLE>
At 28/29 February the future minimum lease payments are as follows:
<TABLE>
<S> <C>
2001........................................................ 97,299
2002........................................................ 18,227
-------
115,526
=======
</TABLE>
NOTE 9--VAT PAYABLE
The VAT payable represents moneys collected on behalf of the South African
Revenue Services and is payable within 30 days
F-118
<PAGE>
COLORSMART.COM, INC.
PRO FORMA FINANCIAL STATEMENTS
The following Pro Forma Combined Balance Sheet of the Registrant has been
prepared by management of the Registrant based upon the balance sheets of the
Registrant as of November 30, 1999. The Pro Forma Combined Statement of
Operations was prepared based upon the statement of operations for the
Registrant for the twelve months ended November 30, 1999. The pro forma
statement of operations also includes the proposed acquisition's statements of
operations for the twelve months ended December 31, 1999. The pro forma
statements give effect to the transactions under the purchase method of
accounting and the assumptions and adjustments in the accompanying notes to the
pro forma combined financial statements. The pro forma combined balance sheets
give effect to the acquisition as if they had occurred as of November 30, 1999.
The pro forma combined statement of operations for the year ended November 30,
1999, gives effect to the acquisitions as if they had occurred as of
December 1, 1998. The balance sheet includes the adjustment to record the
acquisitions, including goodwill.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma combined
financial statements do not purport to represent what the combined companies'
financial position or results of operations would actually have been had the
acquisition occurred on such date or as of the beginning of the period
indicated, or to project the combined companies' financial position or results
of operations for any future period.
F-119
<PAGE>
COLORSMART.COM, INC.
PRO FORMA BALANCE SHEETS
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY COLOUR CC
-------------- ---------- ----------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................... 276 1,605 94,953 32,731 8
Accounts receivable.................... 68,530 64,722 388,296 144,324 30,101 217,969
Investment.............................
Inventory.............................. 8,000 50,054 99,211 19,385 3,868 7.096
Advances for acquisitions.............. 566,237
Prepaid expenses....................... 31,000
---------- ---------- ------- ---------- -------- ------- -------
Total current assets................... 597,237 66,806 116,381 582,462 183,709 64,790 225,065
Property and equipment................. 350,683 198,307 26,780 765,172 186,038 65,676 189,829
Other assets:
Goodwill...............................
Accumulated Amortization...............
Note receivable........................ 255,696
Deferred taxes......................... 20,031
Intangibles, net.......................
Deposits............................... 10,730 6,127 18,295
---------- ---------- ------- ---------- -------- ------- -------
Total other assets..................... 10,730 6,127 38,326 255,898
========== ========== ======= ========== ======== ======= =======
Total assets........................... 956,650 271,240 143,141 1,348,634 388,073 132,486 670,502
========== ========== ======= ========== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liablities:
Obligations under capital issues....... 15,456 135,464 5,767
Cash overdraft......................... 327,473 15,801 23,362
Current maturities of long-term debt... 103,298 142,211 40,802 19,347 79,001
Due to shareholder..................... 20,091 14,200 7,127 267,209
Due to customer........................ 11,000
Restated party notes payable........... 25,000
Line of credit.........................
Accrued expenses....................... 4,196 695 11,185 1,981
Checks outstanding in excess of bank
balance.............................. 25,859
Accounts payable....................... 69,425 147,319 62,104 258,649 141,483 30,503 260,089
---------- ---------- ------- ---------- -------- ------- -------
Total current liablities............... 236,327 321,973 69,231 729,228 496,227 47,811 382,452
---------- ---------- ------- ---------- -------- ------- -------
Long-term debt:
Obligations under capital leases....... 14,744 179,788 6,604
Deferred rent.......................... 4,544
Taxation...............................
Deferred revenue.......................
Note payable--stockholder.............. 118,754 192,732
Notes payable.......................... 60,291 536,540 111,318 2,875 151,503
---------- ---------- ------- ---------- -------- ------- -------
Total long-term debt................... 75,035 179,888 655,294 122,655 105,507 151,503
Stockholders' equity (deficit)
Preferred stock........................ 34
Common stock........................... 4,256 1,000 15,574 15 10 168 18
Additional paid-in capital............. 2,597,051 1,950,009 990
Retained earnings (deficit)............ (1,868,053) (2,191,530) 58,336 (35,904) (231,809) (21,109) 150,621
---------- ---------- ------- ---------- -------- ------- -------
Total stockholders' equity (deficit)... 645,288 (230,521) 73,910 (35,886) (230,809) (29,952) 156,637
========== ========== ======= ========== ======== ======= =======
Total liabilities and stockholders'
Equity (deficit)..................... 958,650 271,240 143,141 1,348,634 388,073 132,486 670,592
========== ========== ======= ========== ======== ======= =======
<CAPTION>
PRO FORMA ADJUSTMENTS
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL ---------------------------
PROPERTIES PRINTING SUPPORT COMBINED DR CR
-------------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................... 2,619 1 22 132,414 7,800,000(14) 7,800,000(14)
Accounts receivable.................... 5,504 81,017 48,352 1,038,807
Investment............................. 0
Inventory.............................. 10,252 197,958
Advances for acquisitions.............. 566,237 566,237(13)
Prepaid expenses....................... 31,000
------- ------- ------- ---------- ---------- ----------
Total current assets................... 8,323 91,270 48,374 1,966,416 7,800,000 8,366,237
Property and equipment................. 128,269 47,271 8,103 1,967,126 500,000(2)
100,000(13)
Other assets:
Goodwill............................... 5,139,620(9)
Accumulated Amortization............... 441,237(13)
Note receivable........................ 11,085 10,067 276,850
Deferred taxes......................... 20,031
Intangibles, net....................... 0
Deposits............................... 35,152
------- ------- ------- ---------- ---------- ----------
Total other assets..................... 0 11,085 10,067 332,033 6,180,857
======= ======= ======= ========== ========== ==========
Total assets........................... 136,612 149,828 56,544 4,265,578 13,980,857 8,366,237
======= ======= ======= ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liablities:
Obligations under capital issues....... 156,677
Cash overdraft......................... 21,531 29,447 420,614
Current maturities of long-term debt... 380,650 373,487(10)
Due to shareholder..................... 308,627 308,627(10)
Due to customer........................ 11,000
Restated party notes payable........... 25,000 25,000(13)
Line of credit......................... 60,363 69,293 1,809 131,485
Accrued expenses....................... 18,039
Checks outstanding in excess of bank
balance.............................. 25,859
Accounts payable....................... 2,507 58,114 27,508 1,057,882 155,832(10)
------- ------- ------- ---------- ---------- ----------
Total current liablities............... 62,890 148,938 58,784 2,535,841 882,946
------- ------- ------- ---------- ---------- ----------
Long-term debt:
Obligations under capital leases....... 201,336 201,336(10)
Deferred rent.......................... 4,533
Taxation............................... 0
Deferred revenue....................... 0
Note payable--stockholder.............. 221,486
Notes payable.......................... 71,045 27,215 4,242 965,629 1,323,595(10)
------- ------- ------- ---------- ---------- ----------
Total long-term debt................... 71,645 27,215 4,242 1,393,184 1,524,931
Stockholders' equity (deficit)
Preferred stock........................ 34
Common stock........................... 63 63 18 21,171 15,780(11)
Additional paid-in capital............. 4,468,050 (11) 5,732,585
Retained earnings (deficit)............ 1,814 (26,590) 3,522 (4,152,703) (11) 2,265,712
------- ------- ------- ---------- ---------- ----------
Total stockholders' equity (deficit)... 1,877 (26,527) 3,536 336,553 15,780 8,018,277
======= ======= ======= ========== ========== ==========
Total liabilities and stockholders'
Equity (deficit)..................... 136,612 149,526 68,544 4,265,578 2,403,657 8,018,277
======= ======= ======= ========== ========== ==========
<CAPTION>
NOVEMBER 30,
1999
PRO FORMA
------------
<S> <C>
ASSETS
Current assets:
Cash................................... 132,414
Accounts receivable.................... 1,038,807
Investment............................. 0
Inventory.............................. 197,958
Advances for acquisitions.............. 0
Prepaid expenses....................... 31,000
----------
Total current assets................... 1,400,179
Property and equipment................. 2,567,128
Other assets:
Goodwill............................... 6,580,857
Accumulated Amortization............... 0
Note receivable........................ 276,850
Deferred taxes......................... 20,031
Intangibles, net....................... 0
Deposits............................... 35,152
----------
Total other assets..................... 5,912,690
==========
Total assets........................... 9,880,196
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liablities:
Obligations under capital issues....... 156,677
Cash overdraft......................... 420,614
Current maturities of long-term debt... 7,172
Due to shareholder..................... 0
Due to customer........................ 11,000
Restated party notes payable........... 0
Line of credit......................... 131,485
Accrued expenses....................... 18,039
Checks outstanding in excess of bank
balance.............................. 25,859
Accounts payable....................... 902,050
----------
Total current liablities............... 1,672,895
----------
Long-term debt:
Obligations under capital leases....... 0
Deferred rent.......................... 4,533
Taxation............................... 0
Deferred revenue.......................
Note payable--stockholder.............. 221,486
Notes payable.......................... (357,766)
----------
Total long-term debt................... (131,747)
Stockholders' equity (deficit)
Preferred stock........................ 34
Common stock........................... 5,391
Additional paid-in capital............. 10,200,616
Retained earnings (deficit)............ (1,566,991)
----------
Total stockholders' equity (deficit)... 8,339,050
==========
Total liabilities and stockholders'
Equity (deficit)..................... 9,880,196
==========
</TABLE>
F-120
<PAGE>
<TABLE>
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
MAGNUM ADV. THAT DISPLAY TOP
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY
-------------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Obligations under capital losses......... 15,456 100,347 4,369
Cash overdraft........................... 7,121 327,478
Current maturities of long-term debt..... 103,298 14,103 142,211 41,618 15,347
Due to shareholder....................... 21,610 267,209
Due to shareholder....................... 300,000
Restated party notes payable............. 280,693 25,000
Line of credit........................... 34,000
Accrued expenses......................... 9,808 13,439
Checks outstanding in excess of bank
balance................................ 20,094
Accounts payable......................... 143,788 127,508 29,005 259,544 179,452 32,484
---------- ---------- ------- --------- -------- -------
Total current liabilities................ 833,219 274,170 50,815 729,232 580,381 47,811
Long-term debt:
Obligations under capital losses......... 57,080 206,675 5,222
Deferred rent............................
Taxation.................................
Deferred revenue.........................
Note payable-stockholder................. 118,750 102,732
Notes payable............................ 14,168 3,000 538,540 99,689 2,875
---------- ---------- ------- --------- -------- -------
Total long-term debt..................... 71,848 209,875 855,291 104,911 105,504
Stockholders' equity (deficit)...........
Preferred Stock.......................... 34
Common stock............................. 4,257 1,000 15,574 16 10 158
Additional paid-in capital............... 2,419,051 1,958,725 990
Retained earnings (deficit).............. (2,625,774) (2,199,328) 95,505 (35,904) (291,282) (21,109)
---------- ---------- ------- --------- -------- -------
Total stockholders' equity (deficit)..... (102,432) (241,803) 111,079 (35,888) (290,282) (20,952)
========== ========== ======= ========= ======== =======
Total liabilities and stockholder's
Equity (deficit)....................... 602,635 242,442 181,694 1,348,634 375,030 132,486
========== ========== ======= ========= ======== =======
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
VIRTUAL VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL
COLOUR CC PROPERTIES PRINTING SUPPORT COMBINED
---------- -------------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Obligations under capital losses......... 120,172
Cash overdraft........................... 23,362 21,631 29,447 408,936
Current maturities of long-term debt..... 79,001 60,383 69,293 1,810 527,267
Due to shareholder....................... 268,819
Due to shareholder....................... 300,000
Restated party notes payable............. 285,893
Line of credit........................... 34,000
Accrued expenses......................... 23,245
Checks outstanding in excess of bank
balance................................ 20,094
Accounts payable......................... 280,089 2,507 58,114 27,508 1,120,045
------- ------- ------- ------- ----------
Total current liabilities................ 382,452 62,890 148,838 58,764 3,128,471
Long-term debt:
Obligations under capital losses......... 289,777
Deferred rent............................ 0
Taxation................................. 0
Deferred revenue......................... 0
Note payable-stockholder................. 221,482
Notes payable............................ 151,504 71,845 27,215 4,242 911,078
------- ------- ------- ------- ----------
Total long-term debt..................... 151,504 71,845 27,215 4,242 1,402,338
Stockholders' equity (deficit)...........
Preferred Stock.......................... 34
Common stock............................. 16 63 63 16 21,172
Additional paid-in capital............... 4,376,788
Retained earnings (deficit).............. 156,621 1,814 (28,590) 3,522 (4,842,508)
------- ------- ------- ------- ----------
Total stockholders' equity (deficit)..... 156,637 1,877 (28,627) 3,538 (444,533)
======= ======= ======= ======= ==========
Total liabilities and stockholder's
Equity (deficit)....................... 670,592 138,612 149,626 88,544 4,088,278
======= ======= ======= ======= ==========
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
PRO FORMA ADJUSTMENTS NOVEMBER 30,
------------------------- 1999
DR CR PRO FORMA
----------- ----------- ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Obligations under capital losses......... 104,718(10) 15,458
Cash overdraft........................... 401,815(10) 7,121
Current maturities of long-term debt..... 388,045(10) 159,222
Due to shareholder....................... 258,183(10) 30,631
Due to shareholder....................... 300,000
Restated party notes payable............. 25,000(13) 280,893
Line of credit........................... 34,000
Accrued expenses......................... 23,245
Checks outstanding in excess of bank
balance................................ 20,094
Accounts payable......................... 640,228(10) 479,819
---------- ---------- ----------
Total current liabilities................ 1,797,990 1,330,481
Long-term debt:
Obligations under capital losses......... 212,097(10) 57,690
Deferred rent............................ 0
Taxation................................. 0
Deferred revenue......................... 0
Note payable-stockholder................. 221,482(10) 0
Notes payable............................ 792,442(10) 118,856
---------- ---------- ----------
Total long-term debt..................... 1,228,002 178,338
Stockholders' equity (deficit)...........
Preferred Stock.......................... 34
Common stock............................. 15,932(11) 5,240
Additional paid-in capital............... (11) 5,900,996 10,277,764
Retained earnings (deficit).............. (11) 2,315,949 (2,528,557)
---------- ---------- ----------
Total stockholders' equity (deficit)..... 15,932 8,218,947 7,758,482
========== ========== ==========
Total liabilities and stockholder's
Equity (deficit)....................... 3,039,924 8,216,947 8,283,299
========== ========== ==========
</TABLE>
COLORSMART.COM, INC.
PRO FORMA STATEMENT OF OPERATIONS
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY COLOUR CC
-------------- -------- ----------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. 57,617 563,717 756,007 2,565,034 1,495,135 465,212 1,088,302
Cost of sales.......... 40,469 376,807 387,799 1,026,499 833,902 290,673 379,647
---------- -------- ------- --------- --------- ------- ---------
Gross profit........... 17,148 186,910 368,208 1,538,535 661,233 174,539 708,655
Depreciation........... 89,637
General and
administrative
expenses............. 350,961 354,311 331,637 1,349,056 922,181 171,367 748,319
Salaries & wages....... 640,578
---------- -------- ------- --------- --------- ------- ---------
Income (loss) from
operations........... (1,064,028) (167,401) 36,571 189,479 (260,948) 3,172 (39,664)
Other income (expense):
Interest income........ 1,117 3,268 19,595
Misc. income........... 25,135 16,018
Interest expense....... (20,706) (14,927) (2,657) (143,796) (17,883) (3,719) (23,254)
Discounts Received.....
Gain (loss) on disposal
of equipment......... (8,447) 926
---------- -------- ------- --------- --------- ------- ---------
Total other income
(expense)............ (20,706) (22,257) (2,657) (118,661) (17,883) (451) 13,285
Income (loss) before
income taxes......... (1,084,734) (189,658) 33,914 70,818 (278,831) 2,721 (26,379)
Provision for income
taxes................ 15,208
---------- -------- ------- --------- --------- ------- ---------
Net income (loss)...... (1,084,734) (189,658) 33,914 55,610 (278,831) 2,721 (26,379)
========== ======== ======= ========= ========= ======= =========
Net loss per share
(basic and
diluted)............. (0.27)
==========
Weighted average shares
outstanding.......... 4,051,971
==========
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
PRO FORMA
ADJUSTMENTS NOVEMBER 30,
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL ---------------------- 1999
PROPERTIES PRINTING SUPPORT COMBINED DR CR PRO FORMA
-------------- -------------- -------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. 26,915 509,778 393,617 7,921,334 7,921,334
Cost of sales.......... 237,915 333,294 3,907,005 3,907,005
------- ------- ------- ---------- -------- --------- ----------
Gross profit........... 26,915 271,863 60,323 4,014,329 4,014,329
Depreciation........... 89,637 89,637
General and
administrative
expenses............. 7,765 285,234 59,074 4,579,905 372,057 (7) 4,951,962
Salaries & wages....... 640,578 640,578
------- ------- ------- ---------- -------- --------- ----------
Income (loss) from
operations........... 19,150 (13,371) 1,249 (1,295,791) (372,057) (1,667,848)
Other income (expense):
Interest income........ 24 136 108 24,248 24,248
Misc. income........... 159 41,312 41,312
Interest expense....... (11,620) (10,456) (31) (249,049) (249,049)
Discounts Received..... 0 0
Gain (loss) on disposal
of equipment......... (7,521) (7,521)
------- ------- ------- ---------- -------- --------- ----------
Total other income
(expense)............ (11,596) (10,161) 77 (191,010) (191,010)
Income (loss) before
income taxes......... 7,554 (23,532) 1,326 (1,486,801) (372,057)(7) (1,858,858)
Provision for income
taxes................ 1,239 464 16,911 16,911
------- ------- ------- ---------- -------- --------- ----------
Net income (loss)...... 6,315 (23,532) 862 (1,503,712) (372,057) (1,875,769)
======= ======= ======= ========== ======== ========= ==========
Net loss per share
(basic and
diluted)............. (0.36)
==========
Weighted average shares
outstanding.......... 5,239,000
==========
</TABLE>
F-121
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOVEMBER 30, 1999
The Pro Forma financial statements have been prepared assuming the
acquisition had occurred at November 30,1999. The consummation of all the
acquisitions is contingent upon the successful initial public offering to be
completed in fiscal year 2000. There are no other contingencies related to these
pending acquisitions. The statement of operations is prepared assuming the
acquisition occurred December 1, 1998.
The following assumptions have been made:
(1) Magnum Digital Services, Inc. will be acquired for $500,000 in cash and
$200,000 of Colorsmart.com, Inc. stock. This will result in the recordation
of approximately $656,000 of goodwill, which will be amortized over
15 years. The purchase agreement states that $275,000 of the purchase price
will be used to pay off debt of Magnum Digital Services, Inc. that existed
at the date of purchase. The fair market value (FMV) of the assets acquired
is $271,240 and the FMV of the liabilities assumed is $501,761. The excess
of $230,521 of liabilities over assets is allocated to goodwill.
(2) Advertising That Works, Inc. will be acquired for $1,500,000 in cash. This
will result in the recordation of approximately $926,000 of goodwill, which
will be amortized over 15 years. The purchase agreement states that $500,000
of the purchase price will be used to purchase the facility currently
occupied by Advertising That Works, Inc. The FMV of the assets acquired is
$143,141 and the FMV of the liabilities assumed is $69,231. The excess of
$73,910 of assets over liabilities is allocated to goodwill.
(3) Stonehouse Graphics (Pty) Limited will be acquired for approximately
$2,500,000 in cash. This will result in the recordation of approximately
$1,700,000 of goodwill, which will be amortized over 15 years.
Colorsmart.com, Inc. will not be assuming any liabilities that existed as of
the acquisition date. The FMV of the assets acquired is $1,348,634.
(4) Display Arts, Inc. will be acquired for approximately $1,300,000 in cash.
This will result in the recordation of approximately $1,231,000 of goodwill,
which will be amortized over 15 years. The purchase agreement states that
$300,000 of the purchase price will be used to pay off debt of Display
Arts, Inc. that existed at the date of purchase. The FMV of the assets
acquired is $388,073 and the FMV of the liabilities assumed is $618,882. The
excess of $230,809 of liabilities over assets is allocated to goodwill.
(5) Top Copy CC will be acquired for approximately $426,000 in cash. This will
result in the recordation of approximately $286,000 of goodwill, which will
be amortized over 15 years. Colorsmart, Inc. will not be assuming any
liabilities that existed as of the acquisition date. The FMV of the assets
acquired is $132,466.
(6) The Company expects to pay approximately $$11,000,000 at the closings, the
cash will be paid from the initial public offering, and it is assumed common
stock will be issued and this amount is included in additional paid-in
capital.
(7) Amortization of goodwill is included in general and administrative expenses
and totals $372,057.
(8) Virtual Colour Group will be acquired for approximately $1,800,000 in cash.
This will result in the recordation of approximately $820,000 of goodwill,
which will be amortized over 15 years. Colorsmart.com, inc. will not be
assuming any liabilities that existed as of the acquisition date. The FMV of
the assets acquired is $1,143,656.
(9) Total goodwill recorded is as follows; $655,521 for Magnum Digital Services,
$926,090 for Advertising That Works, $1,577,888 for Stonehouse Graphics,
$1,230,809 for Display Arts, $285,717 for Top Copy, $904,832 for Virtual
Colour, for a total of $5,580,857.
(10) As agreed upon certain liabilities of the acquirees will be paid off from
the purchase price received from Colorsmart.com, Inc. These liabilities
total $2,362,877.
(11) At November 30, 1999 Colorsmart.com, Inc. had total common stock of 4256.
As a result of the Magnum Digital Services acquisition another 66,667
shares of .001 par value common stock will be issued and another 916,000
shares .001 par value common stock will be issued to fund the acquisition
which will increase common stock to 5,239.
Additional paid in capital increases by $5,732,565 to total
$10,200,615. This is based on common stock sold to fund each acquisition:
$700,000 for Magnum Digital Services, $1,500,000 for Advertising That
Works, $2,500,000 for Stonehouse Graphics, $1,300,000 for Display Arts,
$426,666 for Top Copy, and $1,833,333 for Virtual Colour Group. When added
to Colorsmart.com's additional paid in capital at November 30, 1999 of
$2,507,051 less the $566,435 already funded, ending additional paid in
capital equals $10,200,615.
(12) For the purpose of conversion from South African rand to U.S. dollars, the
end of the month exchange rate was used. This rate, as quoted in the Wall
Street Journal, was 6.19 rand to 1 dollar.
The exchange rate for the past 2 years, by quarter, is as follows:
<TABLE>
<CAPTION>
2000 1998 1999 2000
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
1(ST) QUARTER (Feb)......................................... 4.94 6.18 6.34
2(ND) QUARTER (May)......................................... 5.16 6.21
3(RD) QUARTER (Aug)......................................... 6.44 6.08
4(TH) QUARTER (Nov)......................................... 5.69 6.19
</TABLE>
(13) Advances for acquisitions of $566,237 is eliminated in consolidation;
$100,000 to property and equipment, $25,000 related party notes payable, and
$441,237 to goodwill. These advances for acquisitions are included in the
aforementioned purchase prices.
(14) This represents the cash received from the I.P.O. and the outflow to fund
the acquisitions.
F-122
<PAGE>
COLORSMART.COM, INC.
PRO FORMA FINANCIAL STATEMENTS
The following Pro Forma Combined Balance Sheet of the Registrant has been
prepared by management of the Registrant based upon the balance sheets of the
Registrant as of February 29, 2000. The Pro Forma Combined Statement of
Operations was prepared based upon the statement of operations for the
Registrant for the three months ended February 29, 2000. The pro forma statement
of operations also includes the proposed acquisition's statements of operations
for the three months ended March 31, 2000. The pro forma statements give effect
to the transactions under the purchase method of accounting and the assumptions
and adjustments in the accompanying notes to the pro forma combined financial
statements. The pro forma combined balance sheets give effect to the acquisition
as if they had occurred on February 29, 2000. The pro forma combined statement
of operations for the three months ended February 29, 2000, gives effect to the
acquisitions as if they had occurred as of March 1, 1999. The balance sheet
includes the adjustment to record the acquisitions, including goodwill.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma combined
financial statements do not purport to represent what the combined companies'
financial position or results of operations would actually have been had the
acquisition occurred on such date or as of the beginning of the period
indicated, or to project the combined companies' financial position or results
of operations for any future period.
F-123
<PAGE>
<TABLE>
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY COLOUR CC
-------------- ---------- ----------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash....................... 23,036 19,435 94,953 32,731 8
Accounts receivable........ 47,455 82,703 388,296 152,680 30,101 217,959
Investment.................
Inventory.................. 8,000 31,995 99,211 19,385 3,958 7,098
Advances for
acquisitions............. 401,288
Prepaid expenses........... 31,000
---------- ---------- ------- --------- -------- ------- -------
Total current assets....... 458,222 55,455 134,133 582,462 171,945 66,790 225,065
Properly and equipment..... 335,883 180,880 17,561 766,172 174,734 65,676 189,829
Other assets:
Goodwill
Accumulated Amortization...
Note receivable............ 255,698
Deferred taxes............. 20,031
Intangibles, net...........
Deposits................... 10,730 6,127 8,320
---------- ---------- ------- --------- -------- ------- -------
Total other assets......... 10,730 6,127 28,351 255,808
========== ========== ======= ========= ======== ======= =======
Total assets............... 802,635 242,442 161,894 1,348,634 375,030 132,468 670,592
========== ========== ======= ========= ======== ======= =======
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
PRO FORMA ADJUSTMENTS FEBRUARY 29,
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL ----------------------------- 2000
PROPERTIES PRINTING SUPPORT COMBINED DR CR PRO FORMA
-------------- -------------- ------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash....................... 2,820 1 22 173,908 7,800,000(14) 7,800,000(14) 173,908
Accounts receivable........ 5,504 81,017 48,352 1,053,948 1,053,948
Investment................. 0 0
Inventory.................. 10,252 179,900 179,900
Advances for
acquisitions............. 401,288 401,288(13) 0
Prepaid expenses........... 31,000 31,000
------- ------- ------- ---------- ---------- ---------- ----------
Total current assets....... 8,323 91,271 48,374 1,840,038 7,800,000 8,201,286 1,438,753
500,000(2)
Properly and equipment..... 128,289 47,271 8,103 1,924,180 100,000(13) 2,524,180
Other assets:
Goodwill 4,702,023(9) 4,978,309
Accumulated Amortization... 278,286(13) 0
Note receivable............ 11,084 10,067 276,849 276,849
Deferred taxes............. 20,031 20,031
Intangibles, net........... 0 0
Deposits................... 25,177 25,177
------- ------- ------- ---------- ---------- ---------- ----------
Total other assets......... 0 11,084 10,067 322,057 5,318,309 5,300,388
======= ======= ======= ========== ========== ========== ==========
Total assets............... 136,612 149,626 66,544 4,086,276 15,518,309 8,201,286 9,263,299
======= ======= ======= ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY COLOUR CC
-------------- ---------- ----------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obligations under capital
leases................... 15,456 100,347 4,368
Cash overdraft............. 7,121 327,476 23,362
Current maturities of
long-term debt........... 103,296 14,106 142,211 41,618 15,347 79,001
Due to shareholder......... 21,610 267,209
Due to shareholder......... 300,000
Related party roles
payable.................. 260,893 25,000
Line of credit............. 9,806 34,000
Accrued expenses........... 9,806 13,439
Checks outstanding in
excess of bank balance... 20,094
Accounts payable........... 143,766 127,596 29,005 259,544 179,452 32,464 260,089
---------- ---------- ------- --------- -------- ------- -------
Total current
liabilities.............. 833,219 274,170 50,615 729,232 560,381 47,811 382,452
Long-term debt:
Obligation under capital
leases................... 67,660 206,675 5,222
Deferred rent..............
Taxation...................
Deferred revenue...........
Note
payable--stockholder..... 118,750 102,732
Notes payable.............. 14,166 3,000 536,540 89,689 2,875 151,504
---------- ---------- ------- --------- -------- ------- -------
Total long-term debt....... 71,648 209,875 656,291 104,913 106,607 151,504
Stockholders' equity
(deficit)
Preferred Stock............ 34
Common Stock............... 4,257 1,000 15,574 16 10 158 16
Additional paid-in
capital.................. 2,419,851 1,056,725 990
Retained earnings
(deficit)................ (2,525,774) (2,199,328) 95,505 (35,904) (291,262) (21,109) 156,621
---------- ---------- ------- --------- -------- ------- -------
Total stockholders' equity
(deficit)................ (102,432) (241,603) 111,079 (35,868) (290,262) (20,062) 156,637
========== ========== ======= ========= ======== ======= =======
Total liabilities and
stockholder's Equity
(deficit)................ 802,635 242,442 161,694 1,348,634 376,030 132,486 670,592
========== ========== ======= ========= ======== ======= =======
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
PRO FORMA ADJUSTMENTS NOVEMBER 30,
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL ----------------------------- 1999
PROPERTIES PRINTING SUPPORT COMBINED DR CR PRO FORMA
-------------- -------------- ------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDER
Current liabilities:
Obligations under capital
leases................... 120,172 101,716(10) 15,456
Cash overdraft............. 21,531 29,447 406,936 401,615(10) 7,121
Current maturities of
long-term debt........... 60,383 89,293 1,810 527,287 368,045(10) 159,222
Due to shareholder......... 286,819 256,168(10) 30,631
Due to shareholder......... 300,000 300,000
Related party roles
payable.................. 285,693 25,000(13) 260,893
Line of credit............. 34,000 34,000
Accrued expenses........... 23,245 23,245
Checks outstanding in
excess of bank balance... 20,094 20,094
Accounts payable........... 2,507 58,114 27,506 1,120,045 640,226(10) 479,819
------- ------- ------- ---------- ---------- ---------- ----------
Total current
liabilities.............. 62,890 149,938 58,764 3,126,471 1,797,990 1,330,481
Long-term debt:
Obligation under capital
leases................... 289,777 212,097(10) 57,680
Deferred rent.............. 0 0
Taxation................... 0 0
Deferred revenue........... 0
Note
payable--stockholder..... 221,462 221,482(10) 0
Notes payable.............. 71,845 27,215 4,242 911,078 792,422(10) 118,656
------- ------- ------- ---------- ---------- ---------- ----------
Total long-term debt....... 71,845 27,215 4,242 1,402,338 1,226,002 176,336
Stockholders' equity
(deficit)
Preferred Stock............ 34 34
Common Stock............... 63 63 18 21,172 15,932(11) 5,240
Additional paid-in
capital.................. 4,376,766 (11) 5,900,998 10,277,764
Retained earnings
(deficit)................ 1,814 (26,590) 3,522 (4,642,506) (11) 2,315,949 (2,526,557)
------- ------- ------- ---------- ---------- ---------- ----------
Total stockholders' equity
(deficit)................ 1,877 (26,527) 3,538 (444,533) 15,932 8,216,947 7,756,482
======= ======= ======= ========== ========== ========== ==========
Total liabilities and
stockholder's Equity
(deficit)................ 136,612 149,828 66,544 4,086,276 3,038,924 8,216,947 9,283,299
======= ======= ======= ========== ========== ========== ==========
</TABLE>
F-124
<PAGE>
COLORSMART.COM, INC.
PRO FORMA FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
<TABLE>
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY COLOUR CC
-------------- ---------- ----------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. 164,715 212,696 534,743 391,806 95,942 224,569
Cost of sales.............. 104,767 90,152 130,600 172,525 120,437 106,070
---------- ---------- ------- --------- -------- ------- -------
Gross profit............... 0 59,948 122,544 404,142 219,281 (24,495) 118,499
Salaries and wages......... 64,338
Depreciation............... 15,000
Write down of investment... 425,000
General and administrative
expenses................. 149,862 63,229 85,291 370,515 275,184 (13,268) 159,599
---------- ---------- ------- --------- -------- ------- -------
Income (loss) from
operations............... (654,200) (3,281) 37,253 33,627 (55,903) (11,227) (41,100)
Other income (expense):
Interest income............ 3,268 5,740
Misc. income............... 4,081 1
Interest expense........... (5,521) (4,517) (84) (12,689) (3,550) (3,719) (7,340)
Discounts Received.........
Gain (loss) on disposal of
equipment................ (0)
---------- ---------- ------- --------- -------- ------- -------
Total other income
(expense)................ (5,521) (4,517) (84) (8,609) (3,550) (451) (1,599)
Income (loss) before income
taxes.................... (659,721) (7,798) 37,169 25,018 (59,453) (11,678) (42,699)
Provision for income
taxes.................... (15,208) (8,191)
---------- ---------- ------- --------- -------- ------- -------
Net income (loss).......... (659,721) (7,798) 37,169 9,810 (59,453) (11,678) (50,890)
========== ========== ======= ========= ======== ======= =======
Net loss per share (basic
and diluted)............. (0.15)
==========
Weighted average shares
outstanding.............. 4,257,112
==========
<CAPTION>
(ALL AMOUNTS IN U.S. DOLLARS)
PRO FORMA
ADJUSTMENTS FEBRUARY 29,
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL ----------------------------- 2000
PROPERTIES PRINTING SUPPORT COMBINED DR CR PRO FORMA
-------------- -------------- ------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. 6,672 97,243 60,375 1,788,761 1,788,761
Cost of sales.............. 50,304 71,296 846,150 846,150
------- ------- ------- ---------- ---------- ---------- ----------
Gross profit............... 6,672 46,939 (10,921) 942,610 942,610
Salaries and wages......... 64,338 64,338
Depreciation............... 15,000 15,000
Write down of investment... 425,000 425,000
General and administrative
expenses................. 1,835 73,534 17,810 1,183,592 331,887 (8) 1,515,479
------- ------- ------- ---------- ---------- ---------- ----------
Income (loss) from
operations............... 4,838 (26,595) (28,731) (745,320) (331,887) (1,077,207)
Other income (expense):
Interest income............ 4 38 21 9,072 9,072
Misc. income............... 159 4,241 4,241
Interest expense........... (2,791) (1,403) (3) (41,618) (41,618)
Discounts Received......... 0 0
Gain (loss) on disposal of
equipment................ (0) (0)
------- ------- ------- ---------- ---------- ---------- ----------
Total other income
(expense)................ (2,787) (1,205) 18 (28,306) (28,306)
Income (loss) before income
taxes.................... 2,050 (27,801) (28,713) (773,625) (331,887)(8) (1,105,512)
Provision for income
taxes.................... 615 (8,578) (31,362) (31,362)
------- ------- ------- ---------- ---------- ---------- ----------
Net income (loss).......... 2,665 (27,801) (37,291) (804,987) (331,887) (1,136,874)
======= ======= ======= ========== ========== ========== ==========
Net loss per share (basic
and diluted)............. (0.22)
==========
Weighted average shares
outstanding.............. 5,240,000
==========
</TABLE>
F-125
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
FEBRUARY 29, 2000
The Pro Forma financial statements have been prepared assuming the acquisition
had occurred at February 29, 2000. The consummation of all the acquisitions is
contingent upon the successful initial public offering to be completed in fiscal
year 2000. There are no other contingencies related to these pending
acquisitions. The statement of operations is prepared assuming the acquisition
occurred March 1, 1999.
The following assumptions have been made:
(1) Magnum Digital Services, Inc. will be acquired for $500,000 in cash and
$200,000 of Colorsmart.com, Inc. stock. This will result in the recordation
of approximately $666,000 of goodwill, which will be amortized over
15 years. The purchase agreement states that $275,000 of the purchase price
will be used to pay off debt of Magnum Digital Services, Inc. that existed
at the date of purchase. The fair market value (FMV) of the assets acquired
is $242,442 and the FMV of the liabilities assumed is $484,045. The excess
of $241,603 of liabilities over assets is allocated to goodwill.
(2) Advertising That Works, Inc. will be acquired for $1,500,000 in cash. This
will result in the recordation of approximately $890,000 of goodwill, which
will be amortized over 15 years. The purchase agreement states that $500,000
of the purchase price will be used to purchase the facility currently
occupied by Advertising That Works, Inc. The FMV of the assets acquired is
$161,694 and the FMV of the liabilities assumed is $50,615. The excess of
$111,079 of assets over liabilities is allocated to goodwill.
(3) Stonehouse Graphics (Pty) Limited will be acquired for approximately
$2,500,000 in cash. This will result in the recordation of approximately
$1,000,000 of goodwill, which will be amortized over 15 years.
Colorsmart.com, Inc. will not be assuming any liabilities that existed as of
the acquisition date. The FMV of the assets acquired is $1,348,634.
(4) Display Arts, Inc. will be acquired for approximately $1,300,000 in cash.
This will result in the recordation of approximately $1,020,000 of goodwill,
which will be amortized over 15 years. The purchase agreement states that
$300,000 of the purchase price will be used to pay off debt of Display
Arts, Inc. that existed at the date of purchase. The FMV of the assets
acquired is $375,030 and the FMV of the liabilities assumed is $665,292. The
excess of $290,262 of liabilities over assets is allocated to goodwill.
(5) Top Copy CC will be acquired for approximately $426,000 in cash. This will
result in the recordation of approximately $294,000 of goodwill, which will
be amortized over 15 years. Colorsmart, Inc. will not be assuming any
liabilities that existed as of the acquisition date. The FMV of the assets
acquired is $132,466.
(6) The Company expects to pay approximately $7,800,000 at the closings, the
cash will be paid from the initial public offering, and it is assumed common
stock will be issued and this amount is included in additional paid-in
capital.
(7) Amortization of goodwill is included in general and administrative expenses
and totals $331,887.
(8) Virtual Colour Group will be acquired for approximately $397,000 in cash.
This will result in the recordation of approximately $810,000 of goodwill,
which will be amortized over 15 years. Colorsmart.com, inc. will be paying
off all liabilities of Virtual Colour Group, totaling approximately $900,000
from the closing proceeds of the public offering. The FMV of the assets
acquired is $1,023,374.
(9) Total goodwill recorded is as follows; $666,603 for Magnum Digital Services,
$888,921 for Advertising That Works, $1,026,365 for Stonehouse Graphics,
$1,292,262 for Display Arts, $294,200 for Top Copy, $809,958 for Virtual
Colour, for a total of $4,978,309.
F-126
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 29, 2000
(10) As agreed upon certain liabilities of the acquirees will be paid off from
the purchase price received from Colorsmart.com, Inc. These liabilities
total $3,000,791.
(11) At February 29, 2000 Colorsmart.com, Inc. had total common stock of 4,257.
As a result of the Magnum Digital Services acquisition another 66,667 shares
of .001 par value common stock will be issued and another 916,000 shares to
fund the acquisition which will increase common stock to 5,240.
Additional paid in capital increases by $5,900,998 to total $10,277,764.
This is based on common stock sold to fund each acquisition: $700,000 for
Magnum Digital Services, $1,500,000 for Advertising That Works, $2,500,000
for Stonehouse Graphics, $1,300,000 for Display Arts, $426,666 for Top Copy,
and $1,833,333 for Virtual Colour Group which includes the paydown of
liabilities. When added to Colorsmart.com's additional paid in capital at
November 30, 1999 of $2,419,051 less the $401,286 already funded, ending
additional paid in capital equals $10,277,764.
(12) For the purpose of conversion from South African rand to U.S. dollars, the
end of the month exchange rate was used. This rate, as quoted in the Wall
Street Journal, was 6.19 rand to 1 dollar.
The exchange rate for the past 2 years, by quarter, is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
1(ST) QUARTER (Feb)......................................... 4.94 6.18 6.34
2(ND) QUARTER (May)......................................... 5.16 6.21
3(RD) QUARTER (Aug)......................................... 6.44 6.08
4(TH) QUARTER (Nov)......................................... 5.69 6.19
</TABLE>
(13) Advances for acquisitions of $401,286 is eliminated in consolidation;
$100,000 to property and equipment, $25,000 related party notes payable, and
$276,286 to goodwill. These advances for acquisitions are included in the
aforementioned purchase prices.
(14) This represents the cash received from the I.P.O. and, in turn, the cash
outflow to fund the acquisitions.
F-127
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON, OR ANY OTHER PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION OR REPRESENT ANYTHING THAT IS NOT CONTAINED IN THIS
PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE AS OF THE
DATE ON THE FRONT COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS, AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. THIS
PROSPECTUS IS AN OFFER TO SELL ONLY THE SHARES, AND COMPONENTS THEREOF, OFFERED
HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO
DO SO.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary........................
The Offering..............................
Summary Consolidated Financial Data.......
Risk Factors..............................
Cautionary Note Regarding Forward-Looking
Statements..............................
Use Of Proceeds...........................
Dividend Policy...........................
Capitalization............................
Dilution..................................
Selected Consolidated Financial Data......
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations..............................
Business..................................
Management................................
Certain Transactions......................
Principal Stockholders....................
Description Of Securities.................
Shares Eligible For Future Sale...........
Underwriting..............................
Legal Matters.............................
Experts...................................
ColorSmart.com, Inc. Index To Consolidated
Financial Statements....................
Information Not Required In Prospectus....
</TABLE>
------------------------
UNTIL , 2000, 25 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS THAT
BUY, SELL OR TRADE THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000
SHARES OF COMMON STOCK.
[LOGO]
---------------------
PROSPECTUS
---------------------
NUTMEG SECURITIES, LTD.
MAY , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 78.037 of the Nevada General Corporation Law, the
Company has included in its Restated Articles of Incorporation a provision which
states that a director or officer of the Company shall not be liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty as
a director or officer, except to the extent such limitation of liability is
prohibited by Nevada General Corporation Law as the same exists or may hereafter
be amended. Section 78.037 currently provides that any such provision may not
eliminate or limit the liability of a director or officer for (a) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law; or (b) the payment of dividends in violation of the Nevada General
Corporation Law.
As permitted by Section 78.751 of the Nevada General Corporation Law,
Article VIII of the Company's Bylaws provides for the indemnification by the
Company, including suits brought by or on behalf of the Company, of each
director, officer, employee or agent thereof to the fullest extent permitted by
Nevada law.
As permitted by the Nevada General Corporation Law and Article VIII of the
Company's Bylaws, the Company has entered into indemnity agreements with its
directors and officers that provide for indemnification of such individuals to
the fullest extent permitted by Nevada law, and the Company maintains director's
and officer's liability for its directors and officers against certain
liabilities.
The Registrant intends to obtain directors' and officers' insurance
providing indemnification for certain of the Registrant's directors, officers
and employees against certain liabilities, prior to the completion of this
offering.
Reference is also made to the underwriting agreement filed as Exhibit 1.1 to
the Registration Statement for information concerning the Underwriters'
obligation to indemnify the Registrant and its officers and directors in certain
circumstances, and our obligation to indemnify the underwriters. 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 Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with this offering are
as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 8,774
Nasdaq National Market System Listing Fee................... $ 6,000
NASD Filing Fee............................................. $ 61,875
Accounting Fees and Expenses*............................... $ 75,000
Printing and Engraving*..................................... $100,000
Legal Fees and Expenses*.................................... $150,000
Blue Sky Fees and Expenses*................................. $ 30,000
Transfer Agent and Registrar Fees*.......................... $ 10,000
Miscellaneous Expenses*..................................... $ 58,351
--------
Total*...................................................... $500,000
========
</TABLE>
- ------------------------
* Estimated.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, the Registrant has sold and issued the
following unregistered securities in transactions which were exempt from
registration under the Securities Act of 1933, pursuant to Section 4(2) of the
Securities Act, as they were transactions not involving a public offering:
In February 1998, we offered and sold 719,490 shares of our common stock in
a private placement transaction exempt from registration under Rule 504 of
Regulation D promulgated under the Securities Act of 1933, as amended. We raised
a total of $320,000 in the aggregate in this offering. From March 1999 through
April 1999, we also offered and sold an additional 198,050 shares of our common
stock in a private placement transaction exempt from registration under
Rule 504 of Regulation D promulgated under the Securities Act of 1933, as
amended. We raised a total of $1,000,000 in the aggregate in this offering.
From July 10, 1999 through November 15, 1999, we offered and sold to
accredited investors 16,805 units, with each unit offered and sold consisting of
two shares of our preferred stock and two common stock purchase warrants
entitling the holders to purchase one additional share of our common stock for
each common stock purchase warrant, at an exercise price of $5.00 per warrant.
Accordingly, we offered and sold a total of 33,610 shares of our preferred stock
and 33,610 common stock purchase warrants entitling the holders to purchase
33,610 shares of our common stock at the time the warrants are exercised. All of
these warrants are now outstanding. This offering was made as a private
placement transaction exempt from registration under Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as amended, and we raised a total
of $252,075 in the aggregate.
ITEM 27. EXHIBITS.
a. The following Exhibits are filed as a part of this registration statement
pursuant to Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
1.01* Underwriting Agreement between ColorSmart and Nutmeg
Securities, Ltd. dated
2.01** Stock and Asset Purchase Agreement between ColorSmart and
Magnum Digital Services Corp. dated September 3, 1998
2.02** Extension Agreement between ColorSmart.com, Inc. and Magnum
Digital, Inc. dated December 2, 1999
2.03** Stock and Asset Purchase Agreement between ColorSmart and
Advertising That Works dated September 3, 1998
2.04** Extension Agreement between ColorSmart.com, Inc. and
Advertising That Works, Inc. dated December 2, 1999
2.05** Sales of Shares Agreement between ColorSmart and Stonehouse
Graphics (Pty) Limited dated October 12, 1998
2.06** Stock Purchase Agreement between ColorSmart.com, Inc. and
Donovan J. McNamee Jr. and Pamela M. McNamee dated June 23,
1999
2.07** Extension Agreement between ColorSmart.com, Inc. and
Donovan J. McNamee, Jr. and Pamela M. McNamee dated
October 1, 1999
2.08** Second Extension Agreement between ColorSmart.com, Inc. and
Donovan J. McNamee, Jr. and Pamela M. McNamee dated
December 15, 1999
2.09** Agreement between Top Copy CC and ColorSmart.com Inc, dated
October 14, 1999
2.10** Agreement between Top Copy CC and ColorSmart.com, Inc. to
Reinstate Sale of Business Agreement dated October 8, 1999
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
2.11** Agreement between ColorSmart.com, Inc. and Alois Koch dated
November 19, 1999
2.12** Agreement between Virtual Support CC and ColorSmart.com,
Inc. and Keith Howard Redman and Herbert Maria Trischler and
Alois Koch and Aardt Davidtz dated September 11, 1999
2.13** Agreement between Virtual Colour Printing CC and
ColorSmart.com, Inc. and K. Redman and K. Trischler and
A. Koch dated September 11, 1999
2.14** Agreement between Virtual Colour Property CC and
ColorSmart.com, Inc. and Keith Howard Redman and Herbert
Maria Trischler and Alois Koch dated September 11, 1999
2.15** Agreement between Jamberry Lake, LLC, Jamberry Lake Digital
Media, Inc. and ColorSmart.Com, Inc. dated December 3, 1999,
Nunc Pro Tunc to August , 1999
3.01** Articles of Incorporation of ColorSmart, Inc. dated
July 17, 1997
3.02** Certificate of Amendment to Articles of Incorporation dated
December 29, 1998
3.03** By-laws
5.0* Opinion of Gregory Bartko, Esq.
5.1* Opinion of Lynch, Rowin, Novack, Burnbaum & Crystal, P.C.
10.01** Commercial Rental Agreement between Chris England and
Advertising That Works, Inc. dated January 1, 1998
10.02** Commercial Rental Agreement between Chris England and
Advertising That Works, Inc. dated March 1, 1999
10.03** Contract for Sale of Realty dated August 16, 1995
10.04** Lease Agreement between The Hertz Group and Display Arts,
Inc. dated August 13, 1996
10.05** Lease Agreement between Michael N. Ryan and Lynda K. Ryan
and ColorSmart Inc. dated March 6, 1998
10.06** Memorandum of Agreement of Lease between Constantia Court
Yard and Colour Smart.Com.SA dated on October 1, 1999
10.07** Lease Agreement between Rollins Associates and Professional
Displays, Inc. dated February 25, 1993
10.08** Agreement for Assumption of Obligations Under Lease between
Display Arts, Inc. and Donovan J. McNamee, Jr. dated
October 23, 1998
10.09** Lease Agreement between Raymond G. Guay Revocable Trust and
Display Arts dated January 1, 1999
10.10** Lease Agreement between Steve Kress and Don McNamee Jr.,
d/b/a Graphic Transfer/Display Arts and Enos Reed dated
October 23, 1998
10.11** Agreement between ColorSmart.com and Dimitri Haralambous
dated August 7, 1999
10.12** Memorandum of Agreement of Lease between Norwich Life South
Africa Limited and Colour Smart.Com South Africa dated
June 25, 1999
10.13** Employment Agreement between ColorSmart.com Inc. and Greg
Stooksberry dated October 15, 1999
10.14** Employment Agreement between ColorSmart.com Inc. and Robert
McDowell dated September 16, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
10.15** Employment Agreement between ColorSmart.com Inc. and
Roger D. Finchum, Sr. dated September 16, 1999
10.16** Employment Agreement between ColorSmart.com Inc. and Lee
Watson dated September 16, 1999
10.17** Employment Agreement between ColorSmart.com Inc. and
Roger D. Finchum Jr. dated September 16, 1999
10.18** Employment Agreement between ColorSmart.com Inc. and Erich
Fischer dated September 16, 1999
10.19** Employment Agreement between ColorSmart.com Inc. and
Reginald Burrows dated September 16, 1999
10.20** Employment Agreement between ColorSmart and England dated
September 23, 1998
10.21** Employment Agreement between Stonehouse Graphics (Pty), Ltd.
and Nolan Weight dated October 12, 1998
10.22** Agreement between ColorSmart.com Inc. and Aardt Davidtz
dated November 18, 1999
10.23** Agreement between ColorSmart.com Inc. and Keith Redman dated
November 18, 1999
10.24** Agreement between ColorSmart.com Inc. and Herbert Trischler
dated November 18, 1999
10.25** Employment Agreement between ColorSmart.Com, Inc. and
Greg E. Dukoff dated December 3, 1999
10.26** Closed End Vehicle Lease Agreement between Bank One and
Display Arts, Inc. dated August 30, 1997
10.27** Plain Language Equipment Lease between Dolphin Capital
Corporation and Display Arts Inc. dated January 15, 1999
10.28** Promissory Note between Display Arts, Inc. and First
American National Bank dated May 20, 1999
10.29** Promissory Note executed by ColorSmart, Inc. dated
November 30, 1997
10.30** Promissory Note executed by ColorSmart, Inc. dated
November 30, 1998
10.31** Commercial Guaranty between Donovan McNamee and First
American National Bank dated May 20, 1999
10.32** Commercial Guaranty between Pamela McNamee and First
American National Bank dated May 20, 1999
10.33** Commercial Security Agreement between Display Arts Inc. and
First American National Bank dated May 20, 1999
10.34** Agreement to Provide Insurance between Display Arts Inc. and
First American National Bank dated May 20, 1999
10.35** Business Line Plus Agreement between Display Arts and First
American National Bank dated August 15, 1996
10.36** U.S. Small Business Administration Note between First
American National Bank and Display Arts Inc. dated
August 15, 1996
10.37** Security Agreement between Display Arts Inc. and First
American National Bank dated August 15, 1996
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
10.38** Security Agreement between Display Arts Inc. and First
American National Bank dated August 15, 1996
10.39** Employment Agreement between ColorSmart.com Inc. and
Donovan J. McNamee Jr. dated June 23, 1999
10.40** Lease Agreement between Michele Ferrera, Trustee of the
Michele Ferrera Trust Dated April 4, 1972 as amended et al
and Robert L. McDowell dated November 18, 1994
10.41** Catalog Business Lease Agreement between Apple Commercial
Credit and Robert McDowell
10.42** Lease Agreement between Ikon Capital and Magnum Digital
Services dated November 12, 1997
10.43** Lease Agreement between Ikon Capital and Magnum Digital
Services dated August 27, 1997
10.44** Equipment Lease Agreement between 1199 Mac, Inc. d/b/a
Magnum Digital Services and GBC/Protech for a GBC/Protech
dated November 19, 1997
10.45** Master Lease Agreement between 3M Financing Services and
1199 Mac, Inc. d/b/a Electronic Computer Imaging dated
October 10, 1996
10.46** Exclusive Distributor Agreement between Display Arts, Inc.
and Nimlok Company dated July 8, 1998
10.47** Letter Agreement between Display Arts, Inc. and Xerox
Colorgrafx Systems dated July 31, 1998
10.48 Letter Agreement Dated March 29, 2000 Extending The
Stonehouse Graphics (Pty), Ltd. Acquisition Agreement
10.49 Letter Agreement Dated March 28, 2000 Extending The Top Copy
CC Ltd. Acquisition Agreement
10.50 Letter Agreement Dated March 29, 2000 Extending The Virtual
Colour Group CC Acquisition Agreements
10.51 Letter Agreement Dated April 5, 2000 Extending The Magnum
Digital Services, Inc. Acquisition Agreement
10.52 Letter Agreement Dated March 30, 2000 Extending The ATW
Advertising That Works Acquisition Agreement
10.53 Letter Agreement Dated February 29, 2000 Extending The
Display Arts, Inc. Acquisition Agreement
10.54 10% Promissory Note by ColorSmart.com, Inc. dated
October 26, 1999
10.55 10% Promissory Note by ColorSmart.com, Inc. dated
December 28, 1999
10.56 10% Promissory Note by ColorSmart.com, Inc. dated
February 29, 2000
23.1 Consent of Daszkal, Bolton & Manela dated February 21, 2000
23.2** Consent of Lee R. Watson dated December 3, 1999
23.3 Consent of PricewaterhouseCoopers dated February 22, 2000
23.4 Consent of H.J. Hugo & Associates dated February 22, 2000
23.5 Consent of Snyders & Company dated February 22, 2000
23.6* Consent of Gregory Bartko, Esq. (included in opinion filed
as Exhibit 5.0)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------------------- ------------------------------------------------------------
<C> <S>
23.7* Consent of Lynch, Rowin, Novack, Burnbaum & Crystal, P.C.
(included in opinion filed as Exhibit 5.1)
24.0** Power of Attorney (included in Part II of the Registration
Statement under the caption "Signatures")
27.0 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the undersigned Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the undersigned Registrant of expenses incurred or
paid by a director, officer or controlling person of the undersigned Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the undersigned 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 Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant in all instances will provide to the
Underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the undersigned Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of the registration statement as of the time it was
declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.
(d) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of
II-6
<PAGE>
securities offered would not exceed that which wasregistered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-7
<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 Madison, Tennessee, on the 17 day of May, 2000.
<TABLE>
<S> <C> <C>
COLORSMART.COM,INC.
BY: /S/ ROGER D. FINCHUM, SR.
-----------------------------------------
Roger D. Finchum, Sr.
CHIEF EXECUTIVE OFFICER
</TABLE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ROGER D. FINCHUM, SR. Chief Executive Officer,
------------------------------------------- President and Director May 17, 2000
Roger D. Finchum, Sr. (Principal Executive Officer)
* Vice-President and Director
------------------------------------------- May 17, 2000
Roger D. Finchum, Jr.
* Director
------------------------------------------- May 17, 2000
Reginald W.H. Burrows
* Chief Financial Officer
------------------------------------------- (Principal Financial and May 17, 2000
Lee Watson Accounting Officer)
/s/ ROGER D. FINCHUM, SR.
-------------------------------------------
*Roger D. Finchum, Sr. May 17, 2000
As Power of Attorney
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- -------------
<C> <S> <C>
1.01* Underwriting Agreement between ColorSmart and Nutmeg
Securities, Ltd. dated ..................
2.01** Stock and Asset Purchase Agreement between ColorSmart and
Magnum Digital Services Corp. dated September 3, 1998.....
2.02** Extension Agreement between ColorSmart.com, Inc. and Magnum
Digital, Inc. dated December 2, 1999......................
2.03** Stock and Asset Purchase Agreement between ColorSmart and
Advertising That Works dated September 3, 1998............
2.04** Extension Agreement between ColorSmart.com, Inc. and
Advertising That Works, Inc. dated December 2, 1999.......
2.05** Sales of Shares Agreement between ColorSmart and Stonehouse
Graphics (Pty) Limited dated October 12, 1998.............
2.06** Stock Purchase Agreement between ColorSmart.com, Inc. and
Donovan J. McNamee Jr. and Pamela M. McNamee dated
June 23, 1999.............................................
2.07** Extension Agreement between ColorSmart.com, Inc. and
Donovan J. McNamee, Jr. and Pamela M. McNamee dated
October 1, 1999...........................................
2.08** Second Extension Agreement between ColorSmart.com, Inc. and
Donovan J. McNamee, Jr. and Pamela M. McNamee dated
December 15, 1999.........................................
2.09** Agreement between Top Copy CC and ColorSmart.com Inc, dated
October 14, 1999..........................................
2.10** Agreement between Top Copy CC and ColorSmart.com, Inc. to
Reinstate Sale of Business Agreement dated October 8,
1999......................................................
2.11** Agreement between ColorSmart.com, Inc. and Alois Koch dated
November 19, 1999.........................................
2.12** Agreement between Virtual Support CC and ColorSmart.com,
Inc. and Keith Howard Redman and Herbert Maria Trischler
and Alois Koch and Aardt Davidtz dated September 11,
1999......................................................
2.13** Agreement between Virtual Colour Printing CC and
ColorSmart.com, Inc. and K. Redman and K. Trischler and
A. Koch dated September 11, 1999..........................
2.14** Agreement between Virtual Colour Property CC and
ColorSmart.com, Inc. and Keith Howard Redman and Herbert
Maria Trischler and Alois Koch dated September 11, 1999...
2.15** Agreement between Jamberry Lake, LLC, Jamberry Lake Digital
Media, Inc. and ColorSmart.Com, Inc. dated December 3,
1999, Nunc Pro Tunc to August , 1999....................
3.01** Articles of Incorporation of ColorSmart, Inc. dated July 17,
1997......................................................
3.02** Certificate of Amendment to Articles of Incorporation dated
December 29, 1998.........................................
3.03** By-laws.....................................................
5.0* Opinion of Gregory Bartko, Esq..............................
5.1* Opinion of Lynch, Rowin, Novack, Burnbaum & Crystal, P.C....
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- -------------
<C> <S> <C>
10.01** Commercial Rental Agreement between Chris England and
Advertising That Works, Inc. dated January 1, 1998........
10.02** Commercial Rental Agreement between Chris England and
Advertising That Works, Inc. dated March 1, 1999..........
10.03** Contract for Sale of Realty dated August 16, 1995...........
10.04** Lease Agreement between The Hertz Group and Display Arts,
Inc. dated August 13, 1996................................
10.05** Lease Agreement between Michael N. Ryan and Lynda K. Ryan
and ColorSmart Inc. dated March 6, 1998...................
10.06** Memorandum of Agreement of Lease between Constantia Court
Yard and Colour Smart.Com.SA dated on October 1, 1999.....
10.07** Lease Agreement between Rollins Associates and Professional
Displays, Inc. dated February 25, 1993....................
10.08** Agreement for Assumption of Obligations Under Lease between
Display Arts, Inc. and Donovan J. McNamee, Jr. dated
October 23, 1998..........................................
10.09** Lease Agreement between Raymond G. Guay Revocable Trust and
Display Arts dated January 1, 1999........................
10.10** Lease Agreement between Steve Kress and Don McNamee Jr.,
d/b/a Graphic Transfer/Display Arts and Enos Reed dated
October 23, 1998..........................................
10.11** Agreement between ColorSmart.com and Dimitri Haralambous
dated August 7, 1999......................................
10.12** Memorandum of Agreement of Lease between Norwich Life South
Africa Limited and Colour Smart.Com South Africa dated
June 25, 1999.............................................
10.13** Employment Agreement between ColorSmart.com Inc. and Greg
Stooksberry dated October 15, 1999........................
10.14** Employment Agreement between ColorSmart.com Inc. and Robert
McDowell dated September 16, 1999.........................
10.15** Employment Agreement between ColorSmart.com Inc. and
Roger D. Finchum, Sr. dated September 16, 1999............
10.16** Employment Agreement between ColorSmart.com Inc. and Lee
Watson dated September 16, 1999...........................
10.17** Employment Agreement between ColorSmart.com Inc. and
Roger D. Finchum Jr. dated September 16, 1999.............
10.18** Employment Agreement between ColorSmart.com Inc. and Erich
Fischer dated September 16, 1999..........................
10.19** Employment Agreement between ColorSmart.com Inc. and
Reginald Burrows dated September 16, 1999.................
10.20** Employment Agreement between ColorSmart and England dated
September 23, 1998........................................
10.21** Employment Agreement between Stonehouse Graphics (Pty), Ltd.
and Nolan Weight dated October 12, 1998...................
10.22** Agreement between ColorSmart.com Inc. and Aardt Davidtz
dated November 18, 1999...................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- -------------
<C> <S> <C>
10.23** Agreement between ColorSmart.com Inc. and Keith Redman dated
November 18, 1999.........................................
10.24** Agreement between ColorSmart.com Inc. and Herbert Trischler
dated November 18, 1999...................................
10.25** Employment Agreement between ColorSmart.Com, Inc. and
Greg E. Dukoff dated December 3, 1999.....................
10.26** Closed End Vehicle Lease Agreement between Bank One and
Display Arts, Inc. dated August 30, 1997..................
10.27** Plain Language Equipment Lease between Dolphin Capital
Corporation and Display Arts Inc. dated January 15,
1999......................................................
10.28** Promissory Note between Display Arts, Inc. and First
American National Bank dated May 20, 1999.................
10.29** Promissory Note executed by ColorSmart, Inc. dated
November 30, 1997.........................................
10.30** Promissory Note executed by ColorSmart, Inc. dated
November 30, 1998.........................................
10.31** Commercial Guaranty between Donovan McNamee and First
American National Bank dated May 20, 1999.................
10.32** Commercial Guaranty between Pamela McNamee and First
American National Bank dated May 20, 1999.................
10.33** Commercial Security Agreement between Display Arts Inc. and
First American National Bank dated May 20, 1999...........
10.34** Agreement to Provide Insurance between Display Arts Inc. and
First American National Bank dated May 20, 1999...........
10.35** Business Line Plus Agreement between Display Arts and First
American National Bank dated August 15, 1996..............
10.36** U.S. Small Business Administration Note between First
American National Bank and Display Arts Inc. dated
August 15, 1996...........................................
10.37** Security Agreement between Display Arts Inc. and First
American National Bank dated August 15, 1996..............
10.38** Security Agreement between Display Arts Inc. and First
American National Bank dated August 15, 1996..............
10.39** Employment Agreement between ColorSmart.com Inc. and
Donovan J. McNamee Jr. dated June 23, 1999................
10.40** Lease Agreement between Michele Ferrera, Trustee of the
Michele Ferrera Trust Dated April 4, 1972 as amended et al
and Robert L. McDowell dated November 18, 1994............
10.41** Catalog Business Lease Agreement between Apple Commercial
Credit and Robert McDowell................................
10.42** Lease Agreement between Ikon Capital and Magnum Digital
Services dated November 12, 1997..........................
10.43** Lease Agreement between Ikon Capital and Magnum Digital
Services dated August 27, 1997............................
10.44** Equipment Lease Agreement between 1199 Mac, Inc. d/b/a
Magnum Digital Services and GBC/Protech for a GBC/Protech
dated November 19, 1997...................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- -------------
<C> <S> <C>
10.45** Master Lease Agreement between 3M Financing Services and
1199 Mac, Inc. d/b/a Electronic Computer Imaging dated
October 10, 1996..........................................
10.46** Exclusive Distributor Agreement between Display Arts, Inc.
and Nimlok Company dated July 8, 1998.....................
10.47** Letter Agreement between Display Arts, Inc. and Xerox
Colorgrafx Systems dated July 31, 1998....................
10.48 Letter Agreement Dated March 29, 2000 Extending The
Stonehouse Graphics (Pty), Ltd. Acquisition Agreement.....
10.49 Letter Agreement Dated March 28, 2000 Extending The Top Copy
CC Ltd. Acquisition Agreement.............................
10.50 Letter Agreement Dated March 29, 2000 Extending The Virtual
Colour Group CC Acquisition Agreements....................
10.51 Letter Agreement Dated April 5, 2000 Extending The Magnum
Digital Services, Inc. Acquisition Agreement..............
10.52 Letter Agreement Dated March 30, 2000 Extending The ATW
Advertising That Works Acquisition Agreement..............
10.53 Letter Agreement Dated February 29, 2000 Extending The
Display Arts, Inc. Acquisition Agreement..................
10.54 10% Promissory Note by ColorSmart.com, Inc. dated October
26, 1999..................................................
10.55 10% Promissory Note by ColorSmart.com, Inc. dated December
28, 1999..................................................
10.56 10% Promissory Note by ColorSmart.com, Inc. dated February
29, 2000..................................................
23.1 Consent of Daszkal, Bolton & Manela dated February 21,
2000......................................................
23.2** Consent of Lee R. Watson dated December 3, 1999.............
23.3 Consent of PricewaterhouseCoopers dated February 22, 2000...
23.4 Consent of H.J. Hugo & Associates dated February 22, 2000...
23.5 Consent of Snyders & Company dated February 22, 2000........
23.6* Consent of Gregory Bartko, Esq. (included in opinion filed
as Exhibit 5.0)...........................................
23.7* Consent of Lynch, Rowin, Novack, Burnbaum & Crystal, P.C.
(included in opinion filed as Exhibit 5.1)................
24.0** Power of Attorney (included in Part II of the Registration
Statement under the caption "Signatures").................
27.0 Financial Data Schedule.....................................
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously File
<PAGE>
EXHIBIT 10.48
[STONEHOUSE GRAPHICS LETTERHEAD]
29 March 2000
Colorsmart.com
Fax 021 461 2287
Attention Reg Burrows.
Dear Reg,
I am prepared to extend the date of the agreement to the 15th May 2000,
notwithstanding that Stonehouse Graphics is an ongoing business and decisions
are being made on a daily basis. That Colorsmart.com will accept the results
of these decisions.
Regards,
/s/ Nolan Weight
Nolan Weight.
<PAGE>
EXHIBIT 10.49
AGREEMENT
Between
TOP COPY CC
("Seller")
and
COLORSMART.COM INC.
("Purchaser")
WHEREAS the agreement entered into for the sale of the business of the
Seller to the Purchaser and concluded on 20 May 1999 (The "Sale of Business
Agreement") has lapsed due to the non-fulfillment of the condition precedent
contained in clause 2.3 thereof, the Parties wish to reinstate the Sale of
Business Agreement and effect certain amendments so as to accommodate the
Purchaser's delays.
NOW THEREFORE THE PARTIES AGREE:
1. REINSTATEMENT OF SALE OF BUSINESS AGREEMENT
The parties agree that the Sale of Business Agreement is hereby
reinstated with full force and effect from date of signature hereof save
that, and subject to, the terms of this agreement which hereby amend,
where applicable, the Sale of Business Agreement.
2. INTEREST ON PURCHASE PRICE
The parties hereby agree that interest shall be payable on the full
amount of the purchase price at a rate of 6.5% (six and a half per
centum) per annum, calculated daily, from 23 August 1999 to the date of
payment of the full amount of the purchase price, and such interest
shall be paid together with the purchase price.
3. CHANGE OF EFFECTIVE DATE AND IMPLEMENTATION DATE
The parties hereby amend the Sale of Business Agreement as follows:
3.1 The definition of "effective date" in clause 1.2.5 is amended to
read "means the close of business 15th May 2000".
Hennie Hugo
H J Hugo & Associates
5 Constitution Street CAPE TOWN
E-Mail: [email protected]
Phone: 4657701
Facsimile: 4612287
Cell: 082 458 6634
<PAGE>
3.2 The definition of "implementation date" in clause 1.2.6 is amended
to read "means close of business on 15th May 2000".
3.3 The transfer of ownership and the closing of all Colorsmart.Com
acquisitions, of which your company is one, occur simultaneously
with the closing of the initial public offering. Your presence
will be required in New York City for this closing and you will be
notified of this date with as much lead-time as possible.
4. COUNTERPARTS
This agreement may be entered into any number of counterparts and by the
parties to it on separate counterparts, each of which when so executed
and delivered shall be an original, but all the counterparts shall
together constitute one and the same instrument.
5. GENERAL
No waiver, indulgence, leniency or extension of time which a part (the
"Grantor") may grant of show to the other, will in any way prejudice the
Grantor from exercising any of this rights in the future and no
variation of, or addition or agreed cancellation to the agreement shall
be of any force or effect unless it is reduced to writing and signed by
or on behalf of the parties.
SIGNED on behalf of TopCopy CC at Cape Town on the 28th day of March 2000 in
the presence of the undersigned witnesses:
AS WITNESSES:
1. /s/ [ILLEGIBLE] for TopCopy CC
------------------------------
2./s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
------------------------------ ---------------------------------
Member who warrants that he is
duly authorized
SIGNED on behalf of Colorsmart.Con Inc. at [ILLEGIBLE] on the day of
2000 in the presence of the undersigned witnesses:
AS WITNESSES:
1. for Colorsmart.Com Inc.
------------------------------
2.
------------------------------ ---------------------------------
Director who warrants that he is
duly authorized
Hennie Hugo
H J Hugo & Associates
5 Constitution Street CAPE TOWN
E-Mail: [email protected]
Phone: 4657701
Facsimile: 4612287
Cell: 082 458 6634
<PAGE>
EXHIBIT 10.50
[VIRTUAL COLOUR CC LETTERHEAD]
AGREEMENT
Between
VIRTUAL COLOUR CC
VIRTUAL PRINTING CC
VIRTUAL PROPERTIES CC
VIRTUAL SUPPORT CC
"Seller"
And
COLORSMART.COM INC.
"Purchaser"
REINSTATEMENT OF SALE OF BUSINESS AGREEMENT
The parties agree that the Sale of Business Agreement is hereby
reinstated with full force and effect from date of signature hereof
save that, and subject to, the terms of this agreement which hereby
amend, where applicable, the Sale of Business Agreement.
CHANGE OF EFFECTIVE DATE AND IMPLEMENTATION DATE
The definition of "effective date" is now amended to read "means
the close of business on 15 May 2000".
SIGNED on behalf of Virtual Colour Group CC at Cape Town on the
28th of March 2000.
for: Virtual Colour Group
/s/ [ILLEGIBLE]
-----------------------------------------------
Member, who warrants that he is duly authorised
<PAGE>
EXHIBIT 10.51
CONTRACT EXTENSION
This is to confirm the closing date for closing the acquisition contract
between ColorSmart.com, Inc., and Magnum Digital Services, has hereby been
extended until such time as ColorSmart completes its IPO. It is our
understanding that ColorSmart.com has filed its SB2 registration with the
U.S. Securities and Exchange Commission and completion of the IPO should be
conducted on or about May 15, 2000. We hereby consent to the extension as
stated.
/s/ [ILLEGIBLE]
- -------------------------------------
Seller's Signature
- -------------------------------------
Seller's Signature
Date: 4/5/00
- -------------------------------------
<PAGE>
EXHIBIT 10.52
[ATW LETTERHEAD]
3/30/2000
To: Roger Finchum SR
Dear Roger,
This is to confirm that the contract between ColorSmart Inc. and Chris
England for the acquisition of ATW Inc. has been extended until May/15/2000.
Please sign and fax back copy of such and send original back by FedEx mail.
/s/ Chris England
- -------------------------------------
(Signature) seller
3/30/2000
- -------------------------------------
(Date)
/s/ Roger Finchum
- -------------------------------------
(Signature) purchaser
3/30/2000
- -------------------------------------
(Date)
Best Regards,
Chris England
ATW/Advertising That Works
<PAGE>
EXHIBIT 10.53
[DISPLAY ARTS LETTERHEAD]
CONTRACT EXTENSION
This is to confirm the closing date for closing the acquisition contract
between ColorSmart.com, Inc., and Display Arts, Inc., has hereby been
extended until such time as ColorSmart completes its IPO. It is our
understanding that ColorSmart.com has filed its SB2 registration with the
U.S. Securities and Exchange Commission and completion of the IPO should be
conducted on or about April 15, 2000. We hereby consent to the extension as
stated.
/s/ [ILLEGIBLE]
- -------------------------------------
Seller's Signature
/s/ Pamela M. McNamee
- -------------------------------------
Seller's Signature
Date: February 29, 2000
- -------------------------------------
<PAGE>
Exhibit 10.54
ColorSmart.com, Inc.
10% FEE PROMISSORY NOTE
$170,000.00 Madison, Tennessee
October 26, 1999
FOR VALUE RECEIVED, the undersigned, ColorSmart.com, Inc., a Nevada
corporation (the "Maker"), hereby promises to pay to the order of Roger D.
Finchum, Sr, (the "Lender"), at Lender's address at 135 North Country Club
drive, Hendersonville, Tennessee 37075, or such other address which Lender
may specify by written notice to Maker, in Federal or other funds immediately
available at the Lender's address, the principal sum of ONE HUNDRED SEVENTY
THOUSAND DOLLARS ($170,000.00), together with the flat fee of 10% as
described below.
This Note has been executed between the maker and the lender and
delivered and executed in counterparts, via facsimile. This note is governed
by the laws of the State of Tennessee and accepted by the maker as of October
26, 1999, by and between lender and Maker, as amended and modified from time
to time. This Note is the "Note" referred to the ColorSmart bridge loan term
sheet, for which lender has accepted and signed and attached hereto. The fee
and principal on this Note shall be payable in full on or before July 1,
2000. Subject to the terms and conditions included here, the maker is
entitled to pay the entire amount due to lender at any time prior to the
maturity date, without pre-payment penalty.
Upon the occurrence and during the continuance of an Event of Default of
this Agreement, the holder of this Note (the "Holder") may, at its option,
declare the entire unpaid principal of and fee on this Note immediately due
and payable (provided that, upon the occurrence of certain Events of Default,
such acceleration shall be automatic), without notice, demand, or
presentment, all of which are hereby waived, and the Holder shall have the
right to offset against this Note any sum or sums owed by the Holder to Maker.
If at any time the rate of interest calculated under this Note (the "Note
Rate") exceeds the Maximum Lawful Rate, the rate of interest under this Note
shall be limited to the Maximum Lawful Rate, but any subsequent reductions in
the Note Rate shall not reduce the rate of interest on this Note below the
Maximum Lawful Rate until the total amount of interest accrued equals the
amount of interest which would have accrued if the Note Rate had at all times
been in effect. If at the maturity (stated or by acceleration) or at the
final payment of this Note the total amount of interest paid or accrued on
this Note is less than the amount of interest which would have accrued if the
Note Rate had at all times been in effect with respect thereto, then at such
time the Maker shall pay to the Holder an amount equal to the difference
between (a) the lesser of the amount of interest which would have accrued if
the Note Rate had at all times been in effect and the amount of interest
which would have accrued if the Maximum Lawful Rate had at all times been in
effect, and (b) the amount of interest actually paid or accrued on this Note.
Maker, and each surety, endorser, guarantor, and other party ever liable
for payment of any sums of money evidenced by this Note, jointly and
severally waive presentment and demand for payment, protest, notice of
protest and nonpayment, and notice of acceleration and the intention to
accelerate, and agree that their liability on this Note shall not be affected
by any renewal or extension in the time of payment hereof, by any
indulgences, or by any release or change in any security for the payment of
this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases, or changes, regardless of the number of such renewals,
extensions, indulgences, releases or changes.
1
<PAGE>
THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
ColorSmart.com, Inc
By: /s/ Roger D. Finchum, Jr.
---------------------------
Name: Roger D. Finchum, Jr.
Title: Vice President
Funds
Received by ColorSmart.com 10.26.99
/s/ RF acknowledgement
- ------
Terms accepted by Lender /s/ Roger D. Finchum, Sr.
-------------------------
2
<PAGE>
Exhibit 10.55
ColorSmart.com, Inc.
10% FEE PROMISSORY NOTE
$300,000.00 Madison, Tennessee
December 28, 1999
FOR VALUE RECEIVED, the undersigned, ColorSmart.com, Inc., a Nevada
corporation (the "Maker"), hereby promises to pay to the order of Herzog Max
in Bayern, (the "Lender"), at Lender's address at: 83681 Tegernsee, Germany,
Postfach 1165, or such other address which Lender may specify by written
notice to Maker, in Federal or other funds immediately available at the
Lender's address, the principal sum of THREE HUNDRED THOUSAND DOLLARS
($300,000.00), together with the flat fee of 10% as described below.
This Note has been executed between the maker and the lender and
delivered and executed in counterparts, via facsimile. This note is governed
by the laws of the State of Tennessee and accepted by the maker as of
December 28, 1999, by and between lender and Maker, as amended and modified
from time to time. This Note is the "Note" referred to the ColorSmart bridge
loan term sheet, for which lender has accepted and signed and attached
hereto. The fee and principal on this Note shall be payable in full on or
before July 1, 2000. Subject to the terms and conditions included here, the
maker is entitled to pay the entire amount due to lender at any time prior to
the maturity date, without pre-payment penalty.
Upon the occurrence and during the continuance of an Event of Default of
this Agreement, the holder of this Note (the "Holder") may, at its option,
declare the entire unpaid principal of and fee on this Note immediately due
and payable (provided that, upon the occurrence of certain Events of Default,
such acceleration shall be automatic), without notice, demand, or
presentment, all of which are hereby waived, and the Holder shall have the
right to offset against this Note any sum or sums owed by the Holder to Maker.
If at any time the rate of interest calculated under this Note (the "Note
Rate") exceeds the Maximum Lawful Rate, the rate of interest under this Note
shall be limited to the Maximum Lawful Rate, but any subsequent reductions in
the Note Rate shall not reduce the rate of interest on this Note below the
Maximum Lawful Rate until the total amount of interest accrued equals the
amount of interest which would have accrued if the Note Rate had at all times
been in effect. If at the maturity (stated or by acceleration) or at the
final payment of this Note the total amount of interest paid or accrued on
this Note is less than the amount of interest which would have accrued if the
Note Rate had at all times been in effect with respect thereto, then at such
time the Maker shall pay to the Holder an amount equal to the difference
between (a) the lesser of the amount of interest which would have accrued if
the Note Rate had at all times been in effect and the amount of interest
which would have accrued if the Maximum Lawful Rate had at all times been in
effect, and (b) the amount of interest actually paid or accrued on this Note.
Maker, and each surety, endorser, guarantor, and other party ever liable
for payment of any sums of money evidenced by this Note, jointly and
severally waive presentment and demand for payment, protest, notice of
protest and nonpayment, and notice of acceleration and the intention to
accelerate, and agree that their liability on this Note shall not be affected
by any renewal or extension in the time of payment hereof, by any
indulgences, or by any release or change in any security for the payment of
this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases, or changes, regardless of the number of such renewals,
extensions, indulgences, releases or changes.
1
<PAGE>
THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
ColorSmart.com, Inc
By: /s/ Roger D. Finchum, Sr.
---------------------------
Name: Roger D. Finchum, Sr.
Title: Chief Executive Officer
Funds
Received
Dec 30 1999
Lender /s/ Max Bayern
----------
2
<PAGE>
Exhibit 10.56
ColorSmart.com, Inc.
10% FEE PROMISSORY NOTE
$350,000.00 Madison, Tennessee
February 29, 2000
FOR VALUE RECEIVED, the undersigned, ColorSmart.com, Inc., a Nevada
corporation (the "Maker"), hereby promises to pay to the order of Roger D.
Finchum, Sr, (the "Lender"), at Lender's address at 135 North Country Club
drive, Hendersonville, Tennessee 37075, or such other address which Lender
may specify by written notice to Maker, in Federal or other funds immediately
available at the Lender's address, the principal sum of THREE HUNDRED FIFTY
THOUSAND DOLLARS ($350,000.00), together with the flat fee of 10% as
described below.
This Note has been executed between the maker and the lender and
delivered and executed in counterparts, via facsimile. This note is governed
by the laws of the State of Tennessee and accepted by the maker as of
February 29, 2000, by and between lender and Maker, as amended and modified
from time to time. This Note is the "Note" referred to the ColorSmart bridge
loan term sheet, for which lender has accepted and signed and attached
hereto. The fee and principal on this Note shall be payable in full on or
before July 1, 2000. Subject to the terms and conditions included here, the
maker is entitled to pay the entire amount due to lender at any time prior to
the maturity date, without pre-payment penalty.
Upon the occurrence and during the continuance of an Event of Default of
this Agreement, the holder of this Note (the "Holder") may, at its option,
declare the entire unpaid principal of and fee on this Note immediately due
and payable (provided that, upon the occurrence of certain Events of Default,
such acceleration shall be automatic), without notice, demand, or
presentment, all of which are hereby waived, and the Holder shall have the
right to offset against this Note any sum or sums owed by the Holder to Maker.
If at any time the rate of interest calculated under this Note (the "Note
Rate") exceeds the Maximum Lawful Rate, the rate of interest under this Note
shall be limited to the Maximum Lawful Rate, but any subsequent reductions in
the Note Rate shall not reduce the rate of interest on this Note below the
Maximum Lawful Rate until the total amount of interest accrued equals the
amount of interest which would have accrued if the Note Rate had at all times
been in effect. If at the maturity (stated or by acceleration) or at the
final payment of this Note the total amount of interest paid or accrued on
this Note is less than the amount of interest which would have accrued if the
Note Rate had at all times been in effect with respect thereto, then at such
time the Maker shall pay to the Holder an amount equal to the difference
between (a) the lesser of the amount of interest which would have accrued if
the Note Rate had at all times been in effect and the amount of interest
which would have accrued if the Maximum Lawful Rate had at all times been in
effect, and (b) the amount of interest actually paid or accrued on this Note.
Maker, and each surety, endorser, guarantor, and other party ever liable
for payment of any sums of money evidenced by this Note, jointly and
severally waive presentment and demand for payment, protest, notice of
protest and nonpayment, and notice of acceleration and the intention to
accelerate, and agree that their liability on this Note shall not be affected
by any renewal or extension in the time of payment hereof, by any
indulgences, or by any release or change in any security for the payment of
this Note, and hereby consent to any and all renewals, extensions,
indulgences, releases, or changes, regardless of the number of such renewals,
extensions, indulgences, releases or changes.
1
<PAGE>
THIS NOTE AND THE OTHER TRANSACTION DOCUMENTS COLLECTIVELY REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
ColorSmart.com, Inc
By: /s/ Roger D. Finchum, Sr.
---------------------------
Name: Roger D. Finchum, Sr.
Title: Chief Executive Officer
Funds
Received by ColorSmart.com
During Jan., Feb. and March 2000
/s/ RF acknowledgement
- ------
Terms accepted by Lender /s/ Roger D. Finchum, Sr.
-------------------------
2
<PAGE>
EXHIBIT 23.1
[DASZKAL BOLTON MANELA DEVLIN & CO. LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in Registration Statement on Form SB-2 of our
reports dated for the following companies as follows:
<TABLE>
<S> <C> <C>
COMPANY YEAR ENDED DATE OF REPORT
- --------------------------------- ------------------------ -----------------
Colorsmart.com, Inc. November 30, 1999 & 1998 January 21, 2000
Advertising That Works, Inc. December 31, 1999 & 1998 January 14, 2000
Magnum Digital Services December 31, 1999 & 1998 January 26, 2000
Display Arts, Inc. December 31, 1999 & 1998 January 21, 2000
</TABLE>
May 15, 2000
Boca Raton, Florida
/s/ DASZKAL BOLTON MANELA DEVLIN & CO., CPAS
<PAGE>
EXHIBIT 23.3
[LOGO]
[LETTERHEAD]
May 15, 2000
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated April 17, 2000, relating to the financial statements of Virtual
Support CC, Virtual Colour Properties CC, Virtual Support CC and Virtual Colour
Printing CC for the year ended February 29, 2000, which is part of this
Registration Statement.
/s/ PRICEWATERHOUSECOOPERS, INC
PRICEWATERHOUSECOOPERS, INC
Cape Town, South Africa
<PAGE>
EXHIBIT 23.4
[LETTERHEAD]
HJ HUGO AND ASSOCIATES
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated April 17, 2000, relating to the financial statements of Topcopy CC
for the year ended February 29, 2000, which is part of this Registration
Statement.
/s/ HJ Hugo & Associates
- --------------------------
HJ HUGO & ASSOCIATES
Cape Town, South Africa
May 15, 2000
<PAGE>
EXHIBIT 23.5
SNYDERS & COMPANY
[LETTERHEAD]
May 15, 2000
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
WE HEREBY CONSENT TO THE USE IN THIS REGISTRATION STATEMENT ON FORM SB-2 OF
OUR REPORT DATED APRIL 17, 2000, RELATING TO THE FINANCIAL STATEMENTS OF
STONEHOUSE GRAPHICS (PTY) LTD FOR THE YEAR ENDED FEBRUARY 29, 2000, WHICH IS
PART OF THIS REGISTRATION STATEMENT.
/s/ Snyders & Company
- --------------------------
SNYDERS & COMPANY
Parkrand, South Africa
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> NOV-30-2000 NOV-30-1999
<PERIOD-START> DEC-01-1999 DEC-01-1999
<PERIOD-END> FEB-29-2000 NOV-30-1999
<CASH> 23,936 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 54,936 31,000
<PP&E> 495,687 495,687
<DEPRECIATION> 160,004 145,004
<TOTAL-ASSETS> 802,633 958,650
<CURRENT-LIABILITIES> 833,217 239,326
<BONDS> 71,848 75,035
0 0
34 34
<COMMON> 4,257 4,257
<OTHER-SE> (106,723) 640,998
<TOTAL-LIABILITY-AND-EQUITY> 802,633 958,650
<SALES> 0 57,617
<TOTAL-REVENUES> 0 57,617
<CGS> 0 40,469
<TOTAL-COSTS> 654,200 1,121,646
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,521 20,706
<INCOME-PRETAX> (659,721) (1,084,735)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (659,721) (1,084,735)
<EPS-BASIC> (.15) (.27)
<EPS-DILUTED> (.15) (.27)
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