<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 2000
REGISTRATION NO. 333-92191
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 FEBRUARY 23, 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 7.
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 $ 2,160,000
- - Proceeds, before expenses, to ColorSmart................. $10.92 $21,840,000
</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 February , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Prospectus Summary.......................................... 1
The Offering................................................ 4
Summary Financial Data...................................... 5
Risk Factors................................................ 7
Cautionary Note Regarding Forward-Looking Statements........ 10
Use Of Proceeds............................................. 11
Dividend Policy............................................. 12
Capitalization.............................................. 13
Dilution.................................................... 14
Selected Consolidated Financial Data........................ 15
Management's Discussion And Analysis Of Financial Condition
And Results Of
Operations................................................ 17
Business.................................................... 21
Management.................................................. 29
Certain Transactions........................................ 35
Principal Stockholders...................................... 36
Description Of Securities................................... 36
Shares Eligible For Future Sale............................. 39
Underwriting................................................ 40
Legal Matters............................................... 42
Experts..................................................... 42
ColorSmart.com, Inc. Financial Statements................... F-1
1199 MAC, Inc., d/b/a Magnum Digital Services Financial
Statements................................................ F-16
Advertising That Works, Inc. Financial Statements........... F-26
Display Arts, Inc. Financial Statements..................... F-35
Stonehouse Graphics (Pty) Limited Financial Statements...... F-57
Top Copy CC Financial Statements............................ F-67
Virtual Colour Group Financial Statements................... F-78
Virtual Colour Printing CC................................ F-78
Virtual Support CC........................................ F-88
Virtual Colour Properties CC.............................. F-97
Virtual Colour CC......................................... F-106
ColorSmart.com, Inc. Consolidated Pro Forma Financial
Statements................................................ F-123
</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 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 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. These products range from full motion video
for the Internet, catalogues on CD-ROM, 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 should realize a decrease in the length of the
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 the assets of ten
companies in the digital printing or 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.
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.
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,
such as:
- 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.
1
<PAGE>
THE PRINTING INDUSTRY
We believe digital technology in the printing and graphic design industries
is being under utilized. Most digital print operations are small and lack the
requisite capital, equipment and technical expertise to deliver the full range
of benefits offered by digital technology. It is projected that there will be
more than $18 billion in total worldwide revenue from all digital printing
services and products by 2001. We believe this growth will be demand-driven,
predicated upon continued advancements in digital technology. As a prospective
leader in the digital graphics industry, we expect to be well positioned to
satisfy this demand.
E-commerce via the Internet offers a tremendous opportunity. The Internet is
an exceptional medium for the delivery of digital graphics in a wide variety of
formats. The synergy between digital technology and the Internet should continue
to transform, and we believe, replace an ever-increasing portion of conventional
printing services and products.
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
presence, while acquiring carefully targeted commercial printing companies
in this highly fragmented industry to support the back-end;
- Utilizing the most current digital graphics 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;
- Making the process of creating, approving, ordering and fulfilling
printing jobs more efficient by allowing customers to handle much of this
process from their desktops;
- Tailoring end-to-end business solutions to our customer's needs by
integrating design, production, and distribution services.
ACQUISITIONS
We have entered into agreements to purchase the stock or assets of companies
that have operating histories ranging from startup 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 image is 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.
2
<PAGE>
- Stonehouse Graphics is quickly becoming the largest billboard and backlit
fabricator 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 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.
- Jamberry Lake Digital Media 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. They achieve
this by providing full motion video products and services including real
estate tours, digital catalogues, and e-mail kiosks. The company 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.
3
<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.
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.
4
<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 ten of the acquisitions we have
pending at the date of this prospectus on the terms included in the acquisition
agreements. This 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........................ 620,304 847,794
---------- ----------
(Loss) income from operations....................... (556,999) (830,646)
Interest expense (net of interest income)........... (920) (20,706)
---------- ----------
Net loss............................................ $(557,919) $ (851,352)
---------- ----------
Basic and diluted earnings (loss) per share......... $ (.17) $ (.21)
Shares used in computing basic and diluted earnings
per share......................................... 3,206,787 3,981,931
</TABLE>
The following table includes a summary of our balance sheet at December 31,
1999:
- on an actual basis;
- on a pro forma basis giving effect to the consummation of the ten
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 at $15.00 per unit in
connection with our private placement conducted in September and
October 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 ten 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 at $15.00 per unit in connection with our private
placement
5
<PAGE>
conducted in September and October 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.......................... $ -- $ 241,927 $12,266,927
Total working capital (deficit).................... (207,327) (43,055) 11,981,945
Total assets....................................... 958,650 12,884,767 24,909,767
Short term debt, current portion of long term
liabilities and current related party
obligations...................................... 238,327 159,168 159,168
Long term debt..................................... 75,035 53,773 53,773
Total liabilities.................................. 313,362 1,704,478 1,704,478
Stockholders' equity............................... $ 645,298 $11,180,289 $23,205,289
--------- ----------- -----------
Total liabilities and stockholders' equity... 958,650 12,884,767 24,909,767
========= =========== ===========
</TABLE>
6
<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. As a result, we have a limited basis upon which you
may evaluate our business and prospects. 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. For our fiscal
year that ended November 30, 1998, our net loss was $(557,919) on total revenue
of $127,191. For our fiscal year that ended November 30, 1999, our net loss was
$(851,312) on total revenue of $57,617. 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. Based on our
current operating plan, we anticipate that the net proceeds of this offering and
cash provided by operations will allow us to meet our cash and capital
requirements for at least 12 months following the date of this prospectus. We
may require additional funding sooner than anticipated. 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.
We currently do not have a credit facility or any commitments for additional
financing. We cannot be certain that additional financing will be available when
and to the extent required. If adequate funds are not available on acceptable
terms, we may be unable to fund our expansion, develop or enhance our services
or respond to competitive pressures.
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. A significant barrier
to online commerce is the secure transmission of confidential information over
public networks. We rely on encryption and authentication technology licensed
from third parties to effect secure transmission of confidential information.
Advances in computer capabilities, new discoveries in cryptography, or other
developments may result in a breach of the algorithms we use to protect customer
data. 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. Our market is characterized by rapid technological
changes. 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
7
<PAGE>
technologies that we use. The availability of new and better digital graphics
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
In addition, the applicability to the Internet of existing laws is
uncertain. The adoption of new laws is uncertain. The adoption of new laws or
the application of 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.
Certain telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and that
many areas with high Internet use are experiencing interruptions in telephone
service. 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 communicating on 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 quarterly 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. We
compete in the commercial graphics arts and design and printing sectors, which
are characterized by individual orders from customers for specific printing
projects rather than long-term contracts, with continued engagement for
successive jobs dependent upon the customers' satisfaction with the services we
provide. As such, we are not able to predict, 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. Quarterly results in the future may
be influenced by these or other factors and, accordingly, there may be
significant variations in our quarterly operating results.
WE HAVE RECENTLY ENTERED INTO AGREEMENTS TO ACQUIRE THE STOCK OR ASSETS OF
TEN 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 and in the Republic of South Africa. 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.
8
<PAGE>
IF WE ARE UNABLE TO IMPLEMENT OUR ACQUISITION STRATEGY, WE MAY NOT SUCCEED
OR MAY BE LESS SUCCESSFUL IN THE FUTURE. A key component of our growth strategy
is accomplished by acquiring digital printing companies located throughout the
United States and overseas. While there are many such companies, we may not
always be able to identify and acquire printing companies meeting our
acquisition criteria on terms acceptable to us. Additionally, some of our
competitors have developed growth strategies similar to ours and thus the
competition for acquisition candidates is constantly increasing within the
printing industry. 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. Our acquisitions may also initially have
an adverse effect upon our operating results while the acquired business is
adopting our management practices. 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
compete with MasterGraphics, Inc., Consolidated Graphics, Inc., Imagex, Inc.,
and Integrated Graphics, Inc. in offering our services and products. Since we
are a specialty printer, 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.
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 54.8% 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 54.8% of our outstanding common stock assuming that there
is no exercise of the underwriter's over-allotment option, and approximately
52.3% 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
9
<PAGE>
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
Daniel F. Guifoile of Nutmeg Securities, Ltd. as 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.
FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS. Many current installed computer systems
and software products only accept two digits to identify the year in any date.
Thus, the Year 2000 will appear as "00," which the system might consider to be
the Year 1900 rather than the Year 2000. This could result in system failures,
delays or miscalculations causing disruptions to our operations. The failure of
systems maintained by third parties to be Year 2000 compliant could cause us to
incur significant expense to remedy any problems, reduce our revenues from such
third parties or otherwise seriously damage our business. Our failure to correct
a material Year 2000 problem could result in an interruption in, or a failure
of, some of our normal business activities or operations. We have had no Year
2000 problems as of the date of this Prospectus.
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 MAY BE 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 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,"
10
<PAGE>
"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 $21,840,000
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. 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............................................ $ 8,800,000 40.3%
Equipment and Software Purchases and Upgrades........... 4,000,000 18.3%
Sales and Marketing..................................... 3,500,000 16.0%
Repayment of Debt....................................... 270,000 1.2%
Hiring executive personnel and technicians.............. 1,000,000 4.6%
General corporate and working capital purposes.......... 4,270,000 19.6%
----------- -----
Total............................................. $21,840,000 100.0%
=========== =====
</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 ten pending
acquisitions we have under agreements, all of which should be consummated
concurrently with the completion of this offering.
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.
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.
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
11
<PAGE>
or investment other than our ten 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. 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.
12
<PAGE>
CAPITALIZATION
The following table sets forth our:
- actual capitalization as of November 30, 1999;
- our pro forma capitalization as of November 30, 1999 giving effect to the
issuance of 198,050 shares of our common stock between January and April
1999 where we received gross aggregate offering proceeds of $1,000,000 and
the issuance of 33,610 shares of preferred stock and 33,610 common stock
purchase warrants offered as units from July to October 1999 from which we
received gross aggregate offering proceeds of $252,075.
- 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.... $ 238,327 $ 159,168 $ 159,168
========== =========== ===========
Long term debt......................................... $ 75,035 $ 53,773 $ 53,773
========== =========== ===========
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 5,462 6,257
Additional paid in capital........................... 2,136,912 12,671,921 24,696,122
Accumulated deficit.................................. (1,495,915) (1,497,128) (1,497,128)
---------- ----------- -----------
Total stockholders' (deficit) equity............... 645,288 11,180,289 23,205,289
---------- ----------- -----------
Total capitalization............................... $ 958,650 $12,884,767 $23,418,230
========== =========== ===========
</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.
13
<PAGE>
DILUTION
As of November 30, 1999, our net tangible book value (deficit) was $645,288,
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 $23,205,289, or
approximately $3.71 per share of our common stock. This represents an immediate
increase in net tangible book value of $3.56 per share of common stock to our
existing stockholders and an immediate dilution in net tangible book value of
$8.29 per share of common stock, or approximately 69%, 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.......................................... $ 3.56
------
Net tangible book value per share after the offering........ $ 3.71
------
Dilution of net tangible book value per share to new
investors................................................. $ 8.29
======
</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 $25,264,000, or $3.87
per share of common stock. This represents an immediate increase in net tangible
book value of $3.72 per share of common stock to existing stockholders and an
immediate dilution in net tangible book value of $8.28 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>
14
<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...................... 559,161 748,122
Depreciation.................................... 55,367 89,637
---------- ----------
Total operating costs and expenses.............. 620,304 847,794
---------- ----------
(Loss) income from operations..................... (556,999) (830,646)
Interest expense.................................. 920 20,706
Expenses relating to debt financing and agreements
to retire stock options in preparation of
proposed public offering........................
Minority interest in subsidiary's losses
absorbed by parent..............................
---------- ----------
Net loss.......................................... $ (557,919) $ (851,352)
========== ==========
Basic and diluted net loss per share.............. $ (.17) $ (.21)
========== ==========
Shares used in computing basic and diluted
earnings per share.............................. 3,206,787 3,981,931
========== ==========
</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 ten 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 at $15.00 per unit in
connection with our private placement conducted in September and
October 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 ten 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 at $15.00 per unit in connection with our private
placement conducted in September and October 1999, which resulted in
our receipt of $252,075 in aggregate offering proceeds.
15
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1999
------------------------------------- YEAR ENDED
AS NOVEMBER 30,
UNAUDITED PRO FORMA ADJUSTED 1998
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $ -- $ 241,927 $12,266,927 $ 408
Total working capital (deficit)............. (207,327) (43,055) 11,981,945 (86,882)
Total assets................................ 958,650 12,884,767 24,909,767 299,422
Short term debt, current portion of long
term liabilities and current related party
obligations............................... 238,327 159,168 159,168 89,060
Long term debt.............................. 75,035 53,773 53,773 45,604
Total liabilities........................... 313,362 1,704,478 1,704,478 158,704
Total shareholders' (deficit) equity........ $ 645,288 $11,180,289 $23,205,289 140,718
--------- ----------- ----------- --------
Total liabilities and stockholders'
equity.................................. 958,650 12,884,767 24,909,767 299,422
========= =========== =========== ========
</TABLE>
16
<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
ten companies, four of which are located in the United States and six of which
are located in the Republic of South Africa. All ten 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.
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.
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.......................... 440 1,298
Depreciation expense........................................ 44 156
Total operating expenses.................................... 488 1,471
Income (loss) from operations............................... (438) (1,442)
Interest income or expense..................................
--------- ------
Net income (loss)........................................... (438)% (1,478)%
========= ======
</TABLE>
RESULTS OF OPERATIONS
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.
17
<PAGE>
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 $748,122 for the fiscal
year ended November 30, 1999 from $559,161 for the fiscal year ended
November 30, 1998. As a percentage of revenue, general and administrative
expenses increased from 440% to 1,298%. 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 $89,637 for the fiscal
year ended November 30, 1999 from $55,367 for the fiscal year ended
November 30, 1998. This increase of $34,270, or 62% 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.
NET INCOME/LOSS
Our net loss for the fiscal year ended November 30, 1999 increased $293,433,
or 53% from $(557,919) for the fiscal year ended November 30, 1998 to $(851,352)
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.
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 $715,168 for the
year ended November 30, 1999. Net cash used for investing activities was
$679,953 during the same period including $113,716 used in the purchase of
equipment as a result of our expanded operations, and $566,237 used in the ten
acquisitions we now have under contract.
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 $736,458, after deducting offering, legal, accounting
and finders' fee expenses. From July 1999 to October 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 $252,075
18
<PAGE>
in gross offering proceeds. Net proceeds of our private placements were used
primarily for legal and accounting expenses incurred during the process of
negotiating and documenting our ten targeted acquisitions, 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These systems and software
products will need to accept four digit entries to distinguish 21(st)century
dates from 20(th) century dates. As a result, computer systems and/or software
used by many companies and governmental agencies may need to be upgraded to
comply with Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities. Our services, operations,
customers, suppliers and service providers all rely on information technology
systems, using hardware and software, to function properly. This includes
readily apparent systems including those controlling the digital imaging and
printing equipment that we utilize to deliver our products and services to our
customers, including systems required to provide electricity to our facilities.
SUPPLIERS: We have been surveying our suppliers about their Year 2000
compliance. Each of our suppliers has advised us verbally that they believe they
are Year 2000 compliant, but we have not received confirmation from any
suppliers. If our other suppliers do not reply to our Year 2000 inquiries or
cannot provide Year 2000 compliant products, we may need to locate alternative
sources for goods or services.
OPERATIONS: We have been gathering information from our vendors and making
an assessment of Year 2000 compliance for each of the major elements of our
internal information systems. Based upon the representations of these vendors,
we believe:
- Our operating systems, which include Microsoft Windows NT, Microsoft
Windows 98 and Microsoft Windows 95, are all Year 2000 compliant in their
latest versions, which we currently have installed.
- Our key computer applications, which include Unix, Corel, Adobe,
Macromedia, Onyx, and Microsoft Office 97, have been updated to a level of
revision that is Year 2000 compliant. Our Lucent Partner Mail phone system
is also Year 2000 compliant. Our computer hardware, which is all personal
computer based, is Year 2000 compliant. We have received representations
from the owners and managers of our Madison, Tennessee facility that such
facility is Year 2000 compliant with regard to building security, heating
and lighting controls.
COST TO ADDRESS YEAR 2000 ISSUES: We have not incurred significant costs to
date complying with Year 2000 requirements and we do not believe that we will
incur significant costs for these purposes in the foreseeable future. However,
we may spend more money than we have estimated, and this could have a material
adverse impact on our results of operations. At this stage in our assessment
process, we do not believe that the Year 2000 issue will materially impact our
financial position, results of operations or cash flows in future periods.
However, there can be no assurance that operating problems or expenses related
to the Year 2000 issue will not arise with our computer systems and software or
that our customers or suppliers will be able to resolve their Year 2000 issues
in a timely manner. At the date of this prospectus, we have not encountered any
Year 2000 operating problems.
CONTINGENCY PLANS: Our failure to identify and correct a Year 2000 problem
could result in an interruption of normal business activities and operations. A
worst case Year 2000 scenario would include a
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total malfunction and shutdown of our network server and for this situation not
to be resolved in a timely manner. We are prepared to manually record
information and to manually prepare any necessary reports. If our internal
review and external surveys identifies any other problems that are reasonably
likely to occur, we will develop additional contingency plans to minimize any
impact on our business. However, despite our best efforts, we may not anticipate
all problems that may ultimately arise.
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. These products range from full motion video
for the Internet, catalogues on CD-ROM, 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 ten
companies in the digital printing or multimedia businesses. One of these firms
specializes in the design and production of multimedia advertising, marketing
and presentation applications for delivery over the Internet and CD-ROM. The
others are digital commercial printing companies located in the United States
and the Republic of South Africa.
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
one-stop solution. In addition to the easy on-line ordering process, ColorSmart
will provide a secure
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individual web-site 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:
[LOGO]
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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.
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.
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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 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;
- 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 these 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, 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 RECENT ACQUISITIONS
A key component of our growth strategy is accomplished by acquiring digital
printing companies located throughout the United States and overseas. 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 plan on integrating Jamberry's services with digital print
products offered by our entire group of companies. We signed an agreement
on December 2, 1999 to purchase all of the outstanding shares of Jamberry
from Jamberry Lake, L.L.C., its sole shareholder. We agreed to pay
$1,000,000 as follows: 125,000 of our shares 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 offering. We are also required to make a
monthly capital contribution to Jamberry of $100,000 from August 15, 1999
until we close this public offering. At the date of this prospectus we
have paid $360,000 to Jamberry under this agreement. Even though we are in
arrears $240,000 in our
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payments to Jamberry, we are not considered to be in default of the
acquisition agreement with Jamberry. With each payment of $100,000, 10% of
Jamberry's shares are being placed in escrow for our benefit. If we do not
close this public offering, we are entitled to receive 1% of the issued
and outstanding stock of Jamberry for each $20,000 that we have paid to
Jamberry under this agreement.
- 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 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.
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 5,000,000 Rands or
approximately $816,992 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
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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 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 March 31, 2000. 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.
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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. 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 February 22, 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
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have also hired two new designers and are currently interviewing additional
hires, including a position for a national sales manager.
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.
Our Jamberry Lake Digital Media facility is located in Summit, New Jersey.
The lease is for approximately 2,500 square feet under a lease agreement entered
into in October 1999. There is currently almost 3 years left on a three year
lease at approximately $3,500 per month. 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.
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MANAGEMENT
DIRECTORS AND OFFICERS
Our executive officers, directors, key employees and our nominees for
directors, and their ages as of February 22, 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;
Erich J. Fischer..................... 28 Vice-President of Design;
Lee Watson........................... 47 Chief Financial Officer;
Reginald W.H. Burrows................ 53 Vice-President of Foreign Operations; and Director;
Greg E. Dukoff....................... 35 Director-Nominee;
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 Monarch
Minerals & Mining, a mineral extraction concern headquartered in the United
States 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.
ERICH J. FISCHER, is our vice president of design. Mr. Fischer became our
vice-president in March 1996. From 1994-1996 Mr. Fischer served as manager and
head designer for Signs Now in Nashville, Tennessee. From 1992-1994 Mr. Fischer
was the assistant supervisor of marketing for Elrick & LaVange. Mr. Fischer has
been a freelance graphic artist, writer, musician and photographer since 1990,
and a graphics designer in the sign industry since 1994 with a national
franchise company [name the company], and has done design work for such events
as the Super Bowl, the Grammy Awards, CMA Awards, Dove Awards, and Nashville's
Summer Lights Festival. Mr. Fischer received his Bachelor of Science degree in
marketing and management from McNeese State University in Lake Charles,
Louisiana in May 1992.
29
<PAGE>
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 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.
GREG DUKOFF, will become a director upon the completion of our public
offering. Mr. Dukoff has been the president and chief executive officer of
Jamberry Lake Digital Media, Inc. since its inception in August 1999. He served
as the chief financial officer and as a director of Rolling Pin Kitchen
Emporium, Inc. since July, 1998 and as its chief executive officer since
March 1999. Currently, Mr. Dukoff is the corporate secretary and the interim
chief financial officer of Rolling Pin Kitchen Emporium, Inc. and of Gaylord
Companies, Inc. During Mr. Dukoff's term as an officer and director of the
Gaylord Companies, Inc., the company filed a bankruptcy proceeding under
Chapter 11 of the Bankruptcy Code. Prior to joining Rolling Pin's predecessor
(Gaylord Companies, Inc.) to re-organize the company out of bankruptcy, he spent
the first 13 years of his career in the managed funds and hedge funds industry,
most recently as the head of ABN AMRO Chicago Corporation's Managed Funds
Department and as the director of managed futures and hedge funds at Prudential
Securities, Inc. before that. Mr. Dukoff has a Bachelor of Business
Administration with a concentration in banking, finance and investment from
Hofstra University, Hempstead, New York.
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.
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<PAGE>
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 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 $82,667 -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 $333,534 in 1999, and $287,700 in
1998.
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<PAGE>
OPTION GRANTS DURING THE YEARS
ENDED NOVEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
----------------------------------------------------------------------------
NUMBER OF
SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN
GRANTED FISCAL YEAR
----------------------- ----------------------- EXERCISE EXPIRATION
NAME 1998 1999 1998 1999 PRICE($/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
1999 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
1999 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.
Erich Fischer was employed as our vice president of marketing for a term of
two years. Mr. Fischer's employment will automatically be extended for
additional two year periods unless he is terminated according to the terms of
his employment agreement. Mr. Fischer will have a base salary in 1999 of $48,000
per year. The following year his salary shall increase by 10%. Subsequent
increases in Mr. Fischer'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. Fischer 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. Fischer 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 1999 of $72,000
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<PAGE>
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 a the vice president 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 1999 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.
Greg E. Dukoff is to be employed as president of Jamberry Lake Digital
Media, Inc. for a term of three years. Mr. Dukoff's employment will
automatically be extended for additional one year periods unless he is
terminated according to the terms of his employment agreement. Mr. Dukoff will
have a base salary in 1999 of $120,000 per year. In any renewal period, his
salary shall increase no less than 15%. Mr. Dukoff is eligible for a minimum
cash bonus of $30,000 in any fiscal year that the gross revenues of Jamberry
exceed $2.5 million. The agreement also grants Mr. Dukoff certain stock options.
33
<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.
34
<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.
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, Greg E. Dukoff, one of our director-nominees 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 Media, Inc. In our agreement to
acquire Jamberry Lakes 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 are
also required to make a monthly capital contribution to Jamberry Lakes Media,
Inc. of $100,000 from August 15, 1999 until we close this public offering. At
the date of this prospectus we have paid $360,000 to Jamberry under this
agreement. Even though we are in arrears $240,000 in our payments to Jamberry,
we are not considered to be in default of the acquisition agreement with
Jamberry. With each payment of $100,000, 10% of Jamberry's shares are being
placed in escrow for our benefit. If we do not close this public offering, we
are entitled to receive 1% of the issued and outstanding stock of Jamberry for
each $20,000 that we have paid to Jamberry under this agreement.
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;
35
<PAGE>
- 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%
Erich Fischer..................................... 15,000 .35% .24%
Lee Watson........................................ 33,333 0.78% .54%
William P. Jones.................................. 166,667 3.9% 2.7%
Richard W. Weachter............................... -0- -0- -0-
Max Herzog........................................ 408,000 9.6% 6.5%
SchlobPlatz 1
D-83684
Tegerrsee, Germany
All directors and executive officers as a group
(5) persons).................................... 3,480,002 81.7% 55.6%
</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 be established from
time to time by our board of directors. As of February 22, 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
36
<PAGE>
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.
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.
37
<PAGE>
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 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.
38
<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.
39
<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,
40
<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 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.
41
<PAGE>
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, 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, 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, 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.
42
<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.............. 2
Statements of Operations for the years ended
November 30, 1999 and 1998.............................. 3
Statements of Changes in Stockholders' Equity for the
years ended
November 30, 1999 and 1998.............................. 4
Statements of Cash Flows for the years ended
November 30, 1999 and 1998.............................. 5
Notes to Financial Statements............................... 6-12
</TABLE>
F-2
<PAGE>
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 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 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.
Boca Raton, Florida
January 21, 2000
F-3
<PAGE>
COLORSMART.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ 408
Accounts receivable....................................... -- 10,910
Inventories............................................... -- 15,500
Prepaid expenses.......................................... 31,000 --
----------- ---------
Total current assets.................................... 31,000 26,818
----------- ---------
Property and equipment, net:................................ 350,683 268,729
----------- ---------
Other assets:
Deposits and other........................................ 10,730 3,875
Deferred acquisition costs................................ 566,237 --
----------- ---------
Total other assets...................................... 576,967 3,875
----------- ---------
Total assets............................................ $ 958,650 $ 299,422
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 69,425 $ 3,000
Checks outstanding in excess of bank balance.............. 25,859 8,410
Accrued expenses.......................................... 4,198 12,630
Current maturities of notes payable....................... 103,298 3,489
Current maturities of capital leases...................... 15,456 7,566
Note payable, stockholder/officer......................... 20,091 78,005
----------- ---------
Total current liabilities............................... 238,327 113,100
----------- ---------
Note payable, net of current portion...................... 14,744 10,174
Capital lease obligations, net of current portion......... 60,291 35,430
----------- ---------
Total long term liabilities............................. 75,035 45,604
----------- ---------
Stockholders' equity:
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 --
Common stock, $.001 par value; authorized 24,000,000
shares; 4,007,112 and 3,328,583 shares issued and
outstanding in 1999 and 1998, respectively.............. 4,007 3,329
Additional paid-in capital................................ 2,136,912 531,952
Accumulated deficit....................................... (1,495,915) (394,563)
----------- ---------
Total stockholders' equity.............................. 645,288 140,718
----------- ---------
Total liabilities and stockholders' equity.............. $ 958,650 $ 299,422
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
COLORSMART.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Net sales................................................... $ 57,617 $ 127,191
Costs of goods sold......................................... 40,469 63,886
--------- ---------
Gross profit................................................ 17,148 63,305
General and administrative expenses......................... 847,794 620,304
--------- ---------
Loss from operations........................................ (830,646) (556,999)
--------- ---------
Other income (expense):
Interest income........................................... -- 1,140
Interest expense.......................................... (20,706) (2,060)
--------- ---------
Total other expense..................................... (20,706) (920)
--------- ---------
Net loss.................................................... $(851,352) $(557,919)
========= =========
Net loss per share (basic and diluted)...................... $ (0.22) $ (0.19)
========= =========
Weighted average common shares outstanding.................. 3,944,709 3,099,253
========= =========
</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
SHARE 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
Common stock issued for services............. 250,000 250 -- -- 249,750 -- 250,000
Stock issuance costs......................... -- -- -- -- (53,595) -- (53,595)
Net loss--1998 (as restated)................. -- -- -- -- -- (557,919) (557,919)
--------- ------ ------- --- ---------- ----------- ----------
Balance, November 30, 1998 (as restated)..... 3,578,583 3,579 -- -- 781,702 (644,563) 140,718
Issuance of common stock..................... 257,551 257 -- -- 1,099,743 -- 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............. 387,644 388 -- -- 266,565 -- 266,953
Stock issuance costs......................... -- -- -- -- (296,440) -- (296,440)
Net loss--November 30, 1999.................. -- -- -- -- -- (851,352) (851,352)
--------- ------ ------- --- ---------- ----------- ----------
Balance, November 30, 1999................... 4,257,112 $4,257 $33,610 $34 $2,136,912 $(1,495,915) $ 645,288
========= ====== ======= === ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
COLORSMART.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (851,352) $(557,919)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 90,541 55,367
Common stock issued for services........................ 183,286 250,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable..................................... 10,910 (10,910)
Inventory............................................... 15,500 (7,735)
Prepaid expenses........................................ (31,000) --
Deposits and other...................................... (7,760) (3,625)
Increase (decrease) in:
Accounts payable........................................ 66,425 (62,204)
Accrued expenses........................................ (8,432) 10,670
---------- ---------
Net cash used by operating activities....................... (531,882) (326,356)
---------- ---------
Cash flows from investing activities:
Purchase of property and equipment...................... (113,716) (86,778)
Deferred acquisition costs.............................. (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
Issuance of stock, net.................................. 924,727 304,625
Issuance of preferred stock, net........................ 214,575 --
Repayment of capital leases............................. (8,043) (587)
Proceeds from capital leases............................ 3,020 --
Repayment of note payable............................... (15,721) (2,940)
Proceeds from notes payable............................. 100,000 --
Increase (decrease) in Note Payable,
stockholders'/officer................................. (57,914) 70,505
---------- ---------
Net cash provided by financing activities................... 1,178,093 380,013
---------- ---------
Net decrease in cash........................................ (408) (33,121)
Cash at beginning of period................................. 408 33,529
---------- ---------
Cash at end of period....................................... $ -- $ 408
========== =========
</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 companies in the digital printing or 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.
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
could 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 ten 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.
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 3--MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As shown in the accompanying financial statements, the Company incurred net
losses of $851,352 and $557,919 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>
Depreciation expense for the years ended November 30, 1999 and 1998 was
$90,541 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>
F-9
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 a 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>
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 it's 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.
F-10
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LEASE COMMITMENTS (CONTINUED)
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 Company also issued 33,334 shares of common stock
in an acquisition and 387,644 shares for services. The total amount obtained
from the issuance of these common shares was $924,727, net of $258,940 cost of
issuance.
During the year ended November 30, 1998, the Company issued 836,295 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.
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.
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 as
on December 28, 1998. This resulted in a reduction in the number of shares of
common stock.
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.
F-11
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
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.......... $1,409,271
Applicable effective tax rate............................... 38%
----------
535,523
----------
Valuation allowance......................................... $ (535,523)
----------
Net deferred tax asset...................................... $ --
==========
</TABLE>
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current..................................................... $ -- $ --
Deferred.................................................... -- --
------ ------
$ -- $ --
====== ======
</TABLE>
The Company has net operating loss carryovers of $851,352 and $557,919,
which expire in 2014 and 2013, respectively.
F-12
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.................... 387,644 250,000
======== ========
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 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 purchase 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 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
F-13
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACQUISITIONS (CONTINUED)
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 $775,000 in cash and issue 200,000 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.
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--DEFERRED ACQUISITION COSTS
The company has advanced $566,237 to Stonehouse Graphics, Jamberry Lake 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.
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 250,000 shares to its officers 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 additional common stock and paid in capital
by $250,000, and increase the net loss by $250,000.
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
F-14
<PAGE>
COLORSMART.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--STOCK OPTION PLAN (CONTINUED)
November 30, 1999 carry exercise prices equal to that of the fair 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 1999 net loss would have 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..................... $ -- $ --
Granted.............................................. 400,000 1.00
Exercised............................................ -- --
Forfeited............................................ -- --
-------- -----
Outstanding at November 30, 1999..................... $400,000 $1.00
======== =====
</TABLE>
F-15
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-16
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998........... 2
Statements of Operations for the Years Ended December 31,
1999 and 1998........................................... 3
Statements of Changes in Stockholder's Deficit for the
Years Ended December 31, 1999 and 1998.................. 4
Statements of Cash Flows for the Years Ended December 31,
1999 and 1998........................................... 5
Notes to Financial Statements............................... 6-8
</TABLE>
F-17
<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, P.A.
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.
Boca Raton, Florida
January 26, 2000
F-18
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 276 $ 3,942
Accounts receivable, net of allowance of $3,383 and
$1,520.................................................. 58,530 71,614
Inventories............................................... 8,000 8,000
----------- -----------
Total current assets.................................... 66,806 83,556
----------- -----------
Property and equipment, net................................. 198,307 287,258
----------- -----------
Other assets:
Note receivable........................................... -- 12,538
Security deposits......................................... 6,127 3,977
----------- -----------
Total other assets...................................... 6,127 16,515
----------- -----------
Total assets............................................ $ 271,240 $ 387,329
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 147,319 $ 138,200
Obligations under capital leases.......................... 135,454 107,548
Current maturities of long-term debt...................... -- 4,538
Note payable.............................................. 14,200 --
Related party notes payable............................... 25,000 --
----------- -----------
Total current liabilities............................... 321,973 250,286
----------- -----------
Long-term liabilities:
Obligations under capital leases.......................... 179,788 278,618
Note payable.............................................. -- 5,247
----------- -----------
Total long term liabilities............................. 179,788 283,865
----------- -----------
Stockholder's deficit:
Common stock, $1.00 par value; 7,000 shares authorized;
1,000 shares issued and outstanding..................... 1,000 1,000
Additional paid-in capital................................ 1,960,009 1,854,050
Accumulated deficit....................................... (2,191,530) (2,001,872)
----------- -----------
Total stockholder's deficit............................. (230,521) (146,822)
----------- -----------
Total liabilities and stockholder's deficit............. $ 271,240 $ 387,329
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales................................................... $ 563,717 $ 608,891
Costs of goods sold......................................... 376,807 454,976
--------- ---------
Gross profit................................................ 186,910 153,915
--------- ---------
General and administrative expenses......................... 354,311 484,325
Loss from operations........................................ (167,401) (330,410)
--------- ---------
Other income (expense):
Interest income........................................... 1,117 351
Interest expense.......................................... (14,927) (24,521)
Loss on disposal of equipment............................. (8,447) --
--------- ---------
Total other expense..................................... (22,257) (24,170)
Loss before income taxes.................................... (189,658) (354,580)
Provision for income taxes.................................. -- --
--------- ---------
Net loss.................................................... $(189,658) $(354,580)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-20
<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)
===== ====== ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(189,658) $(354,580)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 101,504 152,097
Net loss on disposal of fixed assets.................... 8,447 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable..................................... 13,084 66,407
Notes receivable........................................ 12,538 (8,980)
Security deposits....................................... (2,150) (924)
Increase (decrease) in:
Accounts payable........................................ 9,119 101,695
--------- ---------
Net cash used by operating activities....................... (47,116) (44,285)
--------- ---------
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
Repayment of capital leases............................... (70,924) (103,809)
Repayment of long-term debt............................... (15,585) (5,007)
Proceeds from note payable................................ 5,800 --
Proceeds from related party note payable.................. 25,000 --
--------- ---------
Net cash provided by financing activities:.................. 50,250 44,056
--------- ---------
Net decrease in cash........................................ (3,666) (3,190)
Cash at beginning of year................................... 3,942 7,132
--------- ---------
Cash at end of year......................................... $ 276 $ 3,942
========= =========
</TABLE>
See accompanying notes to financial statements
F-22
<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.
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.
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>
F-23
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT (CONTINUED)
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.
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
F-24
<PAGE>
1199 MAC, INC.
D/B/A MAGNUM DIGITAL SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
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.
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 200,000 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-25
<PAGE>
ADVERTISING THAT WORKS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-26
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998............. 2
Statements of Operations for the years ended December 31,
1999 and 1998............................................. 3
Statements of Changes in Stockholder's Equity for the years
ended
December 31, 1999 and 1998................................ 4
Statements of Cash Flows for the years ended December 31,
1999 and 1998............................................. 5
Notes to Financial Statements............................... 6-7
</TABLE>
F-27
<PAGE>
DASZKAL BOLTON MANELA DEVLIN & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
2401 N.W. BOCA RATON BOULEVARD, SUITE 100
BOCA RATON, FLORIDA33431
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, P.A.
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.
Boca Raton, Florida
January 14, 2000
F-28
<PAGE>
ADVERTISING THAT WORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,605 $ 8,384
Accounts receivable, net of allowance for doubtful
accounts of $7,431 and $0............................... 64,722 65,270
Inventories............................................... 50,054 47,085
-------- --------
Total current assets.................................... 116,381 120,739
-------- --------
Property and equipment, net................................. 26,760 25,357
-------- --------
Total assets............................................ $143,141 $146,096
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 62,104 $ 61,138
Due to stockholder........................................ 7,127 44,962
-------- --------
Total current liabilities............................... 69,231 106,100
-------- --------
Stockholder's equity:
Common stock, no par value; 100,000 shares authorized; 500
shares issued and outstanding........................... 15,574 15,574
Retained earnings......................................... 58,336 24,422
-------- --------
Total stockholder's equity.............................. 73,910 39,996
-------- --------
Total liabilities and stockholder's equity.............. $143,141 $146,096
======== ========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
ADVERTISING THAT WORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales................................................... $751,480 $967,275
Costs of goods sold......................................... 387,799 594,211
-------- --------
Gross profit................................................ 363,681 373,064
-------- --------
General and administrative expenses......................... 331,637 390,438
Income (loss) from operations............................... 32,044 (17,374)
-------- --------
Other income (expense):
Interest Income........................................... -- 111
Miscellaneous income...................................... 4,527 5,547
Interest expense.......................................... (2,657) (411)
-------- --------
Total other income (expense)............................ 1,870 5,247
-------- --------
Net income (loss)........................................... $ 33,914 $(12,127)
======== ========
</TABLE>
See accompanying notes to financial statements.
F-30
<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
=== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
ADVERTISING THAT WORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ 33,914 $(12,127)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 11,586 17,513
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable..................................... 548 79,777
Inventory............................................... (2,969) (47,085)
Increase (decrease) in:
Accounts payable........................................ 966 11,868
-------- --------
Net cash provided (used) by operating activities:........... 44,045 49,946
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (12,989) (36,348)
-------- --------
Cash flows from financing activities:
Due to stockholder--proceeds.............................. 20,942 --
Due to stockholder--repayments............................ (58,777) (14,445)
-------- --------
Net cash provided (used) by financing activities............ (37,835) (14,445)
-------- --------
Net cash increase (decrease)................................ (6,779) (847)
-------- --------
Cash, beginning of period................................... 8,384 9,231
-------- --------
Cash, end of period......................................... $ 1,605 $ 8,384
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 2,657 $ 411
======== ========
</TABLE>
See accompanying notes to financial statements.
F-32
<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.
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.
F-33
<PAGE>
ADVERTISING THAT WORKS, INC.
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.................................. $ 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-34
<PAGE>
DISPLAY ARTS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
F-35
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998........... 2
Statements of Operations for the years ended December 31,
1999 and 1998........................................... 3
Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1999 and 1998.......... 4
Statements of Cash Flows for the years ended December 31,
1999 and 1998........................................... 5
Notes to Financial Statements............................... 6-10
</TABLE>
F-36
<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, P.A.
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.
Boca Raton, Florida
January 21, 2000
F-37
<PAGE>
DISPLAY ARTS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ -- $ 25,139
Accounts receivable, less allowance of
$52,900 and $31,900 in 1999 and 1998.................... 144,324 249,728
Inventories............................................... 19,385 19,385
--------- --------
Total current assets.................................... 163,709 294,252
--------- --------
Property and equipment, net................................. 186,038 243,276
--------- --------
Other assets:
Security deposits......................................... 18,295 15,414
Deferred income taxes..................................... 20,031 20,031
--------- --------
Total other assets...................................... 38,326 35,445
--------- --------
Total assets............................................ $ 388,073 $572,973
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Due to shareholder........................................ $ 267,209 $187,542
Due to customer........................................... 11,000 --
Cash overdraft............................................ 18,801 --
Obligations under capital leases.......................... 5,767 55,495
Notes payable............................................. 40,802 27,621
Line of credit............................................ -- 31,774
Accounts payable.......................................... 141,463 82,738
Accrued expenses.......................................... 11,185 3,237
--------- --------
Total current liabilities............................... 496,227 388,407
--------- --------
Long-term liabilities:
Obligations under capital leases.......................... 6,804 813
Notes payable............................................. 111,318 128,334
Deferred rent............................................. 4,533 7,397
--------- --------
Total long term liabilities............................. 122,655 136,544
--------- --------
Stockholders' equity (deficit):
Common stock, $.10 par value; 100 shares
authorized, issued and outstanding...................... 10 10
Additional paid-in capital................................ 990 990
Retained earnings (deficit)............................... (231,809) 47,022
--------- --------
Total stockholders' equity (deficit).................... (230,809) 48,022
--------- --------
Total liabilities and stockholders' equity (deficit).... $ 388,073 $572,973
========= ========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
DISPLAY ARTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales................................................... $1,494,278 $1,660,753
Costs of goods sold......................................... 833,902 812,563
---------- ----------
Gross profit................................................ 660,376 848,190
General and administrative expenses......................... 922,181 770,986
---------- ----------
Income (loss) from operations............................... (261,805) 77,204
---------- ----------
Other income (expense):
Miscellaneous income...................................... 857 4,764
Interest expense.......................................... (17,883) (25,635)
Loss on disposal of equipment............................. -- --
---------- ----------
Total other expense..................................... (17,026) (20,871)
Income (loss) before income taxes........................... (278,831) 56,333
Provision (benefit) for income taxes........................ -- 26,408
---------- ----------
Net income (loss)........................................... $ (278,831) $ 29,925
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-39
<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)
=== === ==== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
DISPLAY ARTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(278,831) $ 29,925
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization........................... 78,896 79,303
Deferred income taxes................................... -- 26,408
Changes in assets and liabilities:
(Increase) decrease in:
Inventory............................................... -- (910)
Accounts receivable..................................... 105,404 (4,657)
Security deposits....................................... (2,881) (9,339)
Increase (decrease) in:
Accounts payable........................................ 58,725 35,303
Accrued expenses........................................ 7,948 (13,145)
Due to customer......................................... 11,000
Deferred rent........................................... (2,864) (2,864)
--------- --------
Net cash provided (used) by operating activities............ (22,603) 140,024
--------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (10,703) (25,983)
--------- --------
Cash flows from financing activities:
Due to shareholder........................................ 79,667 9,007
Cash overdraft............................................ 18,801 --
Repayment of line of credit............................... (31,774) (16,564)
Repayment of capital leases............................... (56,585) (56,804)
Proceeds from capital leases.............................. 1,893 --
Repayment of notes payable................................ (35,985) (24,963)
Proceeds from notes payable............................... 32,150 --
--------- --------
Net cash provided (used) by financing activities:........... 8,167 (89,324)
--------- --------
Net increase (decrease) in cash............................. (25,139) 24,717
--------- --------
Cash, beginning of period................................... 25,139 422
--------- --------
Cash, end of period......................................... $ -- $ 25,139
========= ========
</TABLE>
See accompanying notes to financial statements.
F-41
<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.
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.
F-42
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
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.
F-43
<PAGE>
DISPLAY ARTS, INC.
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..................................................... 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>
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>
F-44
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
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 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.
F-45
<PAGE>
DISPLAY ARTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-46
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
AUGUST 24, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999
F-47
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheet as of December 31, 1999..................... 2
Statement of Operations for the period from August 24,
1999 (Inception)
through December 31, 1999............................... 3
Statement of Changes in Stockholders' Equity for the
period from
August 24, 1999 (Inception) through December 31, 1999... 4
Statement of Cash Flows for the period from August 24,
1999 (Inception)
through December 31, 1999............................... 5
Notes to Financial Statements............................... 6-8
</TABLE>
F-48
<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, P.A.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Jamberry Lake Digital Media, Inc.
We have audited the accompanying balance sheet of Jamberry Lake Digital
Media, Inc., (a development stage company) as of December 31, 1999, and the
related statement of operations, changes in stockholders' equity and cash flows
for the period then ended, from August 24, 1999 (Inception) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Jamberry Lake Digital
Media, Inc., as of December 31, 1999, and the results of its operations and its
cash flows for the period from August 24, 1999 (Inception) to December 31, 1999,
in conformity with generally accepted accounting principles.
/S/ DASZKAL BOLTON MANELA DEVLIN & CO.
Boca Raton, Florida
February 7, 2000
F-49
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 33,658
Accounts receivable....................................... 8,063
--------
Total current assets.................................... 41,721
--------
Property and equipment, net................................. 128,230
--------
Other assets:
Deposits.................................................. 2,350
--------
Total assets............................................ $172,301
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,955
Capital lease payable..................................... 2,491
Due to officers........................................... 8,519
Accrued expenses.......................................... 17,548
--------
Total current liabilities............................... 36,513
--------
Capital lease payable, net of current portion............... 4,581
--------
Stockholders' equity (deficit):
Common stock, $0.01 par value; 100 shares authorized
issued and outstanding.................................. 10
Additional paid-in capital................................ 360,000
Deficit accumulated during the development stage.......... (228,803)
--------
Total stockholders' equity.............................. 131,207
--------
Total liabilities and stockholders' equity.............. $172,301
========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
AUGUST 24, 1999
(INCEPTION)
THROUGH
DECEMBER 31, 1999
-----------------
<S> <C>
Sales....................................................... $ 8,063
Cost of sales............................................... --
---------
Gross profit................................................ 8,063
Selling, general and administrative expenses................ 236,563
Interest expense............................................ 303
---------
Net loss.................................................... $(228,803)
=========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT
------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
-------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, August 24, 1999...................... -- $ -- $ -- $ -- $ --
Common stock issued........................... 100 10 -- -- 10
Contribution to capital....................... -- -- 360,000 -- 360,000
Net loss--December 31, 1999................... -- -- -- (228,803) (228,803)
--- ------ -------- --------- --------
Balance, December 31, 1999.................... 100 $ 10 $360,000 $(228,803) $131,207
=== ====== ======== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
AUGUST 24, 1999
(INCEPTION) THROUGH
DECEMBER 31, 1999
-------------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(228,803)
Adjustments to reconcile net loss to net cash used by
operating activities:
(Increase) decrease
Accounts receivable..................................... (8,063)
Deposits................................................ (2,350)
Increase (decrease) in:
Accounts payable........................................ 7,955
Accrued expenses........................................ 17,548
---------
Net cash used by operating activities....................... (213,713)
---------
Cash flows from investing activities:
Purchase of property and equipment........................ (121,158)
---------
Cash flows from financing activities:
Issuance of common stock.................................. 10
Contributions to capital.................................. 360,000
Proceeds from capital leases.............................. 1,428
Payments of capital leases................................ (1,428)
Increase in due to officers............................... 8,519
---------
Net cash provided by financing activities................... 368,529
---------
Net increase in cash........................................ 33,658
Cash at beginning of period................................. --
---------
Cash at end of period....................................... $ 33,658
=========
Supplementary information:
Cash paid for:
Interest.................................................. $ 303
=========
Non-cash transactions affecting investing and financing
activities:
Equipment acquired under capital lease.................... $ 8,500
=========
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE RISK
Jamberry Lake Digital Media specializes in producing digital products and
services for use on the Internet, as well as traditional marketing and
promotional campaigns, revolving around CD-ROM and mini CD-ROM. They achieve
this by providing full motion video products and services including real estate
tours, digital catalogues, and e-mail kiosks. The company is located in Summit,
New Jersey and was formed in August of 1999.
The Company has made no significant product sales to date. Since its
inception, the Company has been dependent upon the receipt of capital investment
or other financing to fund its continuing activities. In addition to the normal
risks associated with a new business venture, there can be no assurance that the
Company's product development will be successfully completed or that it will be
a commercial success. Further, the Company is dependent upon certain related
parties to provid e continued funding and capital resources. See Note 4.
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. As of December 31,
1999, the Company has no cash or cash equivalents.
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.
NOTE 3--INCOME TAXES
The Company has elected to capitalize the start up cost on their 1999 tax
return incurred during 1999 of $226,875. The start up cost will be amortized
over sixty (60) months in accordance with the internal revenue code. The
Company's evaluation of the tax benefit of its carry forward 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
--------
<S> <C>
Deferred tax asset:
Tax benefit of capitalized start-up costs................. $89,616
Less: valuation allowance................................. (89,616)
-------
Deferred tax asset.......................................... $ --
=======
</TABLE>
NOTE 4--CONTRACT FOR SALE OF COMMON STOCK & DEVELOPMENT STAGE RISK
The ability of the Company to continue as a going concern is dependent on
the Company being successfully acquired by Colorsmart.com, Inc. ("Colorsmart").
Colorsmart's ability to complete the acquisition and continue funding the
Company's operations is contingent upon the completion of Colorsmart's initial
public offering ("IPO").
F-54
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CONTRACT FOR SALE OF COMMON STOCK & DEVELOPMENT STAGE RISK (CONTINUED)
The Company has entered into a stock and asset purchase agreement with
Colorsmart. As consideration, upon the completion of the IPO, the shareholders
of the Company will receive 125,000 common shares of Colorsmart. As additional
consideration, Colorsmart has agreed to provide $1,000,000 in working capital to
the Company, payable in non-refundable monthly installments of $100,000.
Colorsmart has contributed $360,000 of capital to the Company since its
inception. This contributed capital is included in the balance sheet at
December 31, 1999 as additional paid-in capital. As of December 31, 1999,
Colorsmart is $240,000 in arrears in its monthly payments to the Company.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Equipment................................................... $100,436
Furniture and Fixtures...................................... 13,970
Software.................................................... 5,324
Equipment acquired under capital lease...................... 8,500
Less: accumulated depreciation.............................. --
--------
Property and equipment, net............................... $128,230
========
</TABLE>
Depreciation expense for the year ended December 31, 1999 was $--0-, since
the company had not begun operations as of December 31, 1999; therefore no
depreciation has been taken on property and equipment purchased during the year.
NOTE 6--RELATED PARTY
During the year an officer of the Company has advanced money to the Company
as needed. As of December 31, 1999 the Company owed this officer $8,519, and
this payable is due on demand.
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
--------
<S> <C>
Equipment................................................... $8,500
Less: accumulated amortization.............................. --
------
Total................................................... $8,500
======
</TABLE>
The Company leases its facility under an operating lease with a term of two
years, payable in monthly installments. Total lease expense for the year ended
December 31, 1999 was $12,588.
F-55
<PAGE>
JAMBERRY LAKE DIGITAL MEDIA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--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...................................................... $ 3,463 $28,200
2001...................................................... 3,463 23,500
2002...................................................... 1,731 --
------- -------
Total minimum lease payments.............................. 8,657 $51,700
------- =======
Less: amount representing interest........................ (1,585)
-------
Present value of net minimum lease payments............... 7,072
Less: current maturities.................................. (2,491)
-------
Long-term obligation.................................... $ 4,581
=======
</TABLE>
F-56
<PAGE>
STONEHOUSE GRAPHICS (PTY) LIMITED
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<S> <C>
/S/ SNYDERS & CO.
--------------------------------------------
SNYDERS & CO.
Chartered Accountants (South Africa)
</TABLE>
F-57
<PAGE>
STONEHOUSE GRAPHICS (PTY) LIMITED
FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1999 AND 1998
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- -----------------
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of February 28, 1999 and 1998 and
unaudited at November 31, 1999 and 1998................. 2
Statements of Operations for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 31, 1999 and 1998.............................. 3
Statements of Changes in Stockholder's Equity for the
years ended February 28, 1999 and 1996 and unaudited for
the nine months ended November 31, 1999 and 1998........ 4
Statements of Cash Flows for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 31, 1999 and 1998.............................. 6
Notes to Financial Statements............................... 6-8
</TABLE>
F-58
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the members
STONEHOUSE GRAPHICS (PTY) LIMITED
We have audited the accompanying balance sheets of STONEHOUSE GRAPHICS
(PROPRIETARY) LIMITED as of 28 February 1999 and 1998, and the related
statements of operations, changes in shareholder's interest and cash flows for
the years then ended. These financial statements are the responsibility of the
company's director while 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 STONEHOUSE GRAPHICS
(PROPRIETARY) LIMITED as of February 28, 1999 and 1998, 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 practice.
<TABLE>
<S> <C>
/S/ SNYDERS & CO.
- -------------------------------------------
Snyders & Company
Registered Accountants and Auditors
Chartered Accountants (SA)
Boksburg
9/2/00.
</TABLE>
F-59
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ 788 980 74,125 34,608
Accounts receivable............................. 1,413,125 520,804 2,767,033 2,572,872
Inventories..................................... 457,515 135,800 307,515 376,000
--------- --------- --------- ---------
Total current assets.......................... 1,871,428 657,584 3,148,673 2,983,480
--------- --------- --------- ---------
Fixed Assets...................................... 5,256,426 803,887 5,087,415 5,356,269
--------- --------- --------- ---------
Total assets.................................. 7,127,854 1,461,471 8,236,088 8,339,749
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'S EQUITY
Current liabilities:
Accounts payable................................ 1,093,629 508,626 1,353,933 1,339,814
Bank overdraft.................................. 1,061,048 413,765 1,503,143 675,985
Short term portion of long term liability....... 828,195 157,506 820,500 180,000
Short term loan.................................
Receiver of Revenue - Vat payable............... 111,911 55,503
Receiver of Revenue - Income tax................ 20,272 202,272 4,406 23,006
--------- --------- --------- ---------
Total current liabilities..................... 3,003,144 1,100,169 3,793,893 2,274,308
--------- --------- --------- ---------
Member's interest
Member's contribution........................... 100 100 100 100
(Accumulated loss/Retained earnings............. (580,198) (576,306) (289,831) 33,423
--------- --------- --------- ---------
Total Member's Interest....................... (580,088) (576,206) (289,731) 33,523
--------- --------- --------- ---------
Loan from member.................................. 306,125 372,747 126,167 636,451
Long Term Liability............................... 4,398,683 564,761 4,605,759 5,395,467
--------- --------- --------- ---------
Total liabilities and members' interest....... 7,127,854 1,461,471 8,236,088 8,339,749
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-60
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED,
FEBRUARY 28 NOVEMBER 30
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales....................................... 10,978,829 4,563,261 12,872,047 8,201,317
Costs of goods sold............................. 4,133,527 1,982,586 5,679,998 3,635,007
---------- --------- ---------- ---------
Gross profit.................................... 6,845,302 2,580,675 7,192,049 4,566,310
---------- --------- ---------- ---------
General and administrative expenses............. 7,864,368 3,541,599 6,203,948 3,978,897
Income (loss) from operations................... (1,019,000) (960,924) 988,101 587,413
---------- --------- ---------- ---------
Other income (expenses)
Interest income...............................
Miscellaneous income.......................... 111,964 61,725 133,483 64,495
Interest expense.............................. 903,210 298,541 (831,217) (642,179)
---------- --------- ---------- ---------
Total other income (expenses)............... 1,015,174 360,266 (697,734) (577,684)
---------- --------- ---------- ---------
Net income (loss) before tax.................... (3,892) (600,658) 290,367 9,729
---------- --------- ---------- ---------
Tax............................................. -- -- -- --
Net profit (loss) for the year.................. (3,892) (600,658) 290,367 9,729
========== ========= ========== =========
</TABLE>
See accompanying notes to the financial statements.
F-61
<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, March 1, 1998...................................... 100 24,352 24,452
Member's contributions...................................... -- -- --
Net loss--1998.............................................. -- (600,658) (600,658)
----- -------- --------
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)
UNAUDITED:
Net income, November 30, 1999............................... -- 290,367 290,367
----- -------- --------
Balance, November 30, 1999.................................. 100 (289,831) (289,731)
===== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-62
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30,
FEBRUARY 26, (UNAUDITED)
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax.................. (3,892) (600,602) 290,387 9,729
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation............................... 1,058,403 257,900 793,802 635,042
Goodwill written off....................... 50,000 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable........................ (892,321) 109,984 (1,353,908) (2,052,068)
Inventory.................................. (321,715) 3,593 150,000 (240,200)
Increase (decrease) in:
Accounts payable........................... 585,003 181,949 260,304 831,188
---------- ---------- ---------- ----------
Net cash provided (used) by operating
activities 475,478 (47,176) 140,565 (816,309)
Cash flows from investing activities:
Purchase of fixed assets..................... (5,630,910) (203,463) (474,510) (4,529,187)
Return on sale of fixed assets............... 69,968 198,766 -- --
---------- ---------- ---------- ----------
Net cash used by investing activities (5,560,942) (4,697) (474,510) (4,529,187)
Cash flows from financing activities:
Acquisition of Long term loan................ 4,504,611 (66,884) (27,118) 5,094,410
Acquisition of Short term loan............... (66,622) (76,159) (7,695) 22,494
Bank overdraft............................... 647,283 195,896 442,095 262,220
---------- ---------- ---------- ----------
Net cash provided (used) by financing activates 5,085,272 52,853 407,282 5,379,124
---------- ---------- ---------- ----------
Net cash increase (decrease)................... (192) 980 (73,337) 33,628
Cash, beginning of period...................... 980 -- 788 980
---------- ---------- ---------- ----------
Cash, and of period............................ 788 980 74,125 34,608
========== ========== ========== ==========
Supplemental disclosure of cash flow
information
Cash paid during the year for interest....... 903,210 298,541 677,408 223,906
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-63
<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.
REVENUES 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.
UNAUDITED INTERIM INFORMATION
The information presented as of November 30, 1999 and 1998, and for the nine
months periods ended November 30, 1999 and 1998, 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 November 30, 1999 and
1998, and the results of its operations and its cash flows for the nine months
ended November 30, 1999 and 1998.
F-64
<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>
1999 1998
--------- ---------
<S> <C> <C>
Furniture, fixtures and fittings....................... 114,832 66,197
Machinery.............................................. 6,118,676 727,885
Motor vehicle.......................................... 296,784 418,290
--------- ---------
Total fixed assets................................... 6,530,292 1,212,372
Less: accumulated depreciation......................... 1,398,886 458,485
--------- ---------
Fixed assets, net.................................... 5,131,426 753,887
========= =========
</TABLE>
Depreciation expense for the years ended February 28, 1999 and 1998 was R1
058 403 and R257 900 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 November 30,
1999 and 1998, the company owes the stockholder R126 167 and R636 451,
respectively. The note is due on demand and is currently non-interest bearing.
NOTE 6--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
</TABLE>
NOTE 7--LEASING CHARGES
Sundry leasing charges, being not material, are not capitalized.
F-65
<PAGE>
STONEHOUSE GRAPHICS (PTY) LTD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 8--LONG TERM LIABILITIES
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Secured................................................. 5,226,878 722,267
Secured in terms of installation 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 171 747, inclusive of
interest.
Less: Amounts payable within one year reflected under
current liabilities................................... 828,195 157,506
--------- -------
4,398,683 564,761
========= =======
</TABLE>
F-66
<PAGE>
H J HUGO AND ASSOCIATES
TOPCOPY CC
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-67
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of February 28, 1999 and 1998 and
unaudited at November 31, 1999 and 1998................... 2
Statements of Operations for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 31, 1999 and 1998................................ 3
Statements of Changes in Stockholder's Equity for the years
ended February 28, 1999 and 1998 and unaudited for the
nine months ended November 31, 1999 and 1998.............. 4
Statements of Cash Flows for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 31, 1999 and 1998................................ 5
Notes to Financial Statements............................... 6-8
</TABLE>
F-68
<PAGE>
RANSOME HOUSE, 5 CONSTRUCTION STREET,
CAPE TOWN 8001
P.O. Box 10116, CALEDON SQUARE, 7905
Tel: (021) 465 7701 FAX: (021) 461 2287
Cell: 082 458 6634
E-Mail: [email protected]
H J HUGO AND ASSOCIATES
- --------------------------------------------------------------------------------
CHARTERED ACCOUNTANTS (SOUTH AFRICA)
H J Hugo, B. COM. C.A. (S.A.)
INDEPENDENT AUDITOR'S REPORT
To the Members
TOPCOPY CC
Cape Town
We have audited the accompanying balance sheets of TOPCOPY CC as of
28 February, 1999 and 1998, 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, 1999 and 1998, 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.
<TABLE>
<S> <C>
/S/ H J HUGO & ASSOCIATES
- -------------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town
9/02/2000
- ----------------
Date
</TABLE>
F-69
<PAGE>
TOPCOPY CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash 232,814 84,753 64,000 148,000
Accounts receivable 139,570 114,519 302,000 160,000
Inventories 21,565 41,616 25,000 15,000
-------- -------- -------- --------
Total current assets 393,949 240,888 391,000 323,000
-------- -------- -------- --------
Fixed Assets 441,386 428,376 419,386 420,000
-------- -------- -------- --------
Total assets 835,335 669,264 810,386 743,000
======== ======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable 175,177 160,025 260,177 169,500
Bank overdraft 46,971
Short term portion of long term liability.......... 100,800 107,820
Short term loan....................................
Receivers of Revenue - Vat payable................. 9,900 8,903 18,900 9,300
Receiver of Revenue - Income tax...................
-------- -------- -------- --------
Total current liabilities........................ 285,877 323,719 280,077 178,800
-------- -------- -------- --------
Member's interest
Member's contribution.............................. 1,000 1,000 1,000 1,000
(Accumulated loss)/Retained earnings............... (151,088) (85,070) (59,798) (134,583)
-------- -------- -------- --------
Total Member's Interest.......................... (150,088) (84,070) (58,798) (133,583)
-------- -------- -------- --------
Loan from member 676,319 376,158 470,509 542,783
Long Term Liability.................................. 23,227 53,457 118,598 155,000
-------- -------- -------- --------
Total liabilities and members' interest.......... 835,335 669,264 810,386 743,000
======== ======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-70
<PAGE>
TOPCOPY CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales...................................... 2,506,408 2,108,080 2,341,170 1,581,060
Costs of goods sold............................ 1,722,615 894,659 1,079,295 670,994
---------- ---------- ---------- ----------
Gross profit................................... 783,793 1,213,421 1,261,875 910,066
---------- ---------- ---------- ----------
General and administrative expenses............ 847,831 1,166,848 1,170,585 875,136
Income (loss) from operations.................. (64,038) 46,573 91,290 34,930
Other income (expenses)
Interest income.............................. 18,572 9,404 7,053
Miscellaneous Income......................... 17,853 13,390
Interest expense............................. (20,552) (19,883) (14,912)
---------- ---------- ---------- ----------
Total other income (expenses).............. (1,980) 7,374 -- 5,531
---------- ---------- ---------- ----------
Net income (loss) before tax................... (66,018) 53,947 91,290 40,460
---------- ---------- ---------- ----------
Tax............................................ -- -- --
Net profit (loss) for the year................. (66,018) 53,947 91,290 40,460
========== ========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-71
<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, March 1, 1998...................................... 1,000 (139,017) 1,000
Member's contributions...................................... -- -- --
Net Income - 1998........................................... -- 53,947 53,947
----- -------- --------
Balance, February 28, 1998.................................. 1,000 (85,070) (84,070)
Net loss - 1999............................................. -- (66,018) (66,018)
----- -------- --------
Balance, February 28, 1999.................................. 1,000 (151,087) (150,087)
Unaudited:
Net income, November 30, 1999............................... -- 91,290 91,290
----- -------- --------
Balance, November 30, 1999.................................. 1,000 (59,797) (58,797)
===== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-72
<PAGE>
TOPCOPY CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30
FEBRUARY 28, (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax........................ (66,018) 53,947 91,290 40,460
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 160,199 173,523 143,519 130,995
Changes in assets and liabilities: (Increase)
decrease in:
Accounts receivable.............................. (25,051) (26,055) (162,430) (63,247)
Inventory........................................ 20,051 -- (3,435) (26,616)
Increase (decrease) in:
Accounts payable................................. (16,149) (31,554) (5,800) 97,948
-------- -------- -------- --------
Net cash provided (used) by operating activities..... 73,032 169,861 63,144 179,540
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets........................... (140,911) (143,521) (121,519) (337,490)
Return on sale of fixed assets..................... -- 17,853 -- --
Net cash used by investing activities................ (140,911) (125,668) (121,519) (337,490)
Cash flows from financing activities:
Acquisition of Long term loan...................... 269,931 (21,580) (110,439) 268,168
Acquisition of Short term loan..................... -- -- -- --
Member's contributions............................. -- -- -- --
-------- -------- -------- --------
Net cash provided (used) by financing activities..... 269,931 (21,580) (110,439) 268,168
-------- -------- -------- --------
Net cash increase (decrease)......................... 202,052 22,613 (168,814) 110,218
-------- -------- -------- --------
Cash, beginning of period............................ 37,782 15,619 232,814 37,782
-------- -------- -------- --------
Cash, end of period.................................. 232,814 38,232 64,000 148,000
-------- -------- -------- --------
Supplemental disclosure of cash flow information
Cash paid during the year for interest............. 20,552 19,883 40,414 14,912
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-73
<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.
UNAUDITED INTERIM INFORMATION
The information presented as of November 30, 1999 and 1998, and for the nine
month periods ended November 30, 1999 and 1998, 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 Close Corporation's financial position as of November 30,
1999 and 1998, and the results of its operations and its cash flows for the nine
months ended November 30, 1999 and 1998.
F-74
<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>
1999 1998
-------- --------
<S> <C> <C>
Machinery................................................. 554,112 381,102
Motor vehicle............................................. 220,797 220,797
------- -------
Total fixed assets.................................... 774,909 601,899
Less: accumulated depreciation............................ 333,623 173,523
------- -------
Fixed assets, net..................................... 441,386 428,376
======= =======
</TABLE>
Depreciation expense for the years ended February 28, 1999 and 1998 was R160
199 and R173 523 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
November 30, 1998 and 1997, the Close Corporation owes the stockholder R 642 491
and R 470 509, respectively. The note is due on demand and is currently
non-interest bearing.
F-75
<PAGE>
TOPCOPY CC
NOTES TO THE 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 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
</TABLE>
NOTE 7--LEASING CHARGES
Sundry leasing charges, being not material, are not capitalized.
NOTE 8--LONG TERM LIABILITIES
<TABLE>
<CAPTION>
1999 1999
-------- --------
<S> <C> <C>
Secured................................................... 124,027 161,277
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..................................... 100,800 107,820
------- -------
23,227 53,467
======= =======
</TABLE>
F-76
<PAGE>
Colorsmart.Com Inc. USA
537 Myatt Drive
Madison
Tennessee, 37115
USA
8/2/00
Dear Sir,
Audited statements: Stonehouse Graphics (Pty) Limited
We refer to the listings requirements of Colorsmart in the USA and to the
inclusion of the audited statements of Stonehouse Graphics for the years ended
28 February 1999 and 1998 and the unaudited statements for the periods ended 30
November 1999 and 1998. The statements were drafted in compliance with South
African GAAP recommendations, which are, in all material aspects, comparable to
USA GAAP requirements.
We consent to the use of the audited statements at 28 February 1999 and 1998
and to the unaudited statements at 30 November 1999 and 1998.
Yours sincerely,
/S/ SNYDERS & CO.
- -------------------------------------------
Snyders & Co.
Chartered accountants SA
F-77
<PAGE>
VIRTUAL COLOUR PRINTING CC
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-78
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements
Balance Sheets as of February 28, 1999 and 1998 and
unaudited at November 31, 1999 and 1998................. 2
Statements of Operations for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 31, 1999 and 1998.............................. 3
Statements of Changes in Members' Equity for the years
ended February 28, 1999 and 1998 and unaudited for the
nine months ended November 31, 1999 and 1998............ 4
Statements of Cash Flows for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 31, 1999 and 1998.............................. 5
Notes to Financial Statements............................... 8-9
</TABLE>
F-79
<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 28 February, 1999 and 1998, 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 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
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 28, 1999 and 1998, 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.
PRICEWATERHOUSECOOPERS INC.
- -------------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town
7-2-00
- ----------------------------
Date
F-80
<PAGE>
VIRTUAL COLOUR PRINTING CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
-------------------- ---------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash.............................................. -- 300 73,966 --
Accounts receivable............................... 680,382 474,194 561,725 577,288
Inventories....................................... 80,000 27,500 45,000 66,875
--------- ------- --------- ---------
Total current assets............................ 760,382 501,994 680,691 644,163
--------- ------- --------- ---------
Fixed Assets........................................ 376,538 16,700 318,736 382,151
--------- ------- --------- ---------
Loan to member...................................... -- -- 62,172 --
--------- ------- --------- ---------
Total assets.................................... 1,136,920 518,694 1,061,599 1,026,314
========= ======= ========= =========
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable.................................. 265,938 154,421 372,425 236,792
Bank overdraft.................................... 139,844 125,643 -- 132,744
Short term portion of long term liability......... 28,041 -- 21,268 28,041
Short term loan................................... 419,250 78,510 324,138 334,065
Receiver of Revenue--Vat payable.................. 66,828 33,464 86,568 50,146
Receiver of Revenue--Income tax................... 47,822 45,097 55,375 48,460
--------- ------- --------- ---------
Total current liabilities....................... 967,723 437,135 859,774 828,248
--------- ------- --------- ---------
Member's Interest
Members' contributions............................ 400 400 400 100
(Accumulated loss)/
Retained earnings................................. (19,391) 81,159 7,673 5,745
--------- ------- --------- ---------
Total members' (deficit/interest)............... (18,991) 81,559 8,073 5,845
--------- ------- --------- ---------
Long Term Liability................................. 188,188 -- 193,752 192,221
--------- ------- --------- ---------
Total liabilities and members' interest......... 1,136,920 518,694 1,061,599 1,026,314
========= ======= ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-81
<PAGE>
VIRTUAL COLOUR PRINTING CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales......................................... 3,026,048 1,096,519 2,615,475 2,269,537
Costs of goods sold............................... 1,507,108 534,282 1,189,456 1,130,331
Gross profit...................................... 1,518,941 562,237 1,426,019 1,139,206
General and administrative expenses............... 1,620,810 432,830 1,342,177 1,215,610
Income (loss) from operations..................... (101,869) 129,407 83,842 (76,404)
Other income (expenses)
Interest income................................. 449 241 621 337
Miscellaneous income............................ 23,122 -- -- 17,342
Interest expense................................ 22,252 3,392 57,399 16,689
--------- --------- --------- ---------
Total other income (expenses)................. 1,319 (3,151) (56,778) 990
--------- --------- --------- ---------
Net income (loss) before tax...................... (100,550) 126,256 27,064 (75,414)
Tax............................................... -- 45,097 -- --
Net income (loss) for the year.................... (100,550) 81,159 27,064 (75,414)
</TABLE>
See accompanying notes to the financial statements.
F-82
<PAGE>
VIRTUAL COLOUR PRINTING 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 -- --
Members' contributions...................................... -- -- --
Net income - 1998........................................... -- 81,159 81,159
--- -------- --------
Balance, February 28, 1998.................................. 400 81,159 81,159
Net loss - 1998............................................. -- (100,550) (100,550)
Balance, February 28, 1999.................................. 400 (19,391) (19,391)
Unaudited
Net income, November 30, 1999............................... -- 27,064 27,064
--- -------- --------
Balance, November 30, 1999.................................. 400 7,673 7,673
--- -------- --------
</TABLE>
See accompanying notes to the financial statements.
F-83
<PAGE>
VIRTUAL COLOUR PRINTING CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30,
FEBRUARY 28, (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax........................ (100,550) 81,159 27,064 (75,414)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 18,939 879 58,162 14,204
Changes in assets and liabilities; (increase)
decrease in:
Accounts receivable.............................. (206,188) (474,194) 118,657 (103,094)
Inventory........................................ (52,500) (27,500) 35,000 (39,375)
Increase (decrease) in:
Accounts payable................................. 147,606 232,982 133,780 99,238
-------- -------- -------- --------
Net cash provided (used) by operating activities..... (192,693) (186,674) 372,663 (104,441)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets........................... (378,777) (17,579) (360) (378,777)
Loan to member..................................... -- -- (62,172) --
Cash flows from financing activities:
Acquisition of long term loan...................... 216,228 -- -- 220,262
Acquisition of short term loan..................... 340,740 78,510 -- 255,855
Repayment of long term loan........................ -- -- (1,209) --
Repayment of short term loan....................... -- -- (95,112) --
Bank overdraft..................................... 14,501 125,343 (139,844) 7,401
Member's contributions............................. -- 400 -- --
-------- -------- -------- --------
Net cash provided (used) by financing activities..... 571,470 204,253 (236,165) 483,218
-------- -------- -------- --------
Net cash increase (decrease)......................... -- -- 73,966 --
-------- -------- -------- --------
Cash, beginning of period............................ -- -- -- --
-------- -------- -------- --------
Cash, end of period.................................. -- -- 73,966 --
======== ======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest............. 22,252 3,392 57,399 16,689
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-84
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO THE FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANISATION AND DESCRIPTION OF BUSINESS
Virtual Colour Printing CC (the "Close Corporation") specializes 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. There is no material
difference with United States of America and international accounting
principles.
COST 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 of products are recognized when products are
shipped.
INVENTORY
Inventory consists primarily of materials and work in progress, and is
stated on the lower of cost or market, with cost determined on the first-in,
first-out (FIFO) method. The value of work in progress includes debt 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.
UNAUDITED INTERIM INFORMATION
The information presented as of November 30, 1999 and 1998, and for the nine
month period ended November 30, 1999 and 1998, 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
F-85
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
present fairly the Close Corporation's financial position as of November 30,
1999 and 1998 and the results of its operations and its cash flows for the nine
months ended November 30, 1999 and 1998 and the results of its operations and
its cash flows for the nine months ended November 30, 1999 and 1998.
NOTE 3--FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Furniture, fixtures and fittings........................... 17,579 17,579
Machinery.................................................. 156,500 --
Motor vehicle.............................................. 222,277 --
------- ------
Total fixed assets..................................... 396,356 17,579
Less: accumulated depreciation............................. 19,818 879
------- ------
Fixed assets, net...................................... 376,538 16,700
</TABLE>
Depreciation expense for the years ended February 28, 1999 and 1998 was R18 939
and R879 respectively.
A motor vehicle with a book value of R211 163 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 Coloremart.com Inc. Colormart.com
Inc shall deliver the purchase price to the members at closing.
There are no other post balance sheet events that are material in the
appreciation of the financial statements.
NOTE 5--RELATED PARTY
A group close corporation has lent money interest free to the Close
Corporation as required. At February 28, 1999 and 1998, the Close Corporation
owes the group close corporation R419 250 and R78 510, respectively. No
repayment terms have been determined and the loan is currently non-interest
bearing.
NOTE 6--LONG TERM LIABILITY
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Secured by suspensive sale agreements over vehicles with a
book value of R222 278.................................... 188,188 --
Repayable in monthly instalments of R4 663 which include
interest and capital...................................... 216,229 --
Less: instalments payable within 12 months transferred to
current liabilities....................................... (28,041) --
</TABLE>
F-86
<PAGE>
VIRTUAL COLOUR PRINTING CC
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
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............................................ 6.2676
</TABLE>
NOTE 8--DEBTORS
The debtors are coded to the bank as security for bank overdraft purposes.
F-87
<PAGE>
VIRTUAL SUPPORT CC
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-88
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of February 28, 1999 and 1998 and
unaudited for November 30, 1999 and 1998................ 2
Statements of Operations for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 30, 1999 and 1998.............................. 3
Statements of Changes in Members' interest for the years
ended February 28, 1999 and 1998 and unaudited for the
nine months ended November 30, 1999 and 1998............ 4
Statements of Cash Flows for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 30, 1999 and 1998.............................. 5
Notes to Financial Statements............................... 6-7
</TABLE>
F-89
<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 28, 1999 and 1998, 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 audits 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
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 Support CC as of
February 28, 1999 and 1998, 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 Accounts (SA)
Cape Town, South Africa
7-2-00
- ----------------------------
Date
F-90
<PAGE>
VIRTUAL SUPPORT CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash..................................................... 199 272 24,587 236
Accounts receivable...................................... 279,999 50,461 211,911 165,224
Inventories.............................................. 454 19,288 22,635 5,165
------- ------ ------- -------
Total current assets................................. 280,649 70,021 259,133 170,625
------- ------ ------- -------
Equipment................................................ 1,605 5,667 41,235 2,605
------- ------ ------- -------
Loan to member........................................... 47,523 -- 63,822 13,753
------- ------ ------- -------
Total assets......................................... 329,777 75,688 364,190 186,983
------- ------ ------- -------
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable....................................... 298,483 44,743 115,270 163,213
Bank overdraft......................................... 9,721 -- -- 4,861
Short term portion of long term liability.............. -- -- 10,772 --
Receiver of Revenue - Income tax....................... 4,608 882 58,017 3,675
------- ------ ------- -------
Total current liabilities............................ 312,812 45,625 184,059 171,749
------- ------ ------- -------
Members' Interest
Members' contributions................................. 100 100 100 100
Retained earnings........................................ 16,965 9,946 149,988 15,134
------- ------ ------- -------
Total Members' Interest.............................. 16,965 10,046 150,088 15,234
Long Term Liability...................................... -- 20,017 30,043 --
------- ------ ------- -------
Total liabilities and members' interest.............. 329,777 75,688 364,190 186,983
======= ====== ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-91
<PAGE>
VIRTUAL SUPPORT CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net assets........................................ 1,890,027 1,049,858 2,112,754 1,417,520
Costs of goods sold............................... 1,684,071 889,052 1,661,068 1,263,053
--------- --------- --------- ---------
Gross profit...................................... 205,956 160,806 451,686 154,467
--------- --------- --------- ---------
General and administrative expenses............... 195,410 150,133 261,612 146,580
Income from operations............................ 10,546 10,673 190,074 7,907
--------- --------- --------- ---------
Other income (expenses)
Interest income................................. 489 196 552 367
Interest expense................................ 390 -- 178 293
--------- --------- --------- ---------
Total other income............................ 99 198 374 74
--------- --------- --------- ---------
Net income before tax............................. 10,645 10,871 190,448 7,981
--------- --------- --------- ---------
Tax............................................... 3,726 882 57,325 2,793
--------- --------- --------- ---------
Net income for the year........................... 6,919 9,989 139,123 5,188
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-92
<PAGE>
VIRTUAL SUPPORT CC
STATEMENTS OF CHANGES IN MEMBERS' INTEREST
(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 43 67
Members' contributions...................................... -- -- --
Net income--1998............................................ -- 9,989 9,989
--- ------- -------
Balance, February 28, 1998.................................. 100 9,946 10,046
Net income--1999............................................ -- 6,919 6,919
--- ------- -------
Balance, February 28, 1999.................................. 100 16,865 16,965
Unaudited:
Net income, November 30, 1999............................... -- 133,123 133,123
--- ------- -------
Balance, November 30, 1999.................................. 100 143,988 150,088
=== ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-93
<PAGE>
VIRTUAL SUPPORT CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income after tax.............................. 6,919 9,989 133,123 5,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 4,000 4,000 10,990 3,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable............................. (229,545) (50,461) 68,085 (114,773)
Inventory....................................... 18,844 (19,288) (22,181) 14,133
(Increase) decrease in:
Accounts payable................................ 257,466 47,915 (129,804) 121,263
--------- -------- -------- --------
Net cash provided (used) by operating activities.... 57,684 (7,845) 60,213 28,811
--------
Cash flows from investing activities
Purchase of fixed assets.......................... -- (12,000) (50,620) 62
Cash flows from financing activities:
Members' advances................................. (67,478) 20,017 (16,299) (33,770)
Suspensive rate agreement........................... -- -- 40,815 --
Bank overdraft.................................... 9,522 -- (9,522) 4,625
Members contributions............................. -- 100 -- --
--------- -------- -------- --------
Net cash provided (used) by financing activities.... (57,956) 20,117 14,994 (29,145)
--------- -------- -------- --------
Net cash increase (decrease)........................ (272) 272 24,587 (272)
--------- -------- -------- --------
Cash, beginning of period........................... 272 -- -- 272
--------- -------- -------- --------
Cash, end of period................................. -- 272 24,587 --
--------- -------- -------- --------
Supplemental disclosure of cash flow information
Cash paid during the year for interest............ 390 -- 7,886 293
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE>
VIRTUAL SUPPORT CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANISATION AND DESCRIPTIONS OF MEMBERS
Virtual Support CC (the "Close Corporation") specializes in computer systems
sales and support.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are presented on the historical costs basis and
incorporate the following principal accounting principles. There is no material
difference with United States of America and International accounting
principles.
CASH FOUNDATION
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 activated 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 conld differ from those estimates.
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products are
shipped.
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 National company
taxation and is taxed at a rate of 35% of taxable income up to 28 February 1999
and 30% thereafter.
UNAUDITED INTERIM INFORMATION
The information presented as of November 30, 1999 and 1998, and for the nine
month periods ended November 30, 1999 and 1998, 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 Close Corporation's financial position as of November 30,
1999 and 1998, and the results of its operations and its cash flows for the nine
months ended November 30, 1999 and 1998.
F-95
<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>
1999 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... 11,938 12,000
Total fixed assets
Less: accumulated depreciation.............................. 10,333 8,333
------ ------
Fixed assets, net......................................... 1,605 8,667
====== ======
</TABLE>
Depreciation expense for the years ended February 28, 1999 and 1998 was
R4,000 and R4,000 respectively. (Encumbered as per note 8.)
NOTE 4--ACQUISITIONS 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.
Colorsmart.com Inc. shall deliver the purchase price to the members at closing.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--LONG TERM LIABILITY
Suspensive sale agreements secured over fixed assets with a book value of
R37 146. Repayable in monthly installments of R1 650 which include interest and
capital.
NOTE 6--LOAN TO MEMBER
Interest free loan to a member to be repaid during the present financial
year.
NOTE 7--ACCOUNTS RECEIVABLE
The accounts receivable are ceded to the bank as security for bank overdraft
purposes.
NOTE 8--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............................................ 6.0134
28 February 1999............................................ 6.3281
31 May 1999................................................. 6.3000
31 August 1999.............................................. 6.1075
30 November 1999............................................ 6.2376
</TABLE>
F-96
<PAGE>
VIRTUAL COLOUR CC
FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND 1999
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-97
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements:
Balance Sheets as of February 28, 1999 and 1998 and
unaudited for November 30, 1999 and 1998................ 2
Statements of Operations for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 30, 1999 and 1998.............................. 3
Statements of Changes in Members' interest for the years
ended February 28, 1999 and 1998 and unaudited for the
nine months ended November 30, 1999 and 1998............ 4
Statements of Cash Flows for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 30, 1999 and 1998.............................. 5
Notes to Financial Statements............................... 6-7
</TABLE>
F-98
<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 28, 1999 and 1998, 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
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 28, 1999 and 1998, 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.
<TABLE>
<S> <C>
PRICEWATERHOUSECOOPERS INC.
- -------------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town, South Africa
7-2-00
- ----------------------------
Date
</TABLE>
F-99
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. -- -- 10,294 --
Accounts receivable................................... 21,649 5,778 32,841 16,237
------- ------- ------- -------
Total current assets................................ 21,649 5,778 43,135 16,237
------- ------- ------- -------
Property................................................ 706,243 706,649 813,353 706,643
Total assets........................................ 728,292 712,421 856,488 722,880
======= ======= ======= =======
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable...................................... 16,849 13,184 6,546 12,059
Receiver of Revenues--income tax...................... -- -- 3,954 --
Short term loan....................................... 267,016 228,440 384,828 257,372
Bank.................................................. 146 6,923 -- 2,590
------- ------- ------- -------
Total current liabilities........................... 284,011 248,547 395,328 272,021
------- ------- ------- -------
Members' Interest
Members' contributions................................ 400 400 400 400
(Accumulated loss)/
Retained earnings..................................... (28,534) (14,626) 2,406 (25,056)
------- ------- ------- -------
Total members' (deficit)/interest................... (28,134) (14,226) 2,806 (24,656)
------- ------- ------- -------
Long term liability..................................... 472,415 478,100 458,354 475,515
Total liabilities and members' interest............. 728,292 712,421 856,488 722,880
======= ======= ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-100
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Rent received.......................................... 136,441 86,561 128,339 102,331
General and administrative expenses.................... 44,195 38,172 37,599 33,146
-------- ------- -------- -------
Income from operations................................. 92,246 48,388 90,740 69,185
-------- ------- -------- -------
Other income (expenses)
Interest income...................................... 1 183 128 1
Interest expense..................................... (106,155) (63,198) (55,974) (79,616)
-------- ------- -------- -------
Total other income (expenses)...................... (106,154) (63,015) (55,846) (79,615)
-------- ------- -------- -------
Net income (loss) before tax........................... (13,908) (14,626) 34,894 (10,430)
Tax.................................................... -- -- 3,954 --
Net income (loss) for the year......................... (13,908) (14,626) 30,940 (10,430)
======== ======= ======== =======
</TABLE>
See accompanying notes to the financial statements.
F-101
<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, 1997...................................... -- -- --
Members' contribution....................................... 400 -- --
Net loss--1998.............................................. -- (14,626) (14,626)
--- -------- --------
Balance, February 28, 1998.................................. 400 (14,626) (14,626)
Net loss--1999.............................................. -- (13,908) (13,908)
--- -------- --------
Balance, February 28, 1999.................................. 400 (28,534) (28,534)
Unaudited:
Net income, November 30, 1999............................... -- 30,940 30,940
--- -------- --------
Balance, November 30, 1999.................................. 400 2,406 2,406
=== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-102
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN BANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30,
FEBRUARY 28, (UNAUDITED)
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income after tax........................ (13,908) (14,626) 30,940 (10,430)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.............................. (15,871) (5,778) (11,192) (10,459)
(Increase) decrease in:
Accounts payable................................. 42,241 241,624 111,463 27,807
------- -------- -------- -------
Net cash provided (used) by operating activities....... 12,462 221,220 131,211 6,918
------- -------- -------- -------
Cash flows from investing activities:
Purchase of property............................... -- (706,643) (106,710) --
Cash flows from financing activities:
Members' contributions............................. -- 400 -- --
Bank overdraft..................................... (6,777) 6,923 (146) (4,333)
Long term liability................................ (5,695) 478,100 (14,061) (2,585)
------- -------- -------- -------
Net cash provided (used) by financing activities....... (12,462) 485,423 (14,207) (6,918)
------- -------- -------- -------
Net cash increase (decrease)........................... -- -- 10,294 --
------- -------- -------- -------
Cash, beginning of period.............................. -- -- -- --
------- -------- -------- -------
Cash, end of period.................................... -- -- 10,294 --
------- -------- -------- -------
Supplemental disclosure of cash flow information
Cash paid during the year for interest............. 106,155 63,198 55,974 79,616
------- -------- -------- -------
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE>
VIRTUAL COLOUR PROPERTIES CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Virtual Colour Properties CC (the "Close Corporation") specializes 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. There is no material
difference with 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.
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 require 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 recognized 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.
UNAUDITED INTERIM INFORMATION
The information presented as of November 30, 1999 and 1998, and for the nine
month periods ended November 20, 1999 and 1998, 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 Close Corporation's financial position as of November 30,
1999 and 1998, and the results of its operations and its cash flows for the nine
months ended November 30, 1999 and 1998.
NOTE 3--PROPERTY AND EQUIPMENT
Property consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Immovable property (Mortgaged as per note 3).............. 706,643 706,643
</TABLE>
F-104
<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 Colormart.com Inc. Colormart.com
Inc. shall deliver the purchase price to the members at closing.
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 FNB payable in monthly installments of R9 485 at an interest rate
of 23.5%. Secured by a first mortgage bond over the immovable property.
NOTE 6--RELATED PARTY
A group close corporation has lent money to the Close Corporation as
required. At February 28, 1999 and 1998, the Close Corporation owes the group
close corporation R267 010 and R220 440 respectively. No repayment terms have
been determined and the loan is currently non-interest bearing.
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>
01 = RANDS
----------
<S> <C>
1 July 1998................................................. 6.2891
31 August 1998.............................................. 6.5620
30 November 1998............................................ 6.8134
28 February 1999............................................ 6.3261
31 May 1999................................................. 6.3000
31 August 1999.............................................. 6.1676
30 November 1999............................................ 6.2576
</TABLE>
NOTE 8--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-105
<PAGE>
VIRTUAL COLOUR CC
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 AND 1998
(AMOUNTS IN SOUTH AFRICAN RANDS)
F-106
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ 1
Financial Statements........................................
Balance Sheets as of February 28, 1999 and 1998 and
unaudited for November 30, 1999 and 1998................ 2
Statements of Operations for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 30, 1999 and 1998.............................. 3
Statements of Changes in Members' interest for the years
ended February 28, 1999 and 1998 and unaudited for the
nine months ended November 30, 1999 and 1998............ 4
Statements of Cash Flows for the years ended February 28,
1999 and 1998 and unaudited for the nine months ended
November 30, 1999 and 1998.............................. 5
Notes to Financial Statements............................... 6-7
</TABLE>
F-107
<PAGE>
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of Virtual Colour CC as of
February 28, 1999 and 1998, 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 the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 issued 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 Virtual Colour CC as of
February 28, 1999 or 1998, and the results of the operations and the cash flows
for the years then ended in conformity with United States of America generally
accepted accounting principles.
PricewaterhouseCoopers Inc.
- -------------------------------------------
Registered Accountants and Auditors
Chartered Accountants (SA)
Cape Town, South Africa
7-2-00
- ----------------------------
Date
F-108
<PAGE>
VIRTUAL COLOUR CC
BALANCE SHEETS
(AMOUNTS IN SOUTH AFRICAN RANDS
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash............................................ 320,341 137,146 6,085 274,542
Accounts receivable............................. 1,339,225 987,390 1,891,530 1,251,266
Inventories..................................... 55,000 51,724 7,000 64,181
--------- --------- --------- ---------
Total current assets........................ 1,714,566 1,176,260 1,904,615 1,579,989
--------- --------- --------- ---------
Fixed assets...................................... 1,275,499 807,881 1,400,531 1,158,594
Loans to associated corporations.................. 686,266 306,950 708,966 591,437
Loans to members.................................. 563,177 41,571 782,848 432,775
--------- --------- --------- ---------
Total assets.................................. 4,239,508 2,332,662 4,796,960 3,762,795
========= ========= ========= =========
</TABLE>
LIABILITIES AND MEMBERS' INTEREST
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C> <C> <C>
Accounts payable................................ 390,215 161,764 423,925 325,899
Receiver of Revenue--income tax................. 811,365 425,776 718,007 722,170
Receiver of Revenue--VAT........................ 498,848 345,846 590,879 460,597
Bank............................................ 72,592 -- 289,028 54,444
Current portion of long term liabilities........ 530,424 351,842 678,900 485,778
--------- --------- --------- ---------
Total current liabilities................... 2,303,444 1,285,228 2,700,739 2,048,888
--------- --------- --------- ---------
Members' interest:
Members' contributions.......................... 100 100 100 100
Retained earnings............................... 1,160,218 587,314 1,201,755 1,016,992
--------- --------- --------- ---------
Total members' interest..................... 1,160,318 587,414 1,201,855 1,017,092
--------- --------- --------- ---------
Long-term liabilities............................. 775,746 460,020 894,366 696,815
Total liabilities and members' interest..... 4,239,508 2,332,662 4,796,960 3,762,795
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-109
<PAGE>
VIRTUAL COLOUR CC
STATEMENTS OF OPERATIONS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net assets........................................ 6,404,826 4,479,852 5,476,067 4,803,620
Costs of goods sold............................... 2,147,757 911,171 1,734,481 1,610,818
--------- --------- --------- ---------
Gross profit...................................... 4,257,069 3,568,681 3,741,586 3,192,802
--------- --------- --------- ---------
General and administrative expenses............... 3,459,056 2,849,844 3,732,484 2,594,292
Income from operations............................ 798,013 718,837 9,102 598,510
--------- --------- --------- ---------
Other income (expenses)
Interest income................................. 51,962 9,901 87,838 38,971
Administration fees received.................... 109,500 -- 101,550 82,125
Insurance claims................................ 32,230 -- -- 24,172
Bad debts recovered............................. 2,560 -- -- 1,920
Export incentive................................ 19,340 -- -- 14,505
Rent recovered.................................. -- 1,400 -- --
Profit on gains of fixed assets................. -- -- 5,871 --
Interest expense................................ (83,922) (30,656) (100,892) (62,941)
--------- --------- --------- ---------
Total other income (expenses)................. 131,670 (19,355) 94,367 98,752
--------- --------- --------- ---------
Net income before tax............................. 929,683 699,482 103,469 697,262
Tax............................................... 356,779 255,396 51,932 267,584
--------- --------- --------- ---------
Net income for the year........................... 572,904 444,086 41,537 429,678
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-110
<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, 1997...................................... 100 -- 143,228
Members' contributions...................................... -- -- --
Net income--1998............................................ -- 444,086 444,086
--- --------- ---------
Balance, February 28, 1998.................................. 100 444,086 587,314
Net income--1999............................................ -- 572,904 572,904
--- --------- ---------
Balance, February 28, 1999.................................. 100 1,016,990 1,160,218
Unaudited:
Net income, November 30, 1999............................... -- 41,537 41,537
--- --------- ---------
Balance, November 30, 1999.................................. 100 1,058,527 1,201,755
=== ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-111
<PAGE>
VIRTUAL COLOUR CC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN SOUTH AFRICAN RANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED NOVEMBER 30
FEBRUARY 28 (UNAUDITED)
------------------------ -----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income after tax........................ 572,904 444,086 41,537 429,678
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 326,652 366,360 677,065 244,989
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable....................... (351,835) 446,603 652,305 (263,876)
Inventory................................. (3,276) (51,724) 48,000 (2,457)
Increase in:
Accounts payable.......................... 945,624 390,506 32,383 575,280
----------- ---------- ---------- ----------
Net cash provided by operating activities..... 1,490,069 1,595,831 146,680 983,614
----------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets.................... (794,270) (1,322,243) (702,097) (595,702)
Increase in loans to associated
corporations.............................. (379,316) (306,950) (22,700) (284,487)
Increase in loans to members................ (521,606) (41,571) (219,671) (391,204)
----------- ---------- ---------- ----------
Net cash used by investing activities......... (1,695,192) (1,670,764) (944,468) (1,271,393)
----------- ---------- ---------- ----------
Cash flows from financing activities:
Bank overdraft.............................. -- -- 282,943 --
Increase in long term facilities............ 315,726 (8,050) 267,096 370,731
----------- ---------- ---------- ----------
Net cash provided by financing activities..... 315,726 (8,050) 550,039 370,731
----------- ---------- ---------- ----------
Net cash increase (decrease).................. 110,803 (82,983) (247,749) 82,952
----------- ---------- ---------- ----------
Cash, beginning of period..................... 137,146 220,129 247,749 137,146
----------- ---------- ---------- ----------
Cash, end of period........................... 247,749 137,146 -- 220,098
=========== ========== ========== ==========
Supplemental disclosure of cash flow
information
Cash paid during the year for interest...... 83,922 199,726 100,892 62,941
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 1--ORGANIZATION AND DESCRIPTION OF BUSINESS
Virtual Colour CC (the "Close Corporation") specializes 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 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 vehicles.............................................. 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 of products are recognized when products are
shipped.
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 1998
and 30% thereafter.
UNAUDITED INTERIM INFORMATION
The information presented as of November 30, 1999 and 1998, and for the nine
month periods ended November 30, 1999 and 1998, 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
F-113
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
present fairly the Close Corporation's financial position as of November 30,
1999 and 1998, and the results of its operations and its cash flows for the nine
months ended November 30, 1999 and 1998.
NOTE 3--FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Furniture, fixtures and fittings....................... 121,208 94,047
Motor vehicles......................................... 482,783 27,447
Computer hardware...................................... 1,685,052 1,373,280
--------- ---------
Total fixed assets................................. 2,289,044 1,494,774
Less: Accumulated depreciation......................... 1,013,545 686,893
--------- ---------
Fixed assets, net.................................. 1,275,499 807,881
========= =========
</TABLE>
Motor vehicles and computer equipment with a book value of R 1 169 587 are
encumbered as security for hire purchase creditors.
Depreciation expense for the years ended February 28, 1999 and 1998 was R326
652 and R366 360 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.
Colorsmart.com shall deliver the purchase price to the members at closing.
There are no other post balance sheet events that are material to the
appreciation of the financial statements.
NOTE 5--RELATED PARTY
The close corporation has lent money to the group close corporations as
required. At February 28, 1999 and 1998, the close corporations owe the Close
Corporation R686 266 and R306 950, respectively. No repayment terms have been
determined and the loan is currently non-interest bearing.
NOTE 6--CURRENCY USED
The financial statements have been prepared on the South African Rand
currency basis.
F-114
<PAGE>
VIRTUAL COLOUR CC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN SOUTH AFRICAN RANDS)
NOTE 6--CURRENCY USED (CONTINUED)
The latest quarterly current 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
</TABLE>
NOTE 7--ACCOUNTS RECEIVABLE
The accounts receivable are ceded to the bank as security for bank overdraft
purposes.
NOTE 8--LEASING CHARGES
Sundry leasing charges, being not material, are not capitalized.
NOTE 9--CONTINGENT LIABILITY
There is a contingent liability for penalties arising from the underpayment
of S A Normal Close Corporation tax and 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 have effectively
indemnified the close corporation for any penalties that may arise.
NOTE 10--LONG TERM LIABILITIES
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Secured................................................. 1,306,170 811,862
Secured in terms of installment sale agreements over
motor vehicles and computer equipment. The rate of
interest is linked to the prime bank overdraft rate.
Repayable in monthly installments of R44 202,
inclusive of interest
Less: Amounts payable within one year reflected under
current liabilities..................................... 530,424 351,842
--------- -------
775,746 460,020
========= =======
</TABLE>
NOTE 11--LOANS TO MEMBERS
<TABLE>
<S> <C> <C>
Interest bearing loans, to be repaid during the next
financial year, interest 18.25% (1998: 19.26%).......... 563,177 41,571
========= =======
</TABLE>
F-115
<PAGE>
COLORSMART
VIRTUAL COLOR--CONSOLIDATION
11/30/1999
<TABLE>
<CAPTION>
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL
CC PROPERTIES PRINTING SUPPORT EJE CONSOLIDATED
-------------- -------------- -------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
ASSETS
Inventory........................ 1,131 7,270 3,657 12,057
A/R.............................. 305,578 5,305 90,747 34,234 435,865
Cash............................. 983 1,663 11,949 3,972 18,567
------- ------- ------- ------ ------- ---------
Total current assets............. 307,692 6,968 109,966 41,863 466,490
Fixed Assets..................... 226,257 131,398 51,492 6,662 415,809
Notes Receivable--related
parties........................ 241,004 10,044 10,311 261,358
------- ------- ------- ------ ------- ---------
Total assets..................... 774,953 138,366 171,502 58,835 1,143,657
======= ======= ======= ====== ======= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
A/P.............................. 279,937 1,696 83,097 27,995 392,725
Bank overdraft................... 46,693 -- -- 46,693
N/P.............................. 109,677 62,169 55,801 1,740 229,387
------- ------- ------- ------ ------- ---------
Total current liabilities........ 436,307 63,866 138,897 29,735 668,805
N/P - L/T........................ 144,486 74,047 31,301 4,853 254,687
Stockholders' equity (deficit)
Common stock..................... 16 65 65 16 162
Additional paid-in capital
Retained earnings (deficit)...... 194,145 389 1,240 24,231 220,004
------- ------- ------- ------ ------- ---------
Total liabilities & stockholders'
equity (deficit)............... 774,953 138,366 171,502 58,835 1,143,657
</TABLE>
F-116
<PAGE>
COLORSMART
VIRTUAL COLOR--CONSOLIDATION
2/28/99
<TABLE>
<CAPTION>
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL
CC PROPERTIES PRINTING SUPPORT EJE CONSOLIDATED
-------------- -------------- -------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
ASSETS
Inventory....................... 9,036 13,144 75 22,255
A/R............................. 290,527 3,557 124,735 60,116 478,935
Cash............................ 53,026 45 53,071
------- ------- ------- ------- ------- ---------
Total current assets............ 352,590 3,557 137,879 60,235 554,260
Fixed Assets.................... 209,562 116,100 27,171 2,235 355,068
Notes Receivable--related
parties....................... 121,871 121,871
------- ------- ------- ------- ------- ---------
Total assets.................... 684,022 119,657 165,050 62,470 1,031,199
======= ======= ======= ======= ======= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
A/P............................. 23,527 2,768 25,585 49,183 101,064
Bank overdraft.................. 14,965 24 21,562 36,552
N/P............................. 87,148 87,148
------- ------- ------- ------- ------- ---------
Total current liabilities....... 125,641 2,793 47,147 49,183 224,764
N/P--L/T........................ 127,454 121,487 68,993 1,659 319,592
Stockholders' equity (deficit)
Common stock.................... 16 66 66 16 164
Additional paid-in capital
Retained earnings (deficit)..... 430,912 (4,688) 48,844 11,611 486,680
------- ------- ------- ------- ------- ---------
Total stockholders' equity
(deficit)..................... 684,022 119,657 165,050 62,470 1,031,200
INCOME STATEMENT
Net sales....................... 991,721 22,417 494,438 318,009 (22,417) 1,804,168
Cost of sales................... 240,125 -- 231,362 274,638 -- 746,126
------- ------- ------- ------- ------- ---------
Gross profit.................... 751,596 22,417 263,075 43,371 (22,417) 1,058,043
General and administrative
expenses...................... 561,918 7,261 253,400 33,559 -- 856,138
------- ------- ------- ------- ------- ---------
Income (loss) from operations... 189,678 15,156 9,676 9,813 (22,417) 201,905
Other income (expense):
Interest income................. 229 74 80 383
Misc. income.................... 26,884 4,067 30,951
Interest expense................ (386) (17,441) (720) (61) (18,608)
Gain (loss) on disposal of
equipment..................... --
------- ------- ------- ------- ------- ---------
Total other income (expense).... 26,727 (17,441) 3,421 20 -- 12,726
Income (loss) before income
taxes......................... 216,404 (2,285) 13,096 9,832 (22,417) 214,631
Provision for income taxes
Net income (loss)............... 216,404 (2,285) 13,096 9,832 (22,417) 214,631
======= ======= ======= ======= ======= =========
</TABLE>
F-117
<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, 1998. 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, 1998. The pro forma
statement of operations also includes the proposed acquisition's statements of
operations for the twelve months ended December 31, 1998. 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, 1998.
The pro forma combined statement of operations for the year ended November 30,
1998, gives effect to the acquisitions as if they had occurred as of
December 1, 1997.
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-118
<PAGE>
COLORSMART.COM, INC.
PRO FORMA BALANCE SHEET
NOVEMBER 30, 1998
<TABLE>
<CAPTION>
MAGNUM ADV. THAT DISPLAY
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS
-------------- -------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................. 408 3,942 8,384 131 25,139
Accounts receivable................................... 10,910 71,614 65,270 235,521 249,726
Investment............................................ 20,833
Inventory............................................. 15,500 8,000 47,085 76,253 19,385
Prepaid expenses......................................
-------- -------------- ------- --------- --------
Total current assets.................................. 26,616 63,556 120,739 332,738 294,252
Property and equipment................................ 268,729 267,256 25,357 955,238 243,276
Other assets:
Goodwill..............................................
Accumulated Amortization..............................
Note receivable....................................... 12,686
Deferred taxes........................................ 20,031
Deposits.............................................. 3,875 3,977 15,414
-------- -------------- ------- --------- --------
Total other assets.................................... 3,875 16,615 35,445
======== ============== ======= ========= ========
Total assets.......................................... 299,422 387,329 146,098 1,187,976 572,973
======== ============== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obilgations under capital leases...................... 7,566 107,548 65,495
Current maturities of long-term debt.................. 3,489 4,538 27,621
Due to shareholder.................................... 44,952 51,021 167,542
Line of credit........................................ 31,774
Accrued expenses...................................... 21,040 150,220 3,237
Accounts payable...................................... 3,000 136,200 61,138 320,304 62,738
-------- -------------- ------- --------- --------
Total current liabilities............................. 35,095 250,256 106,100 551,545 366,407
Long-term debt:
Obligations under capital leases...................... 10,174 276,618 813
Deferred rent......................................... 7,397
Deferred revenue......................................
Note payable--stockholder............................. 78,005
Notes payable......................................... 35,430 5,247 733,114 128,334
-------- -------------- ------- --------- --------
Total long-term debt.................................. 123,609 283,665 733,114 136,544
Stockholders' equity (deficit)
Common stock.......................................... 3,328 1,000 15,574 17 10
Additional paid-in capital............................ 531,952 1,864,050 990
Retained earnings (deficit)........................... (394,583) (2,001,672) 24,422 (96,700) 47,022
-------- -------------- ------- --------- --------
Total stockholders' equity (deficit).................. 140,718 (148,822) 39,986 (96,683) 48,022
======== ============== ======= ========= ========
Total liabilities and stockholder's Equity
(deficit)........................................... 299,422 387,329 148,096 1,167,376 572,973
======== ============== ======= ========= ========
<CAPTION>
TOP VIRTUAL VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL
COPY COLOUR CC PROPERTIES PRINTING SUPPORT
-------- ---------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................. 42,397 53,026 45
Accounts receivable................................... 23,262 290,527 3,657 124,735 60,116
Investment............................................
Inventory............................................. 9,036 13,144 75
Prepaid expenses......................................
------- ------- ------- ------- ------
Total current assets.................................. 65,858 352,589 3,567 137,879 60,236
Property and equipment................................ 73,564 209,562 116,100 27,171 2,235
Other assets:
Goodwill..............................................
Accumulated Amortization..............................
Note receivable....................................... 121,871
Deferred taxes........................................
Deposits..............................................
------- ------- ------- ------- ------
Total other assets.................................... 121,871 0 0 0
======= ======= ======= ======= ======
Total assets.......................................... 139,228 664,022 116,657 165,050 62,471
======= ======= ======= ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obilgations under capital leases......................
Current maturities of long-term debt.................. 67,148 (10)
Due to shareholder....................................
Line of credit........................................
Accrued expenses...................................... 14,965 24 21,582
Accounts payable...................................... 30,848 23,527 2,768 25,686 49,183
------- ------- ------- ------- ------
Total current liabilities............................. 30,848 125,640 2,792 47,147 49,183
Long-term debt:
Obligations under capital leases......................
Deferred rent.........................................
Deferred revenue......................................
Note payable--stockholder.............................
Notes payable......................................... 127,454 121,487 68,993 1,660(10)
------- ------- ------- ------- ------
Total long-term debt.................................. 127,454 121,487 68,993 1,660
Stockholders' equity (deficit)
Common stock.......................................... 167 18 66 66 16
Additional paid-in capital............................ 133,381
Retained earnings (deficit)........................... (26,181) 430,912 (4,688) 48,544 11,611
------- ------- ------- ------- ------
Total stockholders' equity (deficit).................. 108,377 450,828 (4,622) 48,910 11,627
======= ======= ======= ======= ======
Total liabilities and stockholder's Equity
(deficit)........................................... 139,233 664,022 119,657 165,050 62,470
======= ======= ======= ======= ======
<CAPTION>
PRO FORMA ADJUSTMENTS NOVEMBER 30,
JAMBERRY ------------------------- 1998
LAKE COMBINED DR CR PRO FORMA
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................. 153,472 139,472
Accounts receivable................................... 1,135,340 1,135,240
Investment............................................ 20,633 20,833
Inventory............................................. 168,478 168,478
Prepaid expenses......................................
------- ---------- ---------- ---------- ----------
Total current assets.................................. 0 1,478,022 1,478,022
Property and equipment................................ 2,108,490 600,000(2) 2,608,480
Other assets:
Goodwill.............................................. 7,648,282(10) 7,648,282
Accumulated Amortization.............................. 0
Note receivable....................................... 134,409 134,409
Deferred taxes........................................ 20,031 20,031
Deposits.............................................. 23,266 23,266
------- ---------- ---------- ---------- ----------
Total other assets.................................... 177,706 7,646,282 7,825,988
======= ========== ========== ========== ==========
Total assets.......................................... 3,764,218 6,148,282 11,912,500
======= ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obilgations under capital leases...................... 170,609 170,609
Current maturities of long-term debt.................. 122,798 67,148(11) 35,648
Due to shareholder.................................... 263,525 263,525
Line of credit........................................ 31,774 31,774
Accrued expenses...................................... 241,048 241,048
Accounts payable...................................... 737,289 676,064(11) 61,225
------- ---------- ---------- ---------- ----------
Total current liabilities............................. 1,587,041 763,212 823,829
Long-term debt:
Obligations under capital leases...................... 289,605 289,605
Deferred rent......................................... 7,397 7,397
Deferred revenue...................................... 0
Note payable--stockholder............................. 78,005 30,845(11) 47,160
Notes payable......................................... 1,221,719 1,152,925(11) 68,794
------- ---------- ---------- ---------- ----------
Total long-term debt.................................. 1,596,728 1,163,770 412,958
Stockholders' equity (deficit)
Common stock.......................................... 20,261 6,560,271(12) 6,584,544 4,534
Additional paid-in capital............................ 2,520,389 2,520,383(12) 11,085,366 11,065,366
Retained earnings (deficit)........................... (1,980,193) 394,204(12) 1,960,192 (394,205)
------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficit).................. 560,461 11,494,858 21,590,122 10,675,715
======= ========== ========== ========== ==========
Total liabilities and stockholder's Equity
(deficit)........................................... 3,764,218 13,441,840 21,590,122 11,912,500
======= ========== ========== ========== ==========
</TABLE>
F-119
<PAGE>
COLORSMART.COM, INC.
PRO FORMA STATEMENT OF OPERATIONS
NOVEMBER 30, 1998
<TABLE>
<CAPTION>
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL COLOUR
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY CC
-------------- --------- ----------- ---------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............ 127,191 608,891 967,275 1,829,805 1,660,753 420,830 991,721
Cost of sales........ 1,149 454,976 594,211 688,921 812,563 240,125
--------- --------- ------- --------- --------- ------- -------
Gross profit......... 126,042 153,915 373,064 1,140,884 848,190 420,830 751,596
General and
administrative
expenses........... 433,041 484,325 390,438 1,009,658 770,986 431,833 561,918
--------- --------- ------- --------- --------- ------- -------
Income (loss) from
operations......... (306,999) (330,410) (17,374) 131,226 77,204 (11,003) 189,678
Other income
(expense):
Interest income...... 1,140 351 111 229
Misc. income......... 5,547 18,661 4,764 26,884
Interest expense..... (2,060) (24,521) (411) (150,535) (25,635) (386)
--------- --------- ------- --------- --------- ------- -------
Gain (loss) on
disposal of
equipment
Total other income
(expense).......... (920) (24,170) 5,247 (131,874) (20,871) 26,727
Income (loss) before
income taxes....... (307,919) (354,580) (12,127) (649) 56,333 (11,003) 216,404
Provision for income
taxes.............. 26,408
--------- --------- ------- --------- --------- ------- -------
Net income (loss).... (307,919) (354,580) (12,127) (649) 29,925 (11,003) 216,404
========= ========= ======= ========= ========= ======= =======
Net loss per share
(basic and
diluted)........... (0.10)
=========
Weighted average
shares
outstanding........ 2,956,787
=========
<CAPTION>
PRO FORMA
ADJUSTMENTS NOVMBER 30,
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL -------------------- 1998
PROPERTIES PRINTING SUPPORT COMBINED DR CR PRO FORMA
-------------- -------------- --------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............ 22,417 494,438 318,009 7,441,330 7,441,330
Cost of sales........ 231,362 274,638 3,297,945 3,297,945
------- --------- --------- --------- --------- -------- ---------
Gross profit......... 22,417 263,076 43,371 4,143,385 4,143,385
General and
administrative
expenses........... 7,261 253,400 33,559 4,376,419 509,885(8) 4,886,312
------- --------- --------- --------- --------- -------- ---------
Income (loss) from
operations......... 15,156 9,676 9,813 (233,034) (509,885) (742,928)
Other income
(expense):
Interest income...... 74 80 1,985 1,985
Misc. income......... 4,067 59,923 59,923
Interest expense..... (17,441) (720) (61) (221,770) (221,770)
------- --------- --------- --------- --------- -------- ---------
Gain (loss) on
disposal of
equipment
Total other income
(expense).......... (17,441) 3,421 19 (159,862) (159,862)
Income (loss) before
income taxes....... (2,285) 13,096 9,832 (392,898) (509,885)(8) (902,791)
Provision for income
taxes.............. 26,408 26,408
------- --------- --------- --------- --------- -------- ---------
Net income (loss).... (2,285) 13,096 9,832 (419,306) (509,885) (929,199)
======= ========= ========= ========= ========= ======== =========
Net loss per share
(basic and
diluted)........... (0.20)
=========
Weighted average
shares
outstanding........ 4,534,000
=========
</TABLE>
F-120
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOVEMBER 30, 1998
The Pro Forma financial statements have been prepared assuming the
acquisition had occurred at November 30,1998. The acquisitions are contingent
upon the successful initial public offering to be completed in fiscal year 2000.
The statement of operations is prepared assuming the acquisition occurred
December 1, 1997.
The following assumptions have been made:
(1) Magnum Digital Services, Inc. will be acquired for $775,000 in cash and
200,000 shares of Colorsmart.com, Inc. stock. This will result in the
recordation of approximately $847,000 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.
(2) Advertising That Works, Inc. will be acquired for $1,500,000 in cash. This
will result in the recordation of approximately $960,000 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.
(3) Stonehouse Graphics (Pty) Limited will be acquired for approximately
$2,500,000 in cash. This will result in the recordation of approximately
$1,763,000 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.
(4) Display Arts, Inc. will be acquired for approximately $1,300,000 in cash.
This will result in the recordation of approximately $952,000 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.
(5) Top Copy CC will be acquired for approximately $426,000 in cash. This will
result in the recordation of approximately $287,000 of goodwill, which will
be amortized over 15 years. Colorsmart, Inc. will not be assuming any
liabilities that existed as of the acquisition date.
(6) Jamberry Lake, LLC will be acquired for $1,000,000 and 125,000 shares of
Colorsmart.com, Inc. common stock.
(7) The Company expects to pay approximately $9,300,000 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.
(8) Amortization of goodwill is included in general and administrative expenses
and totals $509,885.
(9) 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.
(10) Total goodwill recorded is as follows; $846,822 for Magnum Digital
Services, $960,004 for Advertising That Works, $1,763,350 for Stonehouse
Graphics, $951,978 for Display Arts, $287,443 for Top Copy, $2,000,000 for
Jamberry Lake, and $838,685 for Virtual Colour for a total of $7,648,282.
(11) As agreed upon certain liabilities of the acquirees will be paid off from
the purchase price received from Colorsmart.com, Inc. These liabilities
total $1,946,982.
(12) At November 30, 1998 Colorsmart.com had total common stock of 3,329 as a
result of the Magnum Digital Services acquisition another 200,000 shares of
.001 par value common stock will be issued and as a result of the Jamberry
Lake acquisition another 125,000 shares of .001 par value common stock
F-121
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOVEMBER 30, 1998 (CONTINUED)
will be issued, and another 880,000 shares .001 par value common stock will
be issued to fund the acquisitions which will increase common stock to
4,534.
(13) 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 rand to 1 dollar.
The exchange rate for the past 12 months, by quarter, is as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
1(ST) Quarter........... 4.94
2(ND) Quarter........... 5.16
3(RD) Quarter........... 6.44
4(TH) Quarter........... 5.69
</TABLE>
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 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 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>
COLORSMART.COM, INC.
PRO FORMA BALANCE SHEET
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
MAGNUM ADV. THAT DISPLAY
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS
-------------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................... 276 1,605 98,323
Accounts receivable..................................... 58,530 64,722 453,403 144,324
Investment.............................................. 20,194
Inventory............................................... 8,000 50,054 49,679 19,385
Deferred acquisition costs.............................. 566,237
Prepaid expenses........................................ 31,000 6,407
---------- ----------- ------- --------- --------
Total current assets.................................... 597,237 66,806 116,381 628,007 163,709
Property and equipment.................................. 350,683 198,307 26,760 801,682 186,038
Other assets:
Goodwill................................................
Accumulated Amortization................................
Note receivable.........................................
Deferred taxes.......................................... 20,031
Intangibles, net........................................
Deposits................................................ 10,730 6,127 18,295
---------- ----------- ------- --------- --------
Total other assets...................................... 10,730 6,127 38,326
========== =========== ======= ========= ========
Total assets............................................ 958,650 271,240 143,141 1,429,689 388,073
========== =========== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obilgations under capital leases........................ 15,456 135,454 5,767
Cash overdraft.......................................... 18,801
Current maturities of long-term debt.................... 103,298 40,802
Due to shareholder...................................... 20,091 14,200 7,127 267,209
Due to customer......................................... 11,000
Related party notes payable............................. 25,000
Line of credit..........................................
Accrued expenses........................................ 4,198 11,185
Checks outstanding in excess of bank balance............ 25,859
Accounts payable........................................ 69,425 147,319 62,104 642,985 141,463
---------- ----------- ------- --------- --------
Total current liabilities............................... 238,327 321,973 69,231 642,985 496,227
Long-term debt:
Obligations under capital leases........................ 14,744 179,788 6,804
Deferred rent........................................... 4,533
Taxation................................................
Deferred revenue........................................
Note payable--stockholder...............................
Notes payable........................................... 60,291 819,003 111,318
---------- ----------- ------- --------- --------
Total long-term debt.................................... 75,035 179,788 819,003 122,655
Stockholders' equity (deficit)
Preferred Stock......................................... 34
Common stock............................................ 4,257 1,000 15,574 17 10
Additional paid-in capital.............................. 2,136,912 1,960,009 990
Retained earnings (deficit)............................. (1,495,915) (2,191,530) 58,336 (32,317) (231,809)
---------- ----------- ------- --------- --------
Total stockholders' equity (deficit).................... 645,288 (230,521) 73,910 (32,300) (230,809)
========== =========== ======= ========= ========
Total liabilities and stockholder's Equity (deficit).... 958,650 271,240 143,141 1,429,688 388,073
========== =========== ======= ========= ========
<CAPTION>
TOP VIRTUAL VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL
COPY COLOUR CC PROPERTIES PRINTING SUPPORT
-------- ---------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................... 89,499 983 1,663 11,949 3,971
Accounts receivable..................................... 305,578 5,305 90,747 34,234
Investment..............................................
Inventory............................................... 4,039 1,131 7,270 3,657
Deferred acquisition costs..............................
Prepaid expenses........................................
------- ------- ------- ------- ------
Total current assets.................................... 93,538 307,692 6,968 109,966 41,862
Property and equipment.................................. 67,752 226,257 131,398 51,492 6,662
Other assets:
Goodwill................................................
Accumulated Amortization................................
Note receivable......................................... 2,423 241,004 10,044 10,311
Deferred taxes..........................................
Intangibles, net........................................
Deposits................................................
------- ------- ------- ------- ------
Total other assets...................................... 241,004 0 10,044 10,311
======= ======= ======= ======= ======
Total assets............................................ 163,713 774,953 138,366 171,502 58,835
======= ======= ======= ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obilgations under capital leases........................
Cash overdraft.......................................... 46,692
Current maturities of long-term debt.................... 109,677 62,169 55,801 1,740
Due to shareholder......................................
Due to customer.........................................
Related party notes payable.............................
Line of credit..........................................
Accrued expenses........................................
Checks outstanding in excess of bank balance............
Accounts payable........................................ 39,592 279,937 1,696 83,095 27,995
------- ------- ------- ------- ------
Total current liabilities............................... 39,592 436,306 63,865 138,896 29,735
Long-term debt:
Obligations under capital leases........................
Deferred rent...........................................
Taxation................................................
Deferred revenue........................................
Note payable--stockholder...............................
Notes payable........................................... 122,955 144,486 74,047 31,301 4,853
------- ------- ------- ------- ------
Total long-term debt.................................... 122,955 144,486 74,047 31,301 4,853
Stockholders' equity (deficit)
Preferred Stock.........................................
Common stock............................................ 16 65 65 16
Additional paid-in capital..............................
Retained earnings (deficit)............................. 1,166 194,145 389 1,240 24,231
------- ------- ------- ------- ------
Total stockholders' equity (deficit).................... 1,166 194,161 454 1,305 24,247
======= ======= ======= ======= ======
Total liabilities and stockholder's Equity (deficit).... 163,713 774,953 138,366 171,502 58,835
======= ======= ======= ======= ======
<CAPTION>
PRO FORMA ADJUSTMENTS NOVEMBER 30,
JAMBERRY ------------------------- 1999
LAKE COMBINED DR CR PRO FORMA
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................... 33,658 241,927 241,927
Accounts receivable..................................... 8,063 1,164,906 1,164,906
Investment.............................................. 20,194 20,194
Inventory............................................... 143,215 143,215
Deferred acquisition costs.............................. 566,237 566,237(14) 0
Prepaid expenses........................................ 12,407 12,407
-------- ---------- ---------- ---------- ----------
Total current assets.................................... 41,721 2,173,887 566,237 1,607,650
Property and equipment.................................. 128,230 2,175,261 500,000(2) 2,775,261
100,000(14)
Other assets:
Goodwill................................................ 7,739,304(10) 8,180,541
Accumulated Amortization................................ 441,237(14) 0
Note receivable......................................... 263,782 263,782
Deferred taxes.......................................... 20,031 20,031
Intangibles, net........................................ 0 0
Deposits................................................ 2,350 37,502 37,502
-------- ---------- ---------- ---------- ----------
Total other assets...................................... 2,350 321,315 8,180,541 8,501,856
======== ========== ========== ========== ==========
Total assets............................................ 172,301 4,670,463 8,780,541 566,237 12,884,767
======== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Obilgations under capital leases........................ 2,491 159,168 159,168
Cash overdraft.......................................... 65,493 65,493
Current maturities of long-term debt.................... 373,487 373,487(11) 0
Due to shareholder...................................... 8,519 317,146 308,627(11) 8,519
Due to customer......................................... 11,000 11,000
Related party notes payable............................. 25,000 25,000(14) 0
Line of credit.......................................... 0 0
Accrued expenses........................................ 17,548 32,931 32,931
Checks outstanding in excess of bank balance............ 25,859 25,859
Accounts payable........................................ 7,955 1,503,567 155,832(11) 1,347,735
-------- ---------- ---------- ---------- ----------
Total current liabilities............................... 36,513 2,513,651 862,946 1,650,705
Long-term debt:
Obligations under capital leases........................ 4,581 205,917 201,336(11) 4,581
Deferred rent........................................... 4,533 4,533
Taxation................................................ 0 0
Deferred revenue........................................ 0
Note payable--stockholder............................... 0 0
Notes payable........................................... 1,368,254 1,323,595(11) 44,659
-------- ---------- ---------- ---------- ----------
Total long-term debt.................................... 4,581 1,578,704 1,524,931 53,773
Stockholders' equity (deficit)
Preferred Stock......................................... 34 34
Common stock............................................ 10 21,030 15,568(12) 5,462
Additional paid-in capital.............................. 360,000 4,457,911 (12) 8,214,010 12,671,921
Retained earnings (deficit)............................. (228,803) (3,900,867) (12) 2,403,739 (1,497,128)
-------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficit).................... 131,207 578,108 15,568 10,617,749 11,180,289
======== ========== ========== ========== ==========
Total liabilities and stockholder's Equity (deficit).... 172,301 4,670,463 2,403,445 10,617,749 12,884,767
======== ========== ========== ========== ==========
11,333,024 11,333,024
</TABLE>
F-124
<PAGE>
COLORSMART.COM, INC.
PRO FORMA STATEMENT OF OPERATIONS
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
MAGNUM ADV. THAT DISPLAY TOP VIRTUAL COLOUR
COLORSMART.COM DIGITAL WORKS, INC. STONEHOUSE ARTS COPY CC
-------------- -------- ----------- ---------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ 57,617 583,717 751,450 2,079,491 1,484,278 378,218 684,663
Cost of sales........................ 40,469 370,627 367,799 917,809 833,002 174,361 280,207
-------- -------- ------- --------- --------- ------- -------
Gross profit......................... 17,148 186,910 363,681 1,161,882 660,378 203,657 604,456
General and administrative
expenses........................... 847,794 354,311 311,637 1,121,959 922,181 189,109 602,985
-------- -------- ------- --------- --------- ------- -------
Income (loss) from operations........ (830,646) (187,401) 32,044 39,884 (261,605) 14,748 1,470
Other income (expense):
Interest income...................... 1,117 14,190
Misc. income......................... 4,527 857 16,405
Interest expense..................... (20,705) (14,927) (2,657) (17,883) (16,299)
Discounts received................... 15,029
Gain (loss) on disposal of
equipment.......................... (8,447) 5,535 948
-------- -------- ------- --------- --------- ------- -------
Total other income (expense)......... (20,705) (22,257) 1,870 21,664 (17,028) 15,244
Income (loss) before income taxes.... (851,352) (169,656) 33,914 61,448 (276,631) 14,765 16,716
Provision for income taxes........... 10,006
-------- -------- ------- --------- --------- ------- -------
Net income (loss).................... (851,352) (189,656) 33,914 61,448 (278,631) 14,748 6,710
======== ======== ======= ========= ========= ======= =======
Net loss per share (basic and
diluted)...........................
========
Weighted average shares
outstanding........................
========
<CAPTION>
PRO FORMA
ADJUSTMENTS
VIRTUAL COLOUR VIRTUAL COLOUR VIRTUAL JAMBERRY ---------------------
PROPERTIES PRINTING SUPPORT LAKE COMBINED DR CR
-------------- -------------- --------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ 20,754 422,532 341,317 6,053 7,002,130
Cost of sales........................ 192,156 258,347 3,471,659
------- --------- --------- -------- ---------- ---------- --------
Gross profit......................... 20,754 230,574 72,970 6,053 3,530,471
General and administrative
expenses........................... 6,074 218,830 42,264 736,563 4,871,747 545,369
------- --------- --------- -------- ---------- ---------- --------
Income (loss) from operations........ 14,560 13,544 30,706 (228,500) (1,341,276) (545,369)
Other income (expense):
Interest income...................... 100 89 15,496
Misc. income......................... 21,789
Interest expense..................... (9,043) (9,273) (29) 303 (90,514)
Discounts received................... 15,029
Gain (loss) on disposal of
equipment.......................... (984)
------- --------- --------- -------- ---------- ---------- --------
Total other income (expense)......... (9,043) (9,173) 60 309 (39,164)
Income (loss) before income taxes.... 5,637 4,372 30,767 (228,803) (1,098,909) (545,369)
Provision for income taxes........... 639 9,261 19,905
------- --------- --------- -------- ---------- ---------- --------
Net income (loss).................... 4,908 4,372 21,505 (228,803) (1,400,948) (545,369)
======= ========= ========= ======== ========== ========== ========
Net loss per share (basic and
diluted)...........................
Weighted average shares
outstanding........................
<CAPTION>
NOVMBER 30,
1998
PRO FORMA
------------
<S> <C>
Net sales............................ 7,002,130
Cost of sales........................ 3,471,659
----------
Gross profit......................... 3,530,471
General and administrative
expenses........................... 5,417,116
----------
Income (loss) from operations........ (1,886,645)
Other income (expense):
Interest income...................... 15,496
Misc. income......................... 21,789
Interest expense..................... (90,514)
Discounts received................... 15,029
Gain (loss) on disposal of
equipment.......................... (984)
----------
Total other income (expense)......... (39,164)
Income (loss) before income taxes.... (1,926,411)
Provision for income taxes........... 19,906
----------
Net income (loss).................... (1,946,317)
==========
Net loss per share (basic and
diluted)........................... (.35)
==========
Weighted average shares
outstanding........................ 5,462,000
==========
</TABLE>
F-125
<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 acquisitions are contingent
upon the successful initial public offering to be completed in fiscal year 2000.
The statement of operations is prepared assuming the acquisition occurred
December 1, 1999.
The following assumptions have been made:
(1) Magnum Digital Services, Inc. will be acquired for $775,000 in cash and
200,000 shares of Colorsmart.com, Inc. stock. This will result in the
recordation of approximately $931,000 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.
(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.
(3) Stonehouse Graphics (Pty) Limited will be acquired for approximately
$2,500,000 in cash. This will result in the recordation of approximately
$1,699,000 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.
(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.
(5) Top Copy CC will be acquired for approximately $426,000 in cash. This will
result in the recordation of approximately $264,000 of goodwill, which will
be amortized over 15 years. Colorsmart, Inc. will not be assuming any
liabilities that existed as of the acquisition date.
(6) Jamberry Lake Digital Media, Inc. will be acquired for $1,000,000 and
125,000 shares of Colorsmart.com, Inc. common stock. This will result in the
recordation of approximately $1,900,000 of goodwill, which will be amortized
over 15 years.
(7) The Company expects to pay approximately $9,300,000 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.
(8) Amortization of goodwill is included in general and administrative expenses
and totals $545,369.
(9) 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.
(10) Total goodwill recorded is as follows; $930,521 for Magnum Digital
Services, $926,090 for Advertising That Works, $1,699,300 for Stonehouse
Graphics, $1,230,809 for Display Arts, $263,599 for Top Copy, $1,868,793 for
Jamberry Lake, $820,192 for Virtual Colour, and $441,237 as part of the
elimination of deferred acquisition costs for a total of $8,180,541.
(11) 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.
F-126
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1999
(12) At November 30, 1999 Colorsmart.com, Inc. had total common stock of 4,257.
As a result of the Magnum Digital Services acquisition another 200,000
shares of .001 par value common stock will be issued and as a result of the
Jamberry Lake Digital Media, Inc. acquisition another 125,000 shares of .001
par value common stock will be issued, and another 880,000 shares .001 par
value common stock will be issued to fund the acquisitions which will
increase common stock to 5,462.
(13) 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
-------- --------
<S> <C> <C>
1(st) Quarter (Feb)......................................... 4.94 6.18
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>
(14) Deferred acquisition costs of $566,237 is eliminated in consolidation;
$100,000 to property and equipment, $25,000 related party notes
payable, and $441,237 to goodwill.
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.
JANUARY , 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
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 Snyder & 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 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
II-5
<PAGE>
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 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-6
<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 23rd day of February,
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>
Chief Executive Officer,
/s/ ROGER D. FINCHUM, SR. President and Director
------------------------------------------- (Principal Executive February 23, 2000
Roger D. Finchum, Sr. Officer)
* Vice-President and Director
------------------------------------------- February 23, 2000
Roger D. Finchum, Jr.
* Director
------------------------------------------- February 23, 2000
Reginald W.H. Burrows
* Chief Financial Officer
------------------------------------------- (Principal Financial and February 23, 2000
Lee Watson Accounting Officer)
* Vice-President
------------------------------------------- February 23, 2000
Erich J. Fischer
/s/ ROGER D. FINCHUM, SR.
-------------------------------------------
*Roger D. Finchum, Sr. February 23, 2000
As Power of Attorney
</TABLE>
II-7
<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....................
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 Snyder & 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 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
Jamberry Lake Digital Media, Inc. December 31, 1999 February 7, 2000
</TABLE>
Boca Raton, Florida
February 21, 2000
/s/ DASZKAL BOLTON MANELA DEVLIN & CO., CPAS
<PAGE>
EXHIBIT 23.3
[LOGO]
[LETTERHEAD]
2/22/00
The Directors
Colorsmart.com Inc.
Nashville
Tennessee
USA
C/o Mr. R. Burrows
Fax number: 461 2287
Sirs
VIRTUAL COLOUR CC
VIRTUAL COLOUR PROPERTIES CC
VIRTUAL SUPPORT CC
VIRTUAL COLOUR PRINTING CC
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED:
28 FEBRUARY 1998
28 FEBRUARY 1999
AND UNAUDITED FINANCIAL STATEMENTS FOR THE PERIODS ENDED:
30 NOVEMBER 1998
30 NOVEMBER 1999
We have audited the annual financial statements of the above mentioned close
corporations for the year ended 28 February 1998 and 28 February 1999.
We have compiled unaudited financial statements for the periods ended
30 November 1998 and 30 November 1999.
We consent to the use of the financial statements of the close corporations
for listing purposes.
Yours faithfully
/s/ Eldie Brink
- --------------------------
Eldie Brink
Director
<PAGE>
EXHIBIT 23.4
HJ HUGO AND ASSOCIATES
[LETTERHEAD]
2/22/00
COLORSMART.COM INC. USA
JUMBO GRAPHICS & DIGITAL & PRINTING
537 MYATT DRIVE, MADISON,
TENNESSEE 37115 USA
Dear Sir
TOP COPY FINANCIAL STATEMENT 1998/1999
MANAGEMENT ACCOUNTS FROM MARCH TO NOVEMBER 1999
We hereby give our consent for the use of these accounts for your listing
process.
Yours sincerely
/s/ H J Hugo
- --------------------------
H J Hugo
<PAGE>
EXHIBIT 23.5
SNYDERS & COMPANY
[LETTERHEAD]
2/22/00
COLORSMART.COM INC. USA
537 MYATT DRIVE
MADISON
TENNESSEE 37115
USA
Dear Sir
STONEHOUSE GRAPHICS (PTY) LIMITED
AUDITED FINANCIAL STATEMENTS PERIOD 28 FEBRUARY 1998 AND 1999
UNAUDITED FINANCIAL STATEMENTS PERIOD 30 NOVEMBER 1998 AND 1999
We consent to the use of these accounts for your listing process.
Yours faithfully
/s/ Synders & Company
- --------------------------
Snyders & Company
Chartered Accountants S.A.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1999 NOV-30-1998
<PERIOD-START> DEC-01-1999 DEC-01-1998
<PERIOD-END> NOV-30-1999 NOV-30-1998
<CASH> 0 408
<SECURITIES> 0 0
<RECEIVABLES> 0 10,910
<ALLOWANCES> 0 0
<INVENTORY> 0 15,500
<CURRENT-ASSETS> 31,00 26,818
<PP&E> 495,687 268,729
<DEPRECIATION> 145,004 55,367
<TOTAL-ASSETS> 958,650 299,422
<CURRENT-LIABILITIES> 238,327 113,100
<BONDS> 0 0
0 0
34 0
<COMMON> 4,257 3,329
<OTHER-SE> 2,136,912 781,702
<TOTAL-LIABILITY-AND-EQUITY> 958,650 299,422
<SALES> 57,617 127,191
<TOTAL-REVENUES> 57,617 127,191
<CGS> 40,469 63,886
<TOTAL-COSTS> 847,794 620,304
<OTHER-EXPENSES> 0 920
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,706 2,060
<INCOME-PRETAX> (851,325) (557,919)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (851,352) (557,919)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (851,352) (557,919)
<EPS-BASIC> (0.22) (0.19)
<EPS-DILUTED> (0.22) (0.19)
</TABLE>
