<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
June 2, 2000
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
New York
(State or Other Jurisdiction of Incorporation)
0-21168 13-3253392
(Commission File Number) (IRS Employer Identification Number)
5 East 80th Street, New York, New York 10021
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 717-6544
Page 1 of 5 pages
Exhibit Index located on page 5
<PAGE> 2
The undersigned Registrant hereby amends Item 7 of its Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 19,
2000, which excluded certain financial statements that were not available at the
time of filing, to read in its entirety as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) Financial Statements of Businesses Acquired -- Gordon Acquisition Corp.
and Subsidiary
Report of Independent Accountants
Consolidated Balance Sheets at May 31, 1999 and 1998
Consolidated Statements of Operations for the years ended May 31, 1999
and 1998
Consolidated Statements of Stockholders' Equity for the years ended May
31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended May 31, 1999
and 1998
Notes to Consolidated Financial Statements for the years ended May 31,
1999 and 1998
Gordon Acquisition Corp. and Subsidiary -- Unaudited Financial
Statements
Unaudited Condensed Consolidated Balance Sheet at February 29, 2000
Unaudited Condensed Consolidated Statements of Operations for the nine
months ended February 29, 2000 and February 28, 1999
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended February 29, 2000 and February 28, 1999
Notes to Unaudited Condensed Consolidated Financial Statements for the
nine months ended February 29, 2000 and February 28, 1999
Page 2 of 5 pages
<PAGE> 3
(b) Unaudited Pro Forma Consolidated Financial Information
Unaudited Pro Forma Consolidated Balance Sheet at March 31, 2000
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1999
Unaudited Pro Forma Consolidated Statement of Operations for the three
months ended March 31, 2000
Notes to Unaudited Pro Forma Financial Statements
(c) Exhibits
2.1* Agreement of Purchase and Sale, dated as of April 17, 2000 (the
"Purchase Agreement"), among Chromatics Color Sciences International,
Inc. and the shareholders and certain noteholders of Gordon Acquisition
Corp.
2.2* Amendment No. 1 to the Purchase Agreement, dated May 15, 2000.
2.3* Amendment No. 2 to the Purchase Agreement, dated May 25, 2000.
2.4* Amendment No. 3 to the Purchase Agreement, dated May 31, 2000.
23.1 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
*Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 19, 2000.
Page 3 of 5 pages
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CHROMATICS COLOR SCIENCES
INTERNATIONAL, INC.
By: /S/ Darby S. Macfarlane
------------------------------
Name: Darby S. Macfarlane
Title: Chairperson
Date: August 18, 2000
Page 4 of 5 pages
<PAGE> 5
EXHIBIT INDEX
2.1* Agreement of Purchase and Sale, dated as of April 17, 2000 (the
"Purchase Agreement"), among Chromatics Color Sciences International,
Inc. and the shareholders and certain noteholders of Gordon Acquisition
Corp.
2.2* Amendment No. 1 to the Purchase Agreement, dated May 15, 2000.
2.3* Amendment No. 2 to the Purchase Agreement, dated May 25, 2000.
2.4* Amendment No. 3 to the Purchase Agreement, dated May 31, 2000.
23.1 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
*Incorporated by reference from the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 19, 2000.
Page 5 of 5 pages
<PAGE> 6
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
CONTENTS
INDEPENDENT AUDITORS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity (Deficit) 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-22
2
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gordon Acquisition Corporation
We have audited the accompanying consolidated balance sheets of Gordon
Acquisition Corporation and subsidiary as of May 31, 1999 and 1998, and the
related consolidated statements of operations, 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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gordon Acquisition
Corporation and subsidiary at May 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations. In addition, the Company has a working capital deficiency and a
stockholders' deficit as of May 31, 1999. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
December 20, 1999,
except as to the last
paragraph of Note 6,
which is as of February 23, 2000
and the last paragraph of Note 11,
which is as of April 17, 2000
3
<PAGE> 8
<TABLE>
<CAPTION>
May 31, 1999 1998
--------------------------------------------------------------------------------------------------------------------
ASSETS (Notes 5 and 6)
CURRENT ASSETS
<S> <C> <C>
Cash $ 9,237 $ 128,791
Accounts receivable, net of allowance for doubtful accounts of
$55,096 in 1999 and 1998 357,455 545,701
Inventories (Note 3) 1,007,065 821,004
Prepaid expenses 89,599 20,545
--------------------------------------------------------------------------------------------------------------------
Total current assets 1,463,356 1,516,041
Property and equipment, net (Note 4) 576,538 471,812
Goodwill, net of accumulated amortization of $179,317 in 1999 and
$125,773 in 1998 2,188,408 2,241,952
Other assets 78,010 65,070
--------------------------------------------------------------------------------------------------------------------
$ 4,306,312 $ 4,294,875
====================================================================================================================
</TABLE>
<PAGE> 9
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of note payable (Note 5) $ 236,414 $ 304,460
Current portion of notes payable to related parties (Note 6) 397,100 371,076
Accounts payable 909,921 131,946
Accrued expenses 116,621 92,929
Customer deposits 51,757 60,110
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,711,813 960,521
Note payable, net of current portion (Note 5) 2,021,447 1,694,555
Notes payable to related parties, net of current portion (Note 6) 1,499,096 1,407,126
--------------------------------------------------------------------------------------------------------------------
Total liabilities 5,232,356 4,062,202
--------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 9)
SUBSEQUENT EVENTS (Notes 6, 7 and 11)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 6 and 7)
Preferred stock, $.001 par value. Authorized 65,001 shares;
issued and outstanding 65,000 shares of Series A preferred
stock (aggregate liquidation preference of $1,400,100) 65 65
Common stock, $.001 par value. Authorized 1,000,000 shares;
issued and outstanding 35,000 shares 35 35
Additional paid-in capital 1,379,935 1,379,935
Accumulated deficit (2,306,079) (1,147,362)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (926,044) 232,673
--------------------------------------------------------------------------------------------------------------------
$ 4,306,312 $ 4,294,875
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
4
<PAGE> 10
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended May 31, 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 4,590,649 $ 4,202,600
Cost of sales 3,706,486 2,931,121
--------------------------------------------------------------------------------------------------------------------
Gross profit 884,163 1,271,479
Selling, general and administrative expenses 1,596,429 1,592,596
--------------------------------------------------------------------------------------------------------------------
Loss from operations (712,266) (321,117)
Interest expense 444,856 415,158
Other expense (income) 795 (4,225)
--------------------------------------------------------------------------------------------------------------------
Loss before income taxes (1,157,917) (732,050)
Provision for income taxes (Note 8) 800 152,238
--------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (1,158,717) (884,288)
Cumulative effect of change in accounting principle - (76,365)
--------------------------------------------------------------------------------------------------------------------
Net loss $ (1,158,717) $ (960,653)
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
5
<PAGE> 11
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Accumulated
--------------------- ---------------------
Shares Amount Shares Amount Capital Deficit Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, May 31, 1997 65,000 $ 65 35,000 $ 35 $ 1,379,935 $ (186,709) $ 1,193,326
Net loss - - - - - (960,653) (960,653)
--------------------------------------------------------------------------------------------------------------------
BALANCE, May 31, 1998 65,000 65 35,000 35 1,379,935 (1,147,362) 232,673
Net loss - - - - - (1,158,717) (1,158,717)
--------------------------------------------------------------------------------------------------------------------
BALANCE, May 31, 1999 65,000 $ 65 35,000 $ 35 $ 1,379,935 $(2,306,079) $ (926,044)
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
6
<PAGE> 12
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 31, 1999 1998
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (1,158,717) $ (960,653)
Adjustment to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization 238,948 227,927
Provision for and write-off of doubtful accounts 194,672 -
Provision for inventory obsolescence 210,032 -
Loss on disposal 5,052 -
Deferred income taxes - 151,438
Write-off of organization costs - 76,365
Changes in operating assets and liabilities:
Accounts receivable (6,426) 139,263
Due from stockholder - 54,965
Inventories (396,093) 36,924
Prepaid expenses (69,054) 471,631
Other assets (40,300) -
Accounts payable 777,975 (7,321)
Accrued expenses 23,692 (30,620)
Customer deposits (8,353) 1,437
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (228,572) 161,356
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (267,822) (22,044)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 500,000 -
Payments on note payable (241,154) (415,068)
Proceeds from notes payable to related parties 353,602 135,000
Payments on notes payable to related parties (235,608) -
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) in financing activities 376,840 (280,068)
--------------------------------------------------------------------------------------------------------------------
Net decrease in cash (119,554) (140,756)
Cash, beginning of year 128,791 269,547
--------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 9,237 $ 128,791
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 428,980 $ 576,595
Income taxes $ - $ 800
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
7
<PAGE> 13
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT DESCRIPTION OF BUSINESS
ACCOUNTING
POLICIES
Gordon Acquisition Corporation (the
"Company"), a Delaware corporation, was
incorporated in March 1996. The Company was
formed as a holding company for the purpose
of acquiring H.B. Gordon Manufacturing Co.,
Inc. (dba Gordon Laboratories, Inc.). H.B.
Gordon Manufacturing Co., Inc. develops,
manufactures and distributes cosmetic
products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements
includes the accounts of Gordon Acquisition
Corporation and its wholly-owned subsidiary,
H.B. Gordon Manufacturing Co., Inc. All
significant intercompany accounts and
transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes revenue at the time of
shipment.
INVENTORIES
Inventories are valued at the lower of cost
(first-in, first-out) or market (net
realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Depreciation and amortization are calculated
under the straight-line method for financial
reporting purposes and accelerated methods
for income tax purposes. Leasehold
improvements are amortized over the lesser of
the life of the asset or term of the lease.
The following summarizes the estimated useful
lives for financial reporting purposes:
Years
----------------------------------------
Machinery and equipment 3-7
Furniture and fixtures 7
Leasehold improvements 5
----------------------------------------
8
<PAGE> 14
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT GOODWILL
ACCOUNTING
POLICIES Goodwill represents the excess of the
(CONTINUED) purchase price over net assets acquired
and is amortized on a straight line basis
over 40 years.
LONG-LIVED ASSETS
The Company reviews the carrying amount of
its long-lived and identifiable intangible
assets for possible impairment whenever
events or changes in circumstances indicate
that the carrying amount of the assets may
not be recoverable. Recoverability of assets
to be held and used is measured by a
comparison of the carrying amount of an asset
to future undiscounted net cash flows
expected to be generated by the asset. If
such assets are considered to be impaired,
the impairment to be recognized is measured
by the amount by which the carrying amount of
the assets exceeds the fair value of the
assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair
value less costs to sell.
ORGANIZATION COSTS
Effective June 1, 1997, the Company adopted
the provisions of Statement of Position 98-5
"Reporting on the Costs of Start-Up
Activities". This statement requires costs of
start-up activities and organization costs to
be expensed as incurred. The write-off of
unamortized organization costs of $76,365 is
reflected as a cumulative effect of a change
in accounting principle in the accompanying
1998 consolidated statement of operations.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are
capitalized and amortized over the life of
the related debt instrument.
9
<PAGE> 15
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT INCOME TAXES
ACCOUNTING
POLICIES The Company accounts for income taxes using
(CONTINUED) the liability method. This method
generally provides that deferred tax assets
and liabilities be recognized for temporary
differences between the financial reporting
bases and the tax bases of the Company's
assets and liabilities. A valuation allowance
is established, when necessary, to reduce the
deferred tax assets when it is more likely
than not that all or some portion of the
deferred tax assets will not be realized. The
impact on deferred taxes of changes in tax
rates and laws, if any, are applied to the
years during which temporary differences are
expected to be settled and reflected in the
financial statements in the period of
enactment.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25,
"Accounting for Stock Issued to Employees,"
and related interpretations in accounting for
its employee stock-based compensation plans.
Accordingly, no compensation cost is
recognized for its employee stock option
plans, unless the exercise price of options
granted is less than fair market value on the
date of grant. The Company has adopted the
disclosure provisions of Statement of
Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
USE OF ESTIMATES
The preparation of the financial statements
in conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
10
<PAGE> 16
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT CONCENTRATION OF CREDIT RISK
ACCOUNTING
POLICIES Credit is extended for all customers
(CONTINUED) based on financial condition and,
generally, collateral is not required. Credit
losses are provided for in the financial
statements. The Company had sales to two
customers which represented 30% and 11%,
respectively, of net sales in 1999. The
accounts receivable balance from these
customers were 38% and 3% of total accounts
receivable at May 31, 1999, respectively. The
Company had sales to two customers which
represented 31% and 11%, respectively, of net
sales in 1998.
RECLASSIFICATIONS
Certain reclassifications have been made to
the prior year financial statements to be
consistent with the 1999 presentation.
2. GOING CONCERN The accompanying consolidated financial
statements have been prepared assuming the
Company will continue as a going concern.
During the years ended May 31, 1999 and 1998,
the Company experienced operating losses of
$712,266 and $321,117, respectively. The
Company has a working capital deficiency of
$248,457 and a stockholders' deficit of
$926,044 at May 31, 1999. These factors raise
substantial doubt about the Company's ability
to continue as a going concern. The
consolidated financial statements do not
include any adjustments that might result
from the outcome of this uncertainty.
The Company has taken certain actions in an
effort to become profitable and improve cash
flow from operations in the future. These
actions included an aggressive sales campaign
to significantly increase revenues in fiscal
year 2000 and the relocation of the Company's
manufacturing facility in July 1999 to
provide the necessary capacity in order to
manufacture the products in support of the
increased revenues.
11
<PAGE> 17
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN The Company is also implementing a
(CONTINUED) corporate finance program designed to
improve its working capital structure by
considering alternatives to its existing debt
financing. The Company is actively searching
for alternative financing, which may include
the private placement of certain debt and
equity securities. Finally, management
continues to implement plans to increase
revenues, reduce existing cost structures,
improve operating efficiencies, and
strengthen the Company's operating
infrastructure. Although management has been
successful in obtaining working capital to
fund operations to date, there can be no
assurance that the Company will be able to
generate additional capital in the future.
3. INVENTORIES Inventories consist of the following:
<TABLE>
<CAPTION>
May 31, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 570,111 $ 611,571
Work-in-progress 309,554 201,949
Finished goods 127,400 7,484
--------------------------------------------------------------------------------
$ 1,007,065 $ 821,004
================================================================================
</TABLE>
4. PROPERTY AND Property and equipment consist of the
EQUIPMENT following:
<TABLE>
<CAPTION>
May 31, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 811,753 $ 770,040
Furniture and fixtures 9,128 8,724
Leasehold improvements 224,556 15,000
--------------------------------------------------------------------------------
1,045,437 793,764
Accumulated depreciation and
amortization (468,899) (321,952)
--------------------------------------------------------------------------------
$ 576,538 $ 471,812
================================================================================
</TABLE>
12
<PAGE> 18
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTE PAYABLE Note payable to a finance company is secured
by substantially all of the assets of H.B.
Gordon Manufacturing Co., Inc., bears
interest at a fixed rate of 12.25%, and is
payable in monthly principal and interest
installments of $41,992 through the maturity
date of December 2005. An executive officer
of the Company has provided a guaranty in
connection with the note payable.
Principal maturities of the note payable are
as follows:
<TABLE>
<CAPTION>
Year ending May 31,
----------------------------------------------------------------------------------
<S> <C>
2000 $ 236,414
2001 267,534
2002 302,750
2003 342,601
2004 387,699
Thereafter 720,863
----------------------------------------------------------------------------------
$ 2,257,861
==================================================================================
</TABLE>
The note payable agreement contains certain
covenants and also restricts the payment of
dividends. At May 31, 1999, the Company was
in compliance with, or had obtained waivers
for, all such covenants.
6. NOTES PAYABLE Notes payable to related parties consist of
TO RELATED PARTIES the following:
<TABLE>
<CAPTION>
May 31, 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Note payable to stockholder; secured by
substantially all of the assets of H.B.
Gordon Manufacturing Co., Inc.;
subordinated to note payable to finance
company (Note 5); bearing interest at 8%;
payable in quarterly interest
installments through April 1999.
Principal and interest payments
aggregating $43,640 are due quarterly
commencing July 1999 through April 2003
and $120,950 per quarter thereafter
through April 2004. $ 928,718 $ 928,718
</TABLE>
13
<PAGE> 19
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
6. NOTES PAYABLE
TO RELATED PARTIES
(CONTINUED) May 31, 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Note payable to stockholder; secured by
substantially all of the assets of H.B.
Gordon Manufacturing Co., Inc.;
subordinated to note payable to finance
company (Note 5); bearing interest at
12.78%; payable in monthly principal and
interest installments of $9,035 through
the maturity date of May 2003. 336,462 397,431
Note payable to stockholder; secured by
substantially all of the assets of H.B.
Gordon Manufacturing Co., Inc.;
subordinated to note payable to finance
company (Note 5); bearing interest at 8%;
payable in quarterly principal and
interest payments of $38,769 through
April 2000. 142,414 317,053
Notes payable. In the event of default of
the note, 50% of principal may be
converted into common stock at $21.53 per
share prior to repayment; additionally,
if not converted prior to repayment, the
lender has up to 30 days after repayment
to purchase common stock with an
aggregate value of 50% of the original
note amount at $21.53 per share. Bearing
interest ranging from 10% to 15%;
principal and interest due on various
dates through December 1999. (1) 140,000 135,000
</TABLE>
14
<PAGE> 20
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
6. NOTES PAYABLE
TO RELATED PARTIES
(CONTINUED) May 31, 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable; secured by certain accounts
receivable; subordinated to note payable
to finance company (Note 5); bearing
interest at 10%; principal and interest
due on various dates through July 1999;
stock option to purchase 1,875 shares of
common stock at $10.65 per share for an
eight-year period to be granted upon
maturity. (1) 266,458 -
Notes payable; secured by certain accounts
receivable; subordinated to note payable
to finance company (Note 5); bearing
interest at 10%; principal and interest
due July 1999; stock option to purchase
225 shares of common stock at $10.65 per
share for an eight-year period to be
granted upon maturity. Such notes
payable were repaid in full subsequent to
May 31, 1999. 32,144 -
Note payable; principal and accrued interest
of $52,000 due May 1999. 50,000 -
-----------------------------------------------------------------------------------
1,896,196 1,778,202
Current portion (397,100) (371,076)
-----------------------------------------------------------------------------------
$ 1,499,096 $ 1,407,126
===================================================================================
</TABLE>
15
<PAGE> 21
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE Principal maturities of the notes payable to
TO RELATED PARTIES related parties are as follows:
(CONTINUED)
<TABLE>
<CAPTION>
Year ending May 31,
----------------------------------------------------------------------------------
<S> <C>
2000 $ 397,100
2001 190,437
2002 616,762
2003 230,648
2004 461,250
----------------------------------------------------------------------------------
$ 1,896,196
==================================================================================
</TABLE>
The note payable to stockholder agreements
contain certain covenants. At May 31, 1999,
the Company was in compliance with, or had
obtained waivers for, all such covenants.
(1) On February 23, 2000, the Company
amended the agreements for notes payable
to related parties. Such amendments
extend the maturity date to February 23,
2002 and adjust the interest rate on the
notes to 15%, payable annually. As a
result of the extension of the maturity
date for these notes, they have been
included in non-current liabilities in
the accompanying 1999 balance sheet. In
connection with the amendments, the
Company issued certain warrants to
purchase shares of common stock at $.01
per share, which is at a discount from
the fair value. The Company issued
warrants to purchase an aggregate of
3,473 shares of common stock on the date
of the amended agreements and is
obligated to issue additional warrants
to purchase up to an aggregate of 10,199
shares of common stock on a prorated
quarterly basis through the final
maturity date of the notes. In the event
of a partial or full prepayment of any
of the notes, the number of warrants to
be issued to the noteholder will be
prorated accordingly.
16
<PAGE> 22
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY PREFERRED STOCK
The Company has authorized 65,001 shares of
preferred stock, of which 65,000 shares are
designated as Series A Preferred Stock and
one share is designated as Series B Preferred
Stock. The shares of Series A Preferred Stock
have a liquidation preference of $21.54 per
share and are convertible into common stock
at an initial conversion price of $21.54 per
share. The shares of Series B Preferred Stock
are not convertible into shares of common
stock and have no liquidation preference. In
the event the Company declares and pays a
dividend, the holders of Common Stock and the
Series A Preferred Stock, on an as converted
basis, shall share such dividend on a pro
rata basis. In no event shall dividends be
paid on the Series B Preferred Stock.
STOCK OPTIONS
In February 1998, the Company's Board of
Directors adopted the 1998 Stock Option Plan
(the "Plan"). The Plan is administered by a
committee appointed by the Board of Directors
(the "Committee") which determines the
recipients and the terms of the options
granted. The Plan provides that options
granted may be either incentive stock options
or non-qualified options. Options may be
granted to eligible employees, directors and
consultants to purchase shares of the
Company's common stock at a price generally
not less than 100% of the fair market value
of the common stock on the date of grant. The
Plan provides for the granting of options for
up to 10,000 shares of the Company's common
stock. Subject to termination of employment,
options may expire up to ten years from the
date of grant.
17
<PAGE> 23
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY A summary of stock option activity is as
(CONTINUED) follows:
<TABLE>
<CAPTION>
May 31, 1999 May 31, 1998
-------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding,
beginning of year 2,500 $ 23.68 - $ -
Granted 5,000 26.91 2,500 23.68
------------------------------------------------------------------------------------
Outstanding,
end of year 7,500 $ 25.83 2,500 $ 23.68
====================================================================================
Options exercisable
at year-end 2,500 $ 25.30 625 $ 23.68
====================================================================================
</TABLE>
Information relating to stock options at May
31, 1999 summarized by exercise price is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -------------------------
Weighted Weighted
Exercise Average Average
Price Per Life Exercise Exercise
Share Shares (Year) Price Shares Price
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 23.68 2,500 5.8 $ 23.68 1,250 $ 23.68
26.91 5,000 7.7 26.91 1,250 26.91
----------------------------------------------------------------------------------
$ 23.68
to 26.91 7,500 7.0 $ 25.83 2,500 $ 25.30
==================================================================================
</TABLE>
Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", requires the
Company to provide pro forma information
regarding net income as if such compensation
cost for the Company's stock option plans had
been determined in accordance with the fair
value of each stock option at the grant date
by using the minimum value method with the
following assumptions for grants in 1999 and
1998: 0% dividend yield; risk free interest
rate of 4.74% for 1999 and 5.59% for 1998;
and expected lives of 4 years.
18
<PAGE> 24
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY Under the accounting provisions of SFAS 123,
(CONTINUED) the Company's net loss would have been
increased to the pro forma amount indicated
below:
<TABLE>
<CAPTION>
Net loss 1999 1998
----------------------------------------------------------------------
<S> <C> <C>
As reported $ (1,158,717) $ (960,653)
Pro forma $ (1,161,357) $ (959,538)
</TABLE>
Between June and August 1999, the Company
granted options to purchase 2,100 shares of
common stock at $10.65 per share in
connection with certain notes payable to
related parties (see Note 6).
RESTRICTIONS ON DIVIDENDS
Pursuant to state law, the Company may be
restricted from paying dividends to its
stockholders as a result of its accumulated
deficit as of May 31, 1999.
8. INCOME TAXES Provision for income taxes consists of the
following components:
<TABLE>
<CAPTION>
Year ended May 31, 1999 1998
--------------------------------------------------------------------------------
Current:
<S> <C> <C>
Federal $ - $ -
State 800 800
Deferred:
Federal - 117,901
State - 33,537
--------------------------------------------------------------------------------
$ 800 $ 152,238
================================================================================
</TABLE>
19
<PAGE> 25
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES The principle reason for the difference
(CONTINUED) between the Federal statutory tax rate and
the Company's effective tax rate is the
nonrecognition of the net operating loss
carryforward benefits.
The income tax effects of significant items
comprising the Company's deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
May 31, 1999 1998
--------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 587,276 $ 324,189
Reserves and allowances 156,527 79,111
Inventory capitalization 25,719 28,981
Other 319 47
--------------------------------------------------------------------------------
Total deferred tax assets 769,841 432,328
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (27,803) (13,220)
--------------------------------------------------------------------------------
Net deferred tax assets 742,038 419,108
Valuation allowance (742,038) (419,108)
--------------------------------------------------------------------------------
Net deferred tax asset/liability $ - $ -
================================================================================
</TABLE>
At May 31, 1999, the Company had
approximately $1,600,000 in net operating
loss carryforwards for Federal tax purposes
expiring through 2019. For California tax
purposes, the Company has approximately
$800,000 in net operating loss carryforwards
which expire through 2004.
As a result of the Company's loss and
uncertainties surrounding the realization of
the net operating loss carryforward,
management has determined that the
realization of the deferred tax assets is not
more likely than not. Accordingly, a 100%
valuation allowance has been recorded.
20
<PAGE> 26
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS LEASES
The Company entered into an agreement with an
unrelated party to lease a new corporate and
manufacturing facility under a long-term
non-cancelable operating lease commencing
March 1, 1999 which expires in December 2006,
and includes certain options to renew
thereafter.
The Company previously leased its office and
warehouse facilities from a stockholder of
the Company through August 1999.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending May 31,
--------------------------------------------------------------------------------
<S> <C>
2000 $ 255,300
2001 278,400
2002 286,752
2003 295,355
2004 304,215
Thereafter 636,084
--------------------------------------------------------------------------------
$ 2,056,106
================================================================================
</TABLE>
Total rent expense, primarily for the related
party lease, for the years ended May 31, 1999
and 1998 was $201,344 and $182,500,
respectively.
EMPLOYMENT AGREEMENTS
In April 1996, the Company entered into a
five-year employment agreement with the
Company's President which provides for a base
salary of $110,000 plus incentive
compensation, which is subject to annual
increases.
In April 1996, the Company entered into an
employment agreement with a
stockholder/former officer for services to be
rendered through April 1998. The agreement
required a cash payment of $1,000,000 which
was recorded as prepaid compensation and
amortized on a straight-line basis over the
service period of the agreement.
21
<PAGE> 27
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. YEAR 2000 Like other companies, the Company could be
(UNAUDITED) adversely affected if its computer systems or
the systems of its suppliers or customers do
not properly process and calculate
date-related information and data from the
period surrounding and including January 1,
2000. This is commonly known as the "Year
2000" issue. Additionally, this issue could
impact non-computer systems and devices such
as production equipment, elevators, etc.
While the Company's project to assess and
correct Year 2000 related issues has been
completed, and the Company has not
experienced any significant Year 2000 related
events, interactions with other companies'
systems make it difficult to conclude there
will not be future effects. Consequently, at
this time, management cannot provide
assurances that the Year 2000 issue will not
have an impact on the Company's operations.
11. SUBSEQUENT EVENTS FACTORING AGREEMENT
On July 20, 1999, the Company entered into a
factoring agreement with a finance company to
sell certain accounts receivable due to the
Company from its customers. Advances are
limited to a maximum of $1,000,000 and the
related receivables to be factored, sold or
assigned are subject to the acceptance by the
finance company at its sole discretion. Such
receivables are sold with recourse in the
event the receivable is not paid within 90
days. Advances are subject to a .5% factoring
fee for every 30 day period or fraction
thereof from the date the accounts receivable
is purchased until the date it is paid in
full or otherwise repurchased by the Company.
In addition, outstanding advances bear
interest at a floating fee per annum equal to
the prime rate plus 2%. The finance company
has a security interest in substantially all
of the Company's assets.
PURCHASE AGREEMENT
On April 17, 2000, the Company's stockholders
entered into an agreement to sell their
shares of common stock to Chromatics Color
Sciences International, Inc. ("Chromatics")
in exchange for common stock in Chromatics
and cash with an aggregate value of
approximately $6,000,000, subject to certain
closing conditions.
22
<PAGE> 28
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2000
(UNAUDITED)
<TABLE>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 39,123
Accounts Receivable - net of allowance
for doubtful accounts of $55,096 535,684
Inventories 952,836
Prepaid Expenses 83,972
-----------
Total Current Assets 1,611,615
-----------
Property and Equipment 1,918,436
Accumulated Depreciation (801,170)
-----------
Property and Equipment - net 1,117,266
-----------
Goodwill - net of accumulated
amortization of $210,551 2,157,174
Other Assets 120,025
-----------
TOTAL ASSETS $ 5,006,080
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Current portion of Note Payable $ 209,987
Current portion of Notes Payable to related parties 1,144,931
Current portion, Leases Payable 76,525
Accounts Payable 939,101
Accrued expenses 229,964
Customer Deposits 57,108
-----------
Total Current Liabilities 2,657,616
Note Payable, net of current portion 2,118,731
Notes Payable to related parties, net of current portion 979,971
Long term Leases Payable, net of current portion 196,455
-----------
TOTAL LIABILITIES 5,952,773
-----------
Commitments and Contingencies
Preferred stock, $.001 par value. Authorized 65,001 shares; 65
issued and outstanding 65,000 shares of Series A
preferred stock (aggregate liquidation preference of $1,400,100)
Common stock, $.001 par value. Authorized 1,000,000 35
shares; issued and outstanding 35,000 shares
Additional paid-in-capital 1,379,935
Accumulated Deficit (2,326,728)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (946,693)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 5,006,080
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 29
Gordon Acquisition Corporation and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
February 29 and 28
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 5,621,724 $ 3,548,285
Cost of Sales 3,930,120 2,972,082
----------- -----------
Gross profit 1,691,604 576,203
Selling General and Administrative 1,212,665 1,012,638
----------- -----------
Income( Loss) from Operations 478,939 (436,435)
Interest Expense 499,993 325,755
Other Expense(Income) (405) (945)
----------- -----------
Net Loss $ (20,649) $ (761,245)
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE> 30
<TABLE>
<CAPTION>
GORDON ACQUISITION CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(UNAUDITED) NINE MONTHS ENDED
FEBRUARY 29 AND 28,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (20,649) $(761,245)
Adjustments to Reconcile Net Loss to Cash Provided by
(Used in) Operating Activities
Depreciation & Amortization 377,540 197,461
Provision for Bad debts 150,000
Provision for Inventory Obsolescence 162,000
Changes in Operating assets & Liabilities
Accounts receivable (178,229) (204,546)
Inventories 54,229 37,350
Prepaid Expenses 5,627 (2,354)
Other Assets (55,695) (45,090)
Accounts Payable (13,235) 266,665
Accrued Expenses 84,714 (4,172)
Customer Deposits 5,351 14,428
--------- ---------
Cash Provided by (used in) Operating Activities 259,653 (189,503)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (560,983) (63,353)
--------- ---------
Cash Used in Investing Activities (560,983) (63,353)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Notes Payable 250,000 500,000
Payment on Note Payable (136,728) (367,532)
Payment on Notes Payable to Related Parties (149,865) (15,405)
Proceeds from Related Party Debt 407,200 15,000
Repayment of Capital Leases (39,391) --
--------- ---------
Cash Flows from Financing Activities 331,216 132,063
--------- ---------
Net Increase (Decrease) in cash 29,886 (120,793)
Cash, Beginning of period 9,237 128,791
--------- ---------
Cash, End of period $ 39,123 $ 7,998
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 499,993 $ 325,755
Income Taxes $ -- $ --
Capital leases $ 312,371 $ --
</TABLE>
See Notes to Financial Statements
<PAGE> 31
Gordon Acquisition Corporation and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation:
Nature of Report - The financial statements as of and for the periods ended
February 29,2000 and February 28, 1999 are unaudited. In the opinion of
management, all adjustments, which include only normal recurring adjustments
necessary to present fairly the financial position, results of operations and
changes in cash flows, for all periods presented have been made. The results of
operations for interim periods are not necessarily indicative of the operating
results for the full year.
Footnotes - Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the fiscal year ended May 31, 1999.
Note 2 - Inventories:
Inventories consist of:
<TABLE>
<S> <C>
Raw Materials $ 543,117
Work in Progress 293,326
Finished Goods 116,393
---------
$ 952,836
=========
</TABLE>
Note 3 - Subsequent Event:
On June 2, 2000, Stockholders of the Company representing approximately 85% of
the outstanding stock and Related Party Debt sold their shares of common stock
and debt to Chromatics Color Sciences International, Inc. ("CCSI") in exchange
for common stock in CCSI and cash with an aggregate value of approximately
$5,500,000.
<PAGE> 32
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following historical and pro forma consolidated financial information has
been derived from Chromatics Color Sciences International, Inc. ("CCSI")
consolidated historical financial statements for the year ended December 31,
1999 and the three months ended March 31, 2000, and Gordon Laboratories, Inc.
("Gordon") consolidated historical financial statements for the year and three
months ended February 29, 2000. In preparing this pro forma data, we have used
what we believe are reasonable methods to conform the basis of presentation of
CCSI and Gordon's historical consolidated financial statements. These pro forma
statements are presented for illustrative purposes only. The pro forma
adjustments are based upon available information and certain assumptions that
management feels are reasonable. The pro forma consolidated financial statements
do not purport to represent what the results of operations or financial position
of CCSI would actually have been if the acquisition of Gordon had in fact
occurred on such dates, nor do they purport to project the results of operations
or financial position of CCSI for any future period or as of any date,
respectively.
We accounted for the Gordon acquisition using the purchase method. Under the
purchase method, tangible and intangible assets acquired and liabilities assumed
are recorded at their estimated fair values. The excess of the purchase price,
including estimated fees and expenses related to the acquisition, over the net
assets acquired has been calculated as goodwill on the accompanying unaudited
pro forma consolidated balance sheet. The estimated fair values and useful lives
of assets acquired and liabilities assumed are based on a preliminary valuation.
We are in the process of having an appraisal performed of the net assets
acquired. Based on this appraisal some assets and other intangibles may be
amortized over a shorter life than the goodwill amortization period of 20 years,
however, the effect of any changes is not expected to materially affect the pro
forma financial statements.
We prepared the unaudited pro forma consolidated balance sheet at March 31, 2000
by combining CCSI's unaudited consolidated balance sheet at March 31, 2000 with
Gordon's unaudited consolidated balance sheet at February 29, 2000, giving
effect to the acquisition as though it occurred on March 31, 2000.
We prepared the unaudited pro forma statement of operations for the periods
presented by combining CCSI's audited statement of operations for the year ended
December 31, 1999 and its unaudited statement of operations for the three months
ended March 31, 2000 with Gordon's unaudited statement of operations for the
year and three months ended February 29, 2000, giving effect to the acquisition
as though it occurred on January 1, 1999.
The unaudited pro forma consolidated financial statements are presented for
informational purposes only. You should read this unaudited pro forma
consolidated financial information in conjunction with CCSI's consolidated
financial statements and the related notes thereto and Gordon's consolidated
financial statements and the related notes thereto.
<PAGE> 33
Chromatics Color Sciences International, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
Amounts in thousands
<TABLE>
<CAPTION>
Pro Forma
CCSI Gordon consolidated
at at at
March 31, February 29, Pro Forma March 31,
2000 2000 Adjustments 2000
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
---------------
Cash and equivalents $ 4,995 $ 39 $ (609)(1) $ 4,425
Accounts receivable 66 536 602
Inventories 1,233 953 2,186
Prepaid expenses 113 84 197
-------- ------- -------- --------
Total Current Assets 6,407 1,612 (609) 7,410
-------- ------- -------- --------
Property and equipment 619 1,117 1,736
Software/Patent costs 1,519 1,519
Other assets 1,072 120 1,192
Goodwill 2,157 5,016 (1),(3) 7,173
-------- ------- -------- --------
Total Assets $ 9,617 $ 5,006 $ 4,407 $ 19,030
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Current portion - Long-term debt $ - $ 287 $ - $ 287
Current portion - Notes payable to related parties - 1,145 (1,145)(2) -
Accounts payable - related party 245 - 245
Accounts payable/accrued expenses 665 1,225 397 (2),(3) 2,287
-------- ------- -------- --------
Total Current liabilities 910 2,657 (748) 2,819
-------- ------- -------- --------
LONG - TERM DEBT
----------------
Payable for purchase of Gordon Stock 653 (2) 653
Long-term debt,net of current maturities 2,315 2,315
Notes payable to related parties, net of current portion 980 (980)(2) -
Senior convertible debt/accrued interest 5,552 - 5,552
-------- ------- -------- --------
Total Long - Term Debt 5,552 3,295 (327) 8,520
-------- ------- -------- --------
REDEEMABLE PREFERRED STOCK 4,597 - - 4,597
-------- ------- -------- --------
STOCKHOLDERS' EQUITY( DEFICIENCY)
---------------------------------
Common stock 16 - 1 (1) 17
Additional paid in capital 36,552 1,380 3,155 (1) 41,087
Accumulated deficit (38,010) (2,326) 2,326 (1) (38,010)
-------- ------- -------- --------
Total Stockholders' Equity( Deficiency) (1,442) (946) 5,482 3,094
-------- ------- -------- --------
-------- ------- -------- --------
TOTAL LIABILITIES AND EQUITY $ 9,617 $ 5,006 $ 4,407 $ 19,030
======== ======= ======== ========
</TABLE>
<PAGE> 34
Chromatics Color Sciences International, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
Pro Forma
For the year ended, Consolidated
--------------------------- For the
CCSI Gordon Year Ended
December 31, February 29, Pro Forma December 31,
1999 2000 Adjustments 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
--------- ------ ----- ---------
SALES $ 1,103 $ 6,664 $ - $ 7,767
--------- ------ ----- ---------
COSTS AND EXPENSES
------------------
Cost of Sales 898 4,665 - 5,563
Selling, General and Administrative 8,905 1,731 - 10,636
Research and Development 996 - - 996
Amortization of Goodwill 65 295 (A) 360
--------- ------ ----- ---------
10,799 6,461 295 17,555
--------- ------ ----- ---------
OPERATING INCOME (LOSS) (9,696) 203 (295) (9,788)
--------- ------ ----- ---------
INTEREST INCOME ( EXPENSE )
---------------------------
INTEREST INCOME 201 (1) - 200
INTEREST EXPENSE (3,313) (619) 250 (B) (3,682)
--------- ------ ----- ---------
(3,112) (620) 250 (3,482)
--------- ------ ----- ---------
--------- ------ ----- ---------
NET LOSS $ (12,808) $ (417) $ (45) $ (13,270)
========= ====== ===== =========
NET LOSS TO COMMON SHAREHOLDERS
-------------------------------
NET LOSS $ (12,808) $ (417) $ (45) $ (13,270)
DEEMED DIVIDEND - PREFERRED STOCK 1,558 - - 1,558
--------- ------ ----- ---------
NET LOSS TO COMMON SHAREHOLDERS $ (14,366) $ (417) $ (45) $ (14,828)
========= ====== ===== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,498 - 722 (C) 16,220
========= ====== ===== =========
BASIC AND DILUTED LOSS PER SHARE $ (0.93) $ - $ - $ (0.91)
========= ====== ===== =========
</TABLE>
<PAGE> 35
Chromatics Color Sciences International, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
Pro Forma
Consolidated
For the three months ended, For the three
CCSI Gordon Months Ended
March 31, February 29, Pro Forma March 31,
2000 2000 Adjustments 2000
---- ---- ----------- ----
<S> <C> <C> <C> <C>
-------- -------- -------- --------
SALES $ 39 $ 1,575 $ -- $ 1,614
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of Sales 21 1,103 -- 1,124
Selling, General and Administrative 2,300 321 -- 2,621
Research and Development 295 -- -- 295
Amortization of Goodwill 16 74(A) 90
-------- -------- -------- --------
2,616 1,440 74 4,130
-------- -------- -------- --------
OPERATING INCOME (LOSS) (2,577) 135 (74) (2,516)
-------- -------- -------- --------
INTEREST INCOME ( EXPENSE )
INTEREST INCOME 45 -- -- 45
INTEREST EXPENSE (897) (222) 50(B) (1,069)
-------- -------- -------- --------
(852) (222) 50 (1,024)
-------- -------- -------- --------
-------- -------- -------- --------
NET LOSS $ (3,429) $ (87) $ (24) $ (3,540)
======== ======== ======== ========
NET LOSS TO COMMON SHAREHOLDERS
NET LOSS $ (3,429) $ (87) $ (24) $ (3,540)
DEEMED DIVIDEND - PREFERRED STOCK 703 -- -- 703
-------- -------- -------- --------
NET LOSS TO COMMON SHAREHOLDERS $ (4,132) $ (87) $ (24) $ (4,243)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,630 -- 722(C) 16,352
======== ======== ======== ========
BASIC AND DILUTED LOSS PER SHARE $ (0.26) $ -- $ -- $ (0.26)
======== ======== ======== ========
</TABLE>
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
The pro forma presentation represents a preliminary allocation of the
total consideration paid by the Company in connection with the Gordon
acquisition. The transaction is being accounted for by the purchase
method of accounting. We plan to hire an independent appraiser to value
the net assets. Upon completion of this valuation, we will reallocate
the purchase price to Gordon's assets and liabilities, both intangible
and tangible, with the excess of the cost over the fair value of the
net assets acquired allocated to goodwill. Management expects that,
based on this allocation, additional purchase accounting adjustments
will be made to Gordon's assets and liabilities, however, the affect of
any changes is not expected to materially affect the pro forma
financial statements.
(1) Reflects our acquisition of 100% of Gordon for $3,945,000. This is
reflected with an initial purchase price of approximately 85% for
$3,292,000 and the accrual of an irrevocable option to purchase the
remaining 15% of Gordon within one year of June 2, 2000. The purchase
price is derived from the issuance of 523,405 shares of CCSI common
stock at $6.29 per share issued at the closing date and 103,816 shares
of CCSI common stock to be issued at an assumed price of $6.29 issued
within one year. Goodwill represents the excess of the purchase price
over Gordon's net assets, subject to the appraisal discussed above.
(2) Reflects the repayment of Gordon debt for $609,000 cash and $1,244,000
of Gordon debt for 197,826 shares of CCSI common stock at $6.29 per
share.
(3) Reflects $375,000 of estimated closing costs relating to the
acquisition of Gordon.
PRO FORMA INCOME STATEMENT ADJUSTMENTS
(A) Reflects the amortization of goodwill. Goodwill is amortized over its
estimated useful life of 20 years.
(B) Reflects the reduction of interest expense assuming the debt purchased
by CCSI was purchased at the beginning of the period.
(C) Represents the weighted average number of shares issued in the
acquisition of Gordon as indicated above.
