-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wl2CHp7gheeAVxXNF3H34vEl7pgubyVsAbrZeLYBod3LFZgGvg3LxwbqT+Qk/5wo dDOx0rFfJCTh9M82x4OPew== 0000950116-96-000668.txt : 19960724 0000950116-96-000668.hdr.sgml : 19960724 ACCESSION NUMBER: 0000950116-96-000668 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960722 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISUAL EDGE SYSTEMS INC CENTRAL INDEX KEY: 0001015172 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05193 FILM NUMBER: 96597095 BUSINESS ADDRESS: STREET 1: 7 W 51ST ST CITY: NEW YORK STATE: NY ZIP: 10019 MAIL ADDRESS: STREET 1: 7 WEST 51ST STREET STREET 2: 7 WEST 51ST STREET CITY: NEW YORK STATE: NY ZIP: 10019 SB-2/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996 REGISTRATION NO. 333-5193 ============================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ AMENDMENT NO. 2 to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ VISUAL EDGE SYSTEMS INC. (Exact name of registrant as specified in its charter) Delaware 7999 13-377-8895 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
7 West 51st Street New York, New York 10019 (212) 765-1284 (Address and telephone number of registrant's principal executive offices) ------ Earl T. Takefman Chief Executive Officer Visual Edge Systems Inc. 7 West 51st Street New York, New York 10019 (212) 765-1284 (Name, address and telephone number of agent for service) ------ Copies to: David W. Pollak, Esq. Robert J. Mittman, Esq. Morgan, Lewis & Bockius LLP Tenzer Greenblatt LLP 101 Park Avenue 405 Lexington Avenue New York, New York 10178 New York, New York 10174-0208 Tel: (212) 309-6000 Tel: (212) 885-5555 Fax: (212) 309-6273 Fax: (212) 885-5001 ------ Approximate date of proposed sale to the 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, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ ------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ============================================================================= VISUAL EDGE SYSTEMS INC. CROSS-REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-B SHOWING LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY ITEMS OF FORM SB-2
Form SB-2 Item Number and Heading Caption or Location in Prospectus ------------------------------------------------------- ------------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus ............ Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors .............. Prospectus Summary; Risk Factors 4. Use of Proceeds ................................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price . . . ............. Outside Front Cover Page of Prospectus; Underwriting 6. Dilution .......................................... Dilution 7. Selling Securityholders ........................... Prospectus Summary; Principal Stockholders; Selling Stockholders and Plan of Distribution; Underwriting 8. Plan of Distribution .............................. Outside Front Cover Page of Prospectus; Underwriting 9. Legal Proceedings ................................. Business 10. Directors, Executive Officers, Promoters and Control Persons ........................................... Management 11. Security Ownership of Certain Beneficial Owners and Management ........................................ Management; Principal Stockholders 12. Description of Securities ......................... Outside Front Cover Page of Prospectus; Prospectus Summary; Description of Securities 13. Interests of Named Experts and Counsel ............ Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities .................... Not Applicable 15. Organization Within Five Years .................... Certain Transactions 16. Management's Discussion and Analysis or Plan of Operation .......................................... Plan of Operation; Proposed Business 17. Description of Property ........................... Business 18. Certain Relationships and Related Transactions. ... Certain Transactions 19. Market For Common Equity and Related Stockholder Matters ............................................ Description of Securities 20. Executive Compensation ............................ Management 21. Financial Statements .............................. Financial Statements 22. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............... Not Applicable
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED JULY 22, 1996 SUBJECT TO COMPLETION LOGO 1,300,000 Shares of Common Stock and Redeemable Warrants to Purchase 1,300,000 Shares of Common Stock An additional 220,000 shares of Common Stock are being registered on behalf of certain selling stockholders; however, such shares will be offered on a delayed basis and not as part of the underwritten offering. The Company is offering hereby 1,300,000 shares of Common Stock and redeemable warrants to purchase 1,300,000 shares of Common Stock (the "Warrants"). The shares of Common Stock and Warrants may be purchased separately and will be separately transferable immediately upon issuance. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at a price of $5.00, subject to adjustment in certain circumstances, at any time commencing , 1997 through and including , 2000. The Warrants are redeemable by the Company, upon the consent of the Underwriter, at any time commencing , 1997, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 30 of the trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. See "Description of Securities." Prior to this offering, there has been no public market for the Common Stock or the Warrants and there can be no assurance that any such market will develop. It is anticipated that the Common Stock and the Warrants will be quoted on the Nasdaq SmallCap Market under the symbols "EDGE" and "EDGEW," respectively. The offering prices of the Common Stock and the Warrants, and the exercise price of the Warrants, were determined pursuant to negotiations between the Company and the Underwriter and do not necessarily relate to the Company's book value or any other established criteria of value. For a discussion of the factors considered in determining the offering prices, see "Underwriting." This Prospectus also relates to the offer and sale by certain persons (the "Selling Stockholders") of 220,000 shares of Common Stock. The shares offered by the Selling Stockholders are not part of the underwritten offering and may not be offered or sold prior to twelve months from the date of this Prospectus without the prior written consent of the Underwriter. See "Selling Stockholders and Plan of Distribution." ------ THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF $3.92 PER SHARE AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 7 AND "DILUTION." ------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== Underwriting Discounts Price to and Proceeds to Public Commissions(1) Company(2) - ------------------------------------------------------------------------------- Per Share....................... $5.00 $.50 $4.50 - ------------------------------------------------------------------------------- Per Warrant ................... $.10 $.01 $.09 - ------------------------------------------------------------------------------- Total(3) ...................... $6,630,000 $663,000 $5,967,000 =============================================================================== (1) In addition, the Company has agreed to pay to the Underwriter a 3% non-accountable expense allowance, to grant to the Underwriter warrants (the "Underwriter's Warrants") to purchase 130,000 shares of Common Stock and/or 130,000 warrants and to retain the Underwriter as a financial consultant. The Company has also agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses, including the non-accountable expense allowance in the amount of $198,900 ($228,735 if the Underwriter's over-allotment option is exercised in full), estimated at $660,000, payable by the Company. The Selling Stockholders will not bear any expenses of this offering. (3) The Company has granted the Underwriter an option, exercisable within 45 days from the date of this Prospectus, to purchase up to 195,000 additional shares of Common Stock and/or 195,000 additional Warrants, on the same terms as set forth above, solely for the purpose of covering over-allotments, if any. If the Underwriter's over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $7,624,500, $762,450 and $6,862,050, respectively. See "Underwriting." ------ The shares of Common Stock and Warrants are being offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the shares of Common Stock and the Warrants will be made against payment therefor at the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on or about , 1996. Whale Securities Co., L.P. The date of this Prospectus is , 1996. ------ The Company is not currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As of the date of this Prospectus, the Company will become subject to the reporting requirements of the Exchange Act, and in accordance therewith will file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices: Northeast Regional Office, 7 World Trade Center, 13th Floor, and Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois and copies of such material can be obtained from the Public Reference Section of the Commission at prescribed rates. The Company intends to furnish its stockholders with annual reports containing audited financial statements and other reports as the Company deems appropriate or as may be required by law. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AND WARRANTS AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety. Unless otherwise indicated, all share and per share data and information in this Prospectus relating to the number of shares of Common Stock outstanding (i) has been adjusted to give retroactive effect to a recapitalization effective May 2, 1996 (the "Recapitalization") pursuant to which each outstanding share of Class A Common Stock of the Company was converted into approximately .49 shares of Common Stock and each outstanding share of Class B Common Stock of the Company was converted into 4,882.68 shares of Common Stock and (ii) assumes no exercise of the Underwriter's over-allotment option to purchase up to 195,000 additional Shares and/or 195,000 additional Warrants. See "Certain Transactions" and "Underwriting." THE COMPANY Visual Edge Systems Inc. (the "Company"), a development stage company, was organized to develop and market personalized videotape golf lessons featuring One-on-One instruction by leading professional golfer Greg Norman. To date, the Company has focused its efforts on developing computer software which digitally combines actual video footage of a golfer's swing with a synchronized "split-screen" comparison to Greg Norman's golf swing to produce a 45-minute One-on-One videotape golf lesson. The Company's proposed One-on-One video golf lesson analyzes a golfer's swing by comparing it to Greg Norman's swing at several different club positions from two camera angles using Greg Norman's pre-recorded instructional commentary and analysis and computer graphics to highlight important golf fundamentals intended to improve a golfer's performance. Pursuant to a license agreement with Greg Norman and Great White Shark Enterprises, Inc. (the "Greg Norman License"), Greg Norman agreed to grant to the Company a worldwide license to use his name, likeness and endorsement in connection with the production and promotion of the Company's proposed products. The agreement provides that the continued use of the license by the Company is conditioned upon guaranteed payments aggregating $3,300,000 during the three-year period commencing July 1, 1996 to be applied against a royalty equal to 8% of the Company's net revenues from product sales. The Company's proposed business and prospects are dependent upon the Company's continued association with Greg Norman. In 1995, the Company developed the software necessary to operate a video editing and videotape production process and an initial version of a right-handed, full swing videotape golf lesson. In September 1995, the Company conducted preliminary market testing of such videotape at a public driving range in New York where approximately 175 golfers used the One-on-One concept at no charge. Based on favorable consumer reaction to the videotape, in November and December 1995 the Company engaged in expanded market testing activities at various public and private golf courses, driving ranges and retailers in Florida and California, including the PGA National Golf Course, during which a limited number of videotapes were sold. The market tests were intended to provide information on the product's acceptance among golfers and to test the technical aspects of the Company's video editing and production process. The Company intends to design, develop and test production versions of One-on-One video golf lessons. The production versions are expected to provide enhanced pre-recorded instructional commentary and analysis of a golfer's swing at various club positions. The Greg Norman License provides that the Company has the right to require Greg Norman to be available, subject to his commitments to the PGA Tour and other golf tours and contractual commitments, to produce the Company's proposed products and make promotional appearances to market such products. The Company currently anticipates that, subject to Greg Norman's availability, it will script, film, edit and produce production versions of various right and left handed, full swing, standard, advanced, senior and female One-on-One videotape golf lessons by late 1996. The Company also plans to develop additional videotape golf lessons, such as short game, sand play and putting lessons. 3 In the event of successful completion of production versions of One-on-One videos, the Company anticipates that it will seek to enter selected target markets. The Company's primary marketing strategy is to sell One-on-One videotapes on a prearranged basis to various organizers of amateur corporate, charity and member golf tournaments (who typically offer gifts to tournament participants) and golf professionals at private and daily fee golf courses and driving ranges. The Company may also seek to enter into strategic relationships with third parties relating to product marketing and distribution. The Company's objective is to develop mobile One-on-One vans equipped with video and personal computer equipment to market, promote and produce the Company's proposed products. The Company will seek to position such vans in selected geographic areas that will service golf courses and driving ranges throughout the United States, initially in Florida, the Carolinas and California. The Company anticipates that a Company employee will operate videotaping equipment at the first tee, driving range or other suitable location to videotape a golfer's swing which would be edited inside a One-on-One van to create a personalized videotape golf lesson in approximately 25 minutes. Golf has become an increasingly popular form of sport and entertainment in recent years. According to the National Golf Foundation, consumer spending on golf-related activities, including green fees, golf equipment and related merchandise, has increased from approximately $12.7 billion in 1989 to approximately $15.1 billion in 1994. The number of golfers and golf courses and driving ranges has also increased and golf industry participants have sought to increase public awareness and provide greater access to golfers of all ages and income levels. It is estimated that golfers spend approximately $440 million annually on golf lessons. The Company believes that the capabilities of its software, including its ability to produce instructional commentary by Greg Norman and synchronized, "split-screen" comparisons with Greg Norman's swing, coupled with the consumer recognition and appeal of Greg Norman, differentiate the Company's proposed products from competing products and position the Company to capitalize on the growing popularity of golf. Since its inception, the Company has engaged in only limited operations and has not yet generated any operating revenues, other than limited revenues from market testing activities, and requires the proceeds of this offering to implement its proposed plan of operation. The Company expects to incur substantial up-front expenses in connection with product development and commercialization (including the payment of license fees and the purchase and/or lease of One-on-One vans and video and computer equipment), which will result in significant losses for the foreseeable future. There can be no assurance that the Company will be able to successfully implement its business plan. See "Risk Factors." The Company was incorporated under the laws of the State of Delaware in July 1994 under the name Golf Vision, Inc. The Company changed its name to Visual Edge Systems Inc. in March 1995. The Company's executive offices are currently located at 7 West 51st Street, New York, New York 10019, and its telephone number is (212) 765-1284. BRIDGE FINANCING In May 1996, the Company consummated a bridge financing (the "Bridge Financing") pursuant to which it issued to 29 unaffiliated investors an aggregate of (i) $1,100,000 principal amount of promissory notes (the "Bridge Notes") which bear interest at the rate of 8% per annum and are due on the earlier of the consummation of this offering or May 31, 1997 and (ii) 220,000 shares of Common Stock. The Underwriter acted as placement agent in connection with the Bridge Financing. The Company intends to use a portion of the proceeds of this offering to repay the entire principal amount of and accrued interest on the Bridge Notes. See "Use of Proceeds" and "Selling Stockholders and Plan of Distribution." 4 THE OFFERING Securities offered by the Company...................... 1,300,000 shares of Common Stock and Warrants to purchase 1,300,000 shares of Common Stock. Securities offered by the Selling Stockholders ........ 220,000 shares of Common Stock. Such shares are not part of the underwritten offering and may not be offered or sold prior to twelve months from the date of this Prospectus without the prior written consent of the Underwriter. See "Selling Stockholders and Plan of Distribution." Common Stock to be outstanding after the offering(1)........ 4,520,000 shares. Warrants: Number to be outstanding after the offering...... 1,300,000 Warrants. Exercise terms.......... Exercisable commencing , 1997, each to purchase one share of Common Stock at a price of $5.00, subject to adjustment in certain circumstances. See "Description of Securities -- Redeemable Warrants." Expiration date......... , 2000. Redemption.............. Redeemable by the Company, upon the consent of the Underwriter, at any time commencing , 1997, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 30 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. The Warrants will be exercisable until the close of business on the date fixed for redemption. See "Description of Securities -- Redeemable Warrants." Use of Proceeds................ The Company intends to use the net proceeds from this offering for van development; repayment of the Bridge Notes; repayment of bank indebtedness; marketing and promotion; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors................... The securities offered hereby are speculative and involve a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed Nasdaq Symbols ....... Common Stock -- EDGE Warrants -- EDGEW - ------ (1) Does not include (i) 1,300,000 shares of Common Stock reserved for issuance upon the exercise of the Warrants; (ii) an aggregate of 260,000 shares of Common Stock reserved for issuance upon the exercise of the Underwriter's Warrants and the warrants included therein; (iii) 884,508 shares of Common Stock which may be issued upon the exercise of outstanding options under the Company's 1996 Stock Option Plan (the "Plan"), including up to 500,000 shares of Common Stock which may be issued upon the exercise of options granted to Earl T. Takefman and Alan L. Lubell, Chief Executive 5 Officer and Chairman of the Board of the Company, respectively, subject to certain stock performance levels; and (iv) 15,492 shares of Common Stock reserved for issuance upon the exercise of options available for future grant under the Plan. See "Management -- Employment and Consulting Agreements," "-- Stock Option Plan," "Certain Transactions," "Description of Securities" and "Underwriting." SUMMARY FINANCIAL DATA The summary financial information set forth below is derived from and should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. STATEMENT OF OPERATIONS DATA:
Year Ended Three Months Ended December 31, 1995 March 31, 1996 ----------------- ------------------ Net revenues ................................ $ 132,267 $ 3,848 Net loss .................................... (464,963) (131,299) Pro forma net loss (1) ...................... (1,054,963) (222,549) Pro forma net loss per share (1) ............ (.33) (.07) Weighted average number of shares outstanding . 3,220,000 3,220,000
BALANCE SHEET DATA:
March 31, 1996 ----------------------------------------------- December 31, As 1995 Actual Pro Forma(2) Adjusted(2)(3) -------------- ------------- ------------- -------------- Working capital (deficit) .... $ (682,422) $ (789,556) $ (640,210) $ 4,312,444 Total assets ................. 633,477 609,587 1,709,587 5,204,587 Total liabilities ............ 682,980 790,389 1,556,043 283,389 Deficit accumulated during the development stage ........... (464,963) (596,262) (596,262) (1,135,608)(4) Stockholders' equity (deficit) . (49,503) (180,802) 153,544 4,921,198
- ------ (1) Gives retroactive effect to the salaries of executive officers. See Note 1(f) to Notes to Financial Statements. (2) Gives effect to the Bridge Financing in May 1996. (3) Gives effect to the sale of the Common Stock and Warrants offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (4) Gives effect to a non-recurring charge of $539,346 relating to the Bridge Financing. Does not give effect to a non-recurring charge of $600,000 relating to the transfer of Common Stock to Greg Norman pursuant to the terms of the Greg Norman License, which will be recorded in the three-month period ending June 30, 1996. See Notes 2 and 9 to Notes to Financial Statements. Notice to California Investors. Each purchaser of Common Stock and Warrants in California must be an "accredited investor," as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or satisfy one of the following suitability standards: (i) minimum actual gross income of $65,000 and a net worth (exclusive of home, home furnishings and automobiles) of $250,000; or (ii) minimum net worth (exclusive of home, home furnishings and automobiles) of $500,000. Notice to Washington Investors. Each purchaser of Common Stock and Warrants in Washington must be an "accredited investor," as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. 6 RISK FACTORS The securities offered hereby are speculative and involve a high degree of risk. Prospective investors should carefully consider the following risk factors before making an investment decision. 1. Development Stage Company. The Company was organized in July 1994 and is in the development stage. Since its inception, the Company has been engaged principally in organizational activities, including developing a business plan, entering into the Greg Norman License, engaging in product development and market testing and undertaking preliminary activities for the commencement of operations. Accordingly, the Company has no relevant operating history upon which an evaluation of its performance and prospects can be made. The Company will be subject to all of the risks, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business and the development and commercialization of new products. See "Proposed Business." 2. No Operating Revenues. The Company has not yet generated any operating revenues, other than limited revenues from market testing activities, and will not generate any meaningful revenues until after the Company successfully completes development of its proposed One-on-One videotapes and develops and operates a number of One-on-One vans, which the Company does not anticipate will occur until several months following the consummation of this offering. There can be no assurance that the Company will ever generate meaningful revenues. See Financial Statements. 3. Significant and Continuing Losses; Going Concern. For the period from July 15, 1994 (inception) to March 31, 1996, the Company incurred a cumulative net loss of $596,262 and, at March 31, 1996, had a working capital deficit of $789,556. Since March 31, 1996, the Company has continued to incur significant losses and anticipates that it will continue to incur significant and increasing losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front capital expenditures and operating costs (including significantly increased salaries of executives officers) associated with developing and commercializing its proposed products. The Company will also incur non-recurring charges aggregating approximately $1,139,000 relating to the Bridge Financing and the transfer of Common Stock to Greg Norman pursuant to the terms of the Greg Norman License in future periods. The Company's independent auditors have included an explanatory paragraph in their report on the Company's financial statements stating that the Company's losses and working capital and net capital deficiencies raise substantial doubt about its ability to continue as a going concern. There can be no assurance that the Company will ever achieve profitable operations. See Financial Statements. 4. Uncertainty of Proposed Plan of Operation. The Company's proposed plan of operation and prospects will be largely dependent upon the Company's ability to successfully complete development of production versions of its proposed One-on-One videotapes; hire and retain skilled technical, marketing and other personnel; establish and maintain satisfactory relationships with golf professionals at golf courses and driving ranges; successfully develop, equip and operate One-on-One vans on a timely and cost effective basis; and achieve significant market acceptance for its proposed products. The Company has limited experience in developing and commercializing new products based on innovative technology and there is limited information available concerning the potential performance of the Company's video editing and production process or market acceptance of the Company's proposed products. There can be no assurance that the Company will be able to successfully implement its business plan or that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in its implementation. See "Plan of Operation." 5. Dependence on Proceeds to Implement Plan of Operation. The capital requirements relating to implementation of the Company's business plan will be significant. The Company is dependent on the proceeds of this offering to implement its proposed plan of operation. The Company anticipates, based on currently proposed plans and assumptions relating to the implementation of its business plan (including the timetable of, and costs associated with, product and van development and commercialization), that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to implement its business plan (due to unanticipated expenses, technical difficulties, problems or otherwise), the Company would be required to seek additional financing sooner than currently anticipated. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to meet its objective of developing a significant number of One-on-One vans 7 to market, promote and produce the Company's proposed products or that any assumptions relating to the implementation of the Company's business plan will prove to be accurate. To the extent that the proceeds of this offering are not sufficient to enable the Company to generate meaningful revenues or achieve profitable operations, the inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. See "Use of Proceeds." 6. Need for Additional Financing. Any implementation of the Company's business plan subsequent to the twelve month period following this offering or the development of additional products will require capital resources greater than the proceeds of this offering or otherwise currently available to the Company. There can be no assurance that any additional financing, particularly the significant amounts of financing that would be required if the Company is unable to secure satisfactory equipment leasing or financing arrangements, will be available to the Company on commercially reasonable terms, or at all. See "Use of Proceeds" and "Plan of Operation." 7. Dependence on Greg Norman License. Pursuant to the Greg Norman License, Greg Norman agreed to grant to the Company a worldwide license to use his name, likeness and endorsement in connection with the production and promotion of the Company's proposed products. The license agreement provides that the continued use of the license by the Company is conditioned upon guaranteed payments aggregating $3,300,000 during the three-year period commencing July 1, 1996 to be applied against a royalty equal to 8% of the Company's net revenues from product sales. The Company is required to make payments aggregating $600,000, $1,000,000 and $1,700,000, respectively, during each of the years commencing July 1, 1996, 1997 and 1998, whether or not the Company derives any revenues from product sales. Failure to make any required payment under the Greg Norman License would result in termination of the agreement, which would have a material adverse effect on the Company. The Company is also dependent upon the continued services of Greg Norman, principally his availability to schedule videotaping sessions to complete development of the Company's proposed products on a timely basis. The Greg Norman License provides that the Company has the right to require Greg Norman to be available for a limited number of days per year, subject to his commitments to the PGA Tour and other golf tours and contractual commitments, to produce the Company's proposed products. Failure or any significant delay by Greg Norman in scheduling videotaping sessions, his death, disability or retirement from tournament play or any significant decline in the level of Greg Norman's tournament play would, under certain circumstances, have a material adverse effect on the Company. In addition, the commission by Greg Norman of any serious crime or any act which adversely affects his reputation could also have an adverse affect on the Company. The Company intends to obtain "key-man" insurance on the life of Greg Norman in the amount of $10,000,000. See "Proposed Business -- Relationship with Greg Norman." 8. Uncertainty of Product Development. Although the Company has developed an initial version of a One-on-One videotape golf lesson, the Company has not yet completed development, production or testing of its proposed products. The Company will be required to commit considerable time, effort and resources to finalize development of production versions of its proposed One-on-One videotapes and adapt the video editing and videotape production functions of its software to its proposed products. The Company's development efforts are subject to all of the risks inherent in the development of new products and technologies, including unanticipated delays, expenses, technical problems or difficulties, as well as the possible insufficiency of funds to satisfactorily complete development, which could result in abandonment or substantial change in product commercialization. There can be no assurance that product development efforts will be successfully completed on a timely basis, or at all, or that unanticipated events will not occur which would result in increased costs or material delays in product development or commercialization. In addition, although the Company believes that its software performs the principal functions for which it has been designed, the Company has only conducted limited tests of its software. Consequently, there can be no assurance that such software will perform all of the functions for which it has been designed or prove to be sufficiently reliable for the widespread commercial production of the Company's proposed One-on-One videos. Technologies such as those incorporated into the Company's software may contain errors which become apparent subsequent to commercial use. Remedying such errors could delay the Company's plans and cause it to incur additional costs. See "Proposed Business -- Product Development." 9. Uncertainty of Market Acceptance and Commercialization Strategy. The Company's One-on-One personalized videotape golf lesson is a new business concept and, accordingly, demand and market acceptance for 8 the Company's proposed products is subject to a high level of uncertainty. The Company has not conducted and does not intend to conduct any independent market or concept feasibility studies nor does it currently expect to conduct any additional market testing activities. In the event of successful completion of production versions of its proposed One-on-One videotapes, the Company currently anticipates that it will seek to enter selected target markets. Achieving market acceptance for the Company's proposed products will require significant efforts and expenditures by the Company to create awareness and demand by golf professionals at golf courses and driving ranges and consumers. The Company's prospects will be significantly affected by its ability to successfully build an effective sales organization and develop a significant number of One-on-One vans. The Company has not yet commenced any marketing activities and has limited marketing and technical experience and limited financial, personnel and other resources to independently undertake extensive marketing activities. The Company's strategy and preliminary and future marketing plans may be subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts, changes in market conditions (including the emergence of potentially significant related market segments), the nature of possible license and distribution arrangements which may become available to it in the future and competitive factors. To the extent that the Company enters into third-party marketing and distribution arrangements in the future, it will be dependent on the marketing efforts of such third parties and in certain instances on the popularity and sales of their products. Additionally, to the extent that the Company seeks to market its proposed products in foreign markets, the Company may be subject to various risks associated with foreign trade, including customs duties, quotas and other trade restrictions, shipping delays, currency fluctuations and international political and economic developments. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's proposed products. See "Proposed Business -- Marketing and Distribution." 10. Competition. The Company will face intense competition for a finite amount of consumer discretionary spending from numerous other businesses in the golf industry and related market segments. The Company will compete with numerous other products and services which provide golf instruction, including instructional golf videotapes, golf software used to analyze golf swings and golf courses, schools and professionals who offer video golf lessons, certain of which may be less expensive or provide other advantages to consumers. Various instructional golf videotapes currently being marketed by leading golf professionals and instructors such as Jack Nicklaus, Tom Kite, Nick Faldo, David Leadbetter, Jim McLean and Greg Norman have achieved significant national, regional and local consumer recognition. These products are marketed by companies with substantially greater financial, marketing, distribution, personnel and other resources than the Company, permitting such companies to implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors to enter into new markets. In addition, certain companies offer both hardware and software to golf professionals for use in connection with golf lessons. Moreover, the instructional golf video segment of the industry has no substantial barriers to entry and, consequently, the Company expects that other companies which have developed software technologies may seek to enter into the Company's target markets and compete directly against the Company. There can be no assurance that other companies are not developing or will not seek to develop similar products. The Greg Norman License prohibits Greg Norman from granting similar rights to any person with respect to any concept which is the same as or confusingly similar to the Company's concept or proposed products. For purposes of the Greg Norman License, however, the self-instructional golf video product known as Better Golf featuring Greg Norman or any other form of golf instructional video or multi-media presentation for teaching golf techniques is not deemed the same as or confusingly similar to the Company's proposed products. There can be no assurance that the Company will be able to compete successfully. See "Proposed Business -- Competition." 11. Potential Product Obsolescence. The markets for the Company's proposed products may be characterized by rapidly changing technology which could result in product obsolescence or short product life cycles. Accordingly, the ability of the Company to compete may be dependent upon the Company's ability to complete development and commercialization of the Company's proposed products in a timely manner and to continually enhance and improve its software. There can be no assurance that competitors will not develop technologies or products that render the Company's proposed products obsolete or less marketable. See "Proposed Business -- Product Development." 9 12. Dependence on Limited Product Line. The Company's principal efforts to date have been devoted to securing rights to and engaging in the development of its proposed instructional golf videotapes. The Company will be entirely dependent on the commencement of sales of a limited product line to generate revenues and on the commercial success of its proposed products. There can be no assurance that the Company's proposed products will prove to be commercially viable. Failure to achieve commercial viability would have a material adverse effect on the Company. See "Proposed Business." 13. Industry Factors. Sales of the Company's instructional golf videotapes will be dependent on discretionary spending by consumers, which may be adversely affected by unfavorable general economic conditions, as well as a decline in the popularity of golf. Any decrease in the level of consumer spending on golf instruction could adversely affect the Company's proposed business and prospects. The Company's future operating results will depend on numerous factors beyond its control, including the popularity, price and timing of other instructional golf videos and related products being introduced and distributed, national, regional and local economic conditions (particularly recessionary conditions adversely affecting consumer spending), changes in consumer demographics, the availability and relative popularity of other forms of sports and entertainment, and public tastes and preferences, which may change rapidly and cannot be predicted. The Company's ability to plan for product development and promotional activities may be affected by the Company's ability to anticipate and respond to relatively rapid changes in consumer tastes and preferences. To the extent that the Company targets consumers with limited disposable income, the Company may find it more difficult to price its products at levels which result in profitable operations. In addition, seasonal weather conditions limiting the playing seasons in certain geographic areas may result in fluctuations in the Company's future operating results. See "Proposed Business." 14. Uncertainty of Patent Protection. The Company has filed a patent application with the United States Patent and Trademark Office covering certain aspects of its digital video editing and videotape production process. There can be no assurance, however, as to the breadth or degree of protection which patents may afford the Company, that any patent applications will result in issued patents or that patents will not be circumvented or invalidated. Rapid technological developments in the computer software industry result in extensive patent filings and a rapid rate of issuance of new patents. Although the Company believes that its proposed products do not and will not infringe patents or violate proprietary rights of others, the Company has not conducted any investigation to determine whether its proposed products infringe patents or violate proprietary rights of others, and it is possible that infringement of existing or future patents or proprietary rights of others have occurred or may occur. In the event the Company's proposed products infringe patents or proprietary rights of others, the Company may be required to modify the design of its proposed products or obtain a license. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions or at all. The failure to do any of the foregoing could have a material adverse effect upon the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement action and the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. See "Proposed Business -- Patents, Trademarks and Proprietary Information." 15. Proprietary Information. The Company intends to rely on proprietary processes and to employ various methods to protect the concepts, ideas and documentation of its proposed products. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such processes or obtain access to the Company's proprietary processes, ideas and documentation. Furthermore, although the Company intends to enter into confidentiality agreements with its employees, there can be no assurance that such arrangements will adequately protect the Company. See "Proposed Business -- Patents, Trademarks and Proprietary Information." 16. Broad Discretion in Application of Proceeds. Approximately $1,380,000 (26.0%) of the estimated net proceeds of this offering has been allocated to working capital and general corporate purposes. Accordingly, the Company will have broad discretion as to the application of such proceeds. In addition, approximately $1,627,000 (30.7%) of the estimated net proceeds of this offering has been allocated to the repayment of the Bridge Notes and indebtedness owed to Republic National Bank of New York (the "Bank") and will not be available for use in connection with other corporate purposes. See "Use of Proceeds." 10 17. Substantial Benefits to Related Parties. Repayment of the Company's indebtedness to the Bank will release the personal guarantees of Messrs. Earl T. Takefman, Alan L. Lubell and Barry Minsky, principal stockholders of the Company, and pledges of personal assets in the form of letters of credit and certificates of deposit to secure such loan. The Company also intends to use approximately $1,152,500 (21.7%) of the proceeds of this offering allocated to working capital to pay $112,500 of accrued salaries since January 1, 1996 to Messrs. Takefman and Lubell and to pay salaries of executive officers and license fees pursuant to the Greg Norman License (which are anticipated to be approximately $590,000 and $450,000, respectively, during the twelve months following this offering). See "Use of Proceeds" and "Certain Transactions." 18. Benefits of this Offering to Current Stockholders. Upon the consummation of this offering, the current stockholders of the Company will realize certain benefits, including the creation of a public trading market for their shares of Common Stock (although such shares are subject to a lock-up agreement with the Underwriter, and apart from the shares offered by the Selling Stockholders, will not be registered for sale under the Securities Act), and the corresponding facilitation of sales by such stockholders of their shares of Common Stock in the secondary market. Such stockholders purchased their Common Stock at an average price of $.23 per share, substantially below the initial public offering price. If, at the time the existing stockholders are able to sell their Common Stock in the public market, the market price per share remains at the $5.00 initial public offering price per share (of which there can be no assurance), then such stockholders will realize a substantial gain on the sale of their existing shares. 19. Dependence on Third-Party Production Companies and Equipment Manufacturers. The Company will rely on third-party production companies to film and edit the Company's proposed One-on-One videotapes and will be dependent on such third parties to satisfactorily complete such filming and editing on behalf of the Company on a timely and cost-effective basis. The Company will also rely on third-party manufacturers for all of its supply of video and computer equipment and vans used in its operations. The Company has not entered into agreements with any equipment manufacturer and intends to purchase or lease equipment components pursuant to purchase orders placed from time to time in the ordinary course of business. Failure or delay by any manufacturer in supplying components to the Company on favorable terms could result in interruptions in its operations and adversely effect the Company's ability to implement its business plan. See "Proposed Business." 20. Dependence on Key Personnel; Need for Qualified Personnel. The success of the Company will be dependent on the personal efforts of Earl T. Takefman, its Chief Executive Officer, and other key personnel. The loss of the services of Mr. Takefman could have a material adverse effect on the Company's proposed business and prospects. The Company has entered into employment agreements with Mr. Takefman and other key personnel and intends to obtain "key-man" insurance on the life of Mr. Takefman in the amount of $5,000,000 prior to the consummation of this offering. The success of the Company is also dependent upon its ability to hire and retain additional qualified marketing, technical, financial and other personnel. Competition for qualified personnel is intense and there can be no assurance that the Company will be able to hire or retain additional qualified personnel. Any inability to attract and retain qualified personnel would have a material adverse effect on the Company. See "Management." 21. Control by Management. Upon consummation of this offering, Earl T. Takefman, the Company's Chief Executive Officer, and Alan L. Lubell, Chairman of the Board of Directors of the Company, will beneficially own, in the aggregate, approximately 50.3% of the outstanding shares of Common Stock (assuming no exercise of the Warrants). Accordingly, such persons, acting together, will be in a position to control the Company, elect all of the Company's directors, cause an increase in the authorized capital or the dissolution, merger or sale of the assets of the Company, and generally to direct the affairs of the Company. See "Management" and "Principal Stockholders." 22. Outstanding Options. Upon consummation of this offering, there will be outstanding options to purchase an aggregate of 884,508 shares of Common Stock at an exercise price equal to the initial public offering price per share, of which options to purchase up to an aggregate of 500,000 shares (the "Executive Options") will be granted to Messrs. Takefman and Lubell. Of such Executive Options, 300,000 options shall vest and become exercisable if the market price of the Common Stock equals or exceeds $10.00 per share for at least five consecutive trading days during the 18-month period following the consummation of this offering and 200,000 options shall vest and become exercisable if the market price of the Common Stock equals or exceeds 11 $15.00 per share for five consecutive trading days during the 30-month period following the consummation of this offering. Exercise of any of the foregoing options will have a dilutive effect on the Company's stockholders. Furthermore, the terms upon which the Company may be able to obtain additional equity financing may be adversely affected, since the holders of the options can be expected to exercise them, if at all, at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the options. See "Management -- Stock Option Plan." 23. No Dividends. To date, the Company has not paid any cash dividends on its Common Stock and does not expect to declare or pay dividends on the Common Stock in the foreseeable future. In addition, the payment of cash dividends may be limited or prohibited by the terms of future loan agreements or the future issuance of Preferred Stock. See "Description of Securities -- Dividend Policy." 24. Substantial Dilution. Investors purchasing Common Stock in this offering will incur immediate and substantial dilution of $3.92 (78.4%) per share between the adjusted net tangible book value per share after this offering and the initial public offering price of $5.00 per share. See "Dilution." 25. Authorization and Discretionary Issuance of Preferred Stock. The Company's Certificate of Incorporation authorizes the Company's Board of Directors to issue up to 5,000,000 shares of preferred stock, from time to time, in one or more series. The Board of Directors will be authorized, without further approval of the stockholders, to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each new series of preferred stock. The issuance of such stock could adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company, discourage bids for the Common Stock at a premium, or otherwise adversely affect the market price of the Common Stock. See "Description of Securities--Preferred Stock." 26. No Assurance of Public Market; Possible Volatility of Market Price of Common Stock and Warrants. Prior to this offering, there has been no public trading market for the Common Stock or Warrants. There can be no assurance that a regular trading market for the Common Stock or Warrants will develop after this offering or that, if developed, it will be sustained. The market prices of the Company's securities following this offering may be highly volatile as has been the case with the securities of other emerging companies. Factors such as the Company's operating results and announcements by the Company or its competitors may have a significant impact on the market price of the Company's securities. In addition, in recent years, the stock market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations which have not necessarily been related to the operating performance of such companies. See "Underwriting." 27. Underwriter's Potential Influence on the Market. Although it has no obligation to do so, the Underwriter intends to make a market in the Common Stock and Warrants and may otherwise effect transactions in the Common Stock and Warrants. If the Underwriter makes a market in the Common Stock or Warrants, such activities may exert a dominating influence on the market and such activity may be discontinued at any time. The prices and liquidity of the Common Stock and Warrants may be significantly affected to the extent, if any, that the Underwriter participates in such market. See "Underwriting." 28. Possible Delisting of Securities from Nasdaq. It is currently anticipated that the Company's Common Stock and Warrants will be eligible for listing on the Nasdaq SmallCap Market upon the completion of this offering. In order to continue to be listed on Nasdaq, however, the Company must maintain $2,000,000 in total assets, a $200,000 market value of the public float and $1,000,000 in total capital and surplus. In addition, continued inclusion requires two market-makers and a minimum bid price of $1.00 per share; provided, however, that if the Company falls below such minimum bid price, it will remain eligible for continued inclusion on Nasdaq if the market value of the public float is at least $1,000,000 and the Company has $2,000,000 in capital and surplus. The failure to meet these maintenance criteria in the future may result in the delisting of the Common Stock and Warrants from Nasdaq, and trading, if any, in the Company's securities would thereafter be conducted in the non-Nasdaq over-the-counter market. As a result of such delisting, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's securities. 29. Risks Relating to Low-Priced Stocks. In the event the Common Stock were to become delisted from trading on Nasdaq and the trading price of the Common Stock were to fall below $5.00 per share, trading in the 12 Common Stock would also be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market price and liquidity of the Common Stock and the ability of purchasers in this offering to sell the Common Stock in the secondary market. 30. Potential Adverse Effect of Warrant Redemption. The Warrants are subject to redemption by the Company, upon the consent of the Underwriter, at any time commencing on , 1997, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock on all 30 trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "Description of Securities -- Redeemable Warrants." 31. Possible Inability to Exercise Warrants. The Company intends to qualify the sale of the Common Stock and the Warrants in a limited number of states. Although certain exemptions in the securities laws of certain states might permit the Warrants to be transferred to purchasers in states other than those in which the Warrants were initially qualified, the Company will be prevented from issuing Common Stock in such states upon the exercise of the Warrants unless an exemption from qualification is available or unless the issuance of Common Stock upon exercise of the Warrants is qualified. The Company may decide not to seek or may not be able to obtain qualification of the issuance of such Common Stock in all of the states in which the ultimate purchasers of the Warrants reside. In such a case, the Warrants held by purchasers will expire and have no value if such Warrants cannot be sold. Accordingly, the market for the Warrants may be limited because of these restrictions. Further, a current prospectus covering the Common Stock issuable upon exercise of the Warrants must be in effect before the Company may accept Warrant exercises. There can be no assurance the Company will be able to have a prospectus in effect when this Prospectus is no longer current, notwithstanding the Company's commitment to use its best efforts to do so. See "Description of Securities -- Redeemable Warrants." 32. Shares Eligible for Future Sale. Upon the consummation of this offering, the Company will have 4,520,000 shares of Common Stock outstanding (assuming no exercise of the Warrants), of which 1,520,000 shares, consisting of the 1,300,000 shares offered hereby and, subject to certain contractual restrictions described below, the 220,000 shares being offered by the Selling Stockholders, will be freely tradeable without restriction or further registration under the Securities Act. All of the remaining 3,000,000 shares of Common Stock outstanding are "restricted securities", as that term is defined in Rule 144 promulgated under the Securities Act, and in the future may be sold only pursuant to an effective registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Of the 3,000,000 restricted shares, an aggregate of 2,520,406 shares will be eligible for sale, without registration, under Rule 144 (subject to certain volume limitations prescribed by such rule and to the contractual restrictions described below), commencing March 1997. All of the Company's officers, directors and security holders (except for the holders of 9,776 shares of Common Stock) have agreed not to sell or dispose of any of their securities of the Company for a period of twelve months from the date of this Prospectus (subject to certain exceptions nine months from the date of this Prospectus) without the Underwriter's prior written consent. No prediction can be made as to the effect, if any, that sales of such securities or the availability of such securities for sale will have on the market prices prevailing from time to time. However, even the possibility that a substantial number of the Company's securities may be sold in the public market may adversely affect prevailing 13 market prices for the Common Stock and Warrants and could impair the Company's ability to raise capital through the sale of its equity securities. See "Description of Securities." "Shares Eligible for Future Sale," "Underwriting" and "Selling Stockholders and Plan of Distribution." 33. Limitations of Liability of Directors and Officers. The Company's Certificate of Incorporation includes provisions to limit, to the full extent permitted by Delaware law, the personal liability of directors of the Company for monetary damages arising from a breach of their fiduciary duties as directors. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent permitted under such law as it may from time to time be in effect. In addition, the Company's By-Laws require the Company to indemnify, to the full extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Certificate of Incorporation. As a result of such provisions in the Certificate of Incorporation and the By-Laws of the Company, stockholders may be unable to recover damages against the directors and officers of the Company for actions taken by them which constitute negligence, gross negligence or a violation of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and officers and may discourage or deter stockholders from suing directors, officers, employees and agents of the Company for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders. See "Management -- Limitations of Liability and Indemnification." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the securities offered hereby are estimated to be $5,307,000 ($6,172,215 if the Underwriter's over-allotment option is exercised in full). The Company expects to use the net proceeds over the twelve months following this offering approximately as follows:
Approximate Approximate Application of Proceeds Dollar Amount Percentage - ----------------------- --------------- ------------- Van development(1) ............................... $2,000,000 37.7% Repayment of Bridge Notes(2) ..................... 1,120,000 21.1 Repayment of bank indebtedness(3) ................ 507,000 9.6 Marketing and promotion(4) ....................... 300,000 5.6 Working capital and general corporate purposes(5) . 1,380,000 26.0 --------------- ------------- $5,307,000 100.0% =============== =============
- ------ (1) Represents anticipated costs associated with developing up to twenty One-on-One vans equipped with video and computer equipment, consisting primarily of personal computers, video cassette recorders, video cameras and equipment and television monitors, during the twelve months following the consummation of this offering. The Company anticipates that the average cost to acquire a van and related equipment will be approximately $110,000. The Company may seek to lease or finance rather than purchase One-on-One vans and related equipment. See "Plan of Operation" and "Proposed Business -- Marketing and Distribution." (2) Represents amounts to be used for the repayment of the entire $1,100,000 principal amount of the Bridge Notes and accrued interest thereon. The Bridge Notes bear interest at the rate of 8% per annum and are repayable on the earlier of the consummation of this offering or May 31, 1997. The Company used the proceeds of the Bridge Financing principally in connection with product and van design and development, payment of a license fee and working capital. See "Plan of Operation." (3) Represents amounts to be used to repay outstanding principal and accrued interest owed to the Bank. Such indebtedness currently bears interest at the rate of 8.25% per annum and is repayable on or before December 31, 1996. The Company used the proceeds of such borrowings in connection with product development and market testing activities. See "Plan of Operation." (4) Represents anticipated costs associated with marketing and promotion, including costs associated with public relations and advertising in trade publications, attendance at trade shows and preparation of product brochures. See "Proposed Business -- Marketing and Distribution." (5) Working capital will be used, among other things, to pay accrued salaries since January 1, 1996 of approximately $112,500 to Messrs. Lubell and Takefman, to pay salaries of its executive officers and license fees pursuant to the Greg Norman License (which are anticipated to be $590,000 and $450,000, respectively, during the twelve months following the consummation of this offering), to purchase furniture, fixtures and equipment and to pay salaries of additional personnel, rent, trade payables, professional fees and other operating expenses. See "Management." If the Underwriter exercises its over-allotment option in full, the Company will realize additional net proceeds of $865,000 which will be added to working capital. Based on the Company's currently proposed plans and assumptions relating to the implementation of its business plan (including the timetable of, and costs associated with, product and van design and development and commercialization), the Company anticipates that the net proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change (due to changes in market conditions, competitive factors or new or different business opportunities that may become available in the future), its assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to implement its business plan (due to unanticipated expenses, technical difficulties, problems or otherwise), the Company may find it necessary or 15 desirable to reallocate a portion of the proceeds within the above described categories, use of proceeds for other purposes, seek additional financing or curtail its operations. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. Proceeds not immediately required for the purposes described above will be invested principally in United States government securities, short-term certificates of deposit, money market funds or other short-term interest bearing investments. 16 DILUTION The difference between the public offering price per share of Common Stock and the net tangible book value per share after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of outstanding shares of Common Stock. At March 31, 1996, the net tangible book value of the Company was ($230,816), or ($.08) per share. After giving retroactive effect to the Bridge Financing, the pro forma net tangible book value of the Company at March 31, 1996 would be ($56,470), or ($.02) per share. After also giving effect to the sale of the 1,300,000 shares of Common Stock and 1,300,000 Warrants being offered hereby and the receipt of the estimated net proceeds therefrom (less underwriting discounts and commissions and estimated expenses of this offering), the as adjusted pro forma net tangible book value of the Company at March 31, 1996 would be approximately $4,896,184, or $1.08 per share, representing an immediate increase in net tangible book value of $1.10 per share to existing stockholders and an immediate dilution of $3.92 (78.4%) per share to new investors. The following table illustrates the foregoing information with respect to dilution to new investors on a per share basis:
Initial public offering price .......................... $5.00 Net tangible book value before Bridge Financing ... $(.08) Increase attributable to Bridge Financing ......... .06 -------- Pro forma net tangible book value before offering . $(.02) Increase attributable to investors in this offering . 1.10 -------- Adjusted pro forma net tangible book value after offering 1.08 ------- Dilution to investors in this offering ................. $3.92 =======
The following table sets forth, with respect to existing stockholders (including investors in the Bridge Financing) and new investors in this offering, a comparison of the number of shares of Common Stock acquired from the Company, the percentage of ownership of such shares, the total cash consideration paid, the percentage of total cash consideration paid and the average price per share.
Total Cash Shares Purchased Consideration Paid Average ------------------------ ------------------------- Price Per Number Percent Amount Percent Share ----------- --------- ------------ --------- ----------- Existing stockholders . 3,220,000 71.2% $ 738,046 10.2% $ .23 New investors ....... 1,300,000 28.8% $6,500,000 89.8% $5.00 ----------- --------- ------------ --------- Total ............. 4,520,000 100.0% $7,238,046 100.0% =========== ========= ============ =========
The above table assumes no exercise of the Underwriter's over-allotment option. If such option is exercised in full, such investors will have paid $975,000 for 195,000 shares of Common Stock, representing approximately 11.9% of the total consideration for 4.1% of the total Common Stock outstanding. In addition, the above table also assumes no exercise of outstanding stock options or the Warrants. Upon consummation of this offering, there will be outstanding stock options to purchase an aggregate of 884,508 shares of Common Stock. See "Certain Transactions," "Description of Securities" and "Underwriting." 17 CAPITALIZATION The following table sets forth, as of March 31, 1996, the capitalization of the Company (i) on an actual basis, as adjusted to give effect to the Recapitalization, (ii) on a pro forma basis giving effect to the consummation of the Bridge Financing in May 1996 and (iii) as further adjusted to give retroactive effect to the issuance and the sale of the Common Stock and Warrants offered hereby and anticipated application of the estimated net proceeds therefrom:
March 31, 1996 --------------------------------------------- Pro Forma As Actual Pro Forma Adjusted ------------ ------------ -------------- Short term debt ................................. $ 507,000 $1,272,654 $ -- ============ ============ ============== Stockholders' equity (deficit): Common Stock, $0.01 par value: 20,000,000 shares authorized; 3,000,000 shares issued and outstanding (actual); 3,220,000 shares issued and outstanding pro forma; 4,520,000 shares issued and outstanding (pro forma as adjusted)(1) 30,000 32,200 45,200 Preferred Stock, 5,000,000 shares authorized; none issued; none issued as adjusted. .... -- -- -- Additional paid-in capital ................. 385,460 717,606 6,011,606 Deficit accumulated during the development stage (596,262) (596,262) (1,135,608)(2) ------------ ------------ -------------- Total stockholders' equity (deficit) ....... (180,802) 153,544 4,921,198 ------------ ------------ -------------- Total capitalization ............................ $(180,802) $ 153,544 $ 4,921,198 ============ ============ ==============
- ------ (1) Does not include (i) 1,300,000 shares of Common Stock reserved for issuance upon the exercise of the Warrants, (ii) an aggregate of 260,000 shares of Common Stock reserved for issuance upon the exercise of the Underwriter's Warrants and the warrants included therein, (iii) 884,508 shares of Common Stock which may be issued upon the exercise of outstanding options under the Company's 1996 Stock Option Plan (the "Plan"), including up to 500,000 shares of Common Stock which may be issued upon the exercise of options granted to Earl T. Takefman and Alan L. Lubell, Chief Executive Officer and Chairman of the Board of the Company, respectively, subject to certain stock performance levels, and (iv) 15,492 shares of Common Stock reserved for issuance upon the exercise of options available for future grant under the Plan. See "Management -- Employment and Consulting Agreements," "-- Stock Option Plan," "Certain Transactions," "Description of Securities" and "Underwriting." (2) Gives effect to a non-recurring charge of $539,346 relating to the Bridge Financing. Does not give effect to a non-recurring charge of $600,000 relating to the transfer of Common Stock to Greg Norman pursuant to the terms of the Greg Norman License which will be recorded in the three-month period ending June 30, 1996. See Notes 2 and 9 to Financial Statements. 18 PLAN OF OPERATION The Company was organized in July 1994 and is in the development stage. Since its inception, the Company has been engaged principally in organizational activities, including developing a business plan, entering into the Greg Norman License, engaging in product development and market testing and undertaking preliminary activities for the commencement of operations. The Company has not yet generated any operating revenues, other than limited revenues from market testing activities, and will not generate any meaningful revenues until after the Company successfully completes development of its proposed One-on-One videotapes and develops a number of One-on-One vans, which the Company does not anticipate will occur until several months following the consummation of this offering. For the period from July 15, 1994 (inception) to March 31, 1996, the Company incurred a cumulative net loss of $596,262. Since March 31, 1996, the Company has continued to incur significant losses and anticipates that it will continue to incur significant and increasing losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front capital expenditures and operating costs (including salaries of executive officers) associated with developing and commercializing its proposed products. There can be no assurance that the Company will ever generate meaningful revenues or achieve profitable operations or that the Company's proposed products will be commercially viable. Through March 31, 1996, the Company generated revenues of $11,115 from product sales during market testing activities and $125,000 from a non-refundable royalty payment pursuant to the terms of a distribution agreement with an unaffiliated third party relating to the territories of Australia, New Zealand and Indonesia. To date, a significant portion of the Company's expenses have consisted of general and administrative expenses, including costs associated with market testing, professional fees and travel. Since inception, the Company had capital expenditures of $671,177, consisting primarily of computer hardware and software as well as video production and equipment. See Financial Statements. The Company will incur a non-recurring charge of approximately $539,000 relating to the Bridge Financing upon the consummation of this offering. The Company will also incur a non-recurring charge of $600,000 relating to the transfer of Common Stock to Greg Norman pursuant to the terms of the Greg Norman License for the three-month period ending June 30, 1996. The Company's independent auditors have included an explanatory paragraph in their report on the Company's financial statements stating that the Company's losses and working capital and net capital deficiencies raise substantial doubt about its ability to continue as a going concern. This offering is an integral part of the Company's plan to continue as a going concern. See Financial Statements. BUSINESS DEVELOPMENT The Company's proposed plan of operation and prospects will be largely dependent upon the Company's ability to successfully complete development of production versions of its proposed One-on-One videotapes; hire and retain skilled technical, marketing and other personnel; establish and maintain satisfactory relationships with golf professionals at golf courses and driving ranges; successfully develop, equip and operate One-on-One vans on a timely and cost effective basis; and achieve significant market acceptance for its proposed products. In 1995, the Company developed the software necessary to operate a video editing and videotape production process and an initial version of a right-handed, full swing videotape golf lesson. The Company intends to design, develop and test production versions of its proposed full swing One-on-One videotapes. The production versions are expected to provide enhanced pre-recorded instructional commentary and analysis of a golfer's swing at various club positions. The Company currently anticipates that, subject to Greg Norman's availability, it will script, film, edit and produce production videotapes of its proposed One-on-One lessons by late 1996. The Company will be required to commit considerable time, effort and resources to finalize development of production versions of One-on-One videotapes and adapt the editing and production functions of its software to its proposed products. The Company currently does not have any personnel, other than its executive officers. The Company has engaged a Director of Software Development, who is expected to continue to enhance and adapt the Company's 19 software to the Company's proposed products. Additionally, the Company has engaged independent production companies to produce the Company's proposed One-on-One videos. The Company currently anticipates that Greg Norman will be available to film additional segments of the Company's videos in July 1996. See "Proposed Business -- Product Development." In the event of successful completion of production versions of One-on-One videotapes, the Company anticipates that it will seek to enter selected target markets. The Company's objective is to develop mobile One-on-One vans equipped with video and personal computer equipment to market, promote and produce the Company's proposed products. Pursuant to its currently proposed plan of operation, the Company will seek to develop up to 20 One-on-One vans during the twelve months following the consummation of this offering. The Company is in the process of designing and developing the first of such vans and purchasing necessary equipment to produce personalized One-on-One videotape golf lessons. The Company anticipates that the average cost to acquire a van and purchase and install equipment in each van will be approximately $110,000. The Company will seek to engage the services of the logistic consulting division of KPMG Peat Marwick LLP to advise and assist the Company in connection with van development. In order to reduce the Company's up-front capital requirements associated with van development, the Company may seek to lease or finance rather than purchase a portion of its equipment. There can be no assurance that the Company will be able to obtain satisfactory equipment leasing or financing arrangements. See "Proposed Business -- Marketing and Distribution." LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements will be to fund the development of its proposed products, the purchase of the One-on-One vans and equipment and the Company's working capital requirements. The Company has historically financed its capital requirements through the issuance of equity and debt securities and bank borrowings. In March 1995, an aggregate of 1,281,704, 1,159,636 and 488,268 shares of Common Stock, respectively, were acquired by Alan Lubell, Chairman of the Board of Directors and Vice President -- Product Development of the Company, Status-One Investments Inc. ("Status-One"), a company controlled by Earl T. Takefman, Chief Executive Officer of the Company, and Greenwich Properties, Inc. ("Greenwich"), a company controlled by Barry Minsky, a principal stockholder of the Company, for an aggregate consideration of $1,000. See "Certain Transactions." Since its inception, the Company borrowed $191,750, $162,500 and $48,450, respectively, from Mr. Lubell, Status-One and Greenwich. In December 1995, these loans were contributed to the capital of the Company. See "Certain Transactions" and Financial Statements. The Company borrowed an aggregate of $507,000 from the Bank, which is due and payable on December 31, 1996. Interest on the unpaid principal amount of the loan accrues at the reference rate established by the Bank from time to time (currently 8.25%). All of the Company's assets are pledged as collateral to secure such indebtedness and Earl T. Takefman, Alan Lubell and Barry Minsky, principal stockholders of the Company, have guaranteed and pledged personal assets in the form of letters of credit and certificates of deposit in the amounts of $354,400, $106,325 and $39,275, respectively, to secure such loan. The Company intends to use a portion of the proceeds of this offering to repay such indebtedness, which will release the personal guarantees of Messrs. Takefman, Lubell and Minsky. See "Use of Proceeds" and "Certain Transactions." On May 31, 1996, the Company consummated the Bridge Financing, pursuant to which it issued an aggregate of (i) $1,100,000 principal amount of Bridge Notes which bear interest at the rate of 8% per annum and are due on the earlier of the consummation of this offering or May 31, 1997 and (ii) 220,000 shares of Common Stock. After the payment of $135,000 in placement fees and expenses to the Underwriter, which acted as placement agent for the Company in connection with the Bridge Financing and other offering expenses of approximately $50,000, the Company received net proceeds of approximately $915,000. The proceeds from the Bridge Financing were used for product development, the payment of a license fee of $150,000 under the Greg Norman License, the design and development of a One-on-One van and for working capital and general corporate purposes. See Note 2 to Notes to Financial Statements. The capital requirements relating to the implementation of the Company's business plan will be significant. The Company is dependent on the proceeds of this offering to implement its proposed plan of operation. The 20 Company anticipates, based on currently proposed plans and assumptions relating to the implementation of its business plan (including the timetable of, and costs associated with, product van development and commercialization), that the proceeds of this offering will be sufficient to satisfy its contemplated cash requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, the assumptions change or prove to be inaccurate or if the proceeds of this offering prove to be insufficient to implement its business plan (due to unanticipated expenses, technical difficulties, problems or otherwise), the Company would be required to seek additional financing sooner than currently anticipated. There can be no assurance that the proceeds of this offering will be sufficient to permit the Company to meet its objective of developing a significant number of One-on-One vans to market, promote and produce the Company's proposed products or that any assumptions relating to the implementation of the Company's business plan will prove to be accurate. To the extent that the proceeds of this offering are not sufficient to enable the Company to generate meaningful revenues or achieve profitable operations, the inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. In addition, any implementation of the Company's business plan subsequent to the twelve month period following this offering or the development of additional products will require capital resources greater than the proceeds of this offering or otherwise currently available to the Company. The Company also may determine, depending upon the opportunities available to it, to seek additional debt or equity financing to fund the cost of continuing expansion. The extent that the Company finances expansion through the issuance of additional equity securities, any such issuance would result in dilution to the interests of the Company's stockholders. Additionally, to the extent that the Company incurs indebtedness or issues debt securities in connection with financing expansion activities, the Company will be subject to all of the risks associated with incurring substantial indebtedness, including the risks that interest rates may fluctuate and cash flow may be insufficient to pay principal and interest on any such indebtedness. There can be no assurance that any additional financing, particularly the significant amounts of financing that would be required if the Company is unable to secure satisfactory equipment leasing or financing arrangements, will be available to the Company on commercially reasonable terms, or at all. SEASONALITY The Company's proposed business may be subject to seasonal factors, with a larger portion of sales generally expected to occur in certain geographic regions during the spring and summer months of each year. 21 PROPOSED BUSINESS The Company, a development stage company, was organized to develop and market videotape golf lessons featuring personalized One-on-One instruction by leading professional golfer Greg Norman. The Company intends to sell its proposed products under the name One-on-One with Greg Norman.(TR) INDUSTRY OVERVIEW Golf has become an increasingly popular form of sport in recent years. According to the National Golf Foundation, consumer spending on golf-related activities, including green fees, golf equipment and related merchandise, increased from approximately $12.7 billion in 1989 to approximately $15.1 billion in 1994. The Company believes that this trend is due largely to the aging of the general population as well as baby boomers, whose income and leisure time spent on recreational activities have been increasing. According to the National Golf Foundation, golfers are generally well-educated, high income, young to middle-aged adult males, a target market with attractive demographics and significant spending power. Also, it is estimated that there are more female golfers enjoying the sport than ever before. The number of golfers and golf courses and driving ranges has also increased and golf industry participants have sought to increase public awareness and provide greater access to golfers of all ages and income levels. According to the National Golf Foundation, there are approximately 15,000 public and private courses and, according to the Golf Range and Recreational Association, 1,900 to 2,300 stand-alone driving ranges in the United States today. In addition, the National Golf Foundation has estimated that there are currently 1,850 golf courses under construction in the United States. It is also estimated that golfers spend approximately $440 million annually on golf lessons. The Company believes that golfers are motivated to continually improve their play and that video is an effective method of delivering instruction. The Company believes that the capabilities of its software, including its ability to produce instructional commentary by Greg Norman and synchronized, "split-screen" comparisons with Greg Norman's swing, coupled with consumer recognition and appeal of Greg Norman, differentiate the Company's proposed products from competing products and position the Company to capitalize on the growing popularity of golf. PROPOSED PRODUCTS The Company's proposed One-on-One personalized videotape golf lesson analyzes a golfer's swing by comparing it to Greg Norman's swing at several different club positions from two camera angles using Greg Norman's pre-recorded instructional commentary and analysis and computer graphics to highlight important golf fundamentals intended to improve a golfer's performance. The Company's proposed products, through the use of synchronized "split-screen" comparisons to Greg Norman's swing, are being designed to enable golfers to make meaningful self-observations to improve their play. In each of the Company's proposed video golf lessons, Greg Norman will emphasize the importance of the relevant golf fundamental, comment on the golfer's execution of the fundamental and summarize the key fundamentals to remember. The Company's principal proposed products under development include the following right and left-handed, full swing personalized One-on-One golf lessons with Greg Norman: o Standard Lesson. The Company's standard golf lesson is being designed for golfers of all skill levels. The Company plans to develop three versions of such lesson, each focusing on a different body type. o Advanced Lesson. The Company's advanced golf lesson is being designed primarily for golfers who have taken the standard lesson and lower handicap golfers. o Senior Lesson. The Company's senior lesson is intended for male and female senior golfers who typically have more limited range of motion. The Company expects that this lesson may also include a professional senior golfer. o Female Lesson. The Company's female lesson is being designed for a female golfer and may include a professional female golfer to provide additional comparisons. 22 o Self-Comparison Video. The Company's self-comparison video lesson is being designed to permit golfers to compare two swings taken at different times to Greg Norman's swing to measure improvement or deterioration through the use of triple "split-screen" video. The Company anticipates that golfers will be able to store several swings on a computer diskette which may be incorporated into a self-comparison One-on-One video at any time. The Company's proposed products are expected to sell for $39.95 to $59.95, except for the self-comparison video which is expected to sell for $19.95 to $29.95, and will be available on VHS videotape format. The Company also expects to make personalized video golf lessons available on CD-ROM. In addition, the Company plans to develop additional One-on-One video golf lessons, including short game lessons designed to focus on short iron play, chipping and pitching, sand play lessons and putting lessons. In the event the Company is able to meet its business objective, the Company believes that potential opportunities exist for the application of its One-on-One concept to the sports of bowling, tennis and baseball. There can be no assurance that the Company will be able to successfully develop any of its proposed products. RELATIONSHIP WITH GREG NORMAN Greg Norman, currently the number one player in the world according to the SONY golfer ranking system, is a two-time British Open winner, was awarded the Varden Trophy for the lowest average score on the PGA Tour in 1989, 1990 and 1994 and was named the 1995 PGA Player of the Year. The Company's proposed business and prospects are dependent upon the Company's continued association with Greg Norman. Pursuant to a license agreement dated March 1, 1995, by and among the Company, Greg Norman and Great White Shark Enterprises, Inc. (the "Greg Norman License"), Greg Norman agreed to grant to the Company a worldwide license to use his name, likeness and endorsement in connection with the production and promotion of the Company's proposed products. Greg Norman also agreed to grant to the Company the right to use any trademarks owned by him (except for the "Shark" logo). The agreement provides that the continued use of the license by the Company is conditioned upon guaranteed payments aggregating $3.3 million during the three-year period commencing July 1, 1996 (the "initial term") to be applied against a royalty equal to 8% of the Company's net revenues from product sales. "Net revenues" is defined as revenues less costs associated with discounts, allowances, payments to golf clubs, driving ranges or golf professionals, sales tax and returns, not to exceed 20% of product sales. Under the agreement, the Company is required to make payments aggregating $600,000, $1,000,000 and $1,700,000, respectively, during each of the years commencing July 1, 1996, 1997 and 1998, whether or not the Company derives any revenues from product sales. Such annual payments are payable on a quarterly basis. The Company has the option to renew the agreement for two additional five-year periods. In the event of renewal, the Company is obligated to make guaranteed payments of $1,300,000 during the first year of any renewal term, increasing by $100,000 for each successive year. The Company used a portion of the proceeds of the Bridge Financing to make the first payment of $150,000 under the Greg Norman License, and satisfied all other conditions, prior to its due date on June 30, 1996. In connection with the agreement, in April 1996, Status-One, Greenwich and Mr. Lubell transferred an aggregate of 300,000 shares of Common Stock owned by them to Mr. Norman pursuant to an option held by Mr. Norman. The Company has the right to require Greg Norman to be available, subject to his commitments to the PGA Tour and other golf tours and contractual commitments, to produce the Company's proposed products and make promotional appearances to market such products. Greg Norman is required to be available to the Company on three days, one day and two days during the first, second and third year, respectively, of the initial term, and two days during each year of any renewal term. In order to assist the Company in developing its proposed products, Greg Norman has agreed to make himself available, at a cost of $50,000 per day and subject to his schedule and convenience, for additional days in 1996 and 1997 for the purpose of filming personalized One-on-One golf video lessons. Greg Norman has the right to approve prototypes and finished products and related advertising and promotional materials and may withhold his consent under certain circumstances. The agreement also requires Greg Norman to make himself available for medical exams for the purpose of assisting the Company in obtaining up to $10 million in "key-man" insurance on his life. The Company has agreed to indemnify Greg Norman against any liability arising out of the Greg Norman License. 23 The Greg Norman License prohibits Greg Norman from granting similar rights to any person with respect to any concept which is the same as or confusingly similar to the Company's concept or proposed products. "Products" means a videotape or CD-ROM or other similar medium that is given or sold to a consumer upon use of the concept in which Greg Norman's golf swing or any other golf professional's golf swing is compared to the user's golf swing using audio and video analysis of both swings. For purposes of the agreement, however, the self-instructional golf video product Better Golf featuring Greg Norman or any other form of golf instructional video or multi-media presentation for teaching golf techniques are not deemed to be the same as or confusingly similar to the Company's concept or proposed products. Greg Norman may terminate the agreement in the event the Company fails to make any payment, breaches the agreement, is declared bankrupt or becomes insolvent, assigns its assets for the benefit of creditors, consents to the appointment of a receiver or trustee or winds up or ceases to carry on its business. The Company may terminate the agreement in the event Greg Norman dies, voluntarily enters a substance abuse program, commits an act that results in a criminal conviction damaging to his reputation or good will or breaches any material term of the agreement. The Company may assign the agreement to an affiliated entity and enter into distribution agreements with third parties with respect to product sales. The Company has no right to sublicense its rights under the agreement to a third party without the prior consent of Greg Norman. PRODUCT DEVELOPMENT In 1995, the Company developed the software necessary to operate a video editing and videotape production process and an initial version of a right-handed, full swing videotape golf lesson. The Company intends to design, develop and test production versions of its proposed full swing One-on-One videotapes. The production versions are expected to provide enhanced pre-recorded commentary and analysis of a golfer's swing at various club positions. The Company currently anticipates that, subject to Greg Norman's availability, it will script, film, edit and produce its proposed One-on-One videos by late 1996. The Company intends to engage independent production companies to produce the Company's proposed videotapes. The Company currently anticipates that Greg Norman will be available to film additional segments of the Company's videos in July 1996. The Company allocated approximately $350,000 of the proceeds of the Bridge Financing for video production. To date, the Company has focused its efforts on developing computer software which digitally combines actual video footage of a golfer's swing with a synchronized "split-screen" comparison to Greg Norman's golf swing to produce a 45-minute One-on-One videotape golf lesson. The Company's software was developed on behalf of the Company by Thomas Peters, Director of Software Development of the Company. Mr. Peters has entered into a confidentiality agreement with the Company, has agreed, pursuant to his employment agreement, to devote all of his business time to the Company's affairs and has assigned to the Company all of his right, title and interest in and to any invention relating to or used in connection with the Company's One-on-One products which he developed while engaged by the Company. Mr. Peters has independently developed additional software features for Smart View ("Smart View"), a company he controls which the Company is evaluating and may elect to license for use in connection with its One-on-One products. Such features would provide the ability to size and superimpose a golfer's image onto that of Greg Norman. The Company anticipates that following the consummation of this offering, Mr. Peters will continue to devote his efforts to enhance and adapt the editing and videotape production functions of the Company's software to its proposed products. The Company allocated $75,000 of the proceeds of the Bridge Financing for product development. The Company will be required to commit considerable time, effort and resources to finalize development of production versions of its proposed One-on-One videotapes and adapt the editing and videotape production functions of its software to its proposed products. There can be no assurance that any of the Company's product development efforts will be successful. MARKET TESTING In September 1995, the Company conducted preliminary market testing of its initial version of the right-handed, full swing videotape golf lesson at a public driving range in New York where approximately 175 golf- 24 ers used the One-on-One concept at no charge. Each of the 175 market test participants was asked to complete a two-page questionnaire after reviewing their videotape to solicit evaluations, recommendations, criticisms and comments. Of the approximate 120 responses received by the Company, approximately 55% rated the video golf lesson excellent and approximately 34% rated it above average. Based on favorable consumer reaction to the initial version of the Company's video golf lesson, in November and December 1995 the Company engaged in expanded market testing activities at various public and private golf courses, driving ranges and retailers in Florida and California, including the PGA National Golf Course, during which a limited number of videotapes were sold. The market tests were intended to provide information on the product's acceptance among golfers and to test the technical aspects of the Company's video editing and production process. The Company circulated a limited number of questionnaires and conducted on-site interviews to solicit consumer feedback used to develop a preliminary marketing strategy. The Company believes that the results from market testing indicate that the Company's video editing and videotape production process is effective in commercial applications and that its proposed products will have strong appeal to golfers. There can be no assurance that the results of the market testing of the Company's initial version of the right-handed, full swing videotape will translate into commercial acceptance of the production versions of the One-on-One video golf lessons or that the results of market testing will be indicative of the ultimate success of product commercialization. The Company does not currently expect to conduct any additional market testing activities. MARKETING AND DISTRIBUTION Marketing Strategy In the event of successful completion of production versions of One-on-One videotapes, the Company anticipates that it will seek to enter selected target markets. The Company's primary marketing strategy is to sell One-on-One videotapes on a prearranged basis to various organizers of amateur corporate, charity and member golf tournaments (who typically offer gifts to tournament participants) and golf professionals at private and daily fee golf courses and driving ranges. Target Markets The Company expects that its primary target markets will include: Amateur Golf Tournaments. The Company believes that private and public golf courses present a significant opportunity to sell personalized One-on-One videotape golf lessons. The Company intends to target private and public golf courses which host corporate, charity and member tournaments and typically offer gifts such as golf umbrellas, golf bag towels, golf balls or golf shirts to tournament participants. The Company believes there is a significant opportunity for product and promotional "tie-ins" with potential corporate sponsors. Golf Courses and Golf Professionals. The Company intends to focus its marketing efforts on golf professionals at private and public golf courses. The Company believes that golf professionals will be willing to use the Company's proposed products as instructional tools to enhance the marketing and quality of golf lessons given to their students. Driving Ranges. The Company has identified driving ranges as a potentially significant market for the Company's proposed One-on-One videotapes. Driving ranges generally conduct a substantial portion of their business during the evenings and on weekends. The Company intends to market its proposed products at driving ranges during evening hours to complement its marketing efforts to private and public golf courses during the daytime. Other Potential Markets. The Company also believes that travel agents who plan golf trips, golf specialty shops and sporting goods retailers and professional golf tournaments are also potential markets for the Company's proposed products. Distribution Strategy The Company's objective is to develop mobile One-on-One vans equipped with video and personal computer equipment to market, promote and produce the Company's proposed products. The Company will seek to position such vans in selected geographic areas that will serve golf courses and driving ranges throughout the United States, initially in Florida, the Carolinas and California. The Company anticipates that initially such geographic areas will include Palm Beach, Boca Raton, Miami, Fort Lauderdale, Jacksonville, Orlando, Tampa, Naples, Fort Myers, Sarasota, Tallahassee, Pensacola, as well as Hilton Head and Myrtle Beach and, thereafter, selected areas in Southern California. 25 One-on-One Van Development The Company has allocated approximately $125,000 of the proceeds of the Bridge Financing to develop and customize its first One-on-One van and to purchase certain equipment necessary to produce personalized One-on-One video golf lessons, and intends to use $2,000,000 of the proceeds of this offering to develop up to 20 additional fully-equipped vans during the twelve months following the consummation of this offering. The Company expects that the costs associated with developing a customized One-on-One van will be approximately $35,000. The Company will seek to engage the logistics consulting division of KPMG Peat Marwick LLP to advise and assist the Company in identifying and evaluating van specifications, procurement and lease arrangements, maintenance contracts, security and warranty arrangements. The Company currently estimates that the average cost to acquire and install equipment in each van will be approximately $75,000, including video equipment (cameras, tripods, lens, filters, splitters, small television monitor, lighting and accessories); input equipment (computer and video cassette recorder); and output equipment (computers, output video cassette recorders, scan converters, a television monitor and accessories). In order to reduce the Company's up-front capital requirements associated with van development, the Company may seek to lease or finance rather than purchase a portion of its equipment. There can be no assurance that the Company will be able to obtain satisfactory leasing or financing arrangements. Strategic Relationships The Company may also seek to enter into strategic relationships with third parties relating to product marketing and distribution. Potential marketing partners may include golf industry participants, such as organizers of golf tournaments and companies that offer hole-in-one insurance. In November 1995, the Company entered into a distribution agreement with Visual Edge Systems Australia Pty. Ltd. ("Vesa"), an unaffiliated third party, pursuant to which the Company granted to Vesa the exclusive right to distribute One-on-One products in Australia, New Zealand and Indonesia. In connection with the agreement and upon delivery of the Company's initial version of its product, the Company received a non-refundable payment of $125,000 to be applied against future royalties, and is entitled to receive a royalty of $5.00 for each videotape sold. During the second and third years of the agreement, the Company is entitled to receive aggregate guaranteed royalties of $700,000. In addition, the agreement provides for certain profit sharing arrangements. The Company has not yet commenced any significant marketing activities and has limited marketing and technical experience and limited financial, personnel and other resources to independently undertake extensive marketing activities. The Company's strategy and preliminary and future marketing plans may be subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts, changes in market conditions (including the emergence of potentially significant related market segments), the nature of possible license and distribution arrangements which may become available to it in the future and competitive factors. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's proposed products. PRODUCTION The Company's proposed One-on-One products are made possible by relatively recent advancements in the capabilities of affordable desktop personal computers to process, manipulate and edit digital video information. Creation of a One-on-One videotape involves videotaping a golfers' swing, editing and production of a videotape. Videotaping involves the operation of video equipment, including three cameras, a small television monitor, a splitter (to provide a "split-screen" image), a video cassette recorder and power supply. Editing involves the use of a computer and monitor, a scan converter and video cassette recorder and consists of digitizing the videotape and synchronizing and sizing the golfer's swing to Greg Norman's swing and identifying key clubhead and body positions. In the final videotape production stage, the Company's software scans the videotape to the first blank segment where it records a "split-screen" image of Greg Norman and the golfer at similar club positions. Using pre-recorded film and audio footage stored in the computer's memory, the software creates computer graphics designed to illustrate comparisons to Greg Norman's swing and chooses appropriate verbal 26 instructions and analytical comments from Greg Norman. The Company anticipates that a Company employee will operate videotaping equipment at the first tee, driving range or other suitable location to videotape a golfer's swing which would be edited inside the One-on-One van to create a personalized video golf lesson in approximately 25 minutes. COMPETITION The Company will face intense competition for a finite amount of consumer discretionary spending from numerous other businesses in the golf industry and related market segments. The Company will compete with numerous other products and services which provide golf instruction, including instructional golf videotapes, golf software used to analyze golf swings and golf courses, golf schools and professionals who offer video golf lessons, which may be less expensive or provide other advantages to consumers. Various instructional golf videotapes currently being marketed by leading golf professionals and instructors such as Jack Nicklaus, Tom Kite, Nick Faldo, David Leadbetter, Jim McLean and Greg Norman, including Better Golf and Shark Attack, among others, featuring Greg Norman, have achieved significant national, regional and local consumer recognition. These products are marketed by companies with substantially greater financial, marketing, distribution, personnel and other resources than the Company, permitting such companies to implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors to enter into new markets. In addition, certain companies offer both hardware and software to golf professionals for use in connection with golf lessons. Such companies include Astar, Inc., Vivid Visions, Inc. and Golf Training Systems, Inc. The Company believes that such companies offer hardware and software at prices ranging from $4,500 to $20,000. Certain companies also offer computer software to permit a golfer to analyze a golf swing, such as David Leadbetter's ComputerCoach, which sells at a price of $59.95. The instructional golf video segment of the industry has no substantial barriers to entry and, consequently, the Company expects that other companies which have developed software technologies may seek to enter into the Company's target markets and compete directly against the Company. There can be no assurance that other companies are not developing or will not seek to develop similar products. The Greg Norman License prohibits Greg Norman from granting similar rights to any person with respect to any concept which is the same as or confusingly similar to the Company's concept or proposed products. Notwithstanding this prohibition, the self-instructional golf video product known as Better Golf featuring Greg Norman or any other form of golf instructional video or multi-media presentation for teaching golf techniques are not deemed the same as or confusingly similar to the Company's concept or proposed products. There can be no assurance that the Company will be able to compete successfully. PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION The Company has filed a patent application with the United States Patent and Trademark Office covering certain aspects of its digital video editing and production process. There can be no assurance, however, as to the breadth or degree of protection which patents may afford the Company, that any patent applications will result in issued patents or that patents will not be circumvented or invalidated. Rapid technological developments in the computer software industry results in extensive patent filings and a rapid rate of issuance of new patents. Although the Company believes that its proposed products do not and will not infringe patents or violate proprietary rights of others, the Company has not conducted any investigation, to determine whether its proposed products infringe patents or violate proprietary rights of others, and it is possible that infringement of existing or future patents or proprietary rights of others have occurred or may occur. In the event the Company's proposed products infringe patents or proprietary rights of others, the Company may be required to modify the design of its proposed products or obtain a license. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions or at all. The failure to do any of the foregoing could have a material adverse effect upon the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement action and the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. 27 The Company intends to rely on proprietary processes and to employ various methods to protect the concepts, ideas and documentation of its proposed products. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such processes or obtain access to the Company's proprietary processes, ideas and documentation. Furthermore, although the Company intends to enter into confidentiality agreements with its employees, there can be no assurance that such arrangements will adequately protect the Company. The Company has filed a trademark application with the United States Patent and Trademark Office, on behalf of Greg Norman, for the mark One-on-One with Greg Norman(TM) and may use this mark, as well as all other trademarks owned by Greg Norman (except the "Shark" logo) in connection with the marketing of its products. The Company's rights in these marks may be a significant part of the Company's proposed business. The Company is not aware of any claims or infringement or other challenges to the Company's rights to use these marks. LEGAL PROCEEDINGS The Company has no pending legal proceedings. EMPLOYEES Other than the Company's executive officers, the Company has no employees. The Company anticipates, depending upon its level of business activities, that it will hire approximately ten additional office personnel, including administrative personnel, during the 12 months following this offering. The Company currently estimates that the salaries of the Company's executive officers and such additional personnel during such period will be approximately $1,080,000. In addition, the Company expects to employ approximately two to four operators per van, as each van is deployed, at an approximate annual cost of $30,000 per person. See "Management." PROPERTY The Company's executive offices are located in approximately 200 square feet of office space in New York, New York. Such space is being provided to the Company by Alan Lubell, its Chairman of the Board and Vice President-Product Development, at no cost. The Company intends to relocate its executive offices to South Florida following the completion of this offering. The Company currently anticipates that a new location will provide it with approximately 3,500 square feet of office space at an annual expense of approximately $56,000. See "Certain Transactions." 28 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following are the directors and executive officers of the Company: Name Age Position ---- ----- --------- Earl T. Takefman . 46 Chief Executive Officer and Director Alan L. Lubell .. 57 Chairman of the Board, Vice President -- Product Development and Director Richard Parker* . 35 Chief Operating Officer Ami Trauber* .... 56 Chief Financial Officer Thomas Peters ... 51 Director of Software Development Frank Williams* . 55 Director Eddie Einhorn* .. 60 Director Mark Hershhorn* . 48 Director - ------ * Nominee whose appointment is to become effective upon consummation of this offering. Earl T. Takefman, a co-founder of the Company, has been Chief Executive Officer of the Company since March 1995. Prior to founding the Company, Mr. Takefman was Co-Chief Executive Officer of SLM International, Inc. ("SLM"), a publicly traded toy and sporting goods company, from December 1989 to August 1994. SLM filed for protection under Chapter 11 of the U.S. Bankruptcy Code in October 1995. From 1980 to 1989, prior to joining SLM, Mr. Takefman was Chief Operating Officer of Charan Industries ("Charan"), a publicly traded Canadian toy and sporting goods company. Mr. Takefman also currently serves as a consultant to National Media Corporation of Philadelphia ("National Media"), a publicly traded company which is a producer of infomercials, in the area of new product development. Mr. Takefman received a Bachelor of Architecture degree in 1971 and a Masters of Business Administration degree from McGill University in Montreal, Canada in 1973. Alan L. Lubell, a co-founder of the Company, has been Chairman of the Board of the Company since July 1994 and Vice President -- Product Development since May 1996. Prior to founding the Company, Mr. Lubell had been an entrepreneur in the area of sports television. From 1977 to July 1994, Mr. Lubell served as President of Marathon Entertainment, a sports television company which he founded that created many events and programs that were sold to television stations and networks and national advertisers. Among the events developed, packaged and produced by Marathon Entertainment was the New York City Marathon. Mr. Lubell received a Bachelor of Science degree in marketing from New York University in 1960. Richard Parker has been appointed as Chief Operating Officer, effective upon the completion of this offering. Since February 1990, Mr. Parker has been the founder, owner and president of Diomo Marketing Inc. and Devrew Merchandising Inc., companies engaged in marketing and selling consumer products in Canada. From August 1984 to February 1990, Mr. Parker held various positions, including Vice President, at Charan. Mr. Parker graduated from Vanier College in Montreal in 1980. Ami Trauber has been appointed as Chief Financial Officer, effective upon completion of this offering. Since 1991, Mr. Trauber has been President and Chief Operating Officer of Ed's West, Inc., a designer and importer of headwear and other licensed apparel. From 1978 until 1990, Mr. Trauber was Corporate Vice President -- Finance and Controller of Harcourt General, Inc., a conglomerate. From 1976 to 1978, Mr. Trauber was Corporate Vice President and Controller of Hertz Corporation. Mr. Trauber received a Bachelor of Science degree from the University of Connecticut in 1965 and graduated from the Harvard Business School Advanced Management Program in 1982. Thomas Peters has been Director of Software Development of the Company since May 1996. Since July 1992, Mr. Peters has been the owner of Smart View ("Smart View"), a company he founded to design and develop computer golf software to be used by golf professionals when giving video golf lessons. Since March 1995, Smart View has been engaged as an independent consultant to the Company and is principally responsible for the development of the software used in the Company's proposed products. Smart View also has developed operating systems used by the Golf Academy at PGA National and at the Doral Golf Learning Center, each in Florida. Prior to founding Smart View, Mr. Peters, for 26 years, held various positions at International Business 29 Machines Corporation, including Manager of Application Development from July 1989 to July 1992 and Personal Computer Product Planning Manager from 1984 to 1989. Mr. Peters graduated from Harper College at University of New York in 1967, with a B.A. in mathematics. Frank Williams will become a director of the Company upon completion of this offering. Mr. Williams has been the Managing Director of Great White Shark Enterprises, Inc. ("Great White Shark") since January 1993. From 1988 to January 1993, Mr. Williams served as a General Manager of the Australian division of International Management Group, a company engaged in representing athletes and producing sports programming. From 1978 to 1988, Mr. Williams was Managing Director and a co-founder of the Australian Masters Golf Tournament. Eddie Einhorn will become a director of the Company upon completion of this offering. Mr. Einhorn currently serves, and has served for the past five years, as Vice-Chairman of the Chicago White Sox baseball team franchise. Prior to being appointed Vice-Chairman, he served the franchise as its President and Chief Operating Officer from 1981 to 1991. Mr. Einhorn is a member of the Major League Baseball Schedule Format Committee, the Professional Baseball Association Committee, and was a member of the Television Committee from 1992 to 1995. In 1989, Mr. Einhorn was appointed television consultant to the United States Olympic Committee. He is currently a television consultant for the United States Figure Skating Association and the International Skating Union, the governing bodies for figure skating throughout the world. Mr. Einhorn also serves on the Board of Directors of the Chicago Bulls basketball team of the National Basketball Association. Prior to 1981, Mr. Einhorn was executive producer of CBS Sports Spectacular, where he was awarded an Emmy Award in 1980. Mr. Einhorn holds a Bachelor's degree from the University of Pennsylvania and is a graduate of Northwestern University School of Law. Mark Hershhorn will become a director of the Company upon completion of this offering. Mr. Hershhorn currently serves and has served since November 1994 as President and Chief Executive Officer and as a director of National Media Corporation of Philadelphia, a publicly-traded worldwide infomercial company, and as Chairman of the Board of its international subsidiary, Quantum International, Inc. From August 1994 to November 1994, Mr. Hershhorn acted as President and Chief Operating Officer of National Media. Mr. Hershhorn was President and Chief Operating Officer of Buckeye Communications, a publicly traded corporation, from June 1993 to August 1994 and of National Media from December 1991 to April 1993. From 1990 to December 1991, Mr. Hershhorn was a Senior Vice President of Food Marketing for Nutri-Systems Inc., a diet food company. Prior to joining Nutri-Systems, he held various positions at the Franklin Mint, including Chief Financial Officer, Treasurer, Vice President and director, from 1985 to 1990. Mr. Hershhorn received a Bachelor of Arts degree in economics Rutgers University and a Masters of Business Administration degree from the Wharton School of Business at the University of Pennsylvania. He currently serves as a member of the Wharton School Graduate Executive Board and as a member of the Executive Committee of the National Infomercial Marketing Associations. BOARD OF DIRECTORS All directors currently hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. The Company reimburses directors for reasonable travel expenses incurred in connection with their activities on behalf of the Company but does not currently pay its directors any fees for attending Board meetings. The Company has granted to each of its non-employee directors options to purchase 5,000 shares of Common Stock and each of such directors will receive annual option grants to purchase 2,500 shares of Common Stock. See "Stock Option Plan." Audit Committee. Upon the consummation of this offering, the Company will establish an Audit Committee of the Board of Directors consisting of at least two directors who are not employees of the Company. It is currently anticipated that Messrs. Einhorn and Hershhorn will comprise the Audit Committee. Audit Committee members will meet regularly with the Company's financial management and independent auditors to review the results of their examination, the scope of audits and their opinions on the adequacy of internal controls and quality of financial reporting. Compensation Committee. Upon the consummation of this offering, the Company will establish a Compensation Committee of the Board of Directors consisting of at least two directors who are not employees of the Company. It is currently anticipated that Messrs. Hershhorn and Williams will comprise the Compensation Com- 30 mittee. The Committee will make recommendations to the Board of Directors concerning the salaries of all elected officers. In addition, the Compensation Committee will administer the Company's 1996 Stock Option Plan and determine the amounts of, and the individuals to whom, awards shall be made thereunder. See "Stock Option Plan." The Company has agreed, for a period of three years from the date of the Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company or, at the Underwriter's option, as a non-voting advisor to the Company's Board of Directors. The Underwriter has not yet exercised its right to designate such a person. See "Underwriting." EXECUTIVE COMPENSATION Since its inception, the Company has not paid any salaries, bonuses, long-term compensation (through plans or otherwise) or any other form of compensation to any of its executive officers. Salaries owing since January 1, 1996 under the Company's employment agreements with Messrs. Takefman and Lubell will be paid with a portion of the proceeds of this offering. The Company has not paid, and will not pay, any compensation to any executive officer for periods prior to January 1, 1996 and no non-salary compensation has accrued or will accrue with respect to any executive officer from January 1, 1996 through the consummation of this offering. See "Employment Agreements." EMPLOYMENT AGREEMENTS Effective January 1, 1996, the Company entered into a three-year employment agreement with Earl T. Takefman, the Chief Executive Officer of the Company. Pursuant to the agreement, Mr. Takefman is entitled to receive a base salary of $150,000 per annum, subject to increase to $200,000 in July 1997 and $250,000 in July 1998 if the Company achieves pre-tax earnings of $2 million and $4 million in the prior 12-month periods, respectively. The agreement also provides for additional compensation in the amount of 5% of pre-tax earnings of the Company in each year if the Company achieves pre-tax earnings of at least $3 million and $5 million in fiscal 1997 and 1998, respectively. In addition, pursuant to the agreement, Mr. Takefman shall receive the Executive Options upon the consummation of this offering. Of the Executive Options, 150,000 options will vest and become exercisable at $5.00 per share if the market price of the Common Stock equals or exceeds $10.00 per share for at least five consecutive trading days during the 18-month period following the completion of this offering and 100,000 of the Executive Options will vest and become exercisable at $5.00 per share if the trading price of the Common Stock equals or exceeds $15.00 per share for at least five consecutive trading days during the 30-month period following completion of this offering. The agreement is automatically renewed for additional one-year periods unless Mr. Takefman or the Company provides notice to the other of its termination. In the event that Mr. Takefman is terminated without cause, he will be entitled to receive as severance the amount of his base salary for the lesser of one year or the remaining term of the agreement. Effective January 1, 1996, the Company entered into a three-year employment agreement with Alan L. Lubell, the Chairman of the Board and Vice President -- Product Development of the Company. Pursuant to the agreement, Mr. Lubell is entitled to receive a base salary of $75,000 per annum, subject to increase to $100,000 in July 1997 and $125,000 in July 1998 if the Company achieves pre-tax earnings of $2 million and $4 million in the prior 12-month periods, respectively. In addition, Mr. Lubell shall have the right to receive a bonus based on the Company's performance, as determined by the Board of Directors, and the Executive Options on the same terms and subject to the same conditions as Mr. Takefman. The agreement is automatically renewed for additional one-year periods unless Mr. Lubell or the Company provides notice to the other of its termination. In the event Mr. Lubell is terminated without cause, he will be entitled to receive as severance the amount of his base salary for six months. Effective upon the completion of this offering, the Company will enter into an employment agreement with Richard Parker, pursuant to which Mr. Parker will serve as the Chief Operating Officer of the Company. Mr. Parker will receive a base salary of $150,000 per annum, subject to increase to $175,000 in 1998 if the Company achieves pre-tax earnings during 1997. Mr. Parker will be eligible to receive a bonus based on the Company's performance, as determined by the Board of Directors. The agreement will expire on December 31, 1998 but will automatically be renewed annually unless terminated by one or both of the parties. If Mr. Parker is terminated without cause, he will be entitled to receive as severance the amount of his base salary for the lesser of six months or the remaining term of the agreement. 31 Effective upon completion of this offering, the Company will enter into an employment agreement with Ami Trauber, pursuant to which Mr. Trauber will serve as the Chief Financial Officer of the Company. Mr. Trauber will receive a base salary of $150,000 per annum, subject to increase to $175,000 in 1998 if the Company achieves pre-tax earnings during 1997. Mr. Trauber will be eligible to receive a bonus based on the Company's performance, as determined by the Board of Directors. The agreement will expire on December 31, 1998, but will automatically be renewed for one additional year unless terminated by one or both of the parties, provided that either party may terminate the agreement, without cause, on or before December 31, 1996. If Mr. Trauber is terminated without cause, he will be entitled to receive as severance the amount of his then base salary for the lesser of six months or the remaining term of the agreement. Since March 1995, Thomas Peters and Smart View have been engaged to act as independent consultants to the Company in the area of software development, and are principally responsible for the development of the software used in the Company's proposed products. Mr. Peters has been paid an aggregate of $91,525 in connection with services rendered for the period from March 1995 through April 30, 1996 and received 9,155 shares of Common Stock and options to purchase 20,411 shares of Common Stock. As of May 1, 1996, the Company entered into a two-year employment agreement with Thomas Peters, pursuant to which Mr. Peters serves the Company, as Director -- Software Development. Mr. Peters is entitled to receive a base salary of $65,000 in the first year of the agreement and $75,000 in the second year. Pursuant to the agreement, Mr. Peters will also be eligible to receive a bonus based on the Company's performance, as determined by the Board of Directors. The agreement is automatically renewed for additional one-year periods unless Mr. Peters or the Company provides notice to the other of its termination. In the event that Mr. Peters is terminated without cause, he will be entitled to receive as severance the amount of his base salary for three months. Mr. Peters has entered into a confidentiality agreement with the Company, has agreed, pursuant to his employment agreement, to devote all of his business time to the Company's affairs and has assigned to the Company all of his right, title and interest in and to any invention relating to or used in connection with the Company's One-on-One products which he developed while engaged by the Company. STOCK OPTION PLAN In April 1996, the Board of Directors and the Company's stockholders approved the Company's 1996 Stock Option Plan (the "Plan"). The purpose of the Plan is to provide directors, officers and key employees of, and consultants to, the Company with additional incentives by increasing their ownership interests in the Company. Directors, officers and other key employees of the Company are eligible to participate in the Plan. Awards may also be granted to consultants providing valuable services to the Company. In addition, individuals who have agreed to become a key employee of or a consultant to the Company are eligible for option grants, conditional in each case on actual employment or consultant status. Awards of options to purchase Common Stock may include incentive stock options ("ISOs") and/or non-qualified stock options ("NQSOs"). The maximum number of shares of Common Stock that may be subject to outstanding options, determined immediately after the grant of any option, is equal to the greater of 900,000 shares (reduced by the number of Executive Options not granted or, if granted, forfeited in accordance with their terms) or 12% of the aggregate number of shares of the Company's Common Stock outstanding, provided, however, that options to purchase no more than 300,000 shares of Common Stock may be granted as ISOs. The Board of Directors intends, upon consummation of this offering, to establish a Compensation Committee, consisting of two or more directors who qualify as disinterested persons within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to administer the Plan. The Compensation Committee will generally have discretion to determine the terms of an option grant, including the number of option shares, option price, term, vesting schedule, the post-termination exercise period, and whether the grant will be an ISO or NQSO. Notwithstanding this discretion: (i) the number of shares subject to options granted to any individual in any calendar year may not exceed 250,000; (ii) the option price per share of Common Stock may not be less than 100% of the market value of such share at the time of grant (or 110% if granted as an ISO to a 10% or more stockholder); (iii) the term of any option may not exceed 10 years (unless granted as an ISO to a 10% or more stockholder, which term may not exceed five years); and (iv) an option may terminate upon a grantee's termination of employment for cause. In addition, unless otherwise specified by the Compensation Committee, all outstanding options vest upon a "change in control" of the Company (as defined in the Plan), and all options will terminate three months following any termination of employment. 32 The Plan also provides for automatic option grants to directors who are not otherwise employed by the Company. Upon commencement of service (or upon agreeing to serve in the case of the initial non-employee directors), a non-employee director will receive a nonqualified option to purchase 5,000 shares of Common Stock, and continuing non-employee directors will receive annual options to purchase 2,500 shares of Common Stock. Options granted to non-employee directors become exercisable one-third on the date of grant and one-third on each of the next two anniversaries of the date of grant. Non-employee directors' options have a term of five years from the date of grant. Upon consummation of this offering, Messrs. Williams, Einhorn and Herschhorn will each receive options to purchase 5,000 shares of Common Stock. The Plan will remain in effect until terminated by the Board of Directors. The Plan may be amended by the Board of Directors without the consent of the stockholders of the Company, except that any amendment, although effective when made, will be subject to stockholder approval if required by any Federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. Upon consummation of this offering, the Company will have outstanding nonqualified options to purchase an aggregate of 884,508 shares of Common Stock. Of such options, options to purchase 87,478, 58,318, 50,000, 25,000, 20,411, 5,832 and 5,832 shares were granted to Earl Takefman, Frank Williams, Richard Parker, Ami Trauber, Thomas Peters, Mona-Lee Takefman and Mark Lubell (excluding options granted to Mr. Williams as a non-employee director of the Company), respectively. All of such options are exercisable at the public offering price per share and vest in equal installments over a three- or five-year period following the completion of this offering. In addition, Messrs. Takefman and Lubell are each eligible to receive the Executive Options upon the completion of this offering pursuant to their employment arrangements, which may be exercised at various times over the course of two and a half years following completion of this offering if the market price of the Company's Common Stock reaches certain levels. See "Management--Employment Agreements." LIMITATIONS OF LIABILITY AND INDEMNIFICATION Section 145 of the Delaware General Corporation Law ("DGCL") contains provisions entitling the Company's directors and officers to indemnification from judgments, fines, amounts paid in settlement, and reasonable expenses (including attorneys' fees) as the result of an action or proceeding in which they may be involved by reason of having been a director or officer of the Company. In its Certificate of Incorporation, the Company has included a provision that limits, to the fullest extent now or hereafter permitted by the DGCL, the personal liability of its directors to the Company or its stockholders for monetary damages arising from a breach of their fiduciary duties as directors. Under the DGCL as currently in effect, this provision limits a director's liability except where such director (i) breaches his duty of loyalty to the Company or its stockholders, (ii) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (iii) authorizes payment of an unlawful dividend or stock purchase or redemption as provided in Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This provision does not prevent the Company or its stockholders from seeking equitable remedies, such as injunctive relief or rescission. If equitable remedies are found not to be available to stockholders in any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent that such indemnification and advancement of expenses is permitted under such law, as it may from time to time be in effect. In addition, the Company's By-Laws require the Company to indemnify, to the full extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Certificate of Incorporation. At present, the DGCL provides that, in order to be entitled to indemnification, an individual must have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the Company's best interests. 33 PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of the date of this Prospectus and as adjusted to reflect the sale by the Company of the 1,300,000 shares of Common Stock offered hereby (based on information obtained from the persons named below), relating to the beneficial ownership of shares of Common Stock by: (i) each person or entity who is known by the Company to own beneficially five percent or more of the outstanding Common Stock; (ii) each of the Company's directors; and (iii) all directors and executive officers of the Company as a group.
Percentage of Shares Number of Beneficially Owned(2) Shares ------------------------ Name and address of Beneficially Before After Beneficial Owners(1) Owned(2) Offering Offering - --------------------- -------------- ---------- ---------- Earl T. Takefman(3) ........................... 1,154,350 35.8% 25.5% Alan L. Lubell(4) ............................. 1,117,553 34.7 24.7 Greg Norman ................................... 300,000 9.3 6.6 Barry Minsky(5) ............................... 248,503 7.7 5.5 Eddie Einhorn ................................. -- -- -- Mark Hershhorn ................................ -- -- -- Frank Williams ................................ 8,139 * * All directors and executive officers as a group (six persons) ................................ 2,289,197 71.1% 50.6%
- ------ *Less than 1% (1) Unless otherwise indicated, the address for each named individual, corporation or group is in care of Visual Edge Systems Inc., 7 West 51st Street, New York, New York 10019 (2) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date of this Prospectus, have been exercised. (3) The shares are owned by Status-One Investments Inc., a Delaware corporation owned by Earl T. Takefman and certain family members and controlled by Earl T. Takefman. Does not include options held by Mr. Takefman and his spouse (as to which Mr. Takefman disclaims beneficial ownership) to acquire an aggregate of 93,310 shares of Common Stock, none of which are exercisable within 60 days, or shares underlying the Executive Options. See "Management -- Employment Agreements." (4) Does not include shares underlying the Executive Options. See "Management -- Employment Agreements." (5) The shares are owned by Greenwich Properties Inc., a company controlled by Barry Minsky. Does not include 50,000 shares which Mr. Minsky has agreed to sell to Dr. Leonard Mendell immediately prior to the consummation of this offering. Earl T. Takefman and Alan L. Lubell may be deemed to be "promoters" of the Company within the meaning of the rules and regulations of the Commission. 34 CERTAIN TRANSACTIONS STOCK ISSUANCES AND LOANS In March 1995, the Company issued (i) 1,708,938 shares of Common Stock to Alan L. Lubell, its Chairman of the Board and Vice President -- Product Development, (ii) 732,402 shares of Common Stock to Status-One Investments Inc. ("Status One"), a company controlled by Earl Takefman, its Chief Executive Officer, and (iii) 488,268 shares of Common Stock to Greenwich Properties Inc. ("Greenwich"), a company controlled by Barry Minsky, for nominal consideration. In March 1995, Mr. Lubell transferred 427,235 shares of Common Stock to Status-One in accordance with the terms of a shareholders agreement, dated March 1, 1995, by and between Status-One and Mr. Lubell (the "Shareholders Agreement"). The Shareholders Agreement has since been terminated. Between June 1995 and March 1996, Mr. Lubell sold an additional 102,536 shares of Common Stock to various investors for $630,000 in the aggregate, and Greenwich sold 9,765 shares in consideration of $60,000 in the aggregate. Since its inception, the Company borrowed $191,750, $162,500 and $48,450, respectively, from Mr. Lubell, Status-One and Greenwich. In December 1995, these loans were contributed to the capital of the Company for no consideration. In March 1995, the Company issued an additional 24,413 shares of Common Stock and granted options to purchase 116,637 shares of Common Stock to Status-One at a exercise price of $5.00 per share in exchange for financing considerations arranged by Status-One. In addition, in March 1995 the Company issued an additional 24,413 shares of Common Stock to Status-One in consideration of services rendered to the Company by Earl Takefman, 8,139 shares to Frank Williams in consideration of consulting services rendered to the Company, 9,155 shares to Thomas Peters in consideration of software development services rendered to the Company, 2,136 shares to Mona-Lee Takefman, the spouse of Earl Takefman, the Company's Chief Executive Officer, in consideration of clerical and secretarial services rendered to the Company and 2,136 shares to Mark Lubell, the son of Alan Lubell, the Company's Chairman of the Board of Directors and Vice President--Product Development, in consideration of managerial services rendered to the Company during its market testing activities. The value of the foregoing services were, in each case, determined by the Board of Directors of the Company based upon a per share valuation of $.17. In April 1996, Greenwich, Status-One and Mr. Lubell transferred 180,000, 56,250 and 63,750 shares of Common Stock, respectively, to Greg Norman, upon his exercise of an option granted to him pursuant to the terms of the Shareholders Agreement and the Greg Norman License. Pursuant to the Greg Norman License, the Company is required to make guaranteed payments aggregating $3,300,000 during the three-year period commencing July 1, 1996. RECAPITALIZATION In March 1996, the Company effected a recapitalization of its capital stock. Each outstanding share of Class A Common Stock was converted into the right to receive .488268 shares of Common Stock, and each outstanding share of Class B Common Stock was converted into the right to receive 4,882.68 shares of Common Stock. In addition, options to purchase 505,000 shares of Class A Common Stock were converted, on the same terms and conditions, into the right to purchase 294,508 shares of Common Stock. LOAN GUARANTEES As of May 31, 1996, the Company borrowed an aggregate of $507,000 from the Bank, which is due and payable on December 31, 1996. Interest on the unpaid principal amount of the loan accrues at the reference rate established by the Bank from time to time (currently 8.25%). All of the Company's assets are pledged as collateral to secure such indebtedness and Earl T. Takefman, Alan Lubell and Barry Minsky, principal stockholders of the Company, have guaranteed and pledged personal assets in the form of letters of credit and certificates of deposit and in the amounts of $354,400, $106,325 and $39,275, respectively, to secure such loan. The Company intends to use a portion of the proceeds of this offering to repay this indebtedness which will release the personal guarantees of Messrs. Takefman, Lubell and Minsky. 35 The Company is currently utilizing office space in New York, New York provided to it at no charge by Alan L. Lubell, its Chairman of the Board and Vice President--Product Development. The Company does not owe any rental charges to Mr. Lubell and does not anticipate incurring any such rental charges following the consummation of this offering. Pursuant to a Settlement Agreement entered into in May 1996, the Company agreed to pay $35,000 to Barry Minsky in consideration for the termination of an agreement with Mr. Minsky. The Company believes that each of the foregoing transactions were on terms no less favorable than those which could have been obtained from unaffiliated third parties. All future transactions between the Company and its affiliates will be on terms no less favorable than would be obtained from unaffiliated third parties. DESCRIPTION OF SECURITIES GENERAL The Company is authorized to issue 20,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share. As of the date of this Prospectus, there are 3,220,000 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK The holders of the Common Stock are entitled to one vote for each share held of record in the election of directors of the Company and in all other matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors. Holders of Common Stock are entitled (i) to receive such dividends as may be declared from time to time by the Board out of funds legally available therefor and (ii) in the event of liquidation, dissolution or winding up of the Company, to share ratably in all assets remaining after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. The rights of the holders of the Common Stock are subject to any rights that may be fixed for holders of Preferred Stock, when and if any Preferred Stock is issued. All of the outstanding shares of Common Stock are, and the Common Stock offered hereby, upon issuance and sale, will be, validly issued, fully paid and non-assessable. The holders of Common Stock have no preemptive rights. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Preferred Stock from time to time in one or more series, in all cases ranking senior to the Common Stock with respect to payment of dividends and in the event of the liquidation, dissolution or winding-up of the Company. There are no shares of Preferred Stock currently outstanding. Pursuant to the Company's Certificate of Incorporation, the Board of Directors, without further stockholder approval, is authorized to issue shares of one or more series of Preferred Stock, at any time, for such consideration and with such relative rights, privileges, preferences and other terms as the Board may determine (including, but not limited to, terms relating to dividend rates, redemption rates, liquidation preferences and voting, sinking fund and conversion or other rights). The rights and terms relating to any new series of Preferred Stock could adversely affect the voting power or other rights of the holders of the Common Stock or could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. REDEEMABLE WARRANTS Each Warrant entitles the registered holder thereof to purchase one share of Common Stock, at a price of $5.00, subject to adjustment in certain circumstances, at any time after , 1997 until , 2000. 36 The Warrants are redeemable by the Company, upon the consent of the Underwriter, at any time after , 1997, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid price of the Common Stock on all 30 of the trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Warrants. All warrantholders have exercise rights until the close of business on the date fixed for redemption. The Warrants will be issued in registered form under a Warrant Agreement between the Company and American Stock Transfer & Trust Company as Warrant Agent. Reference is made to said Warrant Agreement for a complete description of the terms and conditions therein (the description herein contained being qualified in its entirety by reference thereto). The exercise price and number of shares of Common Stock or other securities issuable on exercise of the Warrants are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, such Warrants are not subject to adjustment for issuances of Common Stock at a price below the exercise price of the Warrants, including the issuance of shares of Common Stock pursuant to the Plan. The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the certificate completed and executed as indicated, accompanied by full payment of the exercise price (by certified check payable to the Company) to the Warrant Agent for the number of Warrants being exercised. The warrantholders do not have the rights or privileges of holders of Common Stock. No Warrant will be exercisable unless at the time of exercise the Company has filed a current registration statement with the Commission covering the shares of Common Stock issuable upon exercise of such Warrant and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Warrant. The Company will use its best efforts to have all such shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to do so, there is no assurance that it will be able to do so. No fractional shares will be issued upon exercise of the Warrants. However, if a warrantholder exercises all Warrants then owned of record by him, the Company will pay to such warrantholder, in lieu of the issuance of any fractional share which is otherwise issuable, an amount in cash based on the market value of the Common Stock on the last trading day prior to the exercise date. REGISTRATION RIGHTS In connection with this offering, the Company has agreed to grant to the Underwriter certain demand and piggyback registration rights in connection with the 260,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrants and the warrants included therein. See "Underwriting." Pursuant to the terms of the Bridge Financing, the Company has included the shares issued in the Bridge Financing in the Registration Statement of which this Prospectus forms a part. The Company has agreed to use its best efforts to keep the Registration Statement effective until the earlier of (i) the date that all of the shares included in the Registration Statement have been sold pursuant thereto and (ii) the date the Selling Stockholders receive an opinion of counsel that the full amount of their shares may be freely sold by such holders. All registration expenses related to such shares will be paid by the Company. The Selling Stockholders have agreed that they will not, directly or indirectly, offer to sell, sell or otherwise dispose of any shares of Common Stock without the prior written consent of the Underwriter for a period of twelve months after the date of this Prospectus (subject to certain exceptions nine months from the date of this Prospectus). 37 STATUTORY PROVISIONS AFFECTING STOCKHOLDERS Following the consummation of this offering, the Company will be subject to the State of Delaware's "business combination" statute, Section 203 of the Delaware General Corporation Law. In general, such statute prohibits a publicly held Delaware corporation from engaging in various "business combination" transactions with any "interested stockholder" for a period of three years after the date of the transaction in which the person became an "interested stockholder," unless (i) the transaction in which the interested stockholder obtained such status or the business combination is approved by the Board of Directors prior to the date the interested stockholder obtained such status; (ii) upon consummation of the transaction which resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transection commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date the "business combination" is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the "interested stockholder." A "business combination" includes mergers, asset sales and other transactions resulting in financial benefit to a stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. DIVIDEND POLICY Holders of Common Stock are entitled to receive such dividends as may be declared and paid from time to time by the Board of Directors out of funds legally available therefor. The Company intends to retain any earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon future earnings, results of operations, capital requirements, the Company's financial condition and such other factors as the Board of Directors may consider. TRANSFER AGENT AND REGISTRAR The transfer and registrar for the Common Stock and the warrant agent for the Warrants is American Stock Transfer and Trust Company, New York, New York. REPORTS TO STOCKHOLDERS The Company has agreed, subject to the sale of the shares of Common Stock and Warrants offered hereby, that on or before the date of this Prospectus, it will register its Common Stock and Warrants under the provisions of Section 12(g) of the Exchange Act. Such registration will require the Company to comply with periodic reporting, proxy solicitation and certain other requirements of the Exchange Act. SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of this offering, the Company will have 4,520,000 shares of Common Stock outstanding (assuming no exercise of the Warrants), of which 1,520,000 shares (consisting of the 1,300,000 shares of Common Stock offered hereby by the Company, and, subject to certain contractual restrictions described below, the 220,000 shares being offered by the Selling Stockholders) will be freely tradeable without restriction or further registration under the Securities Act. All of the remaining 3,000,000 shares outstanding are "restricted securities," as that term is defined in Rule 144 promulgated under the Securities Act, and in the future may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Of the 3,000,000 restricted shares, an aggregate of 2,520,406 shares will be eligible for sale, without registration, under Rule 144 (subject to certain volume limitations prescribed by such rule and to the contractual restrictions described below), commencing March 1997. 38 In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from either the Company or any affiliate of the Company, the acquiror or subsequent holder thereof may sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock, or the average weekly trading volume of the Common Stock on the Nasdaq SmallCap Market during the four calendar weeks preceding the date on which notice of the proposed sale is sent to the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If three years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or any affiliate of the Company, a person who is not deemed to have been an affiliate of the Company at any time for 90 days preceding a sale would be entitled to sell such shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. The Company's officers, directors and stockholders (excluding the holders of 9,776 shares of Common Stock) have agreed not to sell or dispose of any of their securities of the Company for a period of twelve months from the date of this Prospectus without the Underwriter's prior written consent, provided that such restrictions shall not apply at any time after nine months from the date of this Prospectus if the closing bid quotation of the Common Stock as reported by Nasdaq is at least $10.00 per share for 20 consecutive trading days. Prior to this offering, there has been no market for the Common Stock and no prediction can be made as to the effect, if any, that public sales of shares of Common Stock or the availability of such shares for sale will have on the market prices of the Common Stock and Warrants prevailing from time to time. However, the possibility that a substantial amount of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. UNDERWRITING Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase 1,300,000 shares and 1,300,000 Warrants from the Company. The Underwriter is committed to purchase and pay for all of the Common Stock and Warrants offered hereby if any of such securities are purchased. The Common Stock and Warrants are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Common Stock and Warrants to the public at the public offering prices set forth on the cover page of this Prospectus. The Underwriter may allow certain dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") concessions, not in excess of $. per share of Common Stock and $. per Warrant, of which not in excess of $ per share of Common Stock and $. per Warrant may be reallowed to other dealers which are members of the NASD. The Company has granted to the Underwriter an option, exercisable for 45 days from the date of this Prospectus, to purchase up to 195,000 additional shares of Common Stock and/or 195,000 Warrants at the public offering prices set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriter may exercise this option in whole or, from time to time, in part, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the Common Stock and/or Warrants offered hereby. The Company has agreed to pay to the Underwriter a non-accountable expense allowance of 3% of the gross proceeds of this offering, of which $50,000 has been paid as of the date of this Prospectus. The Company has also agreed to pay all expenses in connection with qualifying the Common Stock and Warrants offered hereby for sale under the laws of such states as the Underwriter may designate including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to grant to the Underwriter and/or its designees warrants (the "Underwriter's Warrants") to purchase up to 130,000 shares of Common Stock at an exercise price of $6.90 per share (138% of the initial public offering price per share) and/or up to 130,000 warrants (each to purchase one share of Com- 39 mon Stock at $6.90 per share) at an exercise price of $.138 per warrant (138% of the initial public offering price per Warrant). The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year from the date of this Prospectus, except to officers and partners of the Underwriter and members of the selling group, and are exercisable at any time and from time to time, in whole or in part, during the five-year period commencing on the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at no cost, the opportunity to profit from a rise in the market price of the Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's stockholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants, the underlying shares or the underlying warrants, or the shares issuable upon exercise of such underlying warrants, may be deemed additional underwriting compensation. Subject to certain limitations and exclusions, the Company has agreed, at the request of the holders of a majority of the Underwriter's Warrants, at the Company's expense, to register the Underwriter's Warrants, the shares and warrants underlying the Underwriter's Warrants, and the shares issuable upon exercise of the underlying warrants under the Securities Act on one occasion during the Warrant Exercise Term and to include the Underwriter's Warrants and all such underlying securities in any appropriate registration statement which is filed by the Company during the seven years following the date of this Prospectus. The Company has agreed, in connection with the exercise of the Warrants pursuant to solicitation (commencing one year from the date of this Prospectus), to pay to the Underwriter for bona fide services provided a fee of 5% of the exercise price for each Warrant exercised; provided, however, that the Underwriter will not be entitled to receive such compensation in Warrant exercise transactions in which (i) the market price of shares at the time of exercise is lower than the exercise price of the Warrants; (ii) the Warrants are held in any discretional account; (iii) disclosure of compensation arrangements is not made, in addition to the disclosure provided in this Prospectus, in documents provided to holders of the Warrants at the time of exercise; (iv) the holder of the Warrants has not confirmed in writing that the Underwriter solicited such exercise; or (v) the solicitation of exercise of the Warrants was in violation of Rule 10b-6 promulgated under the Exchange Act. In addition to soliciting, either orally or in writing, the exercise of the Warrants, such bona fide services may also include disseminating information, either orally or in writing, to the holders of the Warrants about the Company or the market for the Company's securities, and assisting in the processing of the exercise of Warrants. The Company has agreed to retain the Underwriter as a financial consultant for a period of two years following the consummation of this offering at an annual fee of $30,000, the entire $60,000 payable in full, in advance. The consulting agreement with the Underwriter will not require it to devote a specific amount of time to the performance of its duties thereunder. It is anticipated that these consulting services will be provided by principals of the Underwriter and/or members of the Underwriter's corporate fiance department who, however, have not been designated as of the date hereof. In addition, in the event that the Underwriter originates a financing or a merger, acquisition, joint venture or other transaction to which the Company is a party, the Underwriter will be entitled to receive a finder's fee in consideration for origination of such transaction. The Company has also agreed, for a period of three years from the date of this Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company, or, at the Underwriter's option, as a non-voting adviser to the Company's Board of Directors. The Company's officers, directors and principal stockholders have agreed to vote their shares in favor of such designee. The Underwriter has not yet exercised its right to designate such a person. The Company and its officers, directors and security holders (except for the holders of 9,776 shares of Common Stock) have agreed not to sell or dispose of any of their securities of the Company for a period of twelve months from the date of this Prospectus without the Underwriter's prior written consent (subject to certain exceptions nine months from the date of this Prospectus). The Underwriter has no plans, arrangements, agreements or understandings to release any of the Company's officers, directors or security holders from their agreement not to sell shares of Common Stock for a period of twelve months following the consummation of this offering and, historically, the Underwriter has consented to such a release on a limited basis, based upon prevailing market conditions (including price and volume considerations). 40 The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. The Underwriter has advised the Company that it does not expect to make any sales of the securities offered hereby to discretionary accounts. The Underwriter acted as placement agent for the Company in connection with the Bridge Financing and was paid a placement fee of $110,000 (constituting 10% of the gross proceeds of the Bridge Financing) and received an expense reimbursement of $25,000. Prior to this offering, there has been no public trading market for the Common Stock or Warrants. Consequently, the initial public offering price of the Common Stock and Warrants and the exercise price of the Warrants have been determined by negotiations between the Underwriter and the Company. Among the factors considered in determining the initial public offering prices was the Company's financial condition and prospects, the potential market for the Company's products, market prices of similar securities of comparable publicly-traded companies, an assessment of the Company's management and the general condition of the securities markets at the time of the offering. 41 SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION An aggregate of up to 220,000 shares may be offered and sold pursuant to this Prospectus by the Selling Stockholders. The Company has agreed to register the public offering of such shares under the Securities Act concurrently with this offering and to pay all expenses in connection therewith. The shares have been included in the Registration Statement of which this Prospectus forms a part. None of the such shares may be sold by the Selling Stockholders prior to twelve months after the date of this Prospectus, without the prior written consent of the Underwriter. None of the Selling Stockholders has ever held any position or office with the Company or had any other material relationship with the Company. The Company will not receive any of the proceeds from the sale of the shares by the Selling Stockholders. The following table sets forth certain information with respect to the Selling Stockholders:
Percentage Beneficial Beneficial Beneficial Ownership of Amount of Ownership of Ownership of Common Stock Common Stock Common Stock Common Stock Selling Stockholders Prior to Sale Offered After Offering After Offering ------------------- --------------- -------------- -------------- -------------- Dr. Lawrence Howard ..................... 20,000 20,000 -- -- Dr. Leonard Mendell ..................... 5,000 5,000 -- -- Dr. Steven Landman ...................... 5,000 5,000 -- -- John R. Tompson and Constance A. Tompson, Joint Tenants with Right of Survivorship ........................... 5,000 5,000 -- -- Allan R. Lyons .......................... 5,000 5,000 -- -- Jonathan Robinson ....................... 5,000 5,000 -- -- Michael Weissman ........................ 5,000 5,000 -- -- Isaac Kier .............................. 10,000 10,000 -- -- Craig Effron ............................ 5,000 5,000 -- -- Mark Dickstein .......................... 5,000 5,000 -- -- Robert Laikin ........................... 20,000 20,000 -- -- Lisa Grossman ........................... 10,000 10,000 -- -- Gary Newman ............................. 5,000 5,000 -- -- Albert Nocciolino ....................... 5,000 5,000 -- -- FGR Akel ................................ 5,000 5,000 -- -- Scott C. Gottlieb ....................... 5,000 5,000 -- -- Alfonso and Federico de Riveroll, Joint Tenants with Right of Survivorship ..... 10,000 10,000 -- -- Roderick D. MacAlpine ................... 5,000 5,000 -- -- Leonard A. Albanese ..................... 5,000 5,000 -- -- Lester Lieberman ........................ 5,000 5,000 -- -- Albert Greenspoon ....................... 5,000 5,000 -- -- B&B Trading Corp. Retirement Plan ....... 5,000 5,000 -- -- Garland T. Duke, Jr. .................... 5,000 5,000 -- -- Charles J. Reilly and Kathleen M. Reilly . 5,000 5,000 -- -- James H. Cooper ......................... 5,000 5,000 -- -- Wendy and Robert Ull, Joint Tenants with Right of Survivorship .................. 5,000 5,000 -- -- Michael Freidman ........................ 10,000 10,000 -- -- Edward S. Rosenthal ..................... 10,000 10,000 -- -- Nicholas Kahla .......................... 5,000 5,000 -- -- Elliott Broidy .......................... 20,000 20,000 -- --
The shares may be offered and sold from time to time as market conditions permit in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The shares may be sold by one or more of the following methods, without limitation: (a) a block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer 42 as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchases; and (d) face-to-face transactions between sellers and purchasers without a broker/dealer. In effecting sales, brokers or dealers engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Such brokers or dealers may receive commissions or discounts from Selling Stockholders in amounts to be negotiated. Such broker and dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP, New York, New York. Tenzer Greenblatt LLP, New York, New York, has acted as counsel for the Underwriter in connection with this offering. EXPERTS The financial statements of Visual Edge Systems Inc. (a development stage company) as of December 31, 1995 and for the year then ended have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1995 financial statements contains an explanatory paragraph that states that the Company is in its development stage and its losses and working capital and net capital deficiencies raise substantial doubt about the entity's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. AVAILABLE INFORMATION The Company has filed with the Commission a registration statement on Form SB-2 under the Securities Act (together with all amendments and exhibits thereto, the "Registration Statement") with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete and are qualified in their entirety by reference to each such contract, agreement or other document which is filed as an exhibit to the Registration Statement. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Regional Offices of the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601, and 7 World Trade Center, 13th Floor, New York, New York 10007. Copies of such material may be obtained by mail from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. 43 VISUAL EDGE SYSTEMS INC. (A DEVELOPMENT STAGE COMPANY) CONTENTS
PAGE -------- INDEPENDENT AUDITORS' REPORT .......................................................................... F-2 FINANCIAL STATEMENTS Balance Sheets as of December 31, 1995 and March 31, 1996 (Unaudited) ................................. F-3 Statements of Operations for the year ended December 31, 1995, three months ended March 31, 1995 and 1996 (Unaudited) and period from inception (July 15, 1994) to March 31, 1996 (Unaudited) ............. F-4 Statements of Stockholders' Deficit for the year ended December 31, 1995 and three months ended March 31, 1996 (Unaudited) ................................................................................. F-5 Statements of Cash Flows for the year ended December 31, 1995, three months ended March 31, 1995 and 1996 (Unaudited) and period from inception (July 15, 1994) to March 31, 1996 (Unaudited) ............. F-6 Notes to Financial Statements ......................................................................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Visual Edge Systems Inc. (a development stage company): We have audited the accompanying balance sheet of Visual Edge Systems Inc. (a development stage company) as of December 31, 1995 and the related statements of operations, stockholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 Visual Edge Systems Inc. (a development stage company) as of December 31, 1995 and the results of its operations and its cash flows for the year 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 2 to the financial statements, the Company is in its development stage and its losses and working capital and net capital deficiencies raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP New York, New York April 30, 1996, except for notes 1(e), 2 and 10, which are as of May 31, 1996 See accompanying notes to financial statements. F-2 VISUAL EDGE SYSTEMS INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
December 31, March 31, 1995 1996 -------------- ----------- (unaudited) Assets Current Assets: Cash ................................................ $ 558 $ 833 -------------- ----------- Total current assets ......................... 558 833 Fixed assets, net ........................................ 606,434 558,740 Deferred organization costs, net ......................... 26,485 25,014 Deferred financing costs ................................. -- 25,000 -------------- ----------- Total assets ................................. $ 633,477 $ 609,587 ============== =========== Liabilities and Stockholders' Deficit Current Liabilities: Accounts payable .................................... $ 269,262 $ 216,280 Accrued expenses .................................... 13,718 67,109 Note payable to bank ................................ 400,000 507,000 -------------- ----------- Total current liabilities .................... 682,980 790,389 -------------- ----------- Stockholders' deficit: Preferred Stock, 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 20,000,000 shares authorized, 3,000,000 shares issued and outstanding ........... 30,000 30,000 Additional paid-in capital .......................... 385,460 385,460 Deficit accumulated during the development stage .... (464,963) (596,262) -------------- ----------- Total stockholders' deficit .................. (49,503) (180,802) -------------- ----------- Total liabilities and stockholders' deficit .. $ 633,477 $ 609,587 ============== ===========
See accompanying notes to financial statements. F-3 VISUAL EDGE SYSTEMS INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
Unaudited ---------------------------------------------- Period from Inception Year Ended Three Months Ended (July 15, 1994) December 31, March 31, to March 31, 1995 1995 1996 1996 -------------- ------------ ------------ --------------- HISTORICAL: Product sales ...................... $ 7,267 $ -- $ 3,848 $ 11,115 License fees ....................... 125,000 -- -- 125,000 -------------- ------------ ------------ --------------- 132,267 -- 3,848 136,115 -------------- ------------ ------------ --------------- Cost of sales ...................... 44,167 -- 23,728 67,895 General and administrative expenses . 531,984 108,242 98,148 630,132 Selling and Marketing .............. 15,240 -- 459 15,699 -------------- ------------ ------------ --------------- 591,391 108,242 122,335 713,726 -------------- ------------ ------------ --------------- Operating loss .................... (459,124) (108,242) (118,487) (577,611) Interest expense ................... 5,118 -- 12,812 17,930 -------------- ------------ ------------ --------------- Loss before income taxes .......... (464,242) (108,242) (131,299) (595,541) Provision for income taxes ......... 721 -- -- 721 -------------- ------------ ------------ --------------- Net loss .......................... $ (464,963) $(108,242) $(131,299) $ (596,262) ============== ============ ============ =============== PRO FORMA (UNAUDITED): Historical loss before income taxes . $ (464,242) $(108,242) $(131,299) $ (595,541) Pro forma adjustments to executive officers' compensation ............ (590,000) (147,500) (91,250) (681,250) -------------- ------------ ------------ --------------- Pro forma loss before income taxes . (1,054,242) (255,742) (222,549) (1,276,791) Pro forma provision for income taxes. 721 -- -- 721 -------------- ------------ ------------ --------------- Pro forma net loss ................. $(1,054,963) $(255,742) $(222,549) $(1,277,512) ============== ============ ============ =============== Pro forma net loss per share ....... $ (.33) $ (.08) $ (.07) $ (.40) ============== ============ ============ ===============
See accompanying notes to financial statements. F-4 VISUAL EDGE SYSTEMS INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1995 AND THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
Deficit accumulated Additional during the Common Stock paid-in development Shares Amount capital stage Total ----------- ---------- ------------ ------------- ------------- Balance at January 1, 1995 ....... -- $ -- $ -- $ -- $ -- Issuance of common stock ........ 2,929,608 29,296 374,404 -- 403,700 Common stock issued for services 70,392 704 11,056 -- 11,760 Net loss for 1995 ............... -- -- -- (464,963) (464,963) ----------- ---------- ------------ ------------- ------------- Balance at December 31, 1995 ..... 3,000,000 30,000 385,460 (464,963) (49,503) Net loss for the three months ended March 31, 1996 (unaudited). -- -- -- (131,299) (131,299) ----------- ---------- ------------ ------------- ------------- Balance at March 31, 1996 (unaudited) .................... 3,000,000 $30,000 $385,460 $ (596,262) $ (180,802) =========== ========== ============ ============= =============
See accompanying notes to financial statements. F-5 VISUAL EDGE SYSTEMS INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
Unaudited ----------------------------------------------- Period from Inception Year Ended Three Months Ended (July 15, 1994) December 31, March 31, to March 31, 1995 1995 1996 1996 -------------- ------------ ------------- --------------- Operating Activities: Net loss ...................... $ (464,963) $(108,242) $ (131,299) $ (596,262) Adjustments to reconcile net loss to net cash used in operating activities: Stock compensation expense . 11,760 11,760 -- 11,760 Depreciation and amortization 67,686 -- 49,165 116,851 Deferred organization costs . (29,428) (8,535) -- (29,428) Interest expense ........... -- -- 3,400 3,400 Increase (decrease) in accounts payable ......... 269,262 17,645 (52,982) 216,280 Increase in accrued expenses . 13,718 -- 53,391 67,109 -------------- ------------ ------------- --------------- Net cash used in operating activities ................. (131,965) (87,372) (78,325) (210,290) -------------- ------------ ------------- --------------- Investing Activities: Capital expenditures .......... (671,177) (56,138) -- (671,177) Deferred financing costs ...... -- -- (25,000) (25,000) -------------- ------------ ------------- --------------- Net cash used in investing activities ................. (671,177) (56,138) (25,000) (696,177) -------------- ------------ ------------- --------------- Financing Activities: Issuance of note payable to bank 400,000 -- 103,600 503,600 Advances from stockholders .... -- 164,950 -- -- Issuance of common stock ...... 403,700 1,000 -- 403,700 -------------- ------------ ------------- --------------- Net cash provided by financing activities ................. 803,700 165,950 103,600 907,300 -------------- ------------ ------------- --------------- Increase in cash .............. 558 22,440 275 833 Cash at beginning of period ..... -- -- 558 -- -------------- ------------ ------------- --------------- Cash at end of period ........... $ 558 $ 22,440 $ 833 $ 833 ============== ============ ============= =============== Supplemental information: - ------------------------- Cash paid for interest .......... $ 5,118 $ -- $ 9,274 $ 14,392 ============== ============ ============= =============== Cash paid for income taxes ...... $ 721 $ -- $ -- $ 721 ============== ============ ============= ===============
See accompanying notes to financial statements. F-6 VISUAL EDGE SYSTEMS INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Visual Edge Systems Inc. (the "Company") was organized to develop and market personalized videotape golf lessons featuring One-on-One instruction by leading professional golfer Greg Norman. To date, the Company has focused its efforts on developing computer software which digitally combines actual video footage of a golfer's swing with a synchronized "split-screen" comparison to Greg Norman's golf swing to produce a 45-minute One-on-One videotape golf lesson. The Company's proposed One-on-One personalized videotape golf lesson analyzes a golfer's swing by comparing it to Greg Norman's swing at several different club positions from two camera angles using Greg Norman's pre-recorded instructional commentary and analysis and computer graphics to highlight important golf fundamentals intended to improve a golfer's performance. The Company intends to sell its proposed products under the name "One-on-One with Greg Norman." The Company was incorporated in July 1994 and commenced operations in January 1995. The Company is a development stage company which has not commenced generating revenue from its planned primary business activities. Since the Company's inception, it has been primarily engaged in product development, market testing its intended products, recruitment of key personnel, raising capital and preparing the software and videotaped coaching instructions used in the production of its products. As a consequence, the Company has not generated any revenue of substance from operations to date. (b) Revenue Recognition Revenue from product sales is recognized as videotape products are delivered to the customer. Royalties and license fees are recorded as revenue when earned. (c) Fixed Assets Fixed assets are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets (3 to 5 years). (d) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (e) Loss Per Share Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin Topic 4:D, stock issued and stock options granted during the 12-month period preceding the date of the Company's proposed initial public offering (the IPO) have been included in the calculation of weighted average common shares outstanding for the period prior to the IPO, even when the impact of such incremental shares is antidilutive. The computation of weighted average common shares and equivalents outstanding for the year ended December 31, 1995 follows: F-7 VISUAL EDGE SYSTEMS INC. (a Development Stage Company) Notes to Financial Statements (1) Summary of Significant Accounting Policies - (Continued)
Weighted average common shares outstanding, exclusive of issuances within 12 months prior to the IPO ................................... 3,000,000 Shares issued within 12 months prior to the IPO assumed to be outstanding for the entire period. .................................. 220,000 ----------- Weighted average common shares and equivalents outstanding ............ 3,220,000 ===========
References to the number of shares and all per share data have been restated to reflect the recapitalization (note 7). (f) Basis of Presentation The financial statements have been presented on a historical basis and also on a pro forma basis for the statements of operations. The pro forma adjustment presented reflects the increase in five executive officers' aggregate annual base compensation as prescribed in employment agreements. Two agreements were effective January 1, 1996, one is effective May 1, 1996 and two will become effective upon the completion of the Company's planned IPO. (g) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. Cash, accounts payable and accrued expenses as reflected in the financial statements approximate fair value because of the short-term maturity of these instruments. The carrying value of the note payable to bank approximates its fair value since the interest rate fluctuates with changes in market conditions. (h) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (i) New Accounting Pronouncements In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation," which must be adopted by the Company in 1996. The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose, commencing in 1996, the pro-forma net income and earnings per share as if such method had been used to account for stock-based compensation cost as described in the Statement. In March 1995, the FASB issued Statement No. 121," Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which must also be adopted by the Company in 1996. The effect of adopting this standard will be insignificant. (j) Unaudited Interim Financial Statements The accompanying unaudited interim financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the financial position of the Company and the results of its operations as of and for the three months ended March 31, 1996 and 1995. Results for the three months ended March 31, 1996 are not necessarily indicative of results which could be expected for the entire year. F-8 VISUAL EDGE SYSTEMS INC. (a Development Stage Company) Notes to Financial Statements (1) Summary of Significant Accounting Policies - (Continued) (2) LIQUIDITY The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in its development stage and its losses, working capital and net capital deficiencies raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might arise from the outcome of this uncertainty. To generate funds to continue the development of the Company's products, pay the $150,000 royalty advance due June 30, 1996 (note 9(a) and commence its planned primary business activities, the Company on May 31, 1996 raised $915,000, net of expenses, from the sale of 22 units in a private placement for $50,000 per unit, each unit consisting of an 8% unsecured promissory note in the principal amount of $50,000 and 10,000 shares of the Company's common stock. The promissory notes are due on the earlier of the consummation of the Company's planned initial public offering (IPO) of its common stock or May 31, 1997. The relative fair market value of the 220,000 shares of common stock issued of $334,346 was reflected as an increase in additional paid-in capital and as a discount on the promissory notes to be amortized over the one-year term of the notes. In March 1996, the Company entered into a letter of intent, as amended, with a placement agent to offer 1,300,000 shares of common stock and 1,300,000 warrants for sale. There is no assurance that the Company will be able to successfully complete its IPO. (3) FIXED ASSETS Fixed assets consist of the following at December 31, 1995: Amount Life ----------- --------- (years) Equipment ................................ $247,117 5 Video production costs ................... 184,282 3 Computer hardware ........................ 148,253 3 Purchased computer software .............. 91,525 3 ----------- 671,177 Less accumulated depreciation and amortization 64,743 ----------- $606,434 =========== (4) OPERATING LEASES The Company is utilizing office space provided at no charge by an officer of the Company. Accordingly, as of December 31, 1995, the Company did not have any lease commitments. (5) NOTE PAYABLE TO BANK In October 1995, the Company borrowed $400,000 from a bank which was due on demand. This note bears interest at the bank's reference rate (8.25% at December 31, 1995). The note is secured by all of the Company's assets and certain personal assets of certain of the Company's shareholders and is personally guaranteed by such shareholders. In January and April 1996, the Company borrowed an additional $107,000 and the total outstanding balance of $507,000 was converted to a promissory note which is due December 31, 1996. (6) INCOME TAXES Income tax expense consists of: Current Deferred Total ----------- ------------ --------- Year ended December 31, 1995: Federal ......................... -- -- -- State and local ................. $721 -- $721 ----------- ------------ --------- $721 -- $721 =========== ============ ========= F-9 VISUAL EDGE SYSTEMS INC. (a Development Stage Company) Notes to Financial Statements (6) Income Taxes - (Continued) The following is a reconciliation of income tax expense to the expected amounts computed by applying the statutory federal income tax rate to the Company's loss before income taxes for the year ended December 31, 1995. Income tax benefit at statutory rate ................. $ (157,800) State and local income taxes, net of Federal income tax benefit ............................................. 721 Increase in valuation allowance ...................... 157,800 ------------- Provision for income taxes ........................... $ 721 ============= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 are presented below: Deferred tax assets: Deferred start-up costs ........ $ 97,500 Net operating loss carryforward . 54,300 Fixed asset depreciation ....... 6,000 ----------- 157,800 Less: valuation allowance ...... (157,800) ----------- Net deferred tax asset ......... $ -- =========== As of December 31, 1995, the Company has a tax net operating loss carryforward of approximately $160,000 expiring in 2010. The Company has provided a valuation allowance of $157,800 against its deferred tax assets since it is more likely than not that the Company will not realize such asset due to the Company's development stage nature of operations and the pre-tax losses since inception. (7) COMMON STOCK During 1995, the Company's founding shareholders made capital contributions or loaned funds to the Company which were subsequently contributed to the Company as capital, totaling $403,700, in exchange for 5,000,000 Class A non-voting shares and 100 Class B voting shares. On March 11, 1996, the Company's Board of Directors eliminated the Class A and B designation of its common stock and declared a recapitalization effective May 2, 1996, whereby .488268 of a share and 4882.68 shares of common stock with a par value of $.01 per share was issued for each Class A and Class B share, respectively, of common stock outstanding on that date. In addition, options to purchase Class A common stock were converted into the right to purchase .5831847 shares of common stock. All references to number of shares (except shares authorized), per share data and stock option data have been restated to reflect the recapitalization. In March 1995, the Company issued 70,392 shares of common stock to employees and consultants for services. The estimated market value of such shares of $11,760 was recorded as compensation expense. F-10 VISUAL EDGE SYSTEMS INC. (a Development Stage Company) Notes to Financial Statements (8) STOCK OPTIONS In April 1996, the Company adopted the 1996 Stock Option Plan, which provides for the granting to directors, officers, key employees and consultants of the greater of 900,000 shares of common stock (reduced by the number of options which may be granted to two executive officers pursuant to their employment agreements (note 9(b) which are not granted or, if granted, are forfeited in accordance with their terms) or 12% of the aggregate number of the Company's common stock outstanding. Grants of options may be incentive stock options (to a maximum of 300,000) or non-qualified stock options and will be at such exercise prices, in such amounts, and upon such terms and conditions, as determined by the Compensation Committee of the Board of Directors. However, the option exercise price may not be less than 100% of the market value at the time of grant (110% if an incentive stock option granted to a 10% or more stockholder) and the term of any option may not exceed ten years (unless granted as an incentive stock option to a 10% or more stockholder, which term may not exceed five years). The plan also provides for the automatic grant of 5,000 non-qualified stock options upon commencement of service of a non-employee director and 2,500 options per year per director thereafter. Such options vest one-third on the date of grant and one third on the first two anniversary dates and have a term of five years. In March 1995, the Company granted 294,508 nonqualified options to purchase common stock at an exercise price equal to the price common stock is sold in the Company's initial public offering when it may occur. Such options have been converted to options under the 1996 Stock Option Plan. (9) COMMITMENTS (a) License agreement Effective March 1, 1995 the Company entered into a license agreement with Greg Norman (Norman), a professional golfer, and his corporation, Great White Shark Enterprises, Inc. (Great White Shark), pursuant to which the Company was granted a worldwide license to use his name, likeness and endorsement in connection with the production and promotion of the Company's proposed products. Norman will receive royalties of 8% of all net revenues, as defined, derived from the sale of One-on-One videotapes. Such agreement expires on June 30, 1996. However, the Company has advised Norman and Great White Shark that it will extend the agreement and will use a portion of the proceeds from its private placement to pay the initial $150,000 required to extend the agreement. The extension of the agreement, which is for three additional years, requires the Company to pay certain guaranteed fees, amounting to $3,300,000, to be paid quarterly to Great White Shark and total $600,000 (including the $150,000 payment referred to above) in the year ending June 30, 1997, $1 million in the year ending June 1998 and $1.7 million in the year ending June 30, 1999. Such guaranteed payments will be credited against future 8% royalties due on the Company's net revenues from the sale of the One-on-One video. In addition, the Company has the right to renew the license agreement for two additional periods of five years each. In the event of renewal, the Company is obligated to make guaranteed payments of $1,300,000 during the first year of the renewal term, increasing by $100,000 per year thereafter. Also in March 1995, the Company entered into an Agreement with and gave Greg Norman an option to receive 10% of the outstanding shares of the Company from the Company's three founding shareholders. The option was conditioned upon the Company delivering a notice to Greg Norman that it intends to extend the License Agreement for three years, which occurred in April 1996. In April 1996, Greg Norman exercised the option and those shareholders transferred 300,000 shares of common stock to Greg Norman. The estimated market value of such shares, amounting to approximately $600,000 will be recorded as a charge in the income statement in April, 1996. F-11 VISUAL EDGE SYSTEMS INC. (a Development Stage Company) Notes to Financial Statements (9) Commitments - (Continued) (b) Employment agreements The Company entered into employment agreements with three executive employees of the Company expiring through December 1998 which provide for aggregate minimum annual compensation of approximately $268,000 in 1996, $297,000 in 1997 and $250,000 in 1998. The agreements are automatically renewed for additional one-year periods unless the Company or the employees provide timely notice of termination. In addition, two of the employment agreements provide for an increase in compensation commencing in July 1997, if the Company achieves prescribed pre-tax earnings thresholds. The agreements also provide for bonuses and severance payments ranging from three to twelve months. In addition, two of the employment agreements provide for options for each employee to purchase an aggregate of up to 250,000 shares of common stock, at an exercise price per share equal to the proposed IPO price subsequent to completion of the Company's proposed public offering. Of such options, 150,000 options shall vest and become exercisable if the common stock trades at $10.00 or more per share for at least five consecutive trading days during the 18-month period following the completion of the proposed public offering, and 100,000 options shall vest and become exercisable if the common stock trades at $15.00 or more per share for five consecutive trading days during the 30-month period following such completion. (10) CONTINGENCY In April 1996, one of the Company's principal stockholders and his affiliated companies asserted certain claims against the Company, including that the provisions of a stockholders agreement have been breached. In May 1996, such stockholder and his affiliated companies entered into a settlement agreement with the Company under which they agreed to release each other from any claims if the Company's proposed IPO is consummated on or before December 31, 1996, and the Company agreed to pay $35,000 in consideration of the termination of the stockholders agreement. Pursuant to an indemnification agreement, two other principal stockholders, jointly and severally, have agreed to indemnify and hold harmless the Company from and against any losses, claims, damages, expenses or liabilities suffered as a result of the above claims and, in the event the Company issues any equity securities to any stockholder of the Company as a result of any claim, those stockholders have agreed to deliver an equal number of shares of common stock to the Company for cancellation. F-12 ============================================================================= No dealer, salesperson or any other individual has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any security by any person in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, imply that the information in this Prospectus is correct as of any time subsequent to the date of this Prospectus. ------ TABLE OF CONTENTS Page ------- Prospectus Summary .............................. 3 Risk Factors .................................... 7 Use of Proceeds ................................. 14 Dilution ........................................ 16 Capitalization .................................. 17 Plan of Operation ............................... 18 Proposed Business ............................... 21 Management ...................................... 28 Principal Stockholders .......................... 33 Certain Transactions ............................ 34 Description of Securities ....................... 35 Shares Eligible For Future Sale ................. 37 Underwriting .................................... 38 Selling Stockholders and Plan of Distribution ... 41 Legal Matters ................................... 42 Experts ......................................... 42 Available Information ........................... 42 Index to Financial Statements ................... F-1 ------ Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the securities offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ============================================================================= ============================================================================= 1,300,000 SHARES OF COMMON STOCK AND REDEEMABLE WARRANTS TO PURCHASE 1,300,000 SHARES OF COMMON STOCK [LOGO] ------ PROSPECTUS ------ WHALE SECURITIES CO., L.P. , 1996 ============================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Generally, Section 145 of the General Corporation Law of the State of Delaware (the "GCL") permits a corporation to indemnify certain persons made a party or threatened to be made a party to an action by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. In the case of an action by or in the right of the corporation, no indemnification may be made in respect of any matter as to which such person was adjudged liable for negligence or misconduct in the performance of such person's duty to the corporation unless the Delaware Court of Chancery or the court in which such action was brought determines that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for proper expenses. To the extent such person has been successful in the defense of any matter, such person shall be indemnified against expenses actually and reasonably incurred by him. The Company has adopted provisions in its By-laws which provide for indemnification of its officers and directors to the full extent permitted under Delaware law. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate of the expenses that will be incurred by the Registrant in connection with the distribution of the securities being registered hereby: SEC ............................................. $ 6,197.23 NASD filing fees ................................ $ 2,297.21 Nasdaq Small Cap Market listing fee ............. $ 10,000.00 Legal fees and expenses ......................... $200,000.00 Accounting fees and expenses .................... $100,000.00 Printing and engraving expenses ................. $ 75,000.00 State securities qualification fees and expenses . $ 50,000.00 Transfer agent fees and expenses ................ $ 3,500.00 Miscellaneous ................................... $ 14,105.56 ------------- Total .......................................... $461,100.00 ============= None of the foregoing expenses will be borne by the Selling Stockholders. II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The table below sets forth the sales of unregistered securities made by the Company since the date of its organization on July 15, 1994. All of such sales were private placements made in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, and no underwriters were involved in such placements. In each instance in which the Company received services as consideration for the issuance and sale of Common Stock, the value of the services so rendered was determined by the Board of Directors of the Company based upon a per share valuation of $.17.
Title and Amount of Purchaser Security Date of Sale Consideration ---------- ----------- ------------- -------------- Alan L. Lubell ...................... 1,708,938 Common Stock March 1995 $192,350 Status-One Investments Inc. ......... 732,402 Common Stock March 1995 162,750 Greenwich Properties Inc. ........... 488,268 Common Stock March 1995 48,600 Greg Norman ......................... 300,000 License and Services under Common Stock June 1996 License Agreement Status-One Investments Inc. ......... 24,413 Common Stock March 1995 Executive Services Frank Williams ...................... 8,139 Common Stock March 1995 Consulting Services Thomas Peters ....................... 9,155 Common Stock March 1995 Software Development Services Mona-Lee Takefman ................... 2,136 Common Stock March 1995 Secretarial and Clerical Services Mark Lubell ......................... 2,136 Common Stock March 1995 Management Services Dr. Lawrence Howard ................. 20,000 Common Stock $100,000 Note May 1996 $100,000 Dr. Leonard Mandell ................. 5,000 Common Stock $25,000 Note May 1996 25,000 Dr. Steven Landman .................. 5,000 Common Stock $25,000 Note May 1996 25,000 John R. Tompson and 5,000 Constance A. Tompson, Common Stock Joint Tenants with Right of $25,000 Survivorship ....................... Note May 1996 25,000
II-2
Title and Amount of Purchaser Security Date of Sale Consideration ---------- ----------- ------------- -------------- Allan R. Lyons ...................... 5,000 Common Stock $25,000 Note May 1996 $25,000 Jonathan Robinson ................... 5,000 Common Stock $25,000 Note May 1996 25,000 Michael Weissman .................... 5,000 Common Stock $25,000 Note May 1996 25,000 Isaac Kier .......................... 10,000 Common Stock $50,000 Note May 1996 50,000 Craig Effron ........................ 5,000 Common Stock $25,000 Note May 1996 25,000 Mark Dickstein ...................... 5,000 Common Stock $25,000 Note May 1996 25,000 Robert Laikin ....................... 20,000 Common Stock $100,000 Note May 1996 100,000 Lisa Grossman ....................... 10,000 Common Stock $50,000 Note May 1996 50,000 Gary Newman ......................... 5,000 Common Stock $25,000 Note May 1996 25,000 Albert Nocciolino ................... 5,000 Common Stock $25,000 Note May 1996 25,000 FGR Akel ............................ 5,000 Common Stock $25,000 Note May 1996 25,000
II-3
Title and Amount of Purchaser Security Date of Sale Consideration ---------- ----------- ------------- -------------- Scott C. Gottlieb ................... 5,000 Common Stock $25,000 Note May 1996 $25,000 Alfonso and Federico de Riveroll, 10,000 Joint Tenants with Right of Common Stock Survivorship ....................... $50,000 Note May 1996 50,000 Roderick D. MacAlpine ............... 5,000 Common Stock $25,000 Note May 1996 25,000 Leonard A. Albanese ................. 5,000 Common Stock $25,000 Note May 1996 25,000 Lester Lieberman .................... 5,000 Common Stock $25,000 Note May 1996 25,000 Albert Greenspoon ................... 5,000 Common Stock $25,000 Note May 1996 25,000 B&B Trading Corp. 5,000 Retirement Plan .................... Common Stock $25,000 Note May 1996 25,000 Garland T. Duke, Jr. ................ 5,000 Common Stock $25,000 Note May 1996 25,000 Charles J. Reilly and 5,000 Kathleen M. Reilly ................. Common Stock $25,000 Note May 1996 25,000 James H. Cooper ..................... 5,000 Common Stock $25,000 Note May 1996 25,000 Wendy and Robert Ull, 5,000 Joint Tenants with Right of Common Stock Survivorship ....................... $25,000 Note May 1996 25,000
II-4
Title and Amount of Purchaser Security Date of Sale Consideration ---------- ----------- ------------- -------------- Michael Friedman .................... 10,000 Common Stock $50,000 Note May 1996 $50,000 Edward S. Rosenthal ................. 10,000 Common Stock $50,000 Note May 1996 50,000 Nicholas Kahla ...................... 5,000 Common Stock $25,000 Note May 1996 25,000 Elliott Broidy ...................... 20,000 Common Stock $100,000 Note May 1996 100,000
ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (a) Exhibits The following is a complete list of Exhibits filed as part of this Registration Statement, which are incorporated herein:
Exhibit Number Description ----------- ------------ 1.1 Form of Underwriting Agreement. 3.1* Certificate of Incorporation of the Company, as amended. 3.2 Amended and Restated By-laws of the Company. 4.1 Form of Specimen Common Stock Certificate. 4.2 Form of Specimen Redeemable Warrant Certificate. 4.3 Form of Warrant Agreement between the Company and Whale Securities Co., L.P. 4.4 Form of Warrant, among American Stock Transfer & Trust Company, the Company and Whale Securities Co., L.P. 5.1* Opinion of Morgan, Lewis & Bockius LLP with respect to the legality of the Common Stock and Warrants. 10.1 License Agreement, dated March 1, 1995, between Great White Shark Enterprises, Inc. and the Company, as supplemented. 10.2 Promissory Note, dated April 15, 1996, payable to the Republic National Bank of New York. 10.3 Employment Agreement, dated as of January 1, 1996, between Earl Takefman and the Company. 10.4 Employment Agreement, dated as of January 1, 1996, between Alan Lubell and the Company. 10.5 Employment Agreement, dated as of May 1, 1996, between Thomas S. Peters and the Company. 10.6 License Agreement, dated as of November 1, 1996, between the Company and Visual Edge Systems (Australia) Pty. Ltd. 10.7 Form of Consulting Agreement between the Company and Whale Securities Co., L.P. 10.8* 1996 Stock Option Plan. 10.9 Employment Agreement, dated as of June 1, 1996, between the Company and Richard Parker. 10.10 Employment Agreement, dated as of July 1, 1996, between the Company and Ami Trauber. 10.11 Assignment, dated April 19, 1996, from Thomas S. Peters to the Company. 23.1* Consent of KPMG Peat Marwick LLP. 23.2 Consent of Frank Williams to be named as a Director. 23.3 Consent of Eddie Einhorn to be named as a Director. 23.4 Consent of Mark Hershhorn to be named as a Director. 24.1 Power of Attorney relating to the Company (included as part of the signature page hereof). 27 Financial Data Schedule.
- ------ * Filed herewith. II-5 (b) Financial Statement Schedules: None. ITEM 28. UNDERTAKINGS. (1) The undersigned Registrant hereby undertakes that it will: (a) File, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to: (i) include any prospectus required by Section 10(a)(3) of the 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; and (iii) include any additional or changed material information on the plan of distribution. (b) For determining any liability under the Act, each post-effective amendment shall be deemed to be a new Registration Statement of the securities offered, and the offering of securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of this offering. (2) The undersigned Registrant hereby undertakes to 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. (3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions in Item 14 above, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the company of expenses incurred or paid by a director or officer or controlling person of the Company 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 Company 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 of whether such indemnification by it is against public policy as expressed in such act and will be governed by the final adjudication of such issue. (4) The Company hereby undertakes: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) 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. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grants to meet 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 New York, State of New York, on July 18, 1996. VISUAL EDGE SYSTEMS INC. By: /s/ EARL T. TAKEFMAN ------------------------------ Earl T. Takefman Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Earl T. Takefman and Alan L. Lubell, and each of them such person's true and lawful attorneys- in- fact and agents, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities to sign any and all amendments (including additional amendments to this Registration Statement) and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date ----------- ------- ------ /s/ EARL T. TAKEFMAN Chief Executive Officer, Director July 18, 1996 - ------------------------ (Principal Executive Officer) Earl T. Takefman /s/ ALAN L. LUBELL - ------------------------ Chairman of the Board of Directors July 18, 1996 Alan L. Lubell (Principal Financial and Accounting Officer) II-7 EXHIBIT INDEX
Exhibit Number Description Page -------- ----------- -------- 1.1 Form of Underwriting Agreement. 3.1* Certificate of Incorporation of the Company, as amended. 3.2 Amended and Restated By-laws of the Company. 4.1 Form of Specimen Common Stock Certificate. 4.2 Form of Specimen Redeemable Warrant Certificate. 4.3 Form of Warrant Agreement between the Company and Whale Securities Co., L.P. 4.4 Form of Warrant, among American Stock Transfer & Trust Company, the Company and Whale Securities Co., L.P. 5.1* Opinion of Morgan, Lewis & Bockius LLP with respect to the legality of the Common Stock and Warrants. 10.1 License Agreement, dated March 1, 1995, between Great White Shark Enterprises, Inc. and the Company, as supplemented. 10.2 Promissory Note, dated April 15, 1996, payable to the Republic National Bank of New York. 10.3 Employment Agreement, dated as of January 1, 1996, between Earl Takefman and the Company. 10.4 Employment Agreement, dated as of January 1, 1996, between Alan Lubell and the Company. 10.5 Employment Agreement, dated as of May 1, 1996, between Thomas S. Peters and the Company. 10.6 License Agreement, dated as of November 1, 1996, between the Company and Visual Edge Systems (Australia) Pty. Ltd. 10.7 Form of Consulting Agreement between the Company and Whale Securities Co., L.P. 10.8* 1996 Stock Option Plan. 10.9 Employment Agreement, dated as of June 1, 1996, between the Company and Richard Parker. 10.10 Employment Agreement, dated as of July 1, 1996, between the Company and Ami Trauber. 10.11 Assignment, dated April 19, 1996, from Thomas S. Peters to the Company. 23.1* Consent of KPMG Peat Marwick LLP. 23.2 Consent of Frank Williams to be named as a Director. 23.3 Consent of Eddie Einhorn to be named as a Director. 23.4 Consent of Mark Hershhorn to be named as a Director. 24.1 Power of Attorney relating to the Company (included as part of the signature page hereof). 27 Financial Data Schedule.
- ------ * Filed herewith. EX-3.1 2 CERTIFICATE OF INCORPORATION CERTIFICATE OF INCORPORATION OF GOLF VISION, INC. ********** 1. The name of the corporation is GOLF VISION, INC. 2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity which corporations may be organized under the General Corporation Law of Delaware. 4. The total number of shares of stock which the corporation shall have authority to issue is fifteen hundred (1500) each without par value. 5. The name and mailing address of each incorporator is as follows: NAME MAILING ADDRESS ---- --------------- M. A. Brzoska Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 K. A. Widdoes Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 6. The corporation is to have perpetual existence. 7. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide. 8. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that this is our act and deed and the facts herein stated are true, and accordingly have hereunto set our hands this 15th day of July, 1994. /s/ M. A. Brzoska /s/ K. A. Widdoes CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION * * * * * * * * * * Golf Vision, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation, by the unanimous written consent of its members, filed with the minutes of the Board adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said corporation: RESOLVED, that the Certificate of Incorporation of Golf Vision, Inc. be amended by changing the First and Fourth Articles thereof so that, as amended, said Articles shall be and read as follows: "First: The name of the Corporation is Visual Edge Systems, Inc. Fourth: The total number of shares of stock which the corporation shall have authority to issue is twenty million (20,000,000) and par value of each such share is one cent ($0.01) amounting in the aggregate to two hundred thousand dollars ($200,000)." SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given unanimous written 2 consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendments were duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Golf Vision, Inc. has caused this certificate to be signed by Alan Lubell, its chairman, this 16th day of March, 1995. GOLF VISION, By: /s/ Alan Lubell ---------------- Name: Alan Lubell Title: Chairman CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF VISUAL EDGE SYSTEMS INC. * * * Pursuant to Section 242 of the General Corporation Law of Delaware, the undersigned being the director of Visual Edge Systems Inc. (the "Corporation"), DOES HEREBY CERTIFY: FIRST: The name of the corporation is Visual Edge Systems Inc. SECOND: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of the Corporation: RESOLVED, that the Certificate of Incorporation of the Corporation be amended by changing the Fourth Article thereof so that, as amended, said Article shall be and read in its entirety as follows: "Fourth: The total number of shares of all classes of stock which the corporation shall have authority to issue is twenty million (20,000,000) shares Common Stock, One Mill ($.001) Par Value, consisting of (a) nineteen million nine hundred ninety-nine thousand nine hundred (19,999,900) shares which shall be designated Class A, Non-votinq, Participating Common Stock, One Mill ($.001) Par Value, and (b) one hundred (100) shares which shall be designated Class B, Voting, Non-participating Common Stock, One Mill ($.O01) Par Value." THIRD: That in lieu of a meeting and vote of stockholders, the stockholders have given unanimous written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. FOURTH: That the aforesaid amendments were duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. FIFTH: The effective date of the amendment herein certified shall be the date of filing of this Certificate with the Secretary of State. IN WITNESS WHEREOF, said Visual Edge Systems Inc. has caused this certificate to be signed by Alan Lubell, its chairman, this 28th day of March, 1995. VISUAL EDGE SYSTEMS INC., By /s/ Alan Lubell ------------------------- Name: Alan Lubell CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF VISUAL EDGE SYSTEMS INC. * * * Visual Edge Systems Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY to the Secretary of State of the State of Delaware that: FIRST: The name of the Corporation is Visual Edge Systems Inc. SECOND: The Certificate of Incorporation of the Corporation is hereby amended by deleting Article Fourth of the Certificate of Incorporation, and by substituting in lieu thereof the following: Fourth: The Corporation shall have authority to issue a total of twenty five million (25,000,000) shares, consisting of (a) twenty million (20,000,000) shares of Common Stock, par value $.01 per share, and five million (5,000,000) shares of preferred stock, without par value. The preferred stock may be issued from time to time in one or more series and with such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, or restrictions thereof as shall be stated and expressed in this Certificate of Incorporation or in any amendment hereto, or in a resolution adopted by the board of directors. THIRD: The Certificate of Incorporation of the Corporation is hereby amended by adding the following Articles Ninth and Tenth: Ninth: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Tenth: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. FOURTH: That the Board of Directors of Visual Edge Systems Inc. has adopted resolutions setting forth the proposed amendments to the Certificate of Incorporation of said Corporation, declaring said amendments to be advisable and calling a meeting of the stockholders of said Corporation for consideration thereof. FIFTH: In accordance with the provisions of Section 228 of the Delaware General Corporation Law, in lieu of a meeting of stockholders, the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, have provided their written consent thereto and that written notice has been given as provided in such action. SIXTH: The foregoing amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Visual Edge Systems Inc. has caused this Certificate of Amendment to be signed in its name and on its behalf by its President, and attested to by its Secretary, this 30th day of April, 1996. VISUAL EDGE SYSTEMS INC. /s/ Alan Lubell /s/ Earl Takefman - ---------------- ------------------- Secretary CEO EX-5.1 3 EXHIBIT 5.1 July 18, 1996 Visual Edge Systems Inc. 7 West 51st Street New York, NY 10019 Re: Issuance of Shares Pursuant to Registration Statement on Form SB-2 ------------------------------------ Ladies and Gentlemen: We have acted as counsel to Visual Edge Systems Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of a Registration Statement on Form SB-2 (the "Registration Statement") relating to the public offering by the Company of an aggregate of 1,520,000 shares (including 220,000 shares to be sold by certain selling stockholders) (the "Shares") of the Conpany's Common Stock, par value $.0l per share (the "Common Stock"), and an aggregate of 1,300,000 Warrants (the "Warrants") to purchase 1,300,000 shares of Common Stock. In so acting, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the Certificate of Incorporation of the Company, as amended, the By-Laws of the Company, as amended, and such other documents, records, certificates and other instruments as in our judgment are necessary or appropriate for purposes of this opinion, including the proposed Warrant Agent Agreement (the "Warrant Agreement"), to be entered into among the Company, American Stock Transfer & Trust Company and Whale Securities Co., L.P. Based on the foregoing, we are of the opinion that: 1. The Shares have been duly authorized by the Company and, when issued and paid for as contemplated by the Registration Statement, will be duly and validly issued and fully paid and non-assessable. 2. The Warrants have been duly authorized by the Company and, when the Warrants have been issued and paid for as contemplated by the Registration Statement, the Warrants will be duly and validly issued and fully paid and non-assessable. 3. The shares of Common Stock to be issued upon exercise of the Warrants have been duly authorized by the Company and, when issued and paid for as contemplated by the Registration Statement and the Warrant Agreement, such shares of Common Stock will be duly and validly issued and fully paid and non-assessable. We render this opinion as members of the Bar of the State of New York and express no opinion as to any law other than the General Corporation Law of the State of Delaware. We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not admit that we are acting within the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Morgan, Lewis & Bockius LLP EX-10.8 4 1996 STOCK OPTION PLAN EXHIBIT 10.8 VISUAL EDGE SYSTEMS INC. 1996 STOCK OPTION PLAN Section 1. Purpose The Plan (i) authorizes the Committee to provide to Employees and Consultants of the Corporation and its Subsidiaries, who are in a position to contribute materially to the long-term success of the Corporation, with options to acquire Stock of the Corporation, and (ii) provides for the automatic grant of options to Non-Employee Directors of the Corporation in accordance with the terms specified herein. The Corporation believes that this incentive program will cause those persons to increase their interest in the Corporation's welfare, and aid in attracting and retaining Employees, Consultants and Directors of outstanding ability. Section 2. Definitions Unless the context clearly indicates otherwise, the following terms, when used in this Plan, shall have the meanings set forth in this Section: (a) "Board" shall mean the Board of Directors of the Corporation. (b) A "Change in Control" shall be deemed to have occurred if: (i) any person (as defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than the Corporation or an employee benefit plan of the Corporation, acquires directly or indirectly the Beneficial Ownership (within the meaning of Rule 13d-3 promulgated pursuant to the Exchange Act) of any voting security of the Corporation and immediately after such acquisition such Person is, directly or indirectly, the Beneficial Owner of voting securities representing 30% or more of the total voting power of all of the then-outstanding voting securities of the Corporation; (ii) the individuals (A) who, as of the closing date of the Initial Public Offering, constitute the Board (the "Original Directors") or (B) who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the Original Directors then still in office (such directors becoming "Additional Original Directors" immediately following their election) or (C) who are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the Original Directors and Additional Original Directors then still in office (such directors also becoming "Additional Original Directors" immediately following their election) (such individuals being the "Continuing Directors"), cease for any reason to constitute a majority of the members of the Board; 1 (iii) the stockholders of the Corporation shall approve a merger, consolidation, recapitalization, or reorganization of the Corporation, a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not sought or obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being Beneficially Owned by at least 75% of the holders of outstanding voting securities of the Corporation immediately prior to the transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iv) the stockholders of the Corporation shall approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or a substantial portion of the Corporation's assets (i.e., 50% or more of the total assets of the Corporation). (c) "Code" shall mean the Internal Revenue Code of 1986 as it may be amended from time to time. (d) "Committee" shall mean the Board, or any Committee of two or more Directors that may be designated by the Board to administer the Plan. (e) "Consultant" shall mean (i) any person who is engaged to perform services for the Corporation or its Subsidiaries, other than as an Employee or Director, or (ii) any person who has agreed to become a consultant within the meaning of clause (i). (f) "Control Person" shall mean any person who, as of the date of grant of an Option, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Corporation or of any parent or Subsidiary. (g) "Corporation" shall mean Visual Edge Systems Inc., a Delaware corporation. (h) "Director" shall mean any member of the Board. (i) "Employee" shall mean (i) any full-time employee of the Corporation or its Subsidiaries (including Directors who are otherwise employed on a full-time basis by the Corporation or its Subsidiaries), or (ii) any person who has agreed to become an employee within the meaning of clause (i). (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as it may be amended from time to time. 2 (k) "Fair Market Value" of the Stock on a given date shall be based upon: (i) if the Stock is listed on a national securities exchange or quoted in an interdealer quotation system, the last sales price or, if unavailable, the average of the closing bid and asked prices per share of the Stock on such date (or, if there was no trading or quotation in the Stock on such date, on the next preceding date on which there was trading or quotation) as provided by one of such organizations; or (ii) if the Stock is not listed on a national securities exchange or quoted in an interdealer quotation system, as determined by the Board in good faith in its sole discretion; provided, however, that the "fair market value" of Stock on the date on which shares of Stock are first issued and sold pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission shall be the Initial Public Offering price of the shares so issued and sold, as set forth in the first final prospectus used in such offering. (l) "Grantee" shall mean a person granted an Option under the Plan. (m) "Initial Public Offering" shall mean an initial public offering of shares of Stock in a firm commitment underwriting registered with the Securities and Exchange Commission in compliance with the provisions of the 1933 Act. (n) "ISO" shall mean an Option granted pursuant to the Plan to purchase shares of the Stock and intended to qualify as an incentive stock option under Section 422 of the Code, as now or hereafter constituted. (o) "1933 Act" shall mean the Securities Act of 1933, as amended. (p) "Non-Employee Director" shall mean a Director of the Corporation who is not an Employee, nor has been an Employee at any time during the prior one year period. (q) "NQSO" shall mean an Option granted pursuant to the Plan to purchase shares of the Stock that is not an ISO. (r) "Options" shall refer collectively to NQSOs and ISOs issued under and subject to the Plan. (s) "Parent" shall mean any parent corporation as defined in Section 424 of the Code. (t) "Plan" shall mean this 1996 Stock Option Plan as set forth herein and as amended from time to time. (u) "Stock" shall mean shares of the Common Stock of the Corporation, par value $0.01 per share. 3 (v) "Stock Option Agreement" shall mean a written agreement between the Corporation and the Grantee, or a certificate accepted by the Grantee, evidencing the grant of an Option hereunder and containing such terms and conditions, not inconsistent with the Plan, as the Committee shall approve. (w) "Subsidiary" shall mean (i) any corporation with respect to which the Corporation owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation, or (ii) any entity which the Committee reasonably expects to become a subsidiary within the meaning of clause (i). Section 3. Shares of Stock Subject to the Plan The total amount of Stock that may be subject to outstanding Options, determined immediately after the grant of any Option, shall not exceed the greater of 900,000 shares (reduced by 500,000 less the number of shares subject to performance-based Options granted pursuant to employment agreements, effective January 1, 1996, with Messrs. Earl Takefman and Alan Lubell that remain outstanding at such time), or 12% percent of the total number of shares of Stock outstanding. Notwithstanding the foregoing, the number of shares that may be delivered upon exercise of ISOs shall not exceed 300,000, provided, however, that shares subject to ISOs shall not be deemed delivered if such Options are forfeited, expire or otherwise terminate without delivery of shares to the Grantee. Any shares of Stock delivered pursuant to an Option may consist, in whole or in part, of authorized and unissued shares or treasury shares. Section 4. Administration of the Plan The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have the authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Stock Option Agreements thereunder and to make all other determinations necessary or advisable for the administration of the Plan. Any controversy or claim arising out of or related to this Plan or the Options granted thereunder shall be determined unilaterally by, and at the sole discretion of, the Committee. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Corporation, subsidiaries of the Corporation, Grantees, any person claiming any rights under the Plan from or through any Grantee, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. To the extent necessary to comply with Rule 16b-3 under the Exchange Act, determinations concerning Options granted to any person who is subject to Section 16(b) of the Exchange Act shall be made by the Committee, all of whose members shall be "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act. The Committee may delegate to officers or managers of the Corporation or any Subsidiary the authority, subject to such terms as the Committee shall determine, to perform administrative functions and, with respect to persons not subject to Section 16 of the 4 Exchange Act, to perform such other functions as the Committee may determine, to the extent permitted under Rule 16b-3, if applicable, and other applicable law. Section 5. Types of Options Options granted under the Plan may be of two types: ISOs or NQSOs. The Committee shall have the authority and discretion to grant to an eligible Employee either ISOs, NQSOs or both, but shall clearly designate the nature of each Option at the time of grant in the Stock Option Agreement. Grantees who are not Employees (determined with reference to Section 2(i)(i) only) of the Corporation or a Subsidiary (determined with reference to Section 2(w)(i) only) on the date an Option is granted shall only receive NQSOs. Section 6. Grant of Options to Employees and Consultants (a) Employees and Consultants of the Corporation and its Subsidiaries shall be eligible to receive Options under the Plan. (b) The exercise price per share of Stock subject to an Option granted to an Employee or Consultant shall be determined by the Committee and specified in the Stock Option Agreement, provided, however, that the exercise price of each share subject to an ISO shall be not less than 100%, or, in the case of an ISO granted to a Control Person, 110%, of the Fair Market Value of a share of the Stock on the date such Option is granted. (c) The term of each Option granted to an Employee or Consultant shall be determined by the Committee and specified in a Stock Option Agreement, provided that no Option shall be exercisable more than ten years from the date such Option is granted, and provided further that no ISO granted to a Control Person shall be exercisable more than five years from the date of Option grant. (d) The Committee shall determine and designate from time to time Employees or Consultants who are to be granted Options, and shall specify in the Stock Option Agreement the nature of each Option granted and the number of shares of Stock subject to each such Option, provided, however, that in any calendar year, no Employee or Consultant may be granted an Option to purchase more than 250,000 shares of Stock (determined without regard to when such Option is exercisable), subject to adjustment pursuant to Section 10. (e) Notwithstanding any other provisions hereof, the aggregate Fair Market Value (determined at the time the ISO is granted) of the Stock with respect to which ISOs are exercisable for the first time by any Employee during any calendar year under all plans of the Corporation and any Parent or Subsidiary corporation shall not exceed $100,000. To the extent the limitation set forth in the preceding sentence is exceeded, the Options with respect to such excess shall be treated as NQSOs. 5 (f) The Committee shall determine whether any Option granted to an Employee or Consultant shall become exercisable in one or more installments and specify the installment dates in the Stock Option Agreement. The Committee may also specify in the Stock Option Agreement such other provisions, not inconsistent with the terms of this Plan, as it may deem desirable, including such provisions as it may deem necessary to qualify any ISO under the provisions of Section 422 of the Code. Unless otherwise determined by the Committee and specified in the Stock Option Agreement, all Options shall immediately become exercisable upon a Change in Control. (g) The Committee may, at any time, grant new or additional options to any eligible Employee or Consultant who has previously received Options under this Plan, or options under other plans, whether such prior Options or other options are still outstanding, have been exercised previously in whole or in part, or have been cancelled. The exercise price of such new or additional Options may be established by the Committee, subject to Section 6(b) hereof, without regard to such previously granted Options or other options. Section 7. Grants of Options to Non-Employee Directors (a) Non-Employee Directors of the Corporation who serve on the Committee shall be eligible to receive Options under the Plan only pursuant to the provisions of this Section 7. Each individual who agrees to become a Non-Employee Director prior to the consummation of the Corporation's Initial Public Offering shall receive, without the exercise of the discretion of any person, an NQSO under the Plan relating to the purchase of 5,000 shares of Stock at an exercise price per share equal to the Initial Public Offering price per share. Such option grant shall be conditional upon, and for all purposes hereunder, deemed granted upon, the Initial Public Offering. Each individual who becomes a Non-Employee Director thereafter shall, on the date such individual becomes a Non-Employee Director, receive, without the exercise of the discretion of any person, an NQSO under the Plan relating to the purchase of 5,000 shares of Stock. In addition, on the day of the annual meeting of stockholders next following the date of an Initial Public Offering, and the day of each subsequent annual meeting, each individual who is a continuing Non-Employee Director on any such date (other than a Non-Employee Director who was granted an Option pursuant to the preceding sentence within 30 days of the date of any such annual meeting) shall receive, without the exercise of the discretion of any person, an NQSO under the Plan relating to the purchase of 2,500 shares of Stock. In the event that there are not sufficient shares available under this Plan to allow for the grant to each Non-Employee Director of an NQSO for the number of shares provided herein, each Non-Employee Director shall receive an NQSO for his pro rata share of the total number of shares of Stock available under the Plan. 6 (b) The exercise price of each share of Stock subject to an Option granted to a Non-Employee Director shall equal the Fair Market Value of a share of Stock on the date such Option is granted. Payment of the exercise price for the shares being purchased shall be made in cash. (c) Each Option granted to a Non-Employee Director shall become exercisable in three equal annual installments on the date of grant and on each of the first two anniversaries of the date of grant, and shall have a term of five years from the date of grant. Notwithstanding the exercise period of any Option granted to a Non-Employee Director, all such Options shall immediately become exercisable upon a Change in Control. Section 8. Exercise of Options (a) A Grantee shall exercise an Option by delivery of written notice to the Corporation setting forth the number of shares with respect to which the Option is to be exercised, together with cash, certified check, bank draft, wire transfer, or postal or express money order payable to the order of the Corporation for an amount equal to the Option price of such shares and any income tax required to be withheld. The Committee may, in its sole discretion, permit a Grantee to pay all or a portion of the exercise price by delivery of Stock or other property (including notes or other contractual obligations of Grantees to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Stock will be delivered or deemed to be delivered to Grantees. (b) Except as provided pursuant to Section 9(a), no Option granted to an Employee or Consultant shall be exercised unless at the time of such exercise the Grantee is then an Employee (determined with reference to Section 2(i)(i) only) or Consultant (determined with reference to Section 2(e)(i) only) of the Corporation or a Subsidiary (determined with reference to Section 2(w)(i) only). (c) Except as provided in Section 9(a), no Option granted to a Non-Employee Director shall be exercised unless at the time of such exercise the Grantee is then a Non-Employee Director. Section 9. Exercise of Options upon Termination (a) Unless otherwise determined by the Committee, upon termination of a Grantee's employment with the Corporation and its Subsidiaries, such Grantee may exercise any Options during the three month period following such termination of employment, but only to the extent such Option was exercisable immediately prior to such termination of employment. Notwithstanding the foregoing, if the Committee determines that such termination is for cause, all Options held by the Grantee shall immediately terminate. In addition, all Options granted on the basis of clause (ii) of Section 2(e), (i) or (w) shall immediately terminate if the Committee determines, in its sole discretion, that the Consultant, Employee or Subsidiary, as the case may be, will not 7 become a Consultant, Employee or Subsidiary within the meaning of clause (i) of such Sections. (b) Unless otherwise determined by the Committee and specified in the Stock Option Agreement, in no event shall any Option be exercisable for more than the maximum number of shares that the Grantee was entitled to purchase at the date of termination of the relationship with the Corporation and its Subsidiaries. (c) The sale of any Subsidiary shall be treated as a termination of employment with respect to any Grantee employed by such Subsidiary. (d) Subject to the foregoing, in the event of death, Options may be exercised by a Grantee's legal representative. Section 10. Adjustment Upon Changes in Capitalization In the event of any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Grantees under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock deemed to be available thereafter for grants of Options under Section 3, (ii) the number and kind of shares of Stock that may be delivered or deliverable in respect of outstanding Options, (iii) the number of shares with respect to which Options may be granted to a given Grantee in the specified period as set forth in Section 6(d), and (iv) the exercise price (or, if deemed appropriate, the Committee may make provision for a cash payment with respect to any outstanding Option). In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Options (including, without limitation, cash payments in exchange for an Option or substitution of Options using stock of a successor or other entity) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence) affecting the Corporation or any Subsidiary or the financial statements of the Corporation or any Subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. Section 11. Restrictions on Issuing Shares The Corporation shall not be obligated to deliver Stock upon the exercise or settlement of any Option or take other actions under the Plan until the Corporation shall have determined that applicable federal and state laws, rules, and regulations have been complied with and such approvals of any regulatory or governmental agency have been obtained and contractual obligations to which the Option may be subject have been satisfied. The Corporation, in its discretion, may postpone the issuance or delivery of Stock under any 8 Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any federal or state law, rule, or regulation as the Corporation may consider appropriate, and may require any Grantee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock under the Plan. Section 12. Tax Withholding The Corporation shall have the right to require that the Grantee make such provision, or furnish the Corporation such authorization, necessary or desirable so that the Corporation may satisfy its obligation, under applicable laws, to withhold or otherwise pay for income or other taxes of the Grantee attributable to the grant or exercise of Options granted under the Plan or the sale of Stock issued with respect to Options. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Grantee's tax obligations. Section 13. Transferability No Option shall be subject to anticipation, sale, assignment, pledge, encumbrance, charge or transfer except by will or the laws of descent and distribution, and an Option shall be exercisable during the Grantee's lifetime only by the Grantee, provided, however, that the Committee may permit a Grantee to transfer an Option to a family member or a trust created for the benefit of family members. In the case of such a transfer, the transferee's rights and obligations with respect to the Option shall be determined by reference to the Grantee and the Grantee's rights and obligations with respect to the Option had no transfer been made. Notwithstanding such transfer, the Grantee shall remain obligated pursuant to Section 11 if required by applicable law. Section 14. General Provisions (a) Each Option shall be evidenced by a Stock Option Agreement. The terms and provisions of such Stock Option Agreements may vary among Grantees and among different Options granted to the same Grantee. (b) The grant of an Option in any year shall not give the Grantee any right to similar grants in future years, any right to continue such Grantee's employment relationship with the Corporation or its Subsidiaries, or, until such Option is exercised and share certificates are issued, any rights as a Stockholder of the Corporation. All Grantees shall remain subject to discharge to the same extent as if the Plan were not in effect. (c) No Grantee, and no beneficiary or other persons claiming under or through the Grantee shall have any right, title or interest by reason of any Option to any particular assets of the Corporation or its Subsidiaries, or any shares of Stock allocated or reserved for the purposes of the Plan or subject to any Option except as set forth herein. The Corporation shall not be 9 required to establish any fund or make any other segregation of assets to assure the payment of any Option. (d) The issuance of shares of Stock to Grantees or to their legal representatives shall be subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof. Section 15. Amendment or Termination The Board may, at any time, alter, amend, suspend, discontinue or terminate this Plan; provided, however, that no such action shall adversely affect the rights of Grantees to Options previously granted hereunder and, provided further, however, that any shareholder approval necessary or desirable in order to comply with Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or other applicable law or regulation) shall be obtained in the manner required therein. In addition, no plan provision, within the meaning of Rule 16b-3(c)(2)(i)(D), shall be amended more than once every six months, other than to comport with changes in the Code or rules thereunder. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Option theretofore granted and any Stock Option Agreement relating thereto; provided, however, that, without the consent of an affected Grantee, no such action may materially impair the rights of such Grantee under such Option. Section 16. Effective Date of Plan This Plan is effective upon its adoption by the Board and shall continue in effect until terminated by the Board. No ISO may be granted more than ten years after such date. 10 EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Visual Edge Systems Inc. (a development stage company): We consent to the use of our report included herein in Amendment No. 2 to Form SB-2 and to the reference to our firm under the heading "Experts" in the prospectus. Our report dated April 30, 1996, except as to notes 1(e), 2 and 10, which are as of May 31, 1996, contains an explanatory paragraph that states that the Company is in its development stage and its losses and working capital and net capital deficiencies raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. KPMG PEAT MARWICK LLP New York, New York July 19, 1996 -----END PRIVACY-ENHANCED MESSAGE-----