-----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, SsdFh7LU/3Q1m2FpfhnCGfPT21pNaqGB1p5hDQnTmar9l1V9Sj5XH7VlPLWYXkR7 ++DIpLUe++j+ZWwgBXN4yg== 0000950144-99-005869.txt : 19990514 0000950144-99-005869.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950144-99-005869 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISUAL EDGE SYSTEMS INC CENTRAL INDEX KEY: 0001015172 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 133778895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-20995 FILM NUMBER: 99620715 BUSINESS ADDRESS: STREET 1: 2424 NORTH FEDERAL HIGHWAY STREET 2: SUITE 100 CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 5617507559 MAIL ADDRESS: STREET 1: 2424 NORTH FEDERAL HIGHWAY STREET 2: SUITE 100 CITY: BOCA RATON STATE: FL ZIP: 33431 10-K/A 1 VISUAL EDGE SYSTEMS. INC. 10-K/A 12/31/98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 UNITED STATES FORM 10-KSB/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 0-20995 VISUAL EDGE SYSTEMS INC. (Exact name of Registrant as specified in its charter) DELAWARE 13-3778895 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 2424 NORTH FEDERAL HIGHWAY, SUITE 100, BOCA RATON, FLORIDA 33431 (Address of principal executive offices) (zip code) (561) 750-7559 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.01 PER SHARE REDEEMABLE WARRANTS, EACH TO PURCHASE ONE SHARE OF COMMON STOCK (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB/A or any amendment to this Form 10-KSB/A. [ ] The Registrant's revenue for its most recent fiscal year: $2,632,213 The aggregate market value of the Registrant's Common Stock (the "Common Stock"), $.01 par value, held by non-affiliates as of May 6, 1999, based on the last sale price of the Common Stock as reported on the Nasdaq SmallCap Market, was $3,088,190. As of May 6, 1999, there were 10,398,440 shares of the Registrant's Common Stock and 1,930,000 redeemable warrants outstanding, of which 1,495,000 are publicly traded. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Registrant's fiscal year ended December 31, 1998 are incorporated by reference into Part III of this 10-KSB/A. 2 3 VISUAL EDGE SYSTEMS INC. TABLE OF CONTENTS
PAGE PART I ITEM 1. Description of Business 4 ITEM 2. Description of Property 14 ITEM 3. Legal Proceedings 14 ITEM 4. Submission of Matters to a Vote of Securityholders 14 PART II ITEM 5. Market for Common Equity and Related Stockholder Matters 15 ITEM 6. Management's Discussion and Analysis or Plan of Operation 16 ITEM 7. Financial Statements 20 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 45 Section 16(a) of the Exchange Act ITEM 10. Executive Compensation 45 ITEM 11. Security Ownership of Certain Beneficial Owners and Management 46 ITEM 12. Certain Relationships and Related Transactions 46 ITEM 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 47
3 4 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL 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. The Company has developed video production technology 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 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 sells its products under the name "ONE-ON-ONE WITH GREG NORMAN." The Company was incorporated in July 1994 and commenced developmental operations in January 1995. From the Company's inception through the end of 1996, it was primarily engaged in product development, market development, testing technology, recruitment of key personnel, raising capital and preparing the software, hardware and videotape coaching instructions used in the production of its products. INDUSTRY OVERVIEW 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, increased from approximately $12.7 billion in 1989 to approximately $15.1 billion in 1994 to approximately $16.3 billion in 1998. 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. PRODUCTS The Company has developed six full swing personalized ONE-ON-ONE golf lessons with Greg Norman for both right- and left-handed golfers. The Company's personalized products include a lesson stressing basic golf fundamentals for either males or females, a lesson geared towards senior golfers, an advanced lesson for lower-handicap players and a "follow-up" lesson which measures a golfer's improvement from prior lessons. The Company also plans to eventually develop additional videotape golf lessons, such as short game, sand play and putting lessons. 4 5 RELATIONSHIP WITH GREG NORMAN Pursuant to a license agreement, as amended, by and among the Company, Greg Norman and Great White Shark Enterprises, Inc. (the "Greg Norman License"), Greg Norman granted to the Company a worldwide license to use his name, likeness and endorsement and certain trademarks owned by him in connection with the production and promotion of the Company's products. The Greg Norman License originally required the Company to make minimum guaranteed royalty payments to Mr. Norman; however, as a result of a recent amendment, there are no longer any guaranteed payments required, a royalty of all the Company's sales of its products. As of December 31, 1998, the Company has paid Mr. Norman $1,300,000 in cash and has issued to him 602,000 shares of Common Stock, as well as an option to purchase 125,000 shares of the Company's Common Stock at $1.00 per share. The original term of the Greg Norman License expires on December 31, 2001. The Company's business and prospects are dependent upon the Company's continued association with Greg Norman. 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 products and does not prohibit the Company from entering into similar endorsement agreements with other athletes or instructors. MARKETING AND DISTRIBUTION The Company's marketing strategy is to sell ONE-ON-ONE videotapes to (a) various organizers of amateur corporate, charity and member golf tournaments (who typically offer gifts to tournament participants), golf professionals at private and daily fee golf courses and driving ranges and indoor event planners who organize trade shows, conventions, sales meetings, retail store openings and promotions and automobile dealer showroom promotions, (b) corporations who will give the ONE-ON-ONE WITH GREG NORMAN lesson as customer and employee appreciation gifts instead of gifts such as golf balls with logos, fruit baskets or chocolates, (c) individual golfers or persons who wish to give a gift to a golfer via the Internet or a planned thirty minute infomercial, and (d) corporations who will use the ONE-ON-ONE product as an incentive to entice individuals to purchase or use their product or service. To implement its marketing and business strategy, the Company has built 17 mobile ONE-ON-ONE production facilities ("vans"), equipped with video and personal computer equipment, to market, promote and produce the Company's products. The Company locates its ONE-ON-ONE vans in selected geographic areas that service golf courses and driving ranges throughout the United States, and has placed its first vans in Arizona, California, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, Texas and Ontario, Canada. The vans travel to golf courses and corporate events to film participants and produce the ONE-ON-ONE lessons on-site. The Company has also opened authorized ONE-ON-ONE videotaping centers in key cities throughout the country, which allow recipients of ONE-ON-ONE gift certificates or certificates which may in the future be obtained through a planned infomercial to redeem 5 6 their certificates and receive their personalized ONE-ON-ONE video golf lesson. These videotaping centers are permanent, part-time locations which the Company has developed in partnership with existing driving ranges, golf courses, automobile dealerships and other retailers. In 1998, almost 100% of the Company's sales were derived from van service. The Company expects that the videotaping centers will account for less than 10% of sales during 1999, although this amount may be affected by the impact of the planned infomercial. The infomercial has been completed and is currently awaiting approval from Greg Norman and Great White Shark Enterprises, Inc. The Company expects to begin testing the infomercial in May 1999 in three markets. The Company has incurred no costs related to the infomercial's development, because it licensed development rights to an independent third party infomercial company. Delays in testing the infomercial have been related to editing delays by the third party. The Company is marketing the gift certificate program as a corporate incentive and promotional product and is selling the certificates directly to golfers via the Company's web site. Sales to corporations are handled by the Company's sales force and independent sales representatives. FINANCING TRANSACTIONS For the past several years, the Company sought financing through private sources. In general, the Company raised capital through a combination of debt and equity issuances to private investor groups. MARCH FINANCING In March 1997, the Company consummated a bridge financing (the "March Bridge Financing") pursuant to which it issued to 13 investors (including Status-One Investments Inc., a company controlled by the family of the Chief Executive Officer of the Company), a non-cash financing fee of (i) 100,000 shares of common stock and (ii) 100,000 warrants to purchase 100,000 shares of common stock at a price of $10.00 per share, subject to adjustment in certain circumstances. As consideration for such securities, the investors in the March Bridge Financing pledged an aggregate of $3,500,000 in cash and other marketable securities as cash collateral (the "Cash Collateral") to various banks, which in turn issued stand-by letters of credit (the "Letters of Credit") to the Company in the aggregate amount of up to $3,500,000. The Company used the Letters of Credit to secure a $3,500,000 line of credit (the "Line of Credit") from a bank. In June 1997, the Company used a portion of the proceeds from the issuance and sale of certain securities, outlined hereafter in note 5(b), to repay the remaining outstanding balance due and owing on the Line of Credit and returned the Letters of Credit to the various banks, which in turn returned all of the Cash Collateral to the March Bridge Financing investors. 6 7 INFINITY FINANCING On June 13, 1997, the Company entered into a financing arrangement with a group of investment funds, which resulted in net proceeds to the Company of approximately $7.2 million. Under a securities purchase agreement and several amendments thereto, the Company issued to these investors 1,039,388 shares of common stock, 6,000 shares of Series A-2 Convertible Preferred Stock with a liquidation preference of $1,000 per share and 8.25% convertible notes in the current principal amount of $1.5 million. As of May 12, 1999, the investment funds hold 700,638 shares of the Company's common stock. However, the investment funds also may convert their Series A-2 preferred stock and notes into additional shares of the Company's common stock, although the Company has the right at any time to prepay or redeem any of these convertible instruments and, as a result, suffer no dilutive effects. If the Company does not make such prepayment or redemption, then the investment funds will receive upon conversion the number of shares set forth below, based upon the timing of the exercise of their conversion right:
If the investment funds convert Series A-2 preferred stock: then they will receive a maximum of: at any time through June 30, 1999 3,300,000 shares of common stock between July 1, 1999 and January 1, 2000 3,827,273 shares of common stock on or after January 2, 2000 4,800,000 shares of common stock If the investment funds convert notes: then they will receive a maximum of: at any time through January 1, 2000 600,000 shares of common stock on or after January 2, 2000 1,200,000 shares of common stock
The investment funds have agreed not to convert any shares of Series A-2 preferred stock or notes which would result in them owning an aggregate of 9.99% or more of the Company's outstanding common stock following the conversion. Dividends on the Series A-2 preferred stock will begin accruing on January 1, 2000 at the rate of 8.25% annually, payable quarterly in cash or in shares of common stock. The Series A-2 preferred stock is convertible into shares of the Company's common stock at conversion prices ranging between $1.25 and $2.50, and has rights that are senior to those of the common stock with respect to dividends, liquidation and dissolution. The investment funds are entitled to receive 495,000 shares of the Company's common stock in each of 2000 and 2001 as payment of dividends on the Series A-2 preferred stock. The notes mature in June 2000 and interest on the notes shall be paid in cash. The notes are secured by all of the Company's significant assets and are convertible into shares of common stock at a price of $2.50 per share, although that price will become $1.25 per share after January 1, 2000. MARION EQUITY FINANCING In March 1998, the Company entered into an equity financing arrangement with Marion Interglobal, Ltd., an investment group owned by Ron Seale, the Company's Chairman of the 7 8 Board, and its nominees. Under this agreement, Marion was to invest up to $11 million in exchange for up to 5,200,000 shares of common stock in three separate phases. In connection with the first two phases, in March and June 1998, respectively, the Company issued to Marion an aggregate of 2,000,000 shares of its common stock in exchange for $5 million. Marion opted not to proceed with the third phase. The Company paid "transaction fees" to Marion totaling 2,000,000 additional shares of common stock upon completion of the first two phases of Marion's investment. Marion presently holds 976,000 shares of common stock for its own account, with the remaining shares having been given to Marion's nominees. Marion's investment in Visual Edge was on terms as favorable to the Company as those available in an arm's length transaction in the marketplace. COMPETITION The Company faces competition for consumer discretionary spending from numerous other businesses in the golf industry and related market segments. The Company competes with a variety of products and services which are used as participant gifts at golf events or 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. 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 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. 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 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. In addition, there can be no assurance that the Company will have financial or other resources necessary to enforce its own patent 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. The Company relies on proprietary processes and employs various methods to protect the concepts, ideas and documentation of its 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 has entered into confidentiality agreements with certain of its employees, there can be no assurance that such arrangements will adequately protect the Company. 8 9 EMPLOYEES At December 31, 1998, the Company employed (directly or indirectly) four executive employees and 49 employees engaged in the operation of its offices and vans. EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION ---- --- -------- Earl T. Takefman 49 Chief Executive Officer and Director Richard Parker 37 President and Chief Operating Officer Thomas Peters 53 Vice President of Operations and Technology Melissa Forzly 40 Chief Financial Officer
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. 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 received a Bachelor of Architecture degree in 1971 and a Masters of Business Administration degree from McGill University in Montreal, Canada in 1973. RICHARD PARKER has been the Company's President and Chief Operating Officer since July 1996. From February 1990 until his appointment as Chief Operating Officer of the Company, Mr. Parker was 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. THOMAS PETERS has been Vice President of Operations and Technology 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. In March 1995, Smart View was engaged as an independent consultant to the Company and was principally responsible for the development of the software used in the Company's products. Smart View also developed operating systems used by 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 IBM 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. 9 10 MELISSA FORZLY has been the Chief Financial Officer of the Company since March 1998 and joined the Company as Controller in June 1997. Prior to joining the Company, Ms. Forzly was Controller of Big Entertainment, a public company trading on the Nasdaq SmallCap market, which is a diversified entertainment company involved in the licensing of entertainment properties, the operation of retail stores, and the publishing and packaging of books. Ms. Forzly graduated from Boston University in 1981 with a B.S. in Business Administration with concentrations in accounting and finance. RISK FACTORS Readers of this annual report or any of the Company's press releases should carefully consider the following risk factors, in addition to the other information contained herein. This annual report and the Company's press releases contain certain statements of a forward-looking nature relating to future events or the future financial performance of the Company within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, readers should specifically consider the various factors identified herein, including the matters set forth below, which could cause actual results to differ materially from those indicated by such forward-looking statements. SIGNIFICANT AND CONTINUING LOSSES. For the period from July 15, 1994 (inception) to December 31, 1998, the Company incurred an accumulated deficit of $20,302,283. The Company incurred a net loss of $4,846,792 for the year ended December 31, 1998. The Company believes that it will continue to incur losses until, at the earliest, it generates sufficient revenues to offset the costs associated with producing, selling and delivering its products. These losses could limit the Company's ability to grow and to raise new funds to allow it to remain in business. CAPITAL RESOURCES. As a result of the Company's continuing losses and the low market price of its common stock, the Company believes that it will be very difficult, if not impossible, for it to raise additional capital in the future. As of April 28, 1999, the Company had a total of cash and cash equivalents and certificates of deposit of approximately $1,222,425. Thus, if the Company is unable to become profitable in the near future or raise new funds, it will exhaust its cash resources and be unable to continue in business. POTENTIAL INFLUENCE ON MARKET OF SALE OF SHARES; DILUTION. As part of the Infinity Financing, the Company issued to the Funds, through December 31, 1998, an aggregate of 1,039,388 shares of Common Stock. In addition, the Company will be obligated to issue to the Funds additional shares if they decide to convert their Notes or shares of Preferred Stock into Common Stock. Conversion of some or all of the Notes or Preferred Stock would have a dilutive effect on the Company's stockholders. While no prediction can be made as to the effect that the sale of any of these shares will have on 10 11 market prices of the Common Stock, the possibility that a substantial number of shares of Common Stock may be sold in the public market may adversely affect prevailing market prices and could impair the Company's ability to further raise capital through the sale of its equity securities. Additionally, there are currently outstanding options to purchase an aggregate of 1,874,039 shares of Common Stock at exercise prices ranging from $1.00 to $10.75 per share, and outstanding warrants (including the IPO warrants) to purchase an aggregate of 1,930,000 shares of Common Stock at exercise prices ranging from $3.25 to $10.00. Exercise of any of the foregoing options or warrants will have a dilutive effect on the Company's stockholders. Furthermore, holders of such options or warrants are more likely to exercise them at times when the Company could obtain additional equity capital on terms that are more favorable to us than those provided in the options or warrants. As a result, exercise of the options or warrants may adversely affect the terms of such financing. DEPENDENCE ON GREG NORMAN LICENSE. The Company's business may be adversely affected if Greg Norman dies, becomes disabled, retires, experiences a significant decline in the level of his tournament play, commits a serious crime or performs any act which adversely affects his reputation. In connection with the production and promotion of the Company's products, the Company uses, under a worldwide license, Mr. Norman's name, likeness, endorsement and certain trademarks. The Company's license expires on December 31, 2001, but is subject to renewal at the Company's option for two additional five-year periods, with a fee of $500,000 per renewal term. The Company has obtained "keyman" life insurance on the life of Mr. Norman in the amount of $10,000,000. MINIMUM BID PRICE. On March 1,1999, the minimum bid price of the Company's shares had been less than $1.00 per share for thirty consecutive business days and in accordance with Nasdaq's listing requirements, the Company received notice from Nasdaq regarding the minimum bid price of the Company's shares. If the bid price of the Company's shares is not above $1.00 per share for at least ten consecutive business days before June 1, 1999, the Company's shares could be excluded from Nasdaq for failure to comply with Nasdaq's minimum bid price requirement. Although the Company may attempt to meet Nasdaq's rules by effecting a reverse stock spilt, this is unlikely. Exclusion of our shares from Nasdaq would adversely affect the market price and liquidity of our equity securities. 11 12 PENNY STOCK REGULATIONS. In the event the Company's common stock is delisted from the Nasdaq SmallCap Market, it may subsequently become subject to the rules and regulations governing penny stocks. In general, penny stocks are equity securities (i) of companies that have net tangible assets of less than $2 million (if continuously operating for less than three years) or $5 million (if continuously operating for more than three years) and (ii) that have a market price of less than $5.00 (excluding securities that are quoted on Nasdaq or are registered on a national securities exchange meeting certain guidelines). As at December 31, 1998, the Company had been continuously operating for more than three years and had net tangible assets of $3,382,103. In addition, as indicated in the Minimum Bid Price risk factor, the market price of the Company's common stock had been less than $5.00 per share. Under the penny stock rules, broker-dealers who recommend those securities to persons other than institutional accredited investors (generally institutions with assets in excess of $5 million) must make a special suitability determination for the purchaser, receive the purchaser's written agreement to the transaction prior to the sale and provide the purchaser with risk disclosure documents which identify risks associated with investing in penny stocks and which describe the market for the penny stock and the purchaser's legal remedies. Further, the broker-dealer must obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before effecting a transaction in a penny stock. These requirements may have the effect of reducing the level of trading activity in securities which become subject to the penny stock rules. If the Company's common stock becomes subject to the penny stock rules, purchasers of shares of the Company's common stock may find it more difficult to sell these securities, which could have an adverse affect on its market price. UNCERTAINTY OF PROPOSED PLAN OF OPERATION AND MARKET ACCEPTANCE. The Company's ONE-ON-ONE personalized videotape golf lesson is a new business concept and, accordingly, demand and market acceptance for its products is uncertain. Although the Company commenced marketing activities in 1997, it has not been able to develop a sales force necessary to raise widespread awareness of the product and acquire a customer base sufficient to offset its expenses. The Company's business prospects will depend significantly on its ability to successfully build an effective sales organization. To the extent that the Company enters into third-party marketing and distribution arrangements in the future, it will depend on the marketing efforts of those third parties, which will reduce its operating and gross profit margins. The Company cannot assure you that its business strategy will result in successful product commercialization or that its efforts will result in broad-based market acceptance of its products. The Company may need to change its marketing plans based on the progress of its marketing efforts and changes in market conditions. The Company cannot assure that it will be able to continue to implement its business plan. 12 13 PRODUCT OBSOLESCENCE. The markets for the Company's products may be characterized by rapidly changing technology which could result in product obsolescence or short product life cycles. The Company's competitors could develop technologies or products that render its products obsolete or less marketable. Accordingly, the Company's ability to compete may depend on its ability to continually enhance and improve its products. DEPENDENCE ON KEY PERSONNEL. The Company depends on the personal efforts of Earl T. Takefman, Richard Parker, Thomas Peters and other key personnel to implement its operating and growth strategies. The loss of the services of these individuals could adversely affect the Company's business and prospects because they have unique knowledge and experience in the industry. The Company has entered into employment agreements with Mr. Takefman and other key personnel and has obtained "keyman" insurance on the life of Mr. Takefman in the amount of $5,000,000, which will not be renewed when it expires in July 1999. DEPENDENCE ON LIMITED PRODUCT LINE. The Company is entirely dependent on the sales of a limited product line to generate revenues and on the commercial success of its products. The Company cannot assure that its products will prove to be commercially viable. Failure to achieve commercial viability on a timely basis would cause the Company to close its business. INDUSTRY FACTORS. The Company's future operating results will depend on numerous factors beyond its control, including: o the popularity, price and timing of competitors' products being introduced and distributed; o national, regional and local economic conditions (particularly recessionary conditions adversely affecting consumer spending); o changes in consumer demographics; o the availability and relative popularity of other forms of sports and entertainment; and o 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 its 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, it may find it more difficult to price its products at levels which result in profitable operations. 13 14 ACQUISITION STRATEGY. The Company has recently adopted an acquisition strategy to expand its product offering, focusing on technology companies including, in particular, companies engaged in the business of "distance education" or instruction via the Internet. To be suitable for acquisition by the Company, these companies must be small enough to be affordable yet profitable. These candidates may be few in number and may attract offers from companies with greater financial resources than the Company. The Company cannot assure you that it will be able to locate suitable acquisition targets or that it will be able to complete any acquisitions. FINANCING OF ACQUISITIONS. The Company's current financial condition will not allow it to finance an acquisition independently. If the Company locates an acquisition opportunity, it will have to depend on the profitability of the company to be acquired and the efforts of some of its major stockholders to attract and obtain financing. The Company cannot assure you that it will be able to obtain financing on acceptable terms or at all. If the Company cannot obtain financing, it will not be able to complete any acquisitions. VOLATILITY OF MARKET PRICE OF COMMON STOCK AND WARRANTS. Since the Company's initial public offering, the market price of its publicly traded securities has been highly volatile, as has been the case with the securities of other emerging companies. The Company's operating results and announcements by the Company or its competitors may have a significant impact on the market price of its 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 those companies. ITEM 2. DESCRIPTION OF PROPERTY The Company leases approximately 4,400 square feet of office space in Boca Raton, Florida for its executive offices. The lease of this office space provides for a monthly rent of approximately $9,580 and expires on September 30, 1999, with one option to renew for an additional three years. The Company believes that suitable additional space, if required, is readily available on terms that will be reasonably acceptable to the Company. ITEM 3. LEGAL PROCEEDINGS The Company has no material legal proceedings pending or, to the Company's knowledge, threatened. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS None. 14 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS MARKET FOR COMMON STOCK The Company's Common Stock and warrants are traded on the Nasdaq SmallCap Market under the symbols "EDGE" and "EDGEW," respectively (see Risk Factor - Minimum Bid Price). The Company completed the IPO in July 1996 at an offering price of $5.00 per share for its Common Stock and $.10 per warrant. The following table sets forth, for the periods indicated, the range of high and low last reported sale prices for the Common Stock and the warrants.
COMMON STOCK: HIGH LOW ------------- ---- ---- Fiscal Year 1996 Third Quarter (from July 24, 1996) $ 8.00 $4.38 Fourth Quarter 7.63 5.63 Fiscal Year 1997 First Quarter $12.38 $5.75 Second Quarter 13.75 8.63 Third Quarter 10.25 6.50 Fourth Quarter 8.25 3.06 Fiscal Year 1998 First Quarter $ 4.38 $2.63 Second Quarter 4.69 2.81 Third Quarter 3.47 1.38 Fourth Quarter 1.97 .63 IPO WARRANTS: HIGH LOW ------------ ---- --- Fiscal Year 1996 Third Quarter (from July 24, 1996) $ 4.13 $1.00 Fourth Quarter 3.16 1.88 Fiscal Year 1997 First Quarter $ 7.56 $1.88 Second Quarter 8.63 4.00 Third Quarter 5.13 3.00 Fourth Quarter 3.44 .75 Fiscal Year 1998 First Quarter $ 1.69 $ .69 Second Quarter 1.25 .00 Third Quarter .88 .25 Fourth Quarter .69 .06
15 16 HOLDERS OF COMMON STOCK On March 23,1999, the last reported sale price of the Common Stock on the Nasdaq SmallCap Market was $.719 per share and the last reported sale price of the warrants on the Nasdaq SmallCap Market was $.188 per warrant. At March 23, 1999, there were 128 holders of record of the Company's Common Stock and 6 holders of record of the Company's warrants. The Company believes that there are more than 700 beneficial holders of the Company's Common Stock. DIVIDENDS The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future and intends to retain its earnings, if any, to finance the expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions and other factors that the Company's Board of Directors deems relevant. In addition, the payment of cash dividends is limited by the terms of the Preferred Stock and may be further limited or prohibited by the terms of future loan agreements or the future issuance of other series of Preferred Stock, if any. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis should be read in conjunction with the Company's Financial Statements and the Notes thereto included in Part II, Item 7 of this Report. OPERATING MARGINS AND OVERHEAD STRUCTURE Approximately 25% of the cost of sales are variable costs related to making the sale. These costs include the cost of the videotapes, royalties to Greg Norman and salesmen's commissions. The remaining 75% of each sales dollar is contributed to the Company's fixed operating costs which includes operator salaries, vehicle storage and van depreciation and the Company's fixed overhead expenses. As soon as the Company achieves sales levels sufficient to offset its fixed operating costs, the Company believes that 75% of each sales dollar will result in income before taxes. The Company believes that sales of $6,500,000 to $7,000,000 are needed before it may be able to generate profits. Management believes that the Company will not achieve these sales levels in 1999 and no assurance can be given that the Company will ever achieve such sales levels or that the variable costs will remain constant as a percent of sales or that the Company will not incur additional fixed costs. RESULTS OF OPERATIONS For the year ended December 31, 1998 ("Y-98") as compared to the year ended December 31, 1997 ("Y-97") 16 17 Sales for Y-98 increased 91% to $2,632,213 as compared to $1,381,111 for Y-97. The increase in sales in 1998 as compared to 1997 is primarily due to the Company's marketing efforts. In addition, the Company had more vans in use for all of 1998 as compared to 1997. The Company's gross profit increased to $168,273 for Y-98 as compared to a gross loss of $186,362 for Y-97, or a gross margin of 6% in Y-98 as compared to a gross margin of -13% in Y-97. The increase in gross profit in 1998 as compared to 1997 is primarily due to significant training costs for van operators that were incurred in 1997 and were significantly decreased in 1998, as well as low initial sales during the Company's start-up phase in 1997. In addition the Company's sales increased at a greater rate than the cost of sales. The Company's cost of sales in 1998 as compared to 1997 increased by 57% vs. a 91% sales increase. The increase in the cost of sales is primarily attributable to increases in the number of videotapes produced ($30,115), royalty expense to Greg Norman ($200,000), salesmen's commissions ($86,180), and vehicle fuel costs ($33,275). These expenses are all directly related to sales. Operator salaries related to videotape production also increased by $169,860. The balance of the increase is primarily attributable to an increase in depreciation expense associated with the increased number of vans for the full year of 1998 vs. 1997. Operating expenses for Y-98 decreased 42% to $4,577,034 as compared to $7,929,850 for Y-97. The decrease in operating expenses reflects reductions in corporate overhead and start-up expenses that were incurred in 1997. The decrease in operating expense is attributable to a reduction in General & Administrative salaries of $194,166, a reduction in legal fees of $333,446, a reduction in travel expenses of $342,001, a reduction in advertising and marketing expenses of $720,911 and a reduction in financing costs of $825,807. The balance of the decrease is primarily attributable to a decrease in depreciation and amortization expenses. Operating loss for Y-98 decreased 46% to $4,408,761, as compared to $8,116,212 for Y-97. The Company earned $119,647 in interest income for Y-98, as compared to $111,140 for Y-97. Interest expense for Y-98 was $251,566, as compared to $508,080 for Y-97. The decrease in interest expense is primarily due to the conversion of the June Financing Notes to Preferred Stock. Net loss before extraordinary item for Y-98 decreased 50% to $4,846,792, as compared to $9,756,570 for Y-97. Net loss per share for Y-98 decreased 64% to $.81, as compared to $2.26 for Y-97. The decreases in operating and net loss in 1998 as compared to 1997 resulted from increased gross profit and decreased operating expenses in 1998. The decrease in net loss per share in 1998 as compared to 1997 is attributable to both a decrease in net loss and an increase in the number of shares outstanding which is partially offset by Preferred Stock dividends recorded in 1998. 17 18 LIQUIDITY AND CAPITAL RESOURCES On December 31, 1998, the Company had cash and cash equivalents of $244,346, unrestricted short-term investments (certificates of deposit) of $1,750,000 and working capital of $1,269,548, as compared to cash and cash equivalents of $224,429, unrestricted short-term investments (certificates of deposit) of $1,080,000 and working capital of $788,323 at December 31, 1997. Net cash used in operating activities for Y-98 was $3,176,816, which was used to fund the Company's losses. Net cash used in investing activities was $1,017,737 and $4,214,470 was provided by financing activities for a total increase in cash and cash equivalents of $19,917. Net cash used in operating activities for Y-97 was $5,997,342. Net cash used in investing activities in Y-97 was $95,124 and $6,083,778 was provided by financing activities, for a total decrease in cash and cash equivalents in Y-97 of $8,688. On December 31, 1998, the Company had stockholders' equity of $3,549,880, as compared to a stockholders' deficit of $1,137,662 at December 31, 1997. The Company anticipates that its current capital resources, when combined with anticipated cash flows from operations, will be sufficient to satisfy the Company's contemplated working capital requirements for the year ending December 31, 1999. However, there can be no guarantee that the Company's anticipated cash flow from operations and sales will be realized. If the Company is unable to realize the anticipated cash flows, or raise additional equity, it may exhaust its cash resources by the year-end and may be forced to curtail its operations. (See Risk Factors - Uncertainty of Proposed Plan of Operation and Market Acceptance and Risk Factors - Capital Resources). THIRD PARTY REPORTS AND PRESS RELEASES The Company does not make financial forecasts or projections nor endorse the financial forecasts or projections of third parties nor does it comment on the accuracy of third party reports. The Company does not participate in the preparation of the reports or the estimates given by the analysts. Analysts who issue financial reports are not privy to non-public financial information. Any purchase of the Company's securities based on financial estimates provided by analysts or third parties is done entirely at the risk of the purchaser. The Company periodically issues press releases to update shareholders on new developments. These releases may contain certain statements of a forward-looking nature relating to future events or the future financial performance of the Company within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are intended to be covered by the safe harbors created thereby. Readers are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, readers should specifically consider the various risk factors identified which could cause actual results to differ materially from those indicated by such forward-looking statements. 18 19 YEAR 2000 ISSUE The Company has completed its assessment of the impact of Year 2000 on its business including its readiness of internal accounting and operating systems and communicated with key suppliers regarding their exposure to Year 2000 issues. The Company anticipates that its business operations will electronically interact with third parties very minimally, if at all. The Company's Year 2000 risks from third parties are insignificant. Management believes that the Company's worst case scenario would involve delays in receiving videotapes from its supplier. The Company will stockpile videotapes used in production before the 1999 year-end, so as not to run short if its vendor cannot supply the Company. The majority of the Company's systems consist of packaged software purchased from vendors which are already Year 2000 compliant, based on representations from the vendors. The Company has addressed both Information Technology and Non-Information Technology concerns; for instance, the network file servers have been designed to handle Year 2000 issues, and the recently installed telephone system is designed to handle Year 2000 issues. The Company is not presently aware of any significant expenditures which will be necessitated in order to be ready for the Year 2000, although there can be no assurances that significant expenditures may not be required in the future. The Company presently believes that the Year 2000 issue will not have a material impact on the Company's business or operations; however, there can be no guarantee that the Company will be unaffected or in the level of timely compliance by key suppliers or vendors which could impact the Company's operations including, but not limited to, disruptions to the Company's business. 19 20 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE Report of Independent Certified Public Accountants 21 Balance Sheets as of December 31, 1997 and December 31, 1998 22 Statements of Operations for the Years Ended December 31, 1997 and 1998 23 Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1997 and 1998 24 Statements of Cash Flows for the Years Ended December 31, 1997 and 1998 25 Notes to Financial Statements 26
20 21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Visual Edge Systems Inc.: We have audited the accompanying balance sheets of Visual Edge Systems Inc. as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Visual Edge Systems Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Miami, Florida, March 24, 1999 (except with respect to the matter discussed in Note 11, as to which the date is May 12, 1999). 21 22 VISUAL EDGE SYSTEMS INC. BALANCE SHEETS
DECEMBER 31, 1997 DECEMBER 31, 1998 ----------------- ----------------- ASSETS Current Assets: Cash and Cash Equivalents $ 224,429 $ 244,346 Certificates of Deposit 1,080,000 1,750,000 Accounts Receivable 23,917 26,893 Inventory 72,771 103,142 Prepaid Expenses - Advance Royalties 350,000 220,577 Other Current Assets 217,225 107,345 ---------------- ---------------- Total Current Assets 1,968,342 2,452,303 Fixed Assets, net 2,632,826 2,248,514 Intangible Assets, net 286,986 167,777 Prepaid Expenses - Advance Royalties 449 680,157 Investments-Restricted (Note 5(d)) 812,719 587,108 ---------------- ---------------- Total Assets $ 5,701,322 $ 6,135,859 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts Payable $ 344,884 $ 201,617 Accrued Expenses 173,605 167,795 Other Current Liabilities 121,266 218,259 Current Maturities of Equipment Loans 540,264 595,084 ---------------- ---------------- Total Current Liabilities 1,180,019 1,182,755 Equipment Loans 661,939 149,951 Convertible Debt 4,997,026 1,253,273 ---------------- ---------------- Total Liabilities 6,838,984 2,585,979 ---------------- ---------------- Commitments and Contingencies (Notes 5 and 9) STOCKHOLDERS' EQUITY (DEFICIT): Preferred Stock, $.01 par value, 5,000,000 shares authorized: Series A-2 convertible, none issued and outstanding at December 31, 1997 and 6,000 shares issued and outstanding at December 31, 1998 -- 6,000,000 Common Stock, $.01 par value, 20,000,000 shares authorized, 5,316,696 shares issued and outstanding at December 31, 1997 and 10,378,440 issued and outstanding at December 31, 1998 53,167 103,784 Additional Paid in Capital 12,427,394 17,748,379 Accumulated Deficit (13,618,223) (20,302,283) ---------------- ---------------- Total Stockholders' Equity (Deficit) (1,137,662) 3,549,880 ---------------- ---------------- Total Liabilities & Stockholders' Equity (Deficit) $ 5,701,322 $ 6,135,859 ================ ================
The accompanying notes are an integral part of these financial statements. 22 23 VISUAL EDGE SYSTEMS INC. STATEMENTS OF OPERATIONS
For the years ended December 31, -------------------------------- 1997 1998 ------------- ------------- Sales $ 1,381,111 $ 2,632,213 Cost of Sales 1,567,473 2,463,940 ------------- ------------- Gross (Loss) Profit (186,362) 168,273 ------------- ------------- Operating Expenses: General and Administrative 4,565,007 3,024,271 Selling and Marketing 2,072,537 1,036,713 Financing Fees 1,049,049 223,242 Non-cash Stock Compensation Expense 243,257 292,808 ------------- ------------- Total Operating Expenses 7,929,850 4,577,034 ------------- ------------- Operating Loss (8,116,212) (4,408,761) ------------- ------------- Other Income (Expenses): Interest Income 111,140 119,647 Interest Expense (508,080) (251,566) Amortization of Deferred Financing Fees (1,243,418) (306,112) ------------- ------------- Total Other Income (Expenses) (1,640,358) (438,031) ------------- ------------- Net Loss before Extraordinary Item (9,756,570) (4,846,792) Extraordinary item - write off of financing fees in connection with extinguishment of debt (999,000) -- --------------- ------------- Net Loss (10,755,570) (4,846,792) Preferred Stock dividend -- (1,837,268) --------------- ------------- Net Loss to common stockholders $ (10,755,570) $ (6,684,060) ============== ============= Basic and Diluted Loss per Share: Net Loss per Share before Extraordinary Item (2.05) (0.81) Extraordinary Item (0.21) -- -------------- ------------- Net Loss per Share $ (2.26) $ (0.81) ============== ============= Weighted average common shares outstanding 4,758,605 8,238,208 ============== =============
The accompanying notes are an integral part of these financial statements. 23 24 VISUAL EDGE SYSTEMS INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
Common Stock Additional ----------------- Preferred Paid-in Accumulated Shares Amount Stock Capital Deficit Total ------ ------ --------- ------------ ------------ ------------ Balance at December 31, 1996 4,615,000 $46,150 $ -- $ 6,481,159 $ (2,862,653) $ 3,664,656 Common stock issued in connection with the March bridge financing 100,000 1,000 -- 999,000 -- 1,000,000 Warrants issued in connection with the March bridge financing -- -- -- 665,000 -- 665,000 Common stock issued in connection with the Infinity financing 288,025 2,880 -- 1,755,619 -- 1,758,499 Warrants issued in connection with the Infinity financing -- -- -- 962,012 -- 962,012 Common stock issued for services 270,000 2,700 -- 997,300 -- 1,000,000 Options and warrants issued for services -- -- -- 458,237 -- 458,237 Exercise of options 25,000 250 -- 127,750 -- 128,000 Issuance of common stock for payment of interest on convertible debt 65,671 657 -- 333,101 -- 333,758 Repurchase and cancellation of common stock (47,000) (470) -- (351,784) -- (352,254) Net loss -- -- -- -- (10,755,570) (10,755,570) ----------- -------- ---------- ----------- ------------ ------------ Balance at December 31, 1997 5,316,696 53,167 -- 12,427,394 (13,618,223) (1,137,662) Preferred stock Series A convertible issued in connection with the Infinity financing -- -- 6,000,000 (2,178,942) -- 3,821,058 Cancellation of Preferred stock Series A convertible issued in connection with the Infinity financing -- -- (6,000,000) 6,000,000 -- -- Preferred stock Series A-2 convertible issued in connection with the Infinity financing -- -- 6,000,000 (6,000,000) -- -- Preferred stock embedded dividend -- -- -- 1,350,000 (1,350,000) -- Sale of preferred stock in connection with the Infinity financing -- -- 1,550,000 -- -- 1,550,000 Redemption of preferred stock in connection with the Infinity financing -- -- (1,550,000) -- -- (1,550,000) Issuance of common stock for payment of dividends on preferred stock 302,755 3,028 -- 484,240 (487,268) -- Issuance of common stock for payment of interest on convertible debt 80,989 809 -- 123,972 -- 124,781 Common stock and warrants issued in connection with the Infinity financing amendments 350,000 3,500 -- 260,909 -- 264,409 Common stock issued in connection with the Marion equity financing 4,010,000 40,100 -- 4,678,678 -- 4,718,778 Common stock and warrants issued in connection with the Greg Norman agreement 272,000 2,720 -- 290,088 -- 292,808 Issuance of common stock for payment of prepaid royalties 30,000 300 -- 299,700 -- 300,000 Exercise of options 16,000 160 -- 12,340 -- 12,500 Net loss -- -- -- -- (4,846,792) (4,846,792) ----------- -------- ---------- ----------- ------------ ------------ Balance at December 31, 1998 $10,378,440 $103,784 $6,000,000 $17,748,379 $(20,302,283) $ 3,549,880 =========== ======== ========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements. 24 25 VISUAL EDGE SYSTEMS INC. STATEMENTS OF CASH FLOWS
For the years ended December 31, --------------------------------------- 1997 1998 ------------------ ---------------- Operating activities: Net loss $ (10,755,570) $ (4,846,792) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash stock compensation expense 243,257 292,808 Non-cash stock financing fees 1,036,000 95,242 Non-cash interest expenses 333,758 124,781 Depreciation and amortization 1,128,964 851,258 Amortization of deferred financing expenses 1,243,418 306,112 Extraordinary Item 999,000 -- Changes in assets and liabilities: Increase in accounts receivable (23,917) (2,976) (Increase)/decrease in other current assets (136,469) 109,880 (Increase)/decrease in prepaid expense - advance royalties (50,000) 129,423 Increase in inventory (36,024) (30,371) Increase in other assets -- (154,097) Increase/(decrease) in accounts payable 11,770 (143,267) Decrease in accrued expenses (111,295) (5,810) Increase in other current liabilities 119,766 96,993 ----------------- ---------------- Net cash used in operating activities (5,997,342) (3,176,816) ----------------- ---------------- Investing activities: Capital expenditures (71,457) (347,737) Purchases of short-term investments (3,523,667) (3,750,000) Proceeds from the sale of short-term investments 3,500,000 3,080,000 ----------------- ---------------- Net cash used in investing activities (95,124) (1,017,737) ----------------- ---------------- Financing activities: Proceeds from the issuance of common stock -- 4,718,778 Exercise of options 128,000 12,500 Repurchase common stock (352,254) -- Repayment of borrowings (4,351,968) (516,808) Payments of financing costs (340,000) -- Proceeds from borrowings 11,000,000 -- ----------------- ---------------- Net cash provided by financing activities 6,083,778 4,214,470 ----------------- ---------------- Net change in cash and cash equivalents (8,688) 19,917 Cash and cash equivalents at beginning of period 233,117 224,429 ----------------- ---------------- Cash and cash equivalents at end of period $ 224,429 $ 244,346 ================= ================ Supplemental disclosure of cash flow information: Cash paid for interest $ 174,069 $ 117,279 ================= ================
The accompanying notes are an integral part of these financial statements. 25 26 VISUAL EDGE SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 (1) BACKGROUND Visual Edge Systems Inc. (the "Company") was organized to develop and market personalized videotape golf lessons featuring ONE-ON-ONE instruction by professional golfer Greg Norman. The Company has developed video production technology 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 ONE-ON-ONE videotape golf lesson. The Company sells its products under the name "ONE-ON-ONE WITH GREG NORMAN". The Company was incorporated in July 1994 and commenced developmental operations in January 1995. From the Company's inception through the end of December 31, 1996, it was primarily engaged in product development, market development, technology testing, recruitment of key personnel, capital raising and preparation of the software, hardware and videotape coaching instructions used in the production of its products. As a consequence, the Company did not generate any revenue and operated as a development stage company through December 31, 1996. The Company emerged from its development stage and commenced generating revenue from its primary business activities during the first quarter of fiscal 1997. The Company's marketing strategy is to sell ONE-ON-ONE videotapes to (a) various organizers of amateur corporate, charity and member golf tournaments (who typically offer gifts to tournament participants), golf professionals at private and daily fee golf courses and driving ranges and indoor event planners who organize trade shows, conventions, sales meetings, retail store openings and promotions and automobile dealer showroom promotions, (b) corporations who will give the ONE-ON-ONE WITH GREG NORMAN lesson as customer and employee appreciation gifts instead of gifts such as golf balls with logos, fruit baskets or chocolates, (c) individual golfers or persons who wish to give a gift to a golfer via the Internet or a planned thirty minute infomercial, and (d) corporations who will use the ONE-ON-ONE product as an incentive to entice individuals to purchase or use their product or service. To implement its marketing and business strategy, the Company has built 17 mobile ONE-ON-ONE production facilities ("vans") equipped with video and personal computer equipment to market, promote and produce the Company's products. The Company locates its ONE-ON-ONE vans in selected geographic areas that service golf courses and driving ranges throughout the United States, and has placed its first vans in Arizona, California, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, Texas and Ontario, Canada. The vans travel to golf courses and corporate events to film participants and produce the ONE-ON-ONE lessons on-site. The Company has also opened authorized ONE-ON-ONE videotaping centers in key 26 27 cities throughout the country which allow recipients of ONE-ON-ONE gift certificates or certificates which may in the future be obtained through a planned infomercial to redeem their certificates and receive their personalized ONE-ON-ONE video golf lesson. These videotaping centers are permanent, part time locations which the Company has developed in partnership with existing retail establishments such as driving ranges, golf courses, automobile dealerships and other retailers. In 1998, almost 100% of the Company's revenue was derived from van service. The Company expects that the videotaping centers will account for less than 10% of sales during 1999, although this amount may be affected by the impact of the planned infomercial. The infomercial has been completed and is currently awaiting approval from Greg Norman and Great White Shark Enterprises, Inc. The Company expects to begin testing the infomercial in May in three markets. The Company has incurred no costs related to the infomercial's development, because it licensed development rights to an independent third party infomercial company. Delays in testing the infomercial have been related to editing delays by the third party. The Company is marketing the gift certificate program as a corporate incentive and promotional product and is selling the certificates directly to golfers via the Company's web site. Sales to corporations are handled by the Company's sales force and independent sales representatives. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) ACCOUNTING 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (B) REVENUE RECOGNITION Revenue from sale of event days or individual personalized videotapes is recognized when the Company completes the event day or delivers the videotapes to the individual customer. Deposits received in advance of videotape delivery are recorded as customer deposits which are included in other current liabilities in the accompanying balance sheets. (C) CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. At December 31, 1997 and 1998, substantially all cash and cash equivalents are interest-bearing deposits. 27 28 (D) INVENTORIES The Company's inventory consists exclusively of videotapes. Inventory is stated at the lower of weighted average or cost or market. In evaluating whether inventory is stated at the lower of cost or market, management considers factors such as the amount of inventory on hand, estimated time to sell such inventory and current market conditions. (E) FIXED AND INTANGIBLE ASSETS Fixed assets are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets which range from 3 to 5 years. Intangible assets consist primarily of video production costs. The costs of video production are amortized on a straight-line basis over a period of 4 years, the estimated useful lives of the intangible assets. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Under the provisions of this statement, the Company has evaluated its long-lived assets for financial impairment, and will continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets and certain identifiable intangibles to be held and used by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, there were no adjustments to the carrying value of long-lived assets in 1997 or 1998. The Company evaluates the recoverability of long-lived assets held for sale by comparing the asset's carrying amount with its fair value less cost to sell. No assets were held for sale as of December 31, 1997 or 1998. (F) PREPAID EXPENSES-ADVANCE ROYALTIES As described in Note 9(a), prior to December 31, 1998, the Company was required to pay minimum guaranteed advances against a royalty of 8% of all revenues. On December 31, 1998 an amendment to the royalty agreement was signed which eliminated the post December 31, 1998 minimum guaranteed royalty payments and increased the royalty to 13% of all revenues (8% to be paid annually/quarterly/monthly in cash and 5% to be applied against past royalty amounts). Once the Company's revenues exceed $24,172,000 the royalty is to be reduced to 8%. The guaranteed minimum royalty payments were capitalized and expensed as the related revenues were earned. Additionally, the Company continually evaluates the expected realization of the carrying value of the prepaid royalty and, if necessary, reduces the carrying value to reflect management's best estimate of the amounts to be recovered in future periods. 28 29 Through December 31, 1998 payments in cash and shares of the Company's common stock of $1,600,000 had been made under the agreement of which $250,000 and $449,266 was expensed in cost of goods sold in the accompanying statement of operations during the years ended December 31, 1997 and 1998, respectively, and $350,000 and $900,734, is included in prepaid expenses and other assets in the accompanying balance sheets as of December 31, 1997 and 1998, respectively. (G) INCOME TAXES In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred tax assets or liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance would be included in the provision for deferred income taxes in the period of change. (H) CONCENTRATION OF CREDIT RISK The Company has no significant off-balance sheet concentrations of credit risk. (I) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, certificates of deposit, investments, accounts receivable, and other current assets as well as accounts payable, accrued expenses and other current liabilities as reflected in the accompanying balance sheets approximate fair value due to the short-term maturity of these instruments. The fair value of equipment loans and the convertible debt is estimated using an appropriate valuation method and approximates the carrying amounts reported in the accompanying balance sheets. (J) LOSS PER SHARE The Company adopted SFAS No. 128, "Earnings Per Share" during 1997. SFAS No. 128 establishes standards for computing and presenting basic and diluted earnings per share. Basic loss per share is calculated by dividing loss available to Common Stockholders by the weighted average number of shares of Common Stock outstanding during each period. Diluted loss per share includes the potential impact of dilutive common share equivalents using the treasury stock method. As of December 31, 1997 and 1998 shares of Common Stock issuable upon conversion of convertible debt and Preferred Stock and the exercise of outstanding options and warrants have been excluded from the computation of diluted loss per share in the accompanying statements of operations as their impact is antidilutive. 29 30 (K) STOCK OPTION PLAN Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," companies can either measure the compensation cost of equity instruments issued under employee compensation plans using a fair value based method, or can continue to recognize compensation cost using the intrinsic value method under the provisions of Accounting Principles Board ("APB") Opinion No. 25. The Company intends to recognize compensation costs, where appropriate, under the provisions of APB No. 25, and has provided the expanded disclosure required under SFAS No. 123 for the years ending December 31, 1997 and 1998(see Note 8). (L) RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which is required to be adopted in fiscal years beginning after December 15, 1997. This statement requires the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity during the financial reporting period of a business enterprise resulting from non-owner sources. The Company adopted SFAS No. 130 on January 1, 1998. The adoption of SFAS No. 130 did not have a material impact on the Company's financial position or results of operations as comprehensive income is equal to net income for all periods presented. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for reporting information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. The Company adopted SFAS No. 131 effective December 31, 1998. The adoption of SFAS No. 131 did not affect the Company's disclosure requirements since the Company operates in only one segment. SFAS No. 133 ,"Accounting for Derivative Instruments and Hedging Activities", is effective for fiscal years ending after June 15, 1999. This statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or a liability at its fair value. The Company adopted SFAS 133 in 1999 and expects that the adoption of this pronouncement will not have a material impact on the Company's financial position since the Company does not presently have any derivative or hedging-type investment as defined by SFAS 133. 30 31 In April 1998, the American Institute of Certified Public Accountants (the "AICPA") issued a Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs associated with pre-opening, pre-operating and organization activities to be expensed as incurred. The Company's accounting policies conform with the requirements of SOP 98-5, therefore adoption of this statement will not impact the Company's financial position or results of operations. (3) FIXED ASSETS, NET Fixed assets, including equipment and mobile production units acquired under capital leases, consist of the following at December 31, 1997 and 1998:
LIVES 1997 1998 (YEARS) ---------- ---------- ------- Mobile video-tape production units $2,394,704 $2,696,553 5 Product development equipment 489,149 523,224 3 - 5 Training and processing equipment 116,271 117,725 5 Office furniture and equipment 382,399 392,759 5 Trade show exhibits 146,657 146,657 5 ---------- ---------- 3,529,180 3,876,918 Less accumulated depreciation (896,354) (1,628,404) ---------- ----------- Fixed assets, net 2,632,826 2,248,514 ========== ===========
(4) INTANGIBLE ASSETS, NET Intangible assets consist of the following at December 31, 1997 and 1998:
1997 1998 --------- --------- Video and marketing production costs $ 447,404 $ 447,404 Deferred organizational costs 29,428 29,428 --------- --------- 476,832 476,832 Less accumulated amortization (189,846) (309,055) --------- --------- Intangible assets, net $ 286,986 $ 167,777 ========= =========
(5) FINANCINGS (A) MARCH 1997 BRIDGE FINANCING In March 1997, the Company consummated a bridge financing (the "March Bridge Financing") pursuant to which it issued to 13 investors (including Status-One Investments Inc., a company controlled by the family of the Chief Executive Officer of the Company), a non-cash financing fee of (i) 100,000 shares of common stock and (ii) 100,000 warrants to purchase 100,000 shares of common stock at a price of $10.00 per share, subject to adjustment in certain circumstances. As consideration for such securities, the investors in the March Bridge Financing pledged an aggregate of $3,500,000 in cash and other marketable securities as cash collateral (the "Cash Collateral") to various banks, which in turn issued stand-by letters of credit (the "Letters of Credit") to the Company in 31 32 the aggregate amount of up to $3,500,000. The Company used the Letters of Credit to secure a $3,500,000 line of credit (the "Line of Credit") from a bank. In June 1997, the Company used a portion of the proceeds from the issuance and sale of certain securities, outlined hereafter in note 5(b), to repay the remaining outstanding balance due and owing on the Line of Credit and returned the Letters of Credit to the various banks, which in turn returned all of the Cash Collateral to the March Bridge Financing investors. The Company valued the non-cash financing fee in accordance with SFAS No. 123, which resulted in the recording of original issue discounts and financing fees of $1,665,000. At the time of the repayment of the outstanding balance due under the Line of Credit, the Company had amortized $666,000 of the fees. The remaining fees of $999,000 are reflected as an extraordinary item in the accompanying statement of operations for the year ended December 31, 1997. (B) INFINITY FINANCING On June 13, 1997, the Company arranged a three-year $7.5 million debt and convertible equity facility (the "Infinity Financing") with a group of investment funds (the "Funds"). The Company issued and sold to the Funds the following securities pursuant to the Securities Purchase Agreement, dated as of June 13, 1997 (the "Agreement"), among the Company and the Funds: (i) 8.25% unsecured convertible notes (the "Notes") in the aggregate principal amount of $7,500,000 with a maturity date of three years from the date of issuance, subject to the mandatory automatic exchange of $5 million of the Notes for Preferred Stock, par value $.01 per share, which Notes were convertible into shares of Common Stock (the "Note Conversion Shares") at any time and from time to time commencing January 1, 1998 at the option of the holder thereof subject to certain limitations on conversion set forth in the Agreement; (ii) 93,677 shares of Common Stock subject to adjustment (the "Grant Shares"); and (iii) five-year warrants (the "June Warrants") to purchase 100,000 shares of Common Stock (the "Warrant Shares") at an exercise price equal to $10.675. The net proceeds to the Company from the sale of the Notes, Grant Shares and June Warrants was $7,236,938. In addition, the Company issued 14,052 shares (the "IPO Underwriters Shares") of Common Stock to the underwriter in the Company's initial public offering as a fee for services rendered in connection with the transactions contemplated by the Agreement. Pursuant to the Agreement, the Company was required to issue additional Grant Shares (the "Additional Grant Shares") to the Funds in the event that the closing bid price of Common Stock for each trading day during any consecutive 10 trading days from June 13, 1997 through December 31, 1997 did not equal at least $10.00 per share. The Company issued 180,296 Additional Grant Shares during the fourth quarter of 1997. Interest payments on the Notes are, at the option of the Company, payable in cash or in shares of Common Stock. During 1997 and 1998 the Company issued an aggregate of 65,671 shares and 80,989 shares, respectively, (collectively, the "Interest Shares") for payment of interest due. 32 33 On February 6, 1998, the Company entered into the First Amendment to the Securities Purchase Agreement and Related Documents, dated December 31, 1997 (the "First Amendment"), among the Company and the Funds. Pursuant to the First Amendment, the Funds converted $6 million aggregate principal amount of the Notes into the Company's Series A Convertible Preferred Stock (the "Preferred Stock"). In addition, the "Maximum Conversion Price" (as defined in the First Amendment) at which shares of Preferred Stock are convertible into Common Stock (the "Stock Conversion Shares") is $6.00, subject to adjustment in certain circumstances. Dividends on the Preferred Stock and the Series A-2 Preferred Stock (as hereinafter defined) are, at the option of the Company, payable in cash or in shares of Common Stock. During 1998 the Company issued an aggregate of 302,755 shares (the "Dividend Shares") for payment of dividends. The remaining $1.5 million of outstanding Notes held by the Funds have become secured debt pursuant to a Security Agreement, dated as of February 6, 1998 (the "Security Agreement"), between the Company and H.W. Partners, L.P., as agent for and representative of the Funds. With respect to such $1.5 million in outstanding Notes, the Funds have been granted a security interest in the collateral described in the Security Agreement, which includes all of the Company's unrestricted cash deposit accounts, accounts receivable, inventory and equipment and fixtures excluding the vans. In connection with the First Amendment, the Company issued to the Funds an aggregate of 200,000 warrants (the "New Warrants"), each to purchase one share of Common Stock (collectively, the "New Warrant Shares") at an exercise price equal to $4.00 per share. The issuance of the Grant Shares, Additional Grant Shares, June Warrants, IPO Underwriters Shares and the New Warrants resulted in the recording of financing costs of $2,720,511. Additionally, the Company paid financing costs of $340,000 in connection with the Agreement. As $5 million of the Notes were automatically convertible to Preferred Stock as of January 1, 1998, the total financing fees incurred were allocated to equity and debt costs on a pro rata basis consistent with the portion of the Notes subject to the automatic conversion feature. Part of the financing has been recorded as a reduction of the carrying value of the Notes, while the portion of the financing fees attributable to debt costs are recorded as an original issue discount and are being amortized using a method which approximates the interest method over the term of the Notes. On March 16, 1998, the Company sold an additional 1,550 shares of Preferred Stock to the Funds in exchange for marketable securities with an aggregate value of $1,550,000. In connection therewith, the Funds as the holders of the majority of the outstanding shares of Preferred Stock, obtained the right to appoint one director to the Company's Board of Directors, although they had not named such director as of December 31, 1998. 33 34 As a condition to the consummation of the Marion Equity Financing (as defined and described under "Marion Equity Financing" in Note 5(c)), the Company entered into the Agreement and Second Amendment to Bridge Securities Purchase Agreement and Related Documents (the "Second Amendment"), dated March 27, 1998, among the Company and the Funds. Pursuant to the Second Amendment, the Funds agreed that they would not convert, prior to December 31, 1998, any shares of Preferred Stock or any principal amount of the Notes into shares of Common Stock, unless a "Material Transaction" (defined as a change of control of the Company, a transfer of all or substantially all of the Company's assets or a merger of the Company into another entity) has occurred. Further, the Funds agreed that they would not, prior to March 31, 1999, publicly sell any shares of Common Stock owned or acquired by the Funds, unless a Material Transaction has occurred; the Funds are permitted, after June 30, 1998 and subject to the Company's right of first refusal, to privately sell any shares of Common Stock that they own or acquire, provided the purchaser agrees in writing to be bound by the same resale restrictions. The Funds have granted to the Company an option to redeem the Preferred Stock and the Notes owned by the Funds. The Company is required to redeem all of the Preferred Stock outstanding prior to redemption of any of the Notes. In addition, the Funds have granted to the Company and to Marion (as hereafter defined) an option to acquire, on or before March 31, 1999, all of the shares of Common Stock owned by the Funds. In connection with the Second Amendment, the Funds received 100,000 shares of Common Stock. Furthermore, because the Company did not redeem all of the Preferred Stock and Notes owned by the Funds by June 30, 1998, the Funds received 200,000 additional shares of Common Stock. Further, the exercise price of the June Warrants was reduced from $10.675 per share to $3.25 per share and the exercise price of the New Warrants was reduced from $4.00 per share to $3.25 per share. The fair values of the issuances of Common Stock and the repricing of the warrants have been recorded as an original issue discount and are being amortized using a method which approximates the interest method over the term of the Notes. The unamortized portion of the original issue discount was $246,727 at December 31, 1998. On December 29, 1998, the Company entered into the Third Amendment to Bridge Securities and Purchase Agreement and Related Documents (the "Third Amendment"), among the Company and Funds (or, if applicable, their respective transferees) (the "New Funds"). Pursuant to the Third Amendment, the Company agreed to retire all of the issued and outstanding shares of its Series A Convertible Preferred Stock and, in exchange therefor, issue to the New Funds 6,000 shares of a new class of Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred Stock"). The Series A-2 Preferred Stock is senior to the Common Stock with respect to dividends, liquidation and dissolution. Prior to January 1, 2000, no dividends shall accrue or be payable on the Series A-2 Preferred Stock. Beginning on January 1, 2000, each share of Series A-2 Preferred Stock shall entitle the holder to an annual dividend of 8.25%, payable on a quarterly basis, which dividend shall increase to 18% in certain situations as specified in the Certificate of Designation with respect to the Series A-2 Preferred Stock. 34 35 The Third Amendment also revised the conversion price at which the Notes may be convertible into Common Stock, at which the Series A-2 Preferred Stock may be convertible into Common Stock (the "Series A-2 Conversion Shares") and required future interest payments on the Notes to be made in cash. The "Conversion Price" (as defined in the Third Amendment) applicable to the Company's outstanding Convertible Notes is $2.50 until January 1, 2000, inclusive, and $1.25 thereafter. The Conversion Price applicable to the Series A-2 Preferred Stock is (i) for the first $2,000,000 of aggregate liquidation preference of the Series A-2 Preferred Stock, $1.25, (ii) for the next $1,000,000 of aggregate liquidation preference of the Series A-2 Preferred Stock, $2.00 until June 30, 1999, inclusive, $1.375 from July 1, 1999 until January 1, 2000, inclusive, and $1.25 thereafter, and (iii) for any excess amounts of aggregate liquidation preference of the Series A-2 Preferred Stock, $2.50 until June 30, 1999, inclusive, $2.00 from July 1, 1999 until January 1, 2000, inclusive, and $1.25 thereafter. The New Funds agreed to a limitation on their conversion rights, such that they may not convert any amount of convertible instruments or exercise any portion of warrants that would result in the sum of (a) the number of shares of Common Stock beneficially owned by the New Funds and their affiliates and (b) the number of shares of Common Stock issuable upon conversion of convertible instruments or exercise of warrants, exceeding 9.99% of the outstanding shares of Common Stock after giving effect to such conversion or exercise. The Third Amendment removed resale limitations on the New Funds. Furthermore, as a means of retaining the Company's management and as an incentive for such management to pursue the Company's long-term goals, the Third Amendment provided that all outstanding stock options granted to the Chief Executive Officer, the President and Chief Operating Officer, and the Vice President of Operations and Technology be repriced to $1.00 per share and that all such options shall be immediately vested. The Company also agreed to reprice to $1.00 per share approximately 82,000 existing employee stock options, all such options to be immediately vested. In addition, the New Funds also returned to the Company the June Warrants and the New Warrants to purchase an aggregate of 284,000 shares, and the Company repriced 16,000 of these warrants to market value at $.781 per share that were exercised pursuant to the Third Amendment (as described below), provided that options to purchase 200,000 shares of Common Stock be granted to the President and Chief Operating Officer and options to purchase 100,000 shares of Common Stock be granted to the Vice President of Operations and Technology, all such options to be immediately vested and to have an exercise price of $1.00 per share. The unamortized portion amounting to $65,000 of the original issue discount associated with the June Warrants and New Warrants has been fully amortized in 1998. Moreover, the Company granted 200,000 new stock options to the President and Chief Operating Officer, all such options to be immediately vested and to have an exercise price of $1.00 per share. In connection with the Third Amendment the Company paid financing costs of $25,000, issued 50,000 shares of Common Stock and issued 100,000 options, 50,000 with an exercise price of $3.00 per share and 50,000 with an exercise price of $1.00 per share, for the facilitation of the agreement. The fair market value of these payments and issuances of $95,125 are recorded as financing fees in the accompanying 1998 statements of operations. 35 36 Lastly, the New Funds agreed in the Third Amendment to exercise warrants to purchase shares of Common Stock to result in a total exercise price of approximately $12,500. Pursuant to this provision 16,000 shares were issued. (C) MARION EQUITY FINANCING In March 1998, the Company entered into a Purchase Agreement (the "Marion Agreement") with Marion Interglobal, Ltd., an investment group ("Marion"), or its assigns. The Marion Agreement called for the Company to receive up to $11,000,000 from Marion in exchange for shares of Common Stock as explained herein. Pursuant to the Marion Agreement, the purchase of Common Stock was to occur in three tranches as follows: (i) on March 27, 1998, the Company sold to Marion 1,200,000 shares of Common Stock for an aggregate consideration of $3,000,000 which was received on April 16, 1998; (ii) on June 30, 1998, the Company sold to Marion 800,000 shares of Common Stock for an aggregate consideration of $2,000,000; and (iii) on or prior to September 30, 1998 the Company was to sell a number of shares of Common Stock (to be determined by when the closing occurs, which would range from 2,666,667 shares to 3,200,000 shares) for an aggregate consideration of $6,000,000. The third tranche was contingent on Marion's satisfaction that the Company met or exceeded certain unspecified financial targets expected by Marion, in its sole discretion. Marion was under no firm obligation to complete this tranche. The third tranche of the Marion Agreement was not completed by Marion due to market conditions. The Company paid transaction fees to Marion upon completion of each tranche as follows: (i) 1,200,000 shares of Common Stock for the first $3,000,000 tranche; and (ii) 800,000 shares of Common Stock for the second $2,000,000 tranche. The Company issued an additional 10,000 shares as a finders fee in connection with this financing. Further, upon the consummation of the second tranche of the Marion Agreement, Mr. Alan Lubell, a former director of the Company, transferred 250,000 shares of Common Stock to Marion, which shares were registered under the Securities Act of 1933, as amended, effective April 15, 1998. Pursuant to the Marion Agreement, Marion represented a group of investors and was entitled to assign its rights to receive shares of Common Stock from the Company and Mr. Lubell. Marion exercised this right and allocated the shares of Common Stock from the Company and Mr. Lubell to various unrelated investors and retained 876,000 shares for its own account. Marion is controlled by Ronald Seale who became Chairman of the Board of the Company on June 3, 1998 and presently holds 976,000 shares of Common Stock. As a condition to the consummation of this equity financing, the Company renegotiated the terms of its outstanding Notes and Preferred Stock with the Funds (see Infinity Financing and Note 5(b) for details). 36 37 (D) EQUIPMENT LOANS In August 1997, the Company entered into an equipment financing facility whereby the Company will be provided with up to $2.5 million in financing. The facility provides the Company with equipment financing of $100,000 per van for 25 vans, each of which is anticipated to cost approximately $150,000. The Company drew $800,000 on the facility to finance eight vans purchased in May 1997. The outstanding balance bears interest at the rate of 11.62% and is payable in 36 consecutive monthly payments of $25,328 which commenced in August 1997, followed by one balloon payment of $47,040. The Company has pledged to the lender a certificate of deposit in the aggregate amount of $200,000 in connection with the financing of the first eight vans which is included in "Investments-Restricted" in the accompanying December 31, 1997 and 1998 balance sheets. The Company acquired certain fixed assets under capital leases totaling $913,170. As a condition of the leases the Company is required, throughout the term of the leases, to post letters of credit in the aggregate amount of, the lesser of $538,902 or the outstanding aggregate loan balance, for collateral on the leases. The letters of credit were issued from the Company's bank and the Company pledged one of its investment funds with a balance of $612,719 and $387,108 for the years ending December 31, 1997 and 1998, respectively, as security, which is included in "Investments-Restricted" in the accompanying December 31, 1997 and 1998 balance sheets. Future payments under the facility and capital leases are as follows:
FACILITY CAPITAL LEASE TOTAL -------- ------------- ----- For the year ended December 31, 1999 $ 353,172 $ 303,936 $ 657,108 2000 41,957 224,336 266,293 --------- --------- --------- 395,129 528,272 923,401 Less amount representing interest (52,991) (25,915) (78,906) --------- --------- --------- Present value payments 342,138 502,357 844,495 Less current portion (265,406) (329,678) (595,084) --------- --------- --------- Non current portion $ 76,732 $ 172,679 $ 249,411 ========= ========= =========
In connection with the Equipment Financing, the Company issued warrants to purchase 75,000 shares of the Company's common stock at a price per share of $10.00 (subject to adjustment in certain circumstances) at any time prior to August 20, 2000. The fair value of the warrants ($178,980) was recorded as an original issue discount and is being amortized using a method which approximates the interest method over the term of the equipment financing. The unamortized portion of the original issue discount is $159,099 and $99,460 at December 31, 1997 and 1998, respectively. 37 38 (E) FINANCING FEES In 1997 two companies provided consulting services to the Company in an attempt to identify financing sources. One of the companies, in exchange for its services, received 270,000 shares of the Company's common stock with a fair market value of $1,000,000, which is included in financing fees in the accompanying 1997 statement of operations. The other company, in exchange for its services, received 10,548 options to purchase the Company's common stock at an exercise price of $7.50 per share, with a fair market value of $36,000, which is included in financing fees in the accompanying 1997 statement of operations. The 10,548 options were cancelled in 1998. (6) COMMON STOCK In July 1996, the Company sold 1,395,000 shares of common stock and 1,495,000 redeemable warrants (the "IPO Warrants") to the public. The IPO Warrants are exercisable and grant the holder the right to purchase one share of Common Stock at a price of $5.00 per share, subject to adjustment in certain circumstances. The IPO Warrants are redeemable by the Company, upon the consent of the IPO underwriter, at a price of $.10 per Warrant, and subject to the terms set forth therein. In the event that the Company calls the IPO Warrants for redemption, it will be economically advantageous for the warrant holders to exercise the IPO Warrants, resulting in the issuance by the Company of up to 1,495,000 additional shares of Common Stock. As of December 31, 1998, none of the warrants issued in connection with the Company's IPO have been exercised. In addition, the Company issued to the IPO underwriters 260,000 warrants to purchase Common Stock at a price of $6.90 per share. A summary of Common Stock reserved for potential future issuances as of December 31, 1998 is as follows:
IPO warrants at $5.00 per share (Note 6) 1,495,000 Warrants issued to the IPO underwriter at $6.90 per share 260,000 Stock option plan for officers, directors and employees consultants (Note 8) 1,649,039 Warrants issued in connection with 1997 March Bridge Financing at $10.00 per share (Note 5a) 100,000 Equipment financing warrants at $10.00 per share (Note 5d) 75,000 Options granted to Greg Norman at $1.00 per share (Note 9a) 125,000 Options granted to consultants in accordance with the Infinity Financing Third Amendment at $1.00 per share (Note 5b) 50,000 Options granted to consultants in accordance with the Infinity Financing Third Amendment at $3.00 per share (Note 5b) 50,000 --------- 3,804,039 =========
(7) INCOME TAXES As of December 31, 1997 and December 31, 1998, the Company had approximately $5,011,000 and $6,893,000, respectively, of net deferred tax assets resulting primarily from net operating loss carryforwards. Due to the uncertainty of the Company's ability to generate sufficient taxable income in the future to utilize such loss carryforwards, the net deferred assets have been fully reserved as of December 31, 1997 and 1998. 38 39 As of December 31, 1998 the Company's net operating loss carryforward is approximately $19,137,000 and expires as follows: 2011 $ 3,067,000 2012 10,557,000 2013 5,513,000 ----------- $19,137,000 =========== (8) STOCK OPTION PLAN In April 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"), which provides for the granting to directors, officers, key employees and consultants the greater of 800,000 shares of common stock (reduced by the number of options which may be granted to two executive officers pursuant to their employment agreements) or 12% of the aggregate number of the Company's common stock outstanding, whichever is greater. 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. The term of any option may not exceed ten years (unless granted as an incentive stock option to a 10% or more stockholder, which terms may not exceed five years). In February of 1997, the Plan was amended to increase the number of shares reserved for issuance to the greater of 1,200,000 or 12% of the Company's common stock outstanding and to include a provision allowing the compensation committee to issue options under the Plan at below fair market value. 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. The exercise price of the option may not be less than 100% of the market value of the Company's common stock at the time of grant. Such options vest one-third on the date of the grant and one-third on the first two anniversary dates and have a term of five years. The Company applies APB Opinion No. 25 in accounting for its Plan. Had the Company determined compensation cost based on fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and net loss per share for the years ended December 31, 1997 and 1998 would have increased to $12,575,665 and $2.64 and $7,525,041 and $.91, respectively. 39 40 Stock option activity during the periods is indicated as follows:
Weighted Average Number of Shares Exercise Price ---------------- ---------------- Balance at December 31, 1996 787,871 $5.00 Granted 223,548 $7.07 Exercised (25,000) $5.12 Forfeited (38,000) $5.75 ---------- ----- Balance at December 31, 1997 948,419 $5.46 Granted 1,321,500 $1.00 Forfeited (395,880) $5.45 ---------- ----- Balance at December 31, 1998 1,874,039 $2.32 ========== =====
At December 31, 1997 and December 31, 1998, 504,124 and 1,780,633 options were exercisable, respectively. At December 31, 1998, the weighted-average exercise price and weighted-average remaining contractual life of outstanding options was as follows:
Outstanding Exercisable --------------------- ----------------------- Weighted- Weighted Average Weighted- Average Reamining Average Exercise Exercise Contractual Exercise Price Shares Price Life Shares Price ----- ------ ----- ---- ------ ----- $ 1.00 1,734,889 $ 1.00 8.44 1,732,389 $ 1.00 3.00 50,000 3.00 1.50 -- -- 5.00-5.75 84,150 5.04 7.53 44,911 5.03 10.75 5,000 10.75 3.00 3,333 10.75 ----------- --------- ------ ---- --------- ------ $1.00-10.75 1,874,039 $ 1.26 8.20 1,780,633 $ 1.12 =========== ========= ====== ==== ========= ======
The fair value of each option grant is estimated on the date of grant using an option pricing model with the following assumptions used for grants in 1997 and 1998: risk free interest rate of 6.3% for 1997 and 4.8% for 1998; expected lives of 1.5 to 5 years; and expected volatility of 70%. (9) COMMITMENTS AND CONTINGENCIES (A) LICENSE AGREEMENT In 1995 the Company entered into a license agreement (the "Norman Agreement") with Greg Norman, a professional golfer, and Great White Shark Enterprises, Inc. ("Great White Shark"), pursuant to which the Company was granted a worldwide license to use Mr. Norman's name, likeness, endorsement and certain trademarks in connection with the production and promotion of the Company's products. Under the Norman Agreement, Mr. Norman received guaranteed minimum payments against royalties of 8% of all net revenues, as defined, derived from the sale of ONE-ON-ONE videotapes. 40 41 In 1996 certain principal stockholders of the Company transferred an aggregate of 300,000 shares of Common Stock owned by them to Mr. Norman pursuant to an option held by Mr. Norman. In 1997 the Norman Agreement was further amended to restructure the terms of the guaranteed minimum payments due to Mr. Norman under the Norman Agreement. The Company granted to Mr. Norman 25,000 options to purchase shares of the Company's Common Stock at an exercise price of $10.00 per share and recorded non-cash marketing expenses of $93,132 related to the options. On December 31, 1998, the Norman Agreement was further amended to eliminate the guaranteed minimum payments to Mr. Norman; increase the royalty to Mr. Norman to (i) 13% of all revenue derived from aggregate sales of the ONE-ON-ONE WITH GREG NORMAN products commencing January 1, 1999, until aggregate sales shall total $24,172,000, and (ii) 8% of all revenue derived from aggregate sales of the ONE-ON-ONE WITH GREG NORMAN products thereafter. Payments are to be paid 8% in cash and 5% applied to offset the excess of prior guaranteed minimum payments over 8% of net revenues in prior years. After the initial term, which ends on December 31, 2001, the Company has the option to renew the Norman Agreement for two additional five-year periods with a fee of $500,000 per renewal term. The accompanying balance sheets include prepaid royalties of $350,000 and $900,734 at December 31, 1997 and 1998, respectively. The amount that is expected to be amortized within twelve months has been classified as a current asset of $220,577 on the accompanying 1998 balance sheet. The remaining balance of the payments made to Mr. Norman is a long-term prepaid royalty of $680,157 which is included in the accompanying 1998 balance sheet. As consideration for entering into the December 1998 amendment, the Company paid Mr. Norman a fee equal to (i) 272,000 shares of the Company's Common Stock, (ii) an option to purchase 100,000 shares of the Company's Common Stock with an exercise price of $1.00 per share, such options to be immediately vested, and (iii) 25,000 options currently held by Mr. Norman, repriced to $1.00 per share. The Company recorded a non-cash compensation expense of $292,808 related to the December 1998 amendment. Through December 31, 1997, the Company made payments to Mr. Norman amounting to $600,000. These payments, less $250,000 which was expensed and is included in the 1997 statement of operations as a cost of sales, are presented in the accompanying 1997 balance sheet as prepaid expenses-advance royalties. The remaining $350,000 is included in the accompanying 1997 balance sheet as prepaid expenses-advance royalties. Through December 31, 1998 the Company made additional payments to Mr. Norman totaling $1,000,000, of which $700,000 was paid in cash and the balance in the form of 30,000 shares of the Company's Common Stock valued at $10.00 per share. The Company expensed $450,000 of the advance royalty which is presented in the 1998 statement of operations as a cost of sales. The remaining balance is included in current assets-prepaid royalties and other assets-prepaid royalties in the accompanying 1998 balance sheet. 41 42 (B) EMPLOYMENT AGREEMENTS The Company currently has employment agreements with three executive employees which expire on December 31, 2000. The agreements provide for aggregate minimum annual compensation of approximately $480,000 in 1998, $540,000 in 1999 and $600,000 in 2000. The agreements are automatically renewed thereafter for additional one-year periods unless the Company or the employees provide timely notice of termination. The agreements also provide for potential performance bonuses and severance payments ranging from three to twelve months. (C) OPERATING LEASES The Company has one noncancelable operating lease for corporate office space that expires in 1999. Rental payments include minimum rentals plus building expenses. Rental expense for these leases during 1997 and 1998 was $107,863 and $108,374, respectively. Future minimum lease payments under these leases are $78,398 in 1999. (D) SIGNIFICANT AND CONTINUING LOSSES For the period from July 15, 1994 (inception) to December 31, 1998, the Company incurred an accumulated deficit of $20,302,283. The Company believes that it will incur continuing losses until, at the earliest, the Company generates sufficient revenues to offset the substantial operating costs associated with commercializing its products. (E) UNCERTAINTY OF PROPOSED PLAN OF OPERATION The Company's plan of operation and prospects are largely dependent upon the Company's ability to achieve significant market acceptance for its products and realize sufficient sales to offset its operating expenses. There can be no assurance that the Company will be able to continue to implement a business plan that insures profitability. Failure to successfully implement its business plan would result in closure of the business. The Company's ONE-ON-ONE personalized videotape golf lesson is a new business concept and, accordingly, demand and market acceptance for the Company's products is subject to a high level of uncertainty. Achieving market acceptance for the Company's products will require significant efforts and expenditures by the Company to create awareness and demand. The Company's prospects are significantly affected by its ability to successfully build an effective sales organization. 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 products. Management believes that projected 1999 revenues, when combined with planned cost savings and existing financial resources will be sufficient to fund operations through at least January 1, 2000. However, if the Company is unable to realize the anticipated cash flows, or raise additional equity, it may exhaust its cash resources by January 1, 2000 and may be forced to curtail or cease its operations. 42 43 (F) CONTINUED COMPLIANCE WITH NASDAQ SMALLCAP LISTING REQUIREMENTS On March 1, 1999, the minimum bid price of the Company's shares had been less than $1.00 per share for thirty consecutive business days and in accordance with Nasdaq's listing requirements, the Company received notice from Nasdaq regarding the minimum bid price of the Company's shares. The Company must achieve compliance with Nasdaq's rules by June 1, 1999 or the Company's Common Stock could be delisted. According to Nasdaq's rules, the Company can achieve compliance if the minimum bid price of the Company's shares is above $1.00 per share for at least ten consecutive business days during the ninety-day compliance period. The Company may attempt to meet Nasdaq's rules by effecting a reverse stock split. Exclusion of the Company's shares from Nasdaq would adversely affect the market price and liquidity of the Company's equity securities. (10) SUPPLEMENTAL DISCLOSURE OF NON CASH RELATED ACTIVITIES In 1997, the Company, in connection with the 1997 March Bridge Financing and the Infinity Financing, recorded non-cash financing fees of $1,665,000 and $2,720,511, respectively, related to the issuance of the Company's securities. In 1997, the Company, in connection with its Equipment Financing, recorded non-cash financing fees of $178,980 related to the issuance of warrants to purchase the Company's common stock. In 1997 the Company entered into capital lease and equipment financing transactions totaling $1,713,270 for the Company's mobile production units. In February 1998, the Company, in connection with the Infinity Financing, recorded $1,350,000 as an imputed dividend on its Preferred Stock, which has been fully amortized in 1998. In the first quarter of 1998, $6,000,000 in principal amount of the Company's convertible debt was converted to preferred stock net of finance costs of $2,178,942. In 1998 the Company issued 350,000 shares of common stock in connection with the Infinity Financing Amendments. In 1998, the Company issued 30,000 shares of common stock for payment of royalties. In 1998, the Company issued 302,755 shares of common stock for payment of dividends totaling $487,268 on its preferred stock. 43 44 (11) RESTATEMENT The Company has restated its financials pursuant to a comment letter dated April 26, 1999 from the Securities and Exchange Commission. The Company has revised Notes (1), (2(d)), (5(b)), (9(b)) and (9(e)). ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 44 45 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information called for by Item 9 is set forth under the caption "Election of Directors" in the Company's 1999 Proxy Statement, which is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION. EMPLOYMENT AGREEMENTS Effective January 1, 1996, the Company entered into a three-year employment agreement with Earl Takefman, the Chief Executive Officer of the Company. This agreement was amended on April 14, 1998 and extended until December 31, 2000. Pursuant to the agreement, as amended, Mr. Takefman is entitled to receive a base salary of $175,000 per annum, subject to increase to $200,000 on January 1, 1999 and to $225,000 on January 1, 2000. In addition, pursuant to the original employment agreement, Mr. Takefman received 250,000 options upon the consummation of the Company's initial public offering, which options have now vested, and currently have an exercise price of $1.00. 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 twelve months severance pay from the date of termination or the compensation due for the remainder of the term of the agreement, whichever is greater, as liquidated damages for such termination. Effective June 1, 1996, the Company entered into an employment agreement with Richard Parker, pursuant to which Mr. Parker serves as the President and Chief Operating Officer of the Company. This Agreement was amended on April 14, 1998 and extended until December 31, 2000. Mr. Parker is entitled to receive a base salary of $175,000 per annum, subject to increase to $200,000 on January 1, 1999 and to $225,000 on January 1, 2000. The agreement is automatically renewed for additional one-year periods, unless Mr. Parker or the Company provides notice to the other of its termination. If Mr. Parker is terminated without cause, he will be entitled to receive twelve months severance pay from the date of termination or the compensation due for the remainder of the term of the agreement, whichever is greater, as liquidated damages for such termination. In addition, Mr. Parker may terminate his employment agreement if Mr. Takefman is no longer actively involved in the management of the Company; in such case, Mr. Parker would still be entitled to his severance package. As of May 1, 1996, the Company entered into a two-year employment agreement with Thomas Peters, pursuant to which Mr. Peters originally served as Director of Software Development and now serves as Vice President of Operations and Technology. This Agreement was amended on April 14, 1998 and extended until December 31, 2000. Mr. Peters is entitled to receive a base salary of $130,000 per annum, subject to increase to $140,000 on January 1, 1999 and to $150,000 on January 1, 2000. 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 six months severance pay from the date of termination or the compensation due for the remainder of the term of the agreement, whichever is greater, as liquidated damages for such termination. 45 46 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information called for by Item 11 is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's 1999 Proxy Statement, which is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by Item 12 is set forth under the caption "Certain Relationships and Related Transactions" in the Company's 1999 Proxy Statement, which is incorporated herein by reference. 46 47 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following Exhibits are filed as part of this Report as required by Item 601 of Regulation S-B. EXHIBIT NUMBER DESCRIPTION - ------- ------------ 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.1 Form of Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.2 Form of Specimen Redeemable Warrant Certificate (Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.3 Form of Warrant Agreement between the Company and Whale Securities Co., L.P. (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.4 Form of Warrant among American Stock Transfer & Trust Company, the Company and Whale Securities Co., L.P. (Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.5 Form of Warrant Certificate issued to investors in the March 1997 Bridge Financing (Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-24675) filed April 7, 1997) 4.6 Form of Common Stock Purchase Warrant issued to investors in the Infinity Bridge Financing (Incorporated by reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed June 23, 1997) 4.7 Form of Convertible Note issued to investors in the Infinity Bridge Financing (Incorporated by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed June 23, 1997) 47 48 4.8 Form of Common Stock Purchase Warrant issued to Vision Financial Group, Inc. (Incorporated by reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-QSB filed November 14, 1997) 4.9 Form of Common Stock Purchase Warrant issued to investors in the Infinity Bridge Financing in connection with the amendment to such financing (Incorporated by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed February 9, 1998) 10.1 License Agreement, dated March 1, 1995, between Great White Shark Enterprises, Inc. and the Company, as supplemented (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.2 Amendment to License Agreement, dated as of June 3, 1997, by and among the Company, Greg Norman and Great White Shark Enterprises, Inc. (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K/A filed June 27, 1997) 10.3 Employment Agreement, dated as of January 1, 1996, between Earl Takefman and the Company, as amended (Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996). 10.4 Employment Agreement, dated as of May 1, 1996, between Thomas S. Peters and the Company, as amended (Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.5 Amended and Restated 1996 Stock Option Plan (Incorporated by reference to the Company's 1996 definitive Proxy Statement) 10.6 Employment Agreement, dated as of June 1, 1996, between Richard Parker and the Company, as amended (Incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.7 Assignment, dated April 19, 1996 from Thomas S. Peters to the Company (Incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.8 Share and Warrant Purchase Agreement, dated as of February 27, 1997, between the Company and Status-One Investments Inc. (Incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-24675) filed April 7, 1997) 48 49 10.9 Bridge Securities Purchase Agreement, dated as of June 13, 1997, among the Company and Infinity Investors Limited, Infinity Emerging Opportunities Limited, Sandera Partners, L.P. and Lion Capital Partners, L.P. (collectively with their transferees, the "Funds") (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed June 23, 1997) 10.10 Registration Rights Agreement, dated as of June 13, 1997, among the Company and the Funds (Incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed June 23, 1997) 10.11 Transfer Agent Agreement, dated as of June 13, 1997, among the Company, the Funds and American Stock Transfer & Trust Company (Incorporated by reference to Exhibit 99.3 to the Company's Report on Form 8-K filed June 23, 1997). 10.12 Purchase Agreement, dated as of March 27, 1998, among the Company and Marion Interglobal, Ltd. (Incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.13 Registration Rights Agreement, dated as of March 27, 1998, among the Company and Marion Interglobal, Ltd. (Incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.14 First Amendment to Bridge Securities Purchase Agreement and Related Documents, dated as of December 31, 1997, among the Company and the Funds (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed February 9, 1998) 10.15 Second Amendment to Bridge Securities Purchase Agreement and Related Documents, dated as of March 27, 1998, among the Company, Infinity Investors Limited, Infinity Emerging Opportunities Limited, Summit Capital Limited (as the transferee of Sandera Partners, L.P.) and Glacier Capital Limited (as the transferee of Lion Capital Partners, L.P.) (Incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.16 Third Amendment to Bridge Securities Purchase Agreement and Related Documents, dated as of December 29, 1998, among the Company, Infinity Investors Limited, IEO Holdings Limited (as the transferee from Infinity Emerging Opportunities Limited), Summit Capital Limited (as the transferee of Sandera Partners, L.P.) and Glacier Capital Limited (as the transferee of Lion Capital Partners, L.P.) (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed January 8, 1999). 10.17 Security Agreement, dated February 6, 1998, between the Company and HW Partners, L.P., as agent for and representative of the Funds. (Incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed February 6, 1998). 10.18 Form of Warrant Certificate. (Incorporated by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed February 6, 1998). 49 50 10.19 Amendment, dated as of December 31, 1998, to License Agreement dated as of March 1, 1995, by and between Greg Norman and Great White Shark Enterprises, Inc. and the Company, as amended on April 19, 1996, October 18, 1996 and June 3, 1997 (Incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-KSB filed March 31, 1999). 16 Letter, dated November 14, 1997, from KPMG Peat Marwick LLP to the Securities and Exchange (Incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K/A filed November 19, 1997) 24 Power of Attorney (included with the signature page hereof) 27* Financial Data Schedule - ----------------- * Filed herewith. (b) Reports on Form 8-K None 50 51 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VISUAL EDGE SYSTEMS INC. By: /s/ Earl Takefman ---------------------------------- Earl Takefman Chief Executive Officer Date: May 13, 1999 POWER OF ATTORNEY Each person whose signature appears below hereby authorizes and constitutes Earl Takefman and Richard Parker, and each of them singly, his true and lawful attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign and file any and all amendments to this report with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and he hereby ratifies and confirms all that said attorneys-in-fact or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE - --------- ------------------------ ---- /s/ Earl Takefman Director, Chief Executive Officer May 13, 1999 - ------------------------------ (Principal Executive Officer) Earl Takefman * Chief Financial Officer May 13, 1999 - ------------------------------ (Principal Financial and Accounting Officer) Melissa Forzly * Chairman of the Board May 13, 1999 - ------------------------------ Ronald F. Seale * Director May 13, 1999 - ------------------------------ Mark Hershhorn * Director May 13, 1999 - ------------------------------ Beryl Artz * Director May 13, 1999 - ------------------------------ Richard Parker
- ------------------------- * By Earl Takefman under Power of Attorney 51 EX-27 2 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 244,346 1,750,000 26,893 0 103,142 2,452,303 3,876,918 1,628,404 6,135,859 1,182,755 0 0 6,000,000 103,784 (2,553,904) 6,135,859 2,632,213 2,632,213 2,463,940 4,577,034 306,112 0 251,566 4,846,792 0 4,846,792 0 0 0 4,846,792 0.81 0.81
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