-----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, HsWGKCaeNhpuBR+ghVjAF/FSLp7gE/YpyE+Q2Vk5+48kqgins3H8vG9JH/SrY1Hq PzwHt7ckj7dMMY6Bre0wtA== 0001047469-98-014079.txt : 19980409 0001047469-98-014079.hdr.sgml : 19980409 ACCESSION NUMBER: 0001047469-98-014079 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980408 SROS: NASD 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-20995 FILM NUMBER: 98589330 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 10KSB 1 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 UNITED STATES FORM 10-KSB [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 (IRS Employer Identification No.) incorporation or organization) 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 ----- ----- 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 or any amendment to this Firm 10-KSB [ ]. The Registrant's revenue for its most recent fiscal year: $1,381,111 The aggregate market value of the Registrant's Common Stock (the "Common Stock"), $.01 par value, held by non-affiliates as of March 25, 1998, based on the last sale price of the Common Stock as reported on the Nasdaq SmallCap Market, was: $9,272,786. As of March 25, 1998, there were 5,316,696 shares of the Registrant's Common Stock and 2,230,000 redeemable warrants outstanding of which 1,495,000 are publicly traded. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the 1998 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, 1997 are incorporated by reference into Part III of this Form 10-KSB. 2 VISUAL EDGE SYSTEMS INC. TABLE OF CONTENTS PAGE PART I Item 1. Description of Business 4 ITEM 2. Description of Property 17 ITEM 3. Legal Proceedings 17 ITEM 4. Submission of Matters to a Vote of Securityholders 17 PART II ITEM 5. Market for Common Equity and Related Stockholder Matters 18 ITEM 6. Management's Discussion and Analysis or Plan of Operation 19 ITEM 7. Financial Statements 21 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 44 ITEM 10. Executive Compensation 44 ITEM 11. Security Ownership of Certain Beneficial Owners and Management 44 ITEM 12. Certain Relationships and Related Transactions 44 ITEM 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 45 3 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 and is in the early stages of being an operational company. 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." 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. 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 develop additional videotape golf lessons, such as short game, sand play and putting lessons. 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 agreed to grant 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. Pursuant to the Greg Norman License, the Company will make minimum guaranteed royalty payments to Mr. Norman from January 1998 through April 2000, which will consist of $2.38 million in cash and 102,000 shares of Common Stock. The Company has paid Mr. Norman $600,000 in cash through December 31, 1997. After the initial term, which ends on June 30, 2000, the Company has the option to renew the Greg Norman License for two additional five-year periods. The Company's business and prospects are dependent upon the Company's continued association with Greg Norman. 4 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. "Products" means a videotape or CD-ROM or printed versions or other similar medium that is given or sold to a customer upon use of the concept in which Greg Norman's golf swing or any other golf professional's golf swing is compared to the user's golf swing using audio and video analysis of both swings. The Company may assign the Greg Norman License to an affiliated entity and enter into distribution agreements with third parties with respect to product sales. MARKETING AND DISTRIBUTION The Company's primary focus is concentrated on marketing and sales efforts. The Company's marketing strategy is to sell ONE-ON-ONE videotapes on a prearranged basis to various organizers of amateur, corporate, charity and member golf tournaments (who typically offer gifts to tournament participants), golf professionals at private and daily fee golf courses, driving ranges and indoor event planners who organize trade shows, conventions, sales meetings, retail store openings and promotions and automobile dealer showroom promotions. To implement its marketing and business strategy, the Company has developed 15 mobile ONE-ON-ONE vans equipped with video and personal computer equipment to market, promote and produce the Company's products. The Company has positioned its ONE-ON-ONE vans in selected geographic areas that will service golf courses throughout the United States, including Arizona, California (2), Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, Ohio, Pennsylvania and Texas. In addition, to further implement its marketing and sales efforts, the Company has over 25 full time commissioned ONE-ON-ONE sales representatives and has enlisted independent sales representatives who cater to the specialty advertising, premium and incentive industries across the country to present the Company's products to their clients who seek incentives and premiums. These premium sales representatives will be positioning the Company's products as premiums or incentives similar to the Cadillac Agreement, which is described below. THE CADILLAC AGREEMENT The Company entered into an agreement with Cadillac Motor Car Division of General Motors ("Cadillac") on August 5, 1997 (the "Cadillac Agreement"). The Cadillac Agreement granted Cadillac the exclusive U.S. dealership showroom rights to the Company's ONE-ON-ONE WITH GREG NORMAN concept and allowed Cadillac to exclusively offer its customers a free video golf lesson personally analyzed by Greg Norman if they test drove a Cadillac. Pursuant to the Cadillac Agreement the Company provides each participating Cadillac dealership with all marketing materials related to this promotion, including creative pieces for print and radio advertisements, banners, posters and direct mail invitations. In December 1997, the Company and Cadillac amended the Cadillac Agreement (the "Amended Agreement"), and extended the dealership showroom rights granted to Cadillac, subject to the limitations on exclusivity set forth below. The Amended Agreement also extended the rights to the Company's concept to other General Motors divisions. Provided that the Company has enough vans in operation to service all of the Cadillac or General Motors dealers on a nationwide basis, for the period from December 18, 1997 through December 31, 5 1998, Cadillac, combined with General Motors, has guaranteed to purchase a total of 1,500 "Event Days" from the Company or one "Event Day" for each Cadillac dealership where the Company has a van in the area to service the dealership, whichever is less. Each "Event Day" is a day on which one of the Company's ONE-ON-ONE vans appears at a Cadillac or other General Motors dealership to provide up to 165 instructional videotapes for the dealership's customers. On or prior to August 31, 1998, the Company must notify Cadillac as to whether the guaranteed number of "Event Days" are scheduled to be conducted by December 31, 1998. If 1,500 "Event Days" are not scheduled and conducted by December 31, 1998, then the Company is no longer obligated to provide its product exclusively to Cadillac, and may offer its product to auto dealerships other than Cadillac and General Motors dealerships. In each of the periods from January 1, 1999 through December 31, 1999 and January 1, 2000 through December 31, 2000, the terms of the Amended Agreement remain the same, except that the number of "Event Days" guaranteed by Cadillac, combined with General Motors, increases to 2,500 in each of such periods. In the event that in any given year the number of actual "Event Days" conducted by the Company is less than the number of "Event Days" guaranteed by Cadillac, combined with General Motors, then the Company is no longer obligated to provide its product exclusively to Cadillac and General Motors; in such event Cadillac and General Motors, however, have no obligation to pay the Company for the difference between the guaranteed number of "Event Days" and the actual number of "Event Days" provided by the Company to Cadillac and General Motors dealerships. FINANCING TRANSACTIONS MARCH 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 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) in the accompanying financial statements, 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. JUNE CONVERTIBLE FINANCING On June 13, 1997, the Company arranged a three-year $7.5 million debt and convertible equity facility (the "June 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 6 per share, which Notes are 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 June Warrants are redeemable commencing October 1, 1998 at a redemption price equal to $.10 per share, subject to adjustment based on a 20-day minimum closing bid price of the Common Stock. 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 the Company issued an aggregate of 65,671 shares (the "Interest Shares") for payment of interest due. On February 6, 1998 the Company entered into the First Amendment to the Securities Purchase Agreement and Related Documents, dated as of 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. 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. The Company has 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 New Warrants are exercisable through December 2002 and are redeemable at the option of the Company, commencing January 1, 2000, based on a 20-day minimum closing bid price of Common Stock, at a redemption price equal to $.10 per share. The New Warrants also contain a "cashless exercise" feature. On March 16, 1998, the Company sold an additional 1,550 shares of Preferred Stock to the Funds in exchange for non-marketable securities with an aggregate value of $1,550,000 (See note 5(b)). In connection therewith, the Funds as the holders of the majority of the outstanding Preferred Stock obtained the right to appoint one director to the Company's Board of Directors, though they had not named such director as of April 3, 1998. As a condition to the consummation of the Marion Equity Financing (as defined in and described in "Marion Equity Financing" and Note 5(c) in the accompanying financial statements), the Company entered into the Agreement and Second Amendment to Bridge Securities Purchase Agreement and Related 7 Documents (the "Second Amendment"), 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 as follows: (i) up to $2,500,000 principal amount may be redeemed on or before April 30, 1998; (ii) an additional $2,500,000 principal amount may be redeemed on or before May 31, 1998; and (iii) an additional $2,500,000 principal amount may be redeemed from and after June 1, 1998. If the date that the Company redeems such Preferred Stock and Notes is on or before June 30, 1998, the redemption price will be 80% of the principal amount outstanding of the Notes being redeemed or 80% of the liquidation preference of the Preferred Stock being redeemed, plus accrued interest and dividends in the event that all of the Preferred Stock and Notes owned by the Funds are not redeemed by June 30, 1998. If the redemption of the Notes and Preferred Stock is after June 30, 1998 but on or before December 31, 1998, the 80% referred to in the preceding sentence shall increase by 2% per month, up to 90% in December 1998. If the redemption of the Notes and Preferred Stock occurs after December 31, 1998, the redemption price shall be as provided in the original agreement between the Company and 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, as well as the right to receive 200,000 additional shares of Common Stock in the event that all of the Preferred Stock and Notes owned by the Funds have not been redeemed by the Company by June 30, 1998. Further, the exercise price of the June Warrants has been reduced from $10.675 per share to $3.25 per share and the exercise price of the New Warrants has been reduced from $4.00 per share to $3.25 per share. The Company has agreed to register all of such shares of Common Stock (including the shares underlying warrants) under the Securities Act of 1933, as amended. MARION EQUITY FINANCING In March 1998, the Company entered into a Purchase Agreement (the "Marion Agreement") with Marion Interglobal, Ltd., an investment group ("Marion"). The Marion Agreement calls 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 is 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; $1,500,000 of the $3,000,000 has been funded, with the remaining $1,500,000 to be funded on the business day after the Company's shelf registration statement with respect to the shares sold to Marion has been declared effective by the Securities and Exchange Commission; (ii) sixty days following the 8 registration of all the underlying shares of Common Stock under the Marion Agreement, the Company will sell 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 shall 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 is contingent on Marion's satisfaction that the Company has met or exceeded the financial targets expected by Marion, in its sole discretion. The Company has agreed to use the $6,000,000 in proceeds from the third tranche to redeem the Notes and Preferred Stock issued in the June Financing. The issuance and sale of 1,400,000 shares of Common Stock in the first tranche and all of the shares to be issued in the second tranche to Marion, is subject to approval by the Company's stockholders. The Company will pay 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; (ii) 800,000 shares of Common Stock for the second $2,000,000 tranche; and (iii) no additional fee for the completion of the third tranche. Further, upon the consummation of the second tranche of the Marion Agreement, Mr. Alan Lubell, Chairman of the Board of the Company, has agreed to transfer to Marion 250,000 shares of Common Stock, which shares are required to be registered under the Securities Act of 1933, as amended. In addition, if the third tranche of the aforementioned financing is completed, then until March 30, 2001, the Company is required to obtain the prior written consent of Marion before the consummation of any additional financing transaction except for any credit facilities or lines of credit with lenders or equipment financing arrangements. Further, the Company may not redeem the warrants issued in the initial public offering (the "IPO Warrants") without the prior written consent of Marion. 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 June Convertible Financing and Note 5(b) in the accompanying financial statements for details). PRO FORMA EFFECT OF FINANCINGS At December 31, 1997 the Company had a stockholders' deficit of $1,137,662. Pursuant to the First Amendment, the Funds converted $6 million aggregate principal amount of the Notes, net of financing costs of $2,178,942 into shares of Preferred Stock. If the conversion on February 6, 1998 had taken place on December 31, 1997 the Company would have had stockholders' equity of approximately $2,683,396. On March 16, 1998, the Funds purchased an additional 1,550 shares of Preferred Stock in exchange for non-marketable securities with an aggregate value of $1,550,000 (See note 5(b)). If this purchase had taken place on December 31, 1997, the Company would have had stockholders' equity of approximately $4,233,396. In addition, if the $1,500,000 payment from the first tranche of the Marion Agreement had taken place on December 31, 1997, the Company would have recorded approximately an additional $1,250,000 in cash and in stockholders' equity (net of expenses) for a total stockholders' equity of $5,483,396. EQUIPMENT FINANCING In August 1997, the Company entered into an equipment financing agreement (the "Equipment Financing") with Vision Financial Group of Pittsburgh ("Vision"), whereby Vision agreed to provide the Company with up to $2.5 million in financing by September 1998. Such arrangement provides the Company with equipment financing of $100,000 for each of its next 25 mobile one-on-one vans equipped with video and personal computer equipment, each of which is anticipated to cost approximately $150,000. The Company has drawn on $800,000 of 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. Further, the Company has agreed to pledge as collateral a certificate of deposit in the amount of $25,000 per van to Vision. Such collateral is to be returned to the 9 Company within 5 days after the Company notifies Vision that (a) the Company has earned $1,000,000 or more on a pre-tax basis for fiscal 1998 or 1999, or (b) the Company's stock has traded at $20.00 per share for at least 5 consecutive trading days. The Company has pledged to Vision a certificate of deposit in the aggregate amount of $200,000 in connection with the financing of the first eight vans. In connection with the Equipment Financing, the Company issued warrants to Vision (the "Vision Warrants") to purchase 75,000 shares of Common Stock at a price per share of $10.00 (subject to adjustment in certain circumstances) at any time prior to August 20, 2000. 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. EMPLOYEES At December 31, 1997, the Company employed (directly or indirectly) five executive employees and 47 employees engaged in the operation of its offices and vans. 10 EXECUTIVE OFFICERS OF THE COMPANY NAME AGE POSITION ---- --- -------- Earl T. Takefman 47 Chief Executive Officer and Director Alan L. Lubell 59 Chairman of the Board and Vice President Richard Parker 36 President and Chief Operating Officer Thomas Peters 52 Director of Operations and Technology Melissa Forzly 39 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. SLM filed for protection under Chapter 11 of the U.S. Bankruptcy Code in October 1995. From 1980 to 1989, prior to joining SLM, Mr. Takefman was Chief Operating Officer of Charan Industries ("Charan"), a publicly traded Canadian toy and sporting goods company. Mr. Takefman received a Bachelor of Architecture degree in 1971 and a Masters of Business Administration degree from McGill University in Montreal, Canada in 1973. ALAN L. LUBELL, a co-founder of the Company, has been Chairman of the Board of the Company since July 1994 and Vice President since May 1996. Prior to founding the Company, Mr. Lubell had been an entrepreneur in the area of sports television. From 1977 to July 1994, Mr. Lubell served as President of Marathon Entertainment, a sports television company which he founded, that created many events and programs that were sold to television stations and networks and national advertisers. Among the events developed, packaged and produced by Marathon Entertainment was the New York City Marathon. Mr. Lubell received a Bachelor of Science degree in marketing from New York University in 1960. RICHARD PARKER has been 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 Director 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. 11 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 should carefully consider the following risk factors, in addition to the other information contained herein. This annual report contains 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, 1997, the Company incurred a cumulative net loss of $13,618,223. The Company believes that it will incur continuing losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front capital expenditures and operating costs associated with commercializing its products. NEED FOR ADDITIONAL FINANCING. The Company recently entered into a purchase agreement with Marion Interglobal, Ltd. ("Marion"), for additional financing as detailed more fully in "Marion Equity Financing" and Note 5(c) in the accompanying financial statements. The continued implementation of the Company's business plan will require capital resources that will be available to the Company only upon the completion of the first and second tranches of the aforementioned financing. There can be no assurance that the conditions necessary for the completion of these tranche will occur. In addition, if the third tranche of the aforementioned financing is completed, then until March 30, 2001, the Company is required to obtain the prior written consent of Marion before the consummation of any additional financing transaction except for any credit facilities or lines of credit with lenders, or equipment financing arrangements. Further, there can be no assurance that Marion will consent to any additional financings. UNCERTAINTY OF PROPOSED PLAN OF OPERATION. The Company's plan of operation and prospects are largely dependent upon the Company's ability to successfully hire and retain skilled technical, marketing and other personnel, establish and maintain satisfactory relationships with those who arrange golf events, successfully develop, equip and operate ONE-ON-ONE vans on a timely and cost effective basis and achieve significant market acceptance for its products. There can be no assurance that the Company will be able to continue to implement its business plan or that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in its implementation. POTENTIAL INFLUENCE ON MARKET OF SALE OF THE FUNDS' SHARES AND MARION'S SHARES; DILUTION. As part of the June Bridge Financing, the Company issued to the Funds, through December 31, 1997, an aggregate of 65,671 Interest Shares, 93,677 Grant Shares and 180,296 Additional Grant Shares. In addition, the Company will be obligated to issue to the Funds the Note Conversion Shares and the Stock Conversion Shares in the event that the Funds decide to convert their Notes or shares of Preferred Stock into Common Stock. As of December 31, 12 1997, the Funds converted $6.0 million aggregate principal amount of the Notes into 6,000 shares of Preferred Stock. The remaining $1.5 million in Notes outstanding, as well as the 6,000 outstanding shares of Preferred Stock, are convertible into Common Stock at an average discount of 20% to the market price of the Common Stock at the time of conversion; in certain circumstances, the conversion price may be as low as 50% of the market price of the Common Stock at the time of conversion. Conversion of some or all of the $7.5 million of Notes and Preferred Stock would have a dilutive effect on the Company's stockholders. In addition, in connection with the Marion Agreement the Company issued 1,000,000 shares of Common Stock and may be obligated to issue an additional 6,200,000 shares of Common Stock to Marion, which shares will be registered under the Securities Act of 1933, as amended, at which time such shares will be freely tradable without restriction. While no prediction can be made as to the effect that the sale of any of the aforementioned shares will have on market prices of the Common Stock prevailing from time to time, 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. POTENTIAL INFLUENCE ON MARKET OF WARRANT REDEMPTION. Each of the 1,495,000 IPO Warrants entitles the registered holder thereof to purchase one share of Common Stock, at a price of $5.00, subject to adjustment in certain circumstances, at any time until July 24, 2000. The IPO Warrants are redeemable by the Company, upon the consent of the underwriter in the Company's IPO, 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. While no prediction can be made as to the effect, if any, that the availability for sale or actual sale of such shares of Common Stock will have on market prices prevailing from time to time, the possibility that a substantial number of shares of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to further raise capital through the sale of its equity securities. Further, the exercise of the IPO Warrants and issuance of shares of Common Stock at a price of $5.00 (an amount that is likely to be below the prevailing market price of the Common Stock since a precondition for the redeemability of the IPO Warrants is that the price of the Common Stock is at least $7.50, subject to certain terms and adjustments) may have an adverse effect on the market price of the Common Stock. In addition, the Company may not redeem the warrants issued in the initial public offering (the "IPO Warrants") without the prior written consent of Marion. There can be no assurance that Marion will consent to such redemption. OUTSTANDING OPTIONS AND WARRANTS. There are currently outstanding options to purchase an aggregate of 948,419 shares of Common Stock at exercise prices ranging from $5.00 to $10.75 per share, and outstanding warrants (including the IPO Warrants) to purchase an aggregate of 2,230,000 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, the terms upon which the Company may be able to obtain additional equity financing may be adversely affected, since the holders of the options or warrants can be expected to exercise them, if at all, at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the options or warrants. DEPENDENCE ON GREG NORMAN LICENSE. Pursuant to the Greg Norman License, Greg Norman agreed to grant to the Company a worldwide license to use his name, likeness, endorsement and certain trademarks in connection with the production and promotion of the Company's 13 products. The Company will make guaranteed minimum royalty payments to Mr. Norman from January 1998 through April 2000, which will consist of $2.38 million in cash and 102,000 shares of Common Stock. Pursuant to the Greg Norman License, the Company has paid Mr. Norman $600,000 through December 31, 1997. Failure to make any required payment under the Greg Norman License would result in termination of the license agreement, which would have a material adverse effect on the Company. Greg Norman's death, disability or retirement from tournament play or any significant decline in the level of his tournament play may, under certain circumstances, have a material adverse effect on the Company. In addition, the commission by Greg Norman of any serious crime or any act which adversely affects his reputation could also have an adverse affect on the Company. The Company has obtained "key-man" insurance on the life of Greg Norman in the amount of $10,000,000. UNCERTAINTY OF MARKET ACCEPTANCE AND COMMERCIALIZATION STRATEGY. The Company's ONE-ON-ONE personalized videotape golf lesson is a new business concept and, accordingly, demand and market acceptance for 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 will be significantly affected by its ability to successfully build an effective sales organization and develop a significant number of ONE-ON-ONE vans. The Company only commenced marketing activities in 1997 and has limited marketing and technical experience and limited financial, personnel and other resources to independently undertake extensive marketing activities. The Company's strategy and preliminary and future marketing plans may be subject to change as a result of a number of factors, including progress or delays in the Company's marketing efforts, changes in market conditions (including the emergence of potentially significant related market segments), the nature of possible license and distribution arrangements which may become available to it in the future and competitive factors. To the extent that the Company enters into third-party marketing and distribution arrangements in the future, it will be dependent on the marketing efforts of such third parties and in certain instances on the popularity and sales of their products. Additionally, to the extent that the Company seeks to market its products in foreign markets, the Company may be subject to various risks associated with foreign trade, including customs duties, quotas and other trade restrictions, shipping delays, currency fluctuations and international political and economic developments. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's products. POTENTIAL 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. Accordingly, the ability of the Company to compete may be dependent upon the Company's ability to continually enhance and improve its software. There can be no assurance that competitors will not develop technologies or products that render the Company's products obsolete or less marketable. DEPENDENCE ON KEY PERSONNEL; NEED FOR QUALIFIED PERSONNEL. The prospects of the Company are dependent on the personal efforts of Earl T. Takefman, its Chief Executive Officer, and other key personnel. The loss of the services of Mr. Takefman could have a material adverse effect on the Company's proposed business and prospects. The Company has entered into employment agreements with Mr. Takefman and other key personnel and has obtained "key-man" insurance on the life of Mr. Takefman in the amount of $5,000,000. The success of 14 the Company is also dependent upon its ability to hire and retain additional qualified marketing, technical, financial and other personnel. Competition for qualified personnel is intense and there can be no assurance that the Company will be able to hire or retain additional qualified personnel. Any inability to attract and retain qualified personnel would have a material adverse effect on the Company. 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. There can be no assurance that the Company's products will prove to be commercially viable. Failure to achieve commercial viability would have a material adverse effect on the Company. INDUSTRY FACTORS. The Company's future operating results will depend on numerous factors beyond its control, including the popularity, price and timing of competitors' products being introduced and distributed, national, regional and local economic conditions (particularly recessionary conditions adversely affecting consumer spending), changes in consumer demographics, the availability and relative popularity of other forms of sports and entertainment, and public tastes and preferences, which may change rapidly and cannot be predicted. The Company's ability to plan for product development and promotional activities may be affected by the Company's ability to anticipate and respond to relatively rapid changes in consumer tastes and preferences. To the extent that the Company targets consumers with limited disposable income, the Company may find it more difficult to price its products at levels which result in profitable operations. In addition, seasonal weather conditions limiting the playing seasons in certain geographic areas may result in fluctuations in the Company's future operating results. DEPENDENCE ON THIRD-PARTY PRODUCTION COMPANIES AND EQUIPMENT MANUFACTURERS. The Company relies on third-party manufacturers for all of its supply of video and computer equipment and vans used in its operations. The Company has not entered into agreements with any equipment manufacturer and intends to purchase or lease equipment components pursuant to purchase orders placed from time to time in the ordinary course of business. While the Company is not dependent on any single supplier to continue its operations, the failure or delay by any manufacturer in supplying components to the Company on favorable terms could result in interruptions in its operations and adversely affect the Company's ability to implement its business plan. NO DIVIDENDS. To date, the Company has not paid any cash dividends on its Common Stock and does not expect to declare or pay dividends on the Common Stock in the foreseeable future. In addition, the payment of cash dividends is limited by the terms of the Preferred Stock and may be further limited or prohibited by the terms of future loan agreements, if any, or the future issuance of other series of Preferred Stock, if any. AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the Company's Board of Directors to issue up to 5,000,000 shares of Preferred Stock, from time to time, in one or more series. On February 6, 1998, $6 million principal amount of outstanding Notes was converted into 6,000 shares of Preferred Stock; and on March 16, 1998, an additional 1,550 shares of Preferred Stock was purchased by the Funds in exchange for marketable securities with an aggregate value of $1,550,000. The Preferred Stock has a liquidation preference of $1,000 per share and is senior to the Common Stock with respect to dividends, liquidation and dissolution. Each share of Preferred Stock entitles the holder to an annual dividend of 8.25%, payable on a quarterly basis, which dividend increases to 18% in 15 certain situations as specified in the Amended Certificate of Designation with respect to the Preferred Stock. Holders of the shares of Preferred Stock do not have voting rights, except upon the occurrence of certain events that would affect the preferences and rights of the Preferred Stock. Each share of Preferred Stock is convertible into Common Stock at the lesser of: (i) $6.00 per share of Common Stock or (ii) a discount ranging from 15% to 22.5% of the market price of the Common Stock at the time of conversion; in certain circumstances, the conversion price may be as low as 50% of the market price of the Common Stock at the time of conversion. The Preferred Stock is redeemable by the Company at any time at its option. In addition, the holder of a majority of the outstanding Preferred Stock have the right to appoint one director to the Company's Board of Directors, though they had not named such director at April 3, 1998. The Board of Directors is authorized, without further approval of the stockholders, to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each new series of Preferred Stock. VOLATILITY OF MARKET PRICE OF COMMON STOCK AND WARRANTS. Since the IPO, the market prices of the Company's publicly traded securities have been highly volatile as has been the case with the securities of other emerging companies. Factors such as the Company's operating results and announcements by the Company or its competitors may have a significant impact on the market price of the Company's securities. In addition, in recent years, the stock market has experienced a high level of price and volume volatility and market prices for the stock of many companies have experienced wide price fluctuations which have not necessarily been related to the operating performance of such companies. POTENTIAL INFLUENCE ON THE MARKET OF THE IPO UNDERWRITER. The underwriter in the Company's IPO makes a market in the Common Stock and the IPO Warrants and may otherwise effect transactions in the Common Stock and the IPO Warrants. Such activities may exert a dominating influence on the market and such activity may be discontinued at any time. The prices and liquidity of the Company's securities may be significantly affected by the underwriter in the Company's IPO. LIMITATIONS OF LIABILITY OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation includes provisions to limit, to the full extent permitted by Delaware law, the personal liability of directors of the Company for monetary damages arising from a breach of their fiduciary duties as directors. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent permitted under such law as it may from time to time be in effect. In addition, the Company's By-Laws require the Company to indemnify, to the full extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Certificate of Incorporation. As a result of such provisions in the Certificate of Incorporation and the By-Laws of the Company, stockholders may be unable to recover damages against the directors and officers of the Company for actions taken by them which constitute negligence, gross negligence or a violation of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and officers and may discourage or deter stockholders from suing directors, officers, employees and agents of the Company for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders. 16 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 $9,031 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. The Company also leases two sales/operations offices, one of which is in San Diego, with approximately 1,600 square feet, pursuant to a lease expiring June 30, 1998, at a monthly rental of approximately $1,045, and the other which is in New York City with approximately 260 square feet on a month to month rental with a monthly rent of approximately $2,000. In addition, the Company also leases approximately 1,000 square feet of warehouse space in Pompano Beach, Florida with a monthly rent of $475. This lease expired on December 31, 1997 and the Company is in the process of renegotiating a new lease on new space. 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. 17 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. 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 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
HOLDERS OF COMMON STOCK On March 25,1998, the last reported sale price of the Common Stock on the Nasdaq SmallCap Market was $3.375 per share and the last reported sale price of the warrants on the Nasdaq SmallCap Market was $.9375 per warrant. At March 25, 1998, there were 75 holders of record of the Company's Common Stock and 3 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 18 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. RESULTS OF OPERATIONS The Company was a development stage company in 1996 and had no revenue for the fiscal year ended December 31, 1996. The Company commenced its introduction and marketing of personalized videotape golf lessons, featuring ONE-ON-ONE instruction by leading professional golfer Greg Norman, during the fourth quarter of 1996. The Company completed and launched its first seven mobile production units ("vans") during the first three months of 1997 and an additional eight vans were launched in the second quarter of 1997. As of December 31, 1997, the Company had 15 vans in operation. During the first quarter of 1997 the Company began to generate revenue from the sales of its videotape golf lessons. For the year ending December 31, 1997, the Company had sales of $1,381,111 and a gross loss of $186,362. The gross loss reflected for the year ending December 31, 1997 included significant training costs of van operators and resulted from low initial sales during its start-up phase. Operating expenses for the year ending December 31, 1997 were $7,929,850 as compared to $2,416,834 for the year ending December 31, 1996. The increase in operating expenses for the year ending December 31, 1997, as compared to the year ending December 31, 1996, is primarily attributable to start-up expenses related to the launching of the Company's 15 vans and consisted of payroll, marketing, training, travel and other administrative expenses. These expenses also include depreciation and amortization expenses, which totaled $1,128,964 for the year ending December 31, 1997, as compared to $155,546 for the year ending December 31, 1996. Additionally, in compliance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", the Company recorded a non-cash marketing expense of $93,132 related to the 25,000 options granted to Greg Norman and a non-cash stock severance expense of $150,125 related to the termination of an employee. In addition, the Company recorded a non-cash expense of $1,036,000 in connection with securities issued for financial advisory and strategic business planning services. Interest expense for the year ending December 31, 1997 was $508,080 as compared to $50,854 for the year ending December 31, 1996. The increase in interest expense is primarily due to the interest associated with the Company's financings. The Company earned $111,140 in interest income for the year ending December 31, 1997. Amortization of deferred financing fees and extraordinary expense-financing fees were 19 $1,243,418 and $999,000, respectively, for the year ended December 31, 1997, and resulted from: (i) non-cash financing fees of $1,665,000 in connection with the March Bridge Financing, (which have been fully expensed via amortization of $666,000 and the balance of $999,000 as an extraordinary item (see Note 5)); (ii) June Financing fees of $881,569; and (iii) equipment financing costs of $178,980. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997 the Company had cash and cash equivalents of $224,429, unrestricted short-term investments of $1,080,000 and working capital of $788,323. Net cash used in operating activities for the year ending December 31, 1997 was $5,997,342, primarily representing cash used for start-up expenses related to the launching of the Company's 15 vans. Net cash provided by financing was $6,083,778 ($95,124 of which was used in investing activities) for a total decrease in cash and cash equivalents of $8,688. A significant portion of the Company's disbursements during the year ending December 31, 1997 represented investment in fixed assets of $71,457. At December 31, 1997, the Company's cumulative gross investment in fixed assets was $3,529,180. On December 31, 1997 the Company had a stockholders' deficit of $1,137,662. On February 6, 1998, the Company entered into the First Amendment pursuant to which the Funds converted $6 million aggregate principal amount of the Notes into Preferred Stock which would have resulted in an increase to stockholders' equity of approximately $3,821,058. On March 16, 1998, the Funds purchased an additional 1,550 shares of Preferred Stock in exchange for non-marketable securities with an aggregate value of $1,550,000 (See note 5(b)). In addition, in March 1998, the Company entered into the Marion Agreement with Marion. The Marion Agreement calls for the Company to receive a minimum of $5,000,000 from Marion in exchange for shares of Common Stock as explained in Marion Equity Financing. The company received $1,500,000 of the First Tranche on April 3, 1998. If the $1,500,000 payment under the first tranche of the Marion Agreement had been received as of December 31, 1997, the Company would have recorded approximately an additional $1,250,000, which is net of expenses, in cash and in stockholders' equity. If the conversion of Notes and Preferred Stock and the $1,500,000 payment under the first tranche of the Marion Agreement had been recorded on December 31, 1997 the Company's stockholders' equity would have been approximately $5,433,396 as of such date. Based on the recently completed securities purchase agreement for additional financing as detailed more fully in "Marion Equity Financing" and Note 5(c), 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 next twelve months. THIRD PARTY REPORTS 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. 20 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Certified Public Accountants for year ended December 31, 1997 22 Report of Independent Certified Public Accountants for year ended December 31, 1996 23 Balance Sheets as of December 31, 1997 and December 31, 1996 24 Statements of Operations for the Years Ended December 31, 1997 and 1996 25 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997 and 1996 26 Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 27 Notes to Financial Statements 28 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 sheet of Visual Edge Systems Inc. as of December 31, 1997, and the related statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Visual Edge Systems Inc. as of December 31, 1997, and the related statements of operations, stockholders' equity and cash flows for the year then ended in conformity with general accepted accounting principles. ARTHUR ANDERSEN LLP Miami, Florida, February 20, 1998 (except with respect to the matters discussed in Notes 5(b),(c) and 10, as to which the date is April 4, 1998). 22 INDEPENDENT AUDITORS REPORT To the Board of Directors and Stockholders of Visual Edge Systems Inc. We have audited the accompanying balance sheet of Visual Edge Systems Inc. (a development stage company) as of December 31, 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Visual Edge Systems Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with general accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in its development stage and its recurring losses through 1996 and contractual commitment under a license agreement raise substantial doubt about its ability to continue as a going concern unless additional financing or equity is obtained. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Fort Lauderdale, Florida, January 24, 1997, except as to note 9(b) which is as of April 3, 1997. 23
VISUAL EDGE SYSTEMS INC. BALANCE SHEETS As of December 31, 1996 and 1997 Pro Forma (see Note 10 ) 1996 1997 1997 ------------- -------------- ------------------------ (unaudited) ASSETS Current Assets: Cash and Cash Equivalents $ 233,117 $ 224,429 $ 1,474,429 Short-Term Investments 1,869,052 1,080,000 1,080,000 Accounts Receivable - 23,917 23,917 Inventory 36,747 72,771 72,771 Prepaid Expenses - Advance Royalties 300,000 350,000 350,000 Other Current Assets 80,756 217,225 217,225 ----------- ------------ ------------ Total Current Assets 2,519,672 1,968,342 3,218,342 Fixed Assets, net 1,624,826 2,632,826 2,632,826 Non-Marketable Securities - - 1,550,000 Intangible Assets, net 616,470 286,986 286,986 Other Assets 23,202 449 449 Investments-Restricted - 812,719 812,719 ----------- ------------ ------------ Total Assets $ 4,784,170 $ 5,701,322 $ 8,501,322 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Bank Borrowings $ 500,000 $ - $ - Accounts Payable 333,114 344,884 344,884 Accrued Expenses 284,900 173,605 173,605 Other Current Liabilities 1,500 121,266 121,266 Current Maturities of Equipment Loans - 540,264 540,264 ----------- ------------ ------------ Total Current Liabilities 1,119,514 1,180,019 1,180,019 Equipment Loans - 661,939 661,939 Convertible Debt - 4,997,026 1,175,968 ----------- ------------ ------------ Total Liabilities 1,119,514 6,838,984 3,017,926 ----------- ------------ ------------ Commitments and Contingencies (Notes 1,4,5 and 9) STOCKHOLDERS' EQUITY (DEFICIT): Preferred Stock, $.01 par value, 5,000,000 shares authorized, none issued - - 7,550,000 Common Stock, $.01 par value, 20,000,000 shares authorized, 4,615,000 shares issued and outstanding at December 31, 1996 and 5,316,696 issued and outstanding at December 31, 1997 46,150 53,167 66,167 Additional Paid in Capital 6,481,159 12,427,394 11,485,452 Accumulated Deficit (2,862,653) (13,618,223) (13,618,223) ----------- ------------ ------------ Total Stockholders' Equity (Deficit) (Note 10) 3,664,656 (1,137,662) 5,483,396 ----------- ------------ ------------ Total Liabilities & Stockholders' Equity (Deficit) $ 4,784,170 $ 5,701,322 $ 8,501,322 =========== ============ ============
The accompanying notes are an integral part of these financial statements. 24 VISUAL EDGE SYSTEMS STATEMENT OF OPERATIONS
For the years ended December 31, ---------------------------- 1996 1997 ------------- -------------- Sales $ - $ 1,381,111 Cost of Sales - 1,567,473 ----------- ------------ Gross Loss - (186,362) ----------- ------------ Operating Expenses: General and Administrative 1,552,062 4,565,007 Selling and Marketing 264,772 2,072,537 Financing Fees (Note 5) - 1,049,049 Non-cash Stock Compensation Expense (Note 9) 600,000 243,257 ----------- ------------ Total Operating Expenses 2,416,834 7,929,850 ----------- ------------ Operating Loss (2,416,834) (8,116,212) ----------- ------------ Other (Income) Expenses: Interest Income (69,998) (111,140) Interest Expense 50,854 508,080 Amortization of Deferred Financing Fees (Note 5) - 1,243,418 ----------- ------------ Total Other (Income) Expenses (19,144) 1,640,358 ----------- ------------ Net Loss Before Extraordinary Expense (2,397,690) (9,756,570) Extraordinary Expense - Early retirement of debt (Note 5a) - 999,000 ----------- ------------ Net Loss $(2,397,690) $(10,755,570) =========== ============ Net Loss per Share, basic and diluted: Net Loss before Extraordinary Expense $ (0.63) $ (2.05) Extraordinary Expense -.00 (0.21) ----------- ------------ Net Loss per Share $ (0.63) $ (2.26) =========== ============ Weighted average common shares outstanding (Note 1g) 3,801,250 4,758,605 =========== ============
The accompanying notes are an integral part of these financial statements. 25
VISUAL EDGE SYSTEMS INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1996 and 1997 Common Stock Additional ------------------------- Paid-in Accumulated Shares Amount Capital Deficit Total ----------- -------- ------------ ------------- ------------- Balance at December 31, 1995 3,000,000 $30,000 $ 385,460 $ (464,963) $ (49,503) Issuance of common stock 1,615,000 16,150 5,495,699 - 5,511,849 Common stock issued by stockholders for services - - 600,000 - 600,000 Net loss - - - (2,397,690) (2,397,690) --------- ------- ----------- ------------ ------------ 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 June convertible debt financing 288,025 2,880 1,755,619 - 1,758,499 Warrants issued in connection with the June convertible debt 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) ========= ======= =========== ============ ============
The accompanying notes are in integral part of these financial statements. 26 VISUAL EDGE SYSTEMS INC. STATEMENTS OF CASH FLOWS
For the years ended December 31, --------------------------- 1996 1997 ------------ ------------- Operating activities: Net loss $(2,397,690) $(10,755,570) Adjustments to reconcile net loss to net cash used in operating acitivities: Extraordinary Item - 999,000 Non-cash stock compensation expense 600,000 243,257 Non-cash financing expenses - 1,036,000 Non-cash interest expenses - 333,758 Depreciation and amortization 155,546 1,128,964 Amortization of deferred financing expenses - 1,243,418 Changes in assets and liabilities: Increase in accounts receivable - (23,917) Increase in other current assets (117,503) (136,469) Increase in prepaid expense - advance royalties (300,000) (50,000) Increase in inventory (23,202) (36,024) Increase (decrease) in accounts payable 63,852 11,770 Increase (decrease) in accrued expenses 271,182 (111,295) Increase in other current liabilities 1,500 119,766 ----------- ------------ Net cash used in operating activities (1,746,315) (5,997,342) ----------- ------------ Investing activities: Capital expenditures (1,365,365) (71,457) Increase in intangible assets (398,558) - Purchases of short-term investments (3,508,015) (3,523,667) Proceeds from the sale of short-term investments 1,638,963 3,500,000 ----------- ------------ Net cash used in investing activities (3,632,975) (95,124) ----------- ------------ Financing activities: Proceeds from issuance of common stock upon exercise of options 5,511,849 128,000 Repurchase common stock - (352,254) Repayment of borrowings (1,615,000) (4,351,968) Payments of financing costs - (340,000) Proceeds from borrowings 1,715,000 11,000,000 ----------- ------------ Net cash provided by financing activities 5,611,849 6,083,778 ----------- ------------ Net increase (decrease) in cash and cash equivalents 232,559 (8,688) Cash and cash equivalents at beginning of period 558 233,117 ----------- ------------ Cash and cash equivalents at end of period $ 233,117 $ 224,429 =========== ============ Supplemental schedule of cash related activities: Cash paid for interest $ 50,854 $ 174,069 =========== ============ Supplemental disclosure of noncash related activities: In 1997, the Company, in connection with the March Bridge Financing and the June Convertible Debt 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.
The accompanying notes are an integral part of these financial statements. 27 VISUAL EDGE SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 (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. Through December 31,1996, the Company focused its efforts on developing 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 primary marketing strategy is to sell "ONE-ON-ONE WITH GREG NORMAN" videotapes on a prearranged basis to 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. To implement its marketing and business strategy, the Company has developed 15 mobile production facilities ("vans") equipped with video and personal computer equipment to market, promote and produce the Company's products. The Company has positioned its 15 ONE-ON-ONE vans in selected geographic areas that service golf courses and driving ranges throughout the United States, including Arizona, California (2), Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, Texas, Ohio and Pennsylvania. The Company anticipates that additional vans will be developed and situated based on the demand for the Company's products. The Company entered into an agreement with Cadillac Motor Car Division of General Motors ("Cadillac") on August 5, 1997 (the "Cadillac Agreement"). The Cadillac Agreement granted Cadillac the exclusive U.S. dealership showroom rights to the Company's ONE-ON-ONE WITH GREG NORMAN concept and allowed Cadillac to exclusively offer its customers a free video golf lesson personally analyzed by Greg Norman if they test drove a Cadillac. Pursuant to the Cadillac Agreement, the Company provides each participating Cadillac dealership with all the marketing materials related to this promotion, including creative pieces for print and radio advertisements, banners, posters, and direct mail invitations. In December 1997, the Company and Cadillac amended the Cadillac Agreement (the "Amended Agreement"), and extended the 28 dealership showroom rights granted to Cadillac, subject to the limitations on exclusivity set forth below. The Amended Agreement also extended the rights to the Company's concept to other General Motors divisions. Provided that the Company has enough vans in operation to service all of the Cadillac or General Motors dealers on a nationwide basis, for the period from December 18, 1997 through December 31, 1998, Cadillac, combined with General Motors, has guaranteed to purchase a total of 1,500 "Event Days" from the Company or one "Event Day" for each Cadillac dealership where the Company has a van in the area to service the dealership, whichever is less. The Company currently has 15 vans in operation, though it believes it will need approximately 25 vans to potentially realize the minimum guarantee of 1500 "Event Days" for 1998. The Company believes that it will require 30 to 35 vans in the years 1999 and 2000 to potentially realize the minimum guarantee of 2500 "Event Days". Each "Event Day" is a day on which one of the Company's ONE-ON-ONE vans appears at a Cadillac or other General Motors dealership to provide up to 165 instructional videotapes for the dealership's customers. On or prior to August 31, 1998, the Company must notify Cadillac as to whether the guaranteed number of "Event Days" are scheduled to be conducted by December 31, 1998. If 1,500 "Event Days" are not scheduled and conducted by December 31, 1998, then the Company is no longer obligated to provide its product exclusively to Cadillac, and may offer its product to auto dealerships other than Cadillac and General Motors dealerships. In each of the periods from January 1, 1999 through December 31, 1999 and January 1, 2000 through December 31, 2000, the terms of the Amended Agreement remain the same, except that the number of "Event Days" guaranteed by Cadillac, combined with General Motors, increases to 2,500 in each of such periods. In the event that in any given year the number of actual "Event Days" conducted by the Company is less than the number of "Event Days" guaranteed by Cadillac, combined with General Motors, then the Company is no longer obligated to provide its product exclusively to Cadillac and General Motors; in such event Cadillac and General Motors, however, have no obligation to pay the Company for the difference between the guaranteed number of "Event Days" and the actual number of "Event Days" provided by the Company to Cadillac and General Motors dealerships. (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 personalized videotapes is recognized when the Company delivers the videotapes to the customer. Deposits received in advance of videotape delivery are recorded as cutomer deposits which are included in other current liabilites in the accompanying 1997 balance sheet. (c) 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. 29 The Company adopted the provisions of 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" on January 1, 1996. The adoption of SFAS No. 121 did not have a material effect on the Company's financial statements. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed fair value. (d) PREPAID EXPENSES-ADVANCE ROYALTIES As discussed in Note 9(a), the Company is required to pay a royalty payment of 8% of all net revenues. Guaranteed minimum royalty payments are capitalized and expensed as revenues are earned. 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. (e) 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 required 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. (f) CONCENTRATION OF CREDIT RISK The Company has no significant off-balance sheet concentrations of credit risk. (g) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, short-term investments, accounts receivable, prepaid expenses-advance royalties, and other current assets as well as accounts payable, accrued expenses and other current liabilities as reflected in the accompanying financial statements 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 amount of the equipment loans and the convertible debt in the accompanying December 31, 1997 balance sheet. (h) 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 earnings per share is calculated by dividing income (loss) available to Common Stockholders by the weighted average number of shares of Common Stock outstanding during each period. Diluted 30 earnings per share includes the potential impact of dilutive common share equivalents using the treasury stock method. Convertible securities and common share equivalents have not been included in the computation of diluted loss per share in the accompanying statements of operations as their impact is antidilutive. Pursuant to SFAS No. 128 as interpreted by Staff Accounting Bulletin ("SAB") No. 98, "Computations of Earnings Per Share," Common Stock issued by the Company for nominal consideration just prior to its initial public offering have been included in the calculation of weighted average shares for all periods presented even though their effect is antidilutive. The computation of weighted average common shares and common share equivalents outstanding for the year ended December 31, 1997 is as follows:
1996 1997 ---- ---- Weighted average common shares outstanding, exclusive of issuances within twelve months prior to the Company's initial public offering in 1996 3,581,250 4,758,605 Shares issued within twelve months prior to the Company's initial public offering assumed to be outstanding for the entire period 220,000 --------- --------- Weighted average common shares outstanding 3,801,250 4,758,605 ========= =========
(i) 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, 1996 and 1997 (see Note 8). (j) SHORT-TERM INVESTMENTS Short-term investments consist of discount notes and treasury bills and are available for sale. The difference between the carrying value and fair value of short-term investments is immaterial at December 31, 1997. (k) RECENT ACCOUNTING PRONOUNCEMENT In June 1997, the FASB issued 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 will adopt SFAS No. 130 on January 1, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is required to be adopted in fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business 31 enterprises report information and related disclosures about products, services, geographic areas and major customers. The Company will adopt SFAS No. 131 on January 1, 1998. The Company's management believes the adoption of SFAS Nos. 130 and 131 will not have a material impact on its financial position or results of operations. (2) FIXED ASSETS, NET Fixed assets, including equipment and mobile production units acquired under capital leases, consist of the following at December 31, 1996 and 1997:
LIVES 1996 1997 (YEARS) ---- ---- ------- Mobile video-tape production units $ 951,653 $2,394,704 5 Product development equipment 407,184 489,149 3 - 5 Training and processing equipment 112,302 116,271 5 Office furniture and equipment 144,808 382,399 5 Trade show exhibits 144,787 146,657 5 ----------------------- 1,760,734 3,529,180 Less accumulated depreciation (135,908) (896,354) ----------------------- Fixed assets, net 1,624,826 2,632,826 ======================= (3) INTANGIBLE ASSETS, NET Intangible assets consist of the following at December 31, 1996 and 1997: 1996 1997 ---- ---- Video and marketing production costs $674,366 $ 447,404 Deferred organizational costs 29,428 29,428 --------------------- 703,794 476,832 Less accumulated amortization (87,324) (189,846) --------------------- Intangible assets, net $616,470 $ 286,986 =====================
(4) LEASES The Company has two noncancelable operating leases for corporate office space that expire in 1998 and 1999. Rental payments include minimum rentals plus building expenses. Rental expense for these leases during 1996 and 1997 was $16,984 and $107,863, respectively. Future minimum lease payments under these leases as of December 31, 1997 are as follows: 1998 $108,374 1999 78,398 -------- Minimum lease payments $186,772 ========
32 (5) FINANCINGS (a) MARCH 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 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) JUNE CONVERTIBLE FINANCING On June 13, 1997, the Company arranged a three-year $7.5 million debt and convertible equity facility (the "June 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 (the "Preferred Stock"), which Notes are 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 Warrants are redeemable commencing October 1, 1998 at a redemption price equal to $.10 per share, subject to adjustment based on a 20-day minimum closing bid price of the Company's common stock. 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. 33 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 the Company's 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 the Company issued an aggregate of 65,671 shares (the "Interest Shares") for payment of interest due of $333,758. On February 6, 1998 $6 million principal amount of outstanding Notes was converted into 6,000 shares of Preferred Stock (the "First Amendment"). The Preferred Stock has a liquidation preference of $1,000 per share and is senior to the Common Stock with respect to dividends, liquidation and dissolution. Each share of Preferred Stock entitles the holder to an annual dividend of 8.25%, payable on a quarterly basis, which dividend increases to 18% in certain situations as specified in the Amended Certificate of Designation with respect to the Preferred Stock. Holders of the shares of Preferred Stock do not have voting rights, except upon the occurrence of certain events that would affect the preferences and rights of the Preferred Stock. Each share of Preferred Stock is convertible into Common Stock at the lesser of; (i) $6.00 per share of Common Stock or (ii) a discount ranging from 15% to 22.5% of the market price of Common Stock at the time of conversion; in certain circumstances, the conversion price may be as low as 50% of the market price of the Common Stock at the time of conversion. The Preferred STock is redeemable by the Company at any time at its option. In addition, the holder of a majority of the outstanding Preferred Stock have the right to appoint one director to the Company's Board of Directors, through they had not named such director at March 30, 1998. The Board of Directors is authorized, without further approval of the stockholders, to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each new series of Preferred Stock. The 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. The Company has 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 New Warrants are exercisable through December 2002 and are redeemable at the option of the Company, commencing January 1, 2000, based on a 20-day minimum closing bid price of the Company's common stock, at a redemption price equal to $.10 per share. The New Warrants also contain a "cashless exercise" feature. The issuance of the 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. The entire cost 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. The remaining cost of the financing will be reflected as an equity financing cost in 1998 upon automatic conversion of the Notes in 1998. On March 16, 1998, the Company sold an additional 1,550 shares of Preferred Stock to the Funds in exchange for non-marketable securities with an aggregate fair value of $1,550,000 (See note 5(b)). The securities consist of warrants to acquire common shares of various publicly traded companies and the fair value has been determined using the Black Scholes model. In connection therewith, the Funds as the holders of the majority of the outstanding Preferred Stock obtained the right to appoint one director to the Company's Board of Directors, though they had not named such directors as of April 3, 1998. As a condition to the consummation of the Marion Equity Financing (see Note 5c), 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 34 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 as follows: (i) up to $2,500,000 principal amount may be redeemed on or before April 30, 1998; (ii) an additional $2,500,000 principal amount may be redeemed on or before May 31, 1998; and (iii) an additional $2,500,000 principal amount may be redeemed from and after June 1, 1998. If the date that the Company redeems such Preferred Stock and Notes is on or before June 30, 1998, the redemption price will be 80% of the principal amount outstanding of the Notes being redeemed or 80% of the liquidation preference of the Preferred Stock being redeemed, plus accrued interest and dividends in the event that all of the Preferred Stock and Notes owned by the Funds are not redeemed by June 30, 1998. If the redemption of the Notes and Preferred Stock is after June 30, 1998 but on or before December 31, 1998, the 80% referred to in the preceding sentence shall increase by 2% per month, up to 90% in December 1998. If the redemption of the Notes and Preferred Stock occurs after December 31, 1998, the redemption price shall be as provided in the original agreement between the Company and 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 (Note 5c) 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, as well as the right to receive 200,000 additional shares of Common Stock in the event that all of the Preferred Stock and Notes owned by the Funds have not been redeemed by the Company by June 30, 1998. Further, the exercise price of the June Warrants has been reduced from $10.675 per share to $3.25 per share and the exercise price of the New Warrants has been reduced from $4.00 per share to $3.25 per share. The Company has agreed to register all of such shares of Common Stock (including the shares underlying warrants) under the Securities Act of 1933, as amended. (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"). The Marion Agreement calls 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 is 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; $1,500,000 of the $3,000,000 has been funded, with the remaining $1,500,000 to be funded on the business day after the Company's registration statement with respect to the shares sold to Marion has been declared effective by the Securities and Exchange Commission; (ii) sixty days following the 35 registration of all the underlying shares of Common Stock under the Marion Agreement, the Company will sell 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 shall 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 is contingent on Marion's satisfaction that the Company has met or exceeded the financial targets expected by Marion, in its sole discretion. The Company has agreed to use the $6,000,000 in proceeds from the third tranche to redeem the Notes and Preferred Stock issued in the June Financing. The issuance and sale of 1,400,000 shares of Common Stock in the first tranche and all of the shares to be issued in the second tranche to Marion, is subject to approval by the Company's stockholders. The Company will pay 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; (ii) 800,000 shares of Common Stock for the second $2,000,000 tranche; and (iii) no additional fee for the completion of the third tranche. Further, upon the consummation of the second tranche of the Marion Agreement, Mr. Alan Lubell, Chairman of the Board of the Company, has agreed to transfer to Marion 250,000 shares of Common Stock, which shares are required to be registered under the Securities Act of 1933, as amended. In addition, if the third tranche of the aforementioned financing is completed, then until March 30, 2001, the Company is required to obtain the prior written consent of Marion before the consummation of any additional financing transaction except for any credit facilities or lines of credit with lenders or equipment financing arrangements. Further, the Company may not redeem the warrants issued in the initial public offering (the "IPO Warrants") without the prior written consent of Marion. 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 June Convertible Financing and Note 5b for details). (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 by September 1998. The facility provides the Company with equipment financing of $100,000 for each of its next 25 vans, each of which is anticipated to cost approximately $150,000. The Company has drawn on $800,000 of 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 Vision 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 balance sheet. Future payments under the facility are as follows: For the year ended December 31, 1998 $ 303,936 1999 303,936 2000 199,008 --------- 806,880 Less amount representing interest (96,615) --------- Present value payments 710,265 Less current portion (234,985) --------- Non current portion $ 475,280 =========
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 36 which approximates the interest method over the term of the equipment financing. The unamortized portion of the original issue discount is $159,099 at December 31, 1997. The Company acquired certain fixed assets under leases totaling $913,170, which are accounted for as capital leases. 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 $538,902 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 as security, which is included in investments-restricted in the accompanying December 31, 1997 balance sheet. Future minimum lease payments under capital lease obligations together with the present value of the net minimum lease payments as of December 31, 1997 are as follows: For the year ended December 31, 1998 $ 353,172 1999 348,992 2000 16,706 --------- Minimum lease payments 718,870 Less amount representing interest (67,833) --------- Present value of net minimum lease payments 651,037 Less current portion (305,279) --------- Non current portion $ 345,758 =========
(e) FINANCING FEES In October, November and December of 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 at an exercise price of $7.50 per share, 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, with a fair market value of $36,000, which is included in financing fees in the accompanying 1997 statement of operations. During 1997 the Company incurred miscellaneous cash financing expenses of $13,049 in connection with its financing activities. (f) BANK BORROWINGS In November 1996, the Company entered into a revolving line of credit arrangement with a financial institution for $4,000,000. Through December 20, 1996, the line of credit bore an interest rate of 6.625%. Subsequent to December 20, 1996, the interest rate is 1.25% plus LIBOR (5.50% at December 31, 1996). All investments held with the financial institution are pledged as collateral for the line of credit. At December 31, 1996, the outstanding balance under this line was $500,000. (6) COMMON STOCK Prior to its initial public offering, in March 1996, the Company's Board of Directors eliminated the Class A and B designation of its common stock and declared a recapitalization effective 37 May 1996, whereby .488268 of a share and 4882.68 shares of common stock with a par value of $.01 per share were issued for each Class A and Class B share, respectively, of common stock outstanding on that date. In addition, options to purchase Class A common stock were converted into the right to purchase .5831847 shares of common stock. All share and per share information related to shares issued prior to the recapitalization have been restated to reflect the recapitalization. In April 1996, three shareholders transferred an aggregate of 300,000 shares of common stock to Greg Norman, upon his exercise of an option granted to him pursuant to the terms of the Shareholders Agreement and Greg Norman License (see note 9a). The fair value of the option granted to Greg Norman of $600,000 has been recorded as non-cash compensation expense in the accompanying 1996 statement of operations. To generate funds to develop the Company's products and commence its planned primary business activities in May 1996 the Company raised $965,000, net of expenses, from the sale of 22 units, in a private placement for $50,000 per unit, each unit consisting of an 8% unsecured promissory note in the principal amount of $50,000 and 10,000 shares of the Company's common stock. The promissory notes ($1,100,000) were repaid upon consummation of the Company's initial public offering (IPO) in July 1996. In the July 1996 IPO, 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, 1997, none of the warrants issued in connection with the Company's IPO have been exercised. Net proceeds from the IPO were $5,511,849. 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, 1997 is as follows: IPO warrants at $5.00 per share (Note 6) 1,495,000 Stock option plan for officers, directors, employees and consultants (Note 8) 912,871 Warrants issued in connection with June Financing, 100,000 at $3.25 per share and 200,000 at $4.00 per share (Note 5b) 300,000 Employment agreement options at $5.00 per share (Note 9b) 250,000 Warrants issued in connection with 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 $10.00 per share (Note 9a) 25,000 Options granted for consulting services at $7.50 per share (Note 5e) 10,548 --------- 3,168,419 =========
38 (7) INCOME TAXES As of December 31, 1996 and December 31, 1997, the Company had approximately $1,075,000 and $5,011,000, 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, 1996 and 1997. As of December 31, 1997 the Company's net operating loss carryforward is approximately $13,618,223 and expires as follows: 2011 $ 3,067,406 2012 10,550,817 ----------- $13,618,223 ===========
(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, 1996 and 1997 would have increased to $3,579,469 and $.94 and $12,575,665 and $2.64, respectively. 39 Stock option activity during the periods is indicated as follows:
Weighted Average Number of Shares Exercise Price ---------------- -------------- Balance at January 1, 1996 177,871 $5.00 Granted 787,871 $5.00 Forfeited (177,871) $5.00 -------- ----- 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 ======== ===== At December 31, 1996 and December 31, 1997, 287,871 and 504,124 options were exercisable, respectively. At December 31, 1997, the weighted average exercise price and weighted-average remaining contractual life of outstanding options was as follows: Outstanding Exercisable ----------------------- ------------------- Weighted- Weighted Average Weighted- Average Remaining Average Exercise Exercise Contractual Exercise Price Shares Price Life Shares Price -------- ------ -------- ----------- ------ --------- $5.00- 5.75 873,871 $ 5.10 5.70 466,908 $ 5.00 7.50 10,548 7.50 4.50 10,548 7.50 10.00-10.75 64,000 10.06 6.34 26,668 10.05 ------- ------- 5.00-10.75 948,419 5.46 5.73 504,124 5.16 ======= =======
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 1996 and 1997: risk free interest rate of 6.3%; expected lives of 2.5 to 5 years; and expected volitility of 70%. The fair value of options granted during 1996 and 1997 were $2.61 and $3.99 per share or $2,057,388 and $892,139, respectively. (9) COMMITMENTS AND CONTINGENCIES (a) LICENSE AGREEMENT Effective March 1, 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. Mr. Norman will receive guaranteed minimum payments against royalties of 8% of all net revenues, as defined, derived from the sale of ONE-ON-ONE videotapes. 40 As of June 3, 1997, the Company, Mr. Norman and Great White Shark executed an amendment (the "Amendment") to the Norman Agreement. Mr. Norman, Great White Shark and the Company agreed to restructure the terms of the guaranteed minimum payments due to Mr. Norman under the Agreement by: (i) altering the payments such that Mr. Norman will receive 102,000 in shares of the Company's common stock; (ii) changing the schedule of the payments such that they will be paid to Mr. Norman over a period of time from January 1998 through April 2000; and (iii) granting to Mr. Norman 25,000 options to purchase shares of Common Stock. Such options are exercisable at a price of $10.00 per share, vest immediately and are exercisable at Norman's discretion at any time prior to their expiration on June 30, 2000. The Company recorded a non-cash marketing expense of $93,132 related to the options. The Amendment restructures the payments to Norman as follows:
Shares of For the year ended December 31, Cash Common Stock ------------------------------ ---------- ------------ 1997 $ 600,000 - 1998 700,000 30,000 1999 1,200,000 48,000 2000 480,000 24,000 ---------- ------- $2,980,000 102,000 ========== =======
Through December 31, 1996 and 1997, the Company made payments to Mr. Norman amounting to $300,000 each year. These payments are presented in the accompanying 1996 balance sheet as prepaid expenses-advance royalties. In 1997 the Company expensed $250,000 of these payments, which is included in the 1997 statement of operations as a cost of sales, of the total $600,000 paid to date and the remaining $350,000 is included in the accompanying 1997 balance sheet as prepaid expenses-advance royalties. After the initial term, which ends on June 30, 2000, the Company has the option to renew the Agreement for two additional five-year periods (each five-year period, a "Renewal Term"). The guaranteed fee to Norman in the first year of the first Renewal Term will be $1,300,000, increasing by $100,000 each successive year thereafter. All such fees will be payable in cash in equal quarterly installments. (b) EMPLOYMENT AGREEMENTS The Company entered into employment agreements with six executive employees expiring through December 1998 which provide for aggregate minimum annual compensation of approximately $673,333 in 1997, and $665,000 in 1998. The agreements are automatically renewed for additional one-year periods unless the Company or the employees provide timely notice of termination. The agreements also provide for bonuses and severance payments ranging from three to twelve months. In addition, two of the employment agreements provide for options for each employee to purchase an aggregate of up to 250,000 shares of common stock, at an exercise price per share equal to the IPO price of $5.00 per share, which was the per share price at the date of grant. Such options have a vesting term of five years, subject to acceleration if the trading price of the common stock reaches certain thresholds. The original option agreement contained an error in that it did not include a provision for the options to vest 41 in five years. Such error was corrected by revisions to the option agreements dated April 3, 1997. Upon the termination of an employee the 25,000 options to purchase the Company's common stock that were granted to the employee were cancelled. Pursuant to a severance agreement, these option were reissued and the fair market value of $150,125 was included in non-cash stock compensation expense in the accompanying 1997 statement of operations. (c) SIGNIFICANT AND CONTINUING LOSSES For the period from July 15, 1994 (inception) to December 31, 1997, the Company incurred a cumulative net loss of $13,618,223. The Company believes that it will incur continuing losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front capital expenditures and operating costs associated with commercializing its products. (d) NEED FOR ADDITIONAL FINANCING The Company recently entered into a purchase agreement with Marion Interglobal, Ltd. ("Marion"), for additional financing as detailed more fully in Note 5(c). The continued implementation of the Company's business plan will require capital resources that will be available to the Company only upon the completion of the first and second tranches of the aforementioned financing. There can be no assurance that the conditions necessary for the completion of these tranches will occur. (e) UNCERTAINTY OF PROPOSED PLAN OF OPERATION The Company's plan of operation and prospects are largely dependent upon the Company's ability to successfully hire and retain skilled technical, marketing and other personnel, establish and maintain satisfactory relationships with those who arrange golf events, successfully develop, equip and operate ONE-ON-ONE vans on a timely and cost effective basis and achieve significant market acceptance for its products. There can be no assurance that the Company will be able to continue to implement its business plan or that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in its implementation. (10) PRO FORMA PRESENTATION OF STOCKHOLDERS' EQUITY (DEFICIT)-UNAUDITED At December 31, 1997 the Company had a stockholders' deficit of $1,137,662. On February 6, 1998 the Company entered into the First Amendment relating to its June Convertible Financing with the Funds. Pursuant to the First Amendment, the Funds converted, as of December 31, 1997, $6 million aggregate principal amount of the Notes, net of financing costs of $2,178,942, into shares of Preferred Stock (See Note 5(b)). On March 16, 1998, the Funds purchased an additional 1,550 shares of Preferred Stock in exchange for marketable securities with an aggregate value of $1,550,000. In addition, in March 1998, the Company entered into the Marion Agreement. The 42 Marion Agreement is detailed in Note 5(c). On a pro forma basis, assuming the June Financing (including the First Amendment) and the Preferred Stock and the $1,500,000 payment from the first tranche of the Marion Agreement had occurred on December 31, 1997, the Company would have recorded stockholders' equity (net of expenses) of $5,483,396. On a pro forma basis, assuming the June Financing (including the First Amendment) and the Preferred Stock and the $1,500,000 payment from the first tranche of the Marion Agreement had occurred on January 1, 1997, basic and diluted earnings per share for the year ended December 31, 1997 would have been $1.83 per share. Determined as follows: Net Loss $10,755,570 Preferred Stock Dividend 355,869 ----------- Net Loss Applicable to Common Stockholders $11,111,439 =========== Weighted Shares Outstanding As Reported 4,758,605 Additional Common Shares Issued 1,300,000 ----------- 6,058,605 ===========
If the balance of the first tranche and second and third tranches of the Marion Agreement had also occurred prior to December 31, 1997 the Company's stockholders' equity would have increased by approximately $3,075,000 for a total stockholders' equity of $8,508,396. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 43 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 1997 Proxy Statement, which is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION Information called for by Item 10 is set forth under the caption "Executive Compensation" in the Company's 1997 Proxy Statement, which is incorporated herein by reference. 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 1997 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 1997 Proxy Statement, which is incorporated herein by reference. 44 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 June 1997 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 June 1997 Bridge Financing (Incorporated by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed June 23, 1997) 45 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 June 1997 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 (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 January 1, 1996, between Alan Lubell and the Company (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.5* Employment Agreement, dated as of May 1, 1996, between Thomas S. Peters and the Company (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) 10.6 License Agreement, dated as of November 1, 1996, between the Company and Visual Edge Systems (Australia) Pty. Ltd. (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.7 Form of Consulting Agreement between the Company and Whale Securities Co., L.P. (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.8* Amended and Restated 1996 Stock Option Plan (Incorporated by reference to the Company's 1996 definitive Proxy Statement) 10.9* Employment Agreement, dated as of June 1, 1996, between the Company and Richard Parker (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) 10.10 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) 46 10.11 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) 10.12 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) 10.13 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) 10.14 Amended and Restated Guarantee and Agreement, dated as of December 18, 1997, between the Company and Cadillac Motor Car Division of General Motors Corporation (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed December 30, 1997) 10.15 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) 10.16 Purchase Agreement, dated as of March 27, 1998, among the Company and Marion Interglobal, LTD. (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed April 7, 1998) 10.17 Registration Rights Agreement, dated as of March 27, 1998, among the Company and Marion Interglobal, LTD. (Incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed April 7, 1998) 10.18 Second Amendment to Bridge Securities Purchase Agreement and Related Documents, dated as of March 27, 1998, among the Company and the Funds (Incorporated by reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed April 7, 1998) 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 47 * Designates management contracts and compensatory plans and arrangements required to be filed as Exhibits to this Report. ** Filed herewith. (b)Reports on Form 8-K During the last quarter of the fiscal year ended December 31, 1997, the Company filed Current Reports on Form 8-K on November 14, 1997 (as amended on November 19, 1997) and December 30, 1997. 48 SIGNATURES In accordance with the Section 13 or 15(d) of the Securities Exchange Act , the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VISUAL EDGE SYSTEMS INC. /s/ Earl T. Takefman ---------------------------------------- Earl T. Takefman March __, 1998 Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby authorizes and constitutes Earl Takefman and Alan Lubell, 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, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. SIGNATURE CAPACITY IN WHICH SIGNED DATE - --------- ------------------------ ---- /s/ Earl Takefman Director, Chief Executive Officer March 31, 1998 - --------------------- (Principal Executive Officer) Earl Takefman /s/ Melissa Forzly Chief Financial (Principal Financial March 31, 1998 - --------------------- and Accounting Officer) Melissa Forzly /s/ Alan Lubell Chairman of the Board March 31, 1998 - --------------------- Alan Lubell /s/ Eddie Einhorn Director March 31, 1998 - --------------------- Eddie Einhorn /s/ Mark Hershhorn Director March 31, 1998 - --------------------- Mark Hershhorn 49 /s/ Beryl Artz Director March 31, 1998 - --------------------- Beryl Artz /s/ Richard Parker Director March 31, 1998 - --------------------- Richard Parker 50 EX-10.16 2 PURCHASE AGREEMENT DATED 3/27/98 Exhibit 10.16 PURCHASE AGREEMENT This PURCHASE AGREEMENT ("AGREEMENT") is entered into as of March 27, 1998 by and between VISUAL EDGE SYSTEMS INC., a Delaware corporation (the "COMPANY"), with headquarters located at 2424 North Federal Highway, Suite 100, Boca Raton, Florida 33431 and Marion Interglobal, Ltd. ("PURCHASER") and/or its assigns (each, a "PURCHASER TRANSFEREE"). RECITALS A. The Company and Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D ("REGULATION D"), as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"). B. Purchaser desires to purchase, upon the terms and conditions stated in this Agreement, up to Eleven Million ($11,000,000) U.S. Dollars of shares of the Company's common stock, par value $0.01 per share (the "COMMON STOCK"). Collectively, the shares of Common Stock to be issued to the Purchaser are referred to herein as the "COMMON SHARES." C. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement in the form attached hereto as Exhibit A (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights under the Securities Act, the rules and regulations promulgated thereunder and applicable state securities laws. AGREEMENTS NOW, THEREFORE, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchaser hereby agree as follows: ARTICLE I PURCHASE AND SALE OF COMMON SHARES 1.1 PURCHASE OF COMMON SHARES. Subject to the terms and conditions of this Agreement, the issuance, sale and purchase of the Common Shares shall be consummated in up to three tranches, which shall occur in up to three closings (each, a "CLOSING") as follows: (a) FIRST TRANCHE. Prior to March 31, 1998 (the "FIRST CLOSING DATE"), and subject to Section 1.3 below and the satisfaction or waiver of the applicable conditions set forth in Articles VI and VII herein, the Company shall issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, 1,200,000 Common Shares for an aggregate consideration of $3,000,000, or $2.50 per Common Share. In addition, the Purchaser shall receive an aggregate of 1,200,000 additional Common Shares as a transaction fee. The events described in this Section 1(a) are referred to herein as the "FIRST TRANCHE." (b) SECOND TRANCHE. On the sixtieth (60th) day after the Company has provided notice to the Purchaser that all of the Common Shares described in Sections 1.1(a)-1.1(c) (I.E. an aggregate of 7,200,000 shares of Common Stock) have been registered (the "SECOND CLOSING DATE") under the Securities Act on a registration statement that has been declared effective by the SEC (the "REGISTRATION STATEMENT"), then, subject to Section 1.3 below and the satisfaction or waiver of the applicable conditions set forth in Articles VI and VII herein, the Company shall issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, 800,000 Common Shares for an aggregate consideration of $2,000,000, or $2.50 per Common Share. In addition, the Purchaser shall receive an aggregate of 800,000 additional Common Shares as a transaction fee. The events described in this Section 1(b) are referred to herein as the "SECOND TRANCHE." (c) THIRD TRANCHE. On or prior to September 30, 1998 (the "THIRD CLOSING DATE" and, together with the First Closing Date and the Second Closing Date, a "CLOSING DATE"), and subject to Section 1.3 below and the satisfaction or waiver of the applicable conditions set forth in Articles VI and VII herein, the Company shall issue and sell to the Purchaser, and the Purchaser agree to purchase from the Company, the number of Common Shares set forth in the following sentence for an aggregate consideration of $6,000,000. The number of Common Shares to be issued and sold to the Purchaser in this third tranche shall be as follows: (i) 3,200,000 Common Shares if the Third Closing Date occurs on or before June 30, 1998; (ii) 3,000,000 Common Shares if the Third Closing Date occurs between July 1, 1998 and July 31, 1998; (iii) 2,823,529 Common Shares if the Third Closing Date occurs between August 1, 1998 and August 31, 1998; and (iv) 2,666,667 Common Shares if the Third Closing Date occurs between September 1, 1998 and September 30, 1998. The events described in this Section 1(c) are referred to herein as the "THIRD TRANCHE." The $6,000,000 raised by the Company in the Third Tranche shall be used to repay and redeem, as applicable, certain of the Company's outstanding convertible notes and Series A Preferred Stock on the terms as set forth in the agreement (the "INFINITY AGREEMENT") attached hereto as Exhibit B between the Company and certain investment funds (the "INFINITY FUNDS") who hold certain of the Company's outstanding securities. 1.2 FORM OF PAYMENT. On each Closing Date, the Purchaser shall pay the purchase price payable for the Common Shares issued and sold on such date by wire transfer to the account designated by the Company, upon satisfaction of the applicable Closing conditions as of each Closing Date as set forth in Articles VI and VII herein. 1.3 SHAREHOLDER APPROVAL. In no event shall the aggregate number of shares to be issued and sold by the Company to the Purchaser (i) on any single Closing Date or (ii) on one or more Closing Dates, exceed 20% of the number of shares of Common Stock outstanding as of such date 2 (the "MAXIMUM NUMBER OF SHARES") unless the Company has received Shareholder Approval (as hereinafter defined) with respect to such issuances of Common Shares that exceed the Maximum Number of Shares. "SHAREHOLDER APPROVAL" means the approval of the Company's stockholders, in accordance with Nasdaq Rule 4460(i), to the issuance of a number of shares of Common Stock to the Purchaser in excess of the Maximum Number of Shares. In the event that the aggregate number of shares to be issued and sold by the Company to the Purchaser (i) on any single Closing Date or (ii) on one or more Closing Dates, exceeds the Maximum Number of Shares, the number of Common Shares that exceeds the Maximum Number of Common Shares shall be placed into escrow in accordance with the terms of the Escrow Agreement attached hereto as Exhibit C (the "ESCROW AGREEMENT"). The Escrow Agreement shall provide that, upon notice by the Company to the Escrow Agent (as defined therein) that Shareholder Approval has occurred, certificates evidencing the escrowed Common Shares shall be delivered to the Purchaser. A form of the letter to be delivered by certain of the Company's stockholders listed on Schedule 7.1(v), stating that they will vote in favor of the issuance of a number of Common Shares to the Purchaser in excess of the Maximum Number of Shares, is attached hereto as Exhibit D. 1.4 CLOSING. Each Closing will take place at the offices of Morgan, Lewis &Bockius LLP, 101 Park Avenue, New York, New York 10178, or at such other place as the Company and the Purchaser mutually agree, at 10:00 A.M. local time, on such applicable Closing Date. ARTICLE II PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Company as of the date hereof, and as of the date of each Closing, solely with respect to itself and its purchase hereunder, as set forth in this Article II: The Purchaser makes no other representations or warranties, express or implied, to the Company in connection with the transactions contemplated hereby and any and all prior representations and warranties, if any, which may have been made by the Purchaser to the Company in connection with the transactions contemplated hereby shall be deemed to have been merged in this Agreement and any such prior representations and warranties, if any, shall not survive the execution and delivery of this Agreement. 2.1 INVESTMENT PURPOSE. Purchaser is purchasing the Common Shares for Purchaser's own account for investment only and not with a view toward or in connection with the public sale or distribution thereof in violation of the applicable securities laws. Purchaser will not, directly or indirectly, offer, sell, pledge or otherwise transfer the Common Shares or any interest therein except pursuant to transactions that are exempt from the registration requirements of the Securities Act and/or sales registered under the Securities Act, the rules and regulations promulgated pursuant thereto and applicable state securities laws. Purchaser understands that Purchaser must bear the economic risk of this investment until the Common Shares are registered as contemplated by the Registration Rights Agreement pursuant to the Securities Act and any applicable state securities laws or an exemption from such registration is available. 3 2.2 ACCREDITED INVESTOR STATUS. Purchaser is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D and Purchaser has indicated on a duly executed Investor Questionnaire and Representation Agreement in the form attached hereto as Exhibit E and delivered to the Company in which capacity that it so qualifies as an "accredited investor." 2.3 INFORMATION. Purchaser or its counsel have been furnished all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Common Shares which have been specifically requested by Purchaser, including without limitation the Company's Annual Reports on Form 10-KSB/A for the year ended December 31, 1996 and a form of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997, substantially in the form in which it will be filed with the SEC on or before March 31, 1997 (the "1997 FORM 10-KSB"); Quarterly Report on Form 10-QSB for the period ended September 30, 1997; Quarterly Report on Form 10-QSB for the period ended June 30, 1997; Quarterly Report on Form 10-QSB for the period ended March 31, 1997; Current Reports on Form 8-K filed with the SEC on April 14, 1997, June 23, 1997, June 25, 1997, November 14, 1997, December 30, 1997 and February 9, 1998, each as amended (if applicable); and Proxy Statement filed with the Securities and Exchange Commission ("SEC") on April 7, 1997 (such documents collectively, the "SEC DOCUMENTS"). Purchaser has been afforded the opportunity to ask questions of the Company and has received what Purchaser believes to be complete and satisfactory answers to any such inquiries. Purchaser understands that Purchaser's investment in the Common Shares involves a high degree of risk, including without limitation the risks and uncertainties disclosed in the SEC Documents. Subject to the foregoing, Purchaser acknowledges the disclosures presented under the caption "Risk Factors" in the Company's Form 10-KSB/A for the year ended December 31, 1996, and the 1997 Form 10-KSB, and the incorporation of those disclosures by reference herein. 2.4 GOVERNMENTAL REVIEW. Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Common Shares. 2.5 TRANSFER OR RESALE. Purchaser understands that (i) except as provided in the Registration Rights Agreement, the Common Shares have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered, sold, pledged or otherwise transferred unless subsequently registered thereunder or an exemption from such registration is available (which exemption the Company expressly agrees may be established as contemplated in clauses (b) and (c) of Section 5.1 hereof); (ii) any sale of such Common Shares made in reliance on Rule 144 under the Securities Act (or a successor rule) ("RULE 144") may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such Common Shares without registration under the Securities Act under circumstances in which the seller may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Common Shares under the Securities Act or any state securities laws or 4 to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to this Agreement or the Registration Rights Agreement). 2.6 LEGENDS. Purchaser understands that, subject to Article V hereof, the certificates for the Common Shares, until such time as the Common Shares have been registered under the Securities Act as contemplated by the Registration Rights Agreement or otherwise may be sold by Purchaser pursuant to Rule 144 (subject to and in accordance with the procedures specified in Article V hereof), will bear a restrictive legend (the "LEGEND") in substantially the following form: THE SHARES OF COMMON STOCK EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SHARES OF COMMON STOCK REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATING TO SUCH SHARES OF COMMON STOCK UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS OR THE COMPANY IS FURNISHED WITH AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH REGISTRATION IS NOT REQUIRED. 2.7 ORGANIZATION AND QUALIFICATION. Purchaser is a corporation duly organized and existing in good standing under the laws of its jurisdiction of incorporation, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. Purchaser is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction where the failure so to qualify or be in good standing could have a material adverse effect on the transactions contemplated hereby. 2.8 AUTHORIZATION: ENFORCEMENT. (a) Purchaser has the requisite corporate power and authority to enter into and perform this Agreement and the Registration Rights Agreement, and to perform its obligations hereunder in accordance with the terms hereof; (b) the execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company, its board of directors, or its stockholders or any other person, body or agency, and no filing with any person, body or agency, is required with respect to any of the transactions contemplated hereby or thereby; (c) this Agreement and the Registration Rights Agreement have been duly executed and delivered by the Purchaser; and (d) this Agreement and the Registration Rights Agreement constitute legal, valid and binding obligations of the Purchaser enforceable against it in accordance with their respective terms, except (i) to the extent that such validity or enforceability may be subject to or affected by any bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights or remedies of creditors 5 generally, or by other equitable principles of general application, and (ii) as rights to indemnity and contribution under the Registration Rights Agreement may be limited by Federal or state securities laws. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchaser as of the date hereof, and as of the date of each Closing, as set forth in this Article III. The Company makes no other representations or warranties, express or implied, to the Purchaser in connection with the transactions contemplated hereby and any and all prior representations and warranties, if any, which may have been made by the Company to the Purchaser in connection with the transactions contemplated hereby shall be deemed to have been merged in this Agreement and any such prior representations and warranties, if any, shall not survive the execution and delivery of this Agreement. 3.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized and existing in good standing under the laws of Delaware, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction where the failure so to qualify or be in good standing would have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any effect which is (or could reasonably be expected to be) materially adverse to the business, operations, properties, financial condition or operating results of the Company, taken as a whole, or on the transactions contemplated hereby. 3.2 AUTHORIZATION: ENFORCEMENT. (a) The Company has the requisite corporate power and authority to enter into and perform this Agreement and the Registration Rights Agreement, and to issue and sell the Common Shares in accordance with the terms hereof; (b) the execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation the issuance of the Common Shares) have been duly authorized by all necessary corporate action and, except as contemplated by Section 1.3 herein or as set forth on Schedule 3.2 hereof, no further consent or authorization of the Company, its board of directors, or its stockholders or any other person, body or agency, and no filing with any person, body or agency, is required with respect to any of the transactions contemplated hereby or thereby; (c) this Agreement and the Registration Rights Agreement have been duly executed and delivered by the Company; and (d) this Agreement and the Registration Rights Agreement constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except (i) to the extent that such validity or enforceability may be subject to or affected by any bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights or remedies of creditors generally, or by other equitable principles of general application, and (ii) as rights to indemnity and contribution under the Registration Rights Agreement may be limited by Federal or state securities laws. 6 3.3 CAPITALIZATION. The capitalization of the Company as of the date hereof, including the authorized capital stock, the number of shares issued and outstanding and the number of shares reserved for issuance pursuant to the Company's stock option plans is set forth on Schedule 3.3. No shares of capital stock of the Company (including the Common Shares) are, and no such shares will be, subject to preemptive rights or any other similar rights of the stockholders of the Company or of any other person or entity or any liens or encumbrances. Except as disclosed in Schedule 3.3, as of the date of this Agreement and as of each Closing Date, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of Common Stock, and (ii) there are no agreements or arrangements under which the Company is obligated to register the sale of any of its securities under the Securities Act (except the Registration Rights Agreement). The Company has furnished to Purchaser true and correct copies of the Company's Certificate of Incorporation as in effect on the date hereof ("CERTIFICATE OF INCORPORATION"), and the Company's By-laws as in effect on the date hereof (the ("BY-LAWS"). 3.4 ISSUANCE OF SHARES. The Common Shares have been duly authorized and, upon issuance and sale in accordance with the terms hereof, will be validly issued, fully paid and non-assessable. The Common Shares shall be entitled to be traded on the same markets as the other shares of Common Stock of the Company are traded, and will not be subject to preemptive rights or other similar rights of stockholders of the Company or of any other person or entity. 3.5 NO CONFLICTS. The execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby, will not (a) result in a violation of the Certificate of Incorporation or By-laws or (b) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or result in a material violation of any law, rule, regulation, order, judgment or decree applicable to the Company or by which any property or asset of the Company is bound or affected (except as contemplated by Section 1.3 herein or except for such possible conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect or that are related to any inaccuracies or omissions in any representation or warranty of the Purchaser set forth herein). Except as set forth on Schedule 3.5, or except (A) such as may be required under the Securities Act in connection with the performance of the Company's obligations under the Registration Rights Agreement, (B) filing of a Form D with the SEC, (C) filing of any required Nasdaq SmallCap listing applications and (D) compliance with the state securities or Blue Sky laws of applicable jurisdictions, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement or the Registration Rights Agreement or to perform its obligations in accordance with the terms hereof or thereof. 7 3.6 SEC DOCUMENTS. Except as disclosed in Schedule 3.6, since December 31, 1996 the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). The Company has made available to the Purchaser true and complete copies of the SEC Documents, except for exhibits, schedules and incorporated documents. The financial statements of the Company included in the SEC Documents have been prepared in accordance with U.S. generally accepted accounting principles, consistently applied, and the rules and regulations of the SEC during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they do not include footnotes or are condensed or summary statements) and, fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flow for the periods then ended (subject, in the case of unaudited statements, to normal, immaterial year-end audit adjustments). 3.7 ABSENCE OF CERTAIN CHANGES. Since December 31, 1997, there has been no Material Adverse Effect on the Company, except as disclosed in Schedule 3.7 or as disclosed in the SEC Documents. 3.8 ABSENCE OF LITIGATION. Except as disclosed in Schedule 3.8 or in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, or self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its directors or officers in their capacities as such, which could reasonably be expected to result in an unfavorable decision, ruling or finding which would have a Material Adverse Effect or would adversely affect the transactions contemplated by this Agreement or any of the documents contemplated hereby or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of such other documents. 3.9 S-3 REGISTRATION. The Company is currently eligible to register the resale of its Common Stock on a registration statement on Form S-3 under the Securities Act. 3.10 NO GENERAL SOLICITATION. Neither the Company nor any distributor participating on the Company's behalf in the transactions contemplated hereby (if any) nor any person acting for the Company, or any such distributor, has conducted any "general solicitation," as described in Rule 502(c) under Regulation D, with respect to any of the Common Shares being offered hereby. 3.11 NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would either require registration of any of the Common Shares under the Act or prevent the parties hereto from consummating, or delay or interfere with the consummation of, the transactions contemplated hereby pursuant to an 8 exemption from the registration under the Securities Act pursuant to the provisions of Regulation D. 3.12 NO BROKERS. The Company has taken no action, directly or indirectly, which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by Purchaser relating to this Agreement or the transactions contemplated hereby, except for dealings with Evan Bines the fees of which shall be paid in full by the Company. 3.13 INTELLECTUAL PROPERTY. Except as disclosed in the SEC Documents, the Company owns, is licensed to use, or possesses adequate and enforceable rights to use all material patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "INTANGIBLES") used or necessary for the conduct of its business as described in the 1997 Form 10-KSB. 3.14 CERTAIN TRANSACTIONS. Except as disclosed in the SEC Documents and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties, none of the officers, directors, or employees of the company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. ARTICLE IV COVENANTS 4.1 BEST EFFORTS. The parties shall use their best efforts to timely satisfy each of the conditions described in Articles VI and VII of this Agreement. 4.2 SECURITIES LAWS. The Company agrees to timely file a Form D with respect to the Common Shares with the SEC as required under Regulation D and to provide a copy thereof to each Purchaser promptly after such filing. 4.3 REPORTING STATUS. So long as the Purchaser or a Purchaser Transferee beneficially owns any of the Common Shares, (a) the Company shall timely file all reports required to be filed with the SEC pursuant to the Exchange Act, and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and 9 regulations thereunder would permit such termination, and (b) the Company will maintain its ability and eligibility to register the resale of its Common Shares on Form S-3. 4.4 INFORMATION. Upon the request of the Purchaser or any Purchaser Transferee, the Company agrees to send the following reports to the Purchaser or Purchaser's Transferee until the Purchaser and Purchaser's Transferee transfers, assigns or sells all of its Common Shares in transactions in which the transferee is (unless such transferee is an affiliate) not subject to securities law resale restrictions: (a) a copy of its Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB, any proxy statements and any Current Reports on Form 8-K; and (b) copies of all press releases issued by the Company. The Company further agrees to promptly provide to the Purchaser and Purchaser's Transferee any information with respect to the Company, its properties, or its business or Purchaser's investment as the Purchaser and Purchaser's Transferee may reasonably request; provided, however, that the Company shall not be required to give the Purchaser any material nonpublic information. 4.5 PROSPECTUS DELIVERY REQUIREMENT. The Purchaser understands that the Securities Act may require delivery of a prospectus relating to the Common Shares in connection with any sale thereof pursuant to a registration statement under the Securities Act covering the resale by the Purchaser of the Common Shares being sold, and the Purchaser shall comply with the applicable prospectus delivery requirements of the Securities Act in connection with any such sale. 4.6 CORPORATE EXISTENCE. So long as the Purchaser or any Purchaser Transferee beneficially owns any Common Shares, the Company shall maintain its corporate existence, except in the event of a merger, consolidation or sale of all or substantially all of the Company's assets, as long as the surviving or successor entity in such transaction (i) assumes the Company's obligations hereunder and under the Registration Rights Agreement entered into in connection herewith and (ii) is a publicly traded corporation whose common stock is listed for trading on the Nasdaq SmallCap Market, the Nasdaq National Market, the New York Stock Exchange or the AMEX. 4.7 USE OF PROCEEDS. The Company covenants that, in the event that the Third Tranche is consummated, the entire $6,000,000 of proceeds raised by the Company in the Third Tranche shall be used to repay and redeem, as applicable, certain of the Company's outstanding convertible notes and Series A Preferred Stock on the terms as set forth in the Infinity Agreement attached hereto as Exhibit B between the Company and the Infinity Funds. ARTICLE V LEGEND REMOVAL, TRANSFER, CERTAIN SALES, ADDITIONAL SHARES 5.1 REMOVAL OF LEGEND. The Legend shall be removed and the Company shall issue, or shall cause to be issued, a certificate without such Legend to the holder of Common Shares upon which it is stamped, if, (a) the resale of such Common Shares is registered under the Securities Act or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions and reasonably satisfactory to the 10 Company and its counsel (the reasonable cost of which shall be borne by the Purchaser) to the effect that a public sale or transfer of such Common Shares may be made without registration under the Securities Act pursuant to an exemption from such registration requirements. The Purchaser agrees to sell all registered Common Shares, including those represented by a certificate(s) from which the Legend has been removed, or which were originally issued without the Legend, pursuant to an effective registration statement, in accordance with the manner of distribution described in such registration statement and to deliver a prospectus in connection with such sale or in compliance with an exemption from the registration requirements of the Securities Act. In the event the Legend is removed from any certificate evidencing Common Shares or any certificate evidencing Common Shares is issued without the Legend and such Common Shares are to be disposed of other than pursuant to the registration statement or pursuant to Rule 144, then prior to, and as a condition to, such disposition, the certificate evidencing such Common Shares shall be relegended as provided herein in connection with any disposition if the subsequent transfer thereof would be restricted under the Securities Act. Also, in the event the Legend is removed from any certificate evidencing Common Shares or any certificate evidencing Common Shares is issued without the Legend and thereafter the effectiveness of a registration statement covering the resale of such Common Shares is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to Purchaser holding such Common Shares, the Company may require that the Legend be placed on any such certificate evidencing Common Shares that cannot then be sold pursuant to an effective registration statement or Rule 144 or with respect to which the opinion referred to in clause (b) next above has not been rendered, which Legend shall be removed when such Common Shares may be sold pursuant to an effective registration statement or Rule 144 or such holder provides the opinion with respect thereto described in clause (b) next above. ARTICLE VI CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL 6.1 The obligation of the Company hereunder to issue and sell the Common Shares to the Purchaser at the Closing is subject to the satisfaction, AS OF EACH CLOSING DATE, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: (i) The Purchaser shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company. The Purchaser shall have completed and executed the Investor Questionnaire and delivered the same to the Company. (ii) The Purchaser shall have wired the purchase price for the Common Shares being purchased on such Closing Date to the account of the Company. (iii) The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of each Closing Date as though made at that time 11 (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the Closing. (iv) The Escrow Agreement shall have been validly executed and delivered by the Purchaser and the Escrow Agent. (v) The Infinity Agreement attached hereto as Exhibit B shall have been validly executed and delivered by the Purchaser and the Infinity Funds. ARTICLE VII CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE 7.1 The obligation of the Purchaser hereunder to purchase the Common Shares to be purchased by it on the date of the Closing is subject to the satisfaction AS OF EACH DATE OF CLOSING, of each of the following conditions, provided that these conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in the Purchaser's sole discretion: (i) The Company shall have executed this Agreement and the Registration Rights Agreement and delivered the same to Purchaser. (ii) The Company shall have delivered to the Purchaser duly issued Common Shares being so purchased at the Closing, in such number and denominations as are reasonably requested by Purchaser. (iii) The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of each Closing Date as though made at that time and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the applicable Closing Date. Purchaser shall have received a certificate, executed by the Chief Executive Officer or Chief Financial Officer of the Company, dated as of the applicable Closing Date to the foregoing effect. (iv) The Escrow Agreement shall have been validly executed and delivered by the Company and the Escrow Agent. (v) Purchaser shall have received, from each person or entity listed on Schedule 7.1(v), a letter stating that such person or entity, as the case may be, will vote their shares so that Shareholder Approval is received, and the Company may issue a number of Common Shares to the Purchaser that exceeds the Maximum Number of Shares. 12 (vi) The Infinity Agreement attached hereto as Exhibit B shall have been validly executed and delivered by the Company and the Infinity Funds. 7.2 The obligation of the Purchaser hereunder to purchase the Common Shares to be purchased by it on the Second Closing Date and the Third Closing Date is subject to the satisfaction AS OF EACH SUCH CLOSING DATE, of each of the following conditions, provided that these conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in the Purchaser's sole discretion: (i) The conditions set forth in Section 7.1 above shall continue to be satisfied. (ii) The Company shall have delivered to the Purchaser a notice that Shareholder Approval had occurred with respect to the issuance of a number of Common Shares to the Purchaser in excess of the Maximum Number of Shares. (iii) The Company shall have delivered to the Purchaser notice that the Registration Statement had been declared effective by the SEC. 7.3 The obligation of the Purchaser hereunder to purchase the Common Shares to be purchased by it on the Third Closing Date is subject to the satisfaction of each of the following conditions, provided that these conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in the Purchaser's sole discretion: (i) The conditions set forth in Sections 7.1 and 7.2 above shall continue to be satisfied. (ii) The Purchaser, in its sole discretion, shall be satisfied that the Company has met or exceeded the financial targets expected by the Purchaser, and has delivered a letter to the Company setting forth its satisfaction with the Company's performance under this Section 7.3(ii). ARTICLE VIII GOVERNING LAW; MISCELLANEOUS 8.1 GOVERNING LAW: JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties hereto irrevocably consent to the jurisdiction of the United States federal courts and state courts located in the State of New York in any suit or proceeding based on or arising under this Agreement or the transactions contemplated hereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. 8.2 COUNTERPARTS. This Agreement may be executed in two or more counterparts, including, without limitation, by facsimile transmission, all of which counterparts shall be 13 considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. 8.3 HEADINGS. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 8.4 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. 8.5 ENTIRE AGREEMENT: AMENDMENTS. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived other than by an instrument in writing signed by the party to be charged with enforcement and no provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Purchaser. 8.6 NOTICE. Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by nationally-recognized overnight courier or by facsimile machine confirmed telecopy, and shall be deemed delivered at the time and date of receipt (which shall include telephone line facsimile transmission). The addresses for such communications shall be: IF TO THE COMPANY: Visual Edge Systems Inc. Attn: Mr. Earl T. Takefman, CEO 2424 North Federal Highway, Suite 100 Boca Raton, Florida 33431 Telephone: (561) 750-7559 Telecopy: (561) 750-7299 with a copy to: Morgan, Lewis & Bockius LLP Attn: David W. Pollak, Esq. 101 Park Avenue, 45th Floor New York, NY 10178-0060 Telephone: (212) 309-6058 Telecopy: (212) 309-6273 14 IF TO PURCHASER: Marion Interglobal, Ltd. 12803 Water Point Blvd. Windermere, Florida 34786 Attn: Mr. Ron Seales Telephone: (407) 876-5550 Telecopy: (407) 876-5117 Each party shall provide notice to the other party of any change in address. 8.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor the Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, the Purchaser may assign all or part of its rights and obligations hereunder to any of its "affiliates," as that term is defined under the Securities Act, without the consent of the Company so long as such affiliate is an accredited investor (within the meaning of Regulation D under the Securities Act) and agrees in writing to be bound by this Agreement. This provision shall not limit the Purchaser's right to transfer the Common Shares pursuant to the terms of this Agreement or to assign the Purchaser's rights hereunder to any such transferee pursuant to the terms of this Agreement. 8.8 THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 8.9 SURVIVAL. The representations and warranties of the Company and the Purchaser and the agreements and covenants set forth herein shall survive for one (1) year after the Closing hereunder. 8.10 FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 15 IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this Agreement to be duly executed as of the date first above written. PURCHASER: MARINE INTERGLOBAL, LTD. By: /s/ Ronald Seale -------------------------------------- Name: Ronald Seale Title: Senior Managing Director VISUAL EDGE SYSTEMS INC. By: /s/ Earl Takefman -------------------------------------- Name: Earl Takefman Title: Chief Executive Officer 16 EXHIBIT A REGISTRATION RIGHTS AGREEMENT EXHIBIT B INFINITY AGREEMENT EXHIBIT C ESCROW AGREEMENT EXHIBIT D Letter from Certain Stockholders of the Company Exhibit E FORM OF INVESTOR QUESTIONNAIRE EX-10.17 3 REGISTRATION RIGHTS AGREEMENT Exhibit 10.17 REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 27, 1998 (the "Agreement"), is made by and between VISUAL EDGE SYSTEMS INC., a Delaware corporation (the "Company"), and MARION INTERGLOBAL, LTD. (the "Investor"). WITNESSETH: WHEREAS, in connection with the Purchase Agreement dated as of the date hereof between the Investor and the Company (the "Purchase Agreement"), the Company has agreed, upon the terms and subject to the conditions of the Purchase Agreement, to issue and sell to the Investor Eleven Million ($11,000,000) U.S. Dollars of shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock"). Collectively, the shares of common stock to be issued to the Purchaser are collectively referred to herein as the "Common Shares." In connection with the sale of the Common Shares to the Investor, the Investor will be entitled to registration rights as set forth in this Agreement; WHEREAS, to induce the Investor to execute and deliver the Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws with respect to the Common Shares; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: (a) "HOLDERS" are stockholders of the Company who, by virtue of agreements with the Company, are entitled to include their securities in certain Registration Statements filed by the Company. (b) "INVESTOR" refers to the investor who purchased Common Shares from the Company pursuant to the Purchase Agreement and includes any transferee or assignee of the Investor who agrees to become bound by the provisions of this Agreement in accordance with Section 8 hereof. (c) "REGISTRABLE SECURITIES" means the Common Shares, together with any shares of Common Stock which may be issued as a dividend or other distribution and any additional shares of Common Stock which are required to be included in a Registration Statement pursuant to Section 2(a) below. (d) "REGISTRATION PERIOD" means the period between the date of this Agreement and the earlier of (i) the date on which all of the Registrable Securities have been sold, or (ii) the date on which the Registrable Securities (in the opinion of the Company's counsel) may be sold without registration. (e) "REGISTRATION STATEMENT" means a registration statement filed with the Securities and Exchange Commission (the "SEC") under the 1933 Act. (f) The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a Registration Statement in compliance with the 1933 Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. 2. REGISTRATION. (a) MANDATORY REGISTRATION. The Company will file a Registration Statement with the SEC registering the Registrable Securities for resale within twenty (20) business days of the First Closing Date of the purchase of the Common Shares (the "Closing Date"). The Company shall use its best efforts to cause such Registration Statement to be declared effective by the SEC as soon as practicable after filing. Such best efforts shall include, but not be limited to, promptly responding to all comments received from the staff of the SEC. (b) PIGGYBACK REGISTRATIONS. If, at any time prior to the expiration of the Registration Period, the Company decides to register any of its securities for its own account or for the account of others (excluding registrations relating to equity securities to be issued in connection with an acquisition of any entity or business or in connection with stock option or other employee benefit plans), the Company will promptly give the Investor written notice thereof, and will use its best efforts to include in such registration all or any part of the Registrable Securities so requested by the Investor (excluding any Registrable Securities previously included in a Registration Statement). The Investor's request for registration must be given to the Company in writing within ten (10) days after receipt of the notice from the Company. If the registration for which the Company gives notice is a public offering involving an underwriting, the Company will so advise the Investor as part of the above-described written notice. In such event, if the managing underwriter(s) of the public offering impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement, then the Company will be obligated to include only such limited portion, if any, of the Registrable Securities with respect to which the Investor has requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro-rata among all Holders of the Company's securities seeking to include shares of Common Stock in proportion to the number of shares of Common Stock sought to be included by such Holders. No right to registration of Registrable -2- Securities under this Section 2(b) shall be construed to limit in any way the registration required under Section 2(a) above. The obligations of the Company under this Section 2(b) will expire upon the earlier of: (i) the effectiveness of the Registration Statement filed pursuant to Section 2(a) above; (ii) after the Company has afforded the opportunity for the Investor to exercise registration rights under this Section 2(b) for two registrations; or (iii) when all of the Registrable Securities held by the Investor may be sold by the Investor under Rule 144 under the 1933 Act without being subject to any volume restrictions. (c) LATE REGISTRATION PAYMENTS. If the Registration Statement required pursuant to Section 2(a) above has not been declared effective by June 30, 1998 (the "Required Effective Date"), the Company will make a cash payment to the Investor in the amount of $3 million as compensation for such delay. Such payment will be made the business day following the Required Effective Date. 3. ADDITIONAL OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall have the following additional obligations: (a) The Company shall keep the Registration Statement effective pursuant to Rule 415 under the 1933 Act at all times during the Registration Period as defined in Section l(d) above. (b) The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) filed by the Company shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, shall comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the sellers thereof as set forth in the Registration Statement. (c) Upon the request of the Investor, the Company shall furnish to the Investor (i) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, one copy of the Registration Statement and any amendment thereto; each preliminary prospectus and final prospectus and each amendment or supplement thereto; and (ii) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto, and such other documents as the Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by the Investor. -3- (d) The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Investor reasonably requests, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions. Notwithstanding the foregoing provision, the Company shall not be required in connection therewith or as a condition thereto to (i) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) subject itself to general taxation in any such jurisdiction, (iii) file a general consent to service of process in any such jurisdiction, (iv) provide any undertakings that cause more than nominal expense or burden to the Company or (v) make any change in its charter or bylaws. (e) In the event the Investor requests underwriters for such offering, such underwriters shall be selected by the Company and will be reasonably acceptable to the Investor and the Company shall enter into and perform its obligations under an underwriting agreement in usual and customary form including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering. The Investor shall be responsible for payment of the attorney fees and costs incurred in connection with such underwritten offering in accordance with Section 5. (f) The Company shall notify the Investor of the happening of any event of which the Company has knowledge as a result of which the prospectus included in the Registration Statement as then in effect includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (a "Suspension Event"). The Company shall make such notification as promptly as practicable after the Company becomes aware of such Suspension Event, shall promptly use its best efforts to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and shall deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request. Notwithstanding the foregoing provision, the Company shall not be required to maintain the effectiveness of the Registration Statement or to amend or supplement the Registration Statement for a period (a "Delay Period") expiring upon the earlier to occur of (i) the date on which such material information is disclosed to the public or ceases to be material or (ii) the date on which the Company is able to comply with its disclosure obligations and SEC requirements related thereto. (g) The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement and, if such an order is issued, shall use its best efforts to obtain the withdrawal of such order at the earliest possible -4- time and to notify the Investor (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof. (h) The Company shall permit a single firm of counsel designated by the Investor (or Investors) who hold a majority in interest of the Registrable Securities being sold pursuant to such registration to review the Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC. (i) The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earning statement (in a form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter following the date of the Registration Statement. (j) At the request of the Investor the Company shall furnish on the date that Registrable Securities are delivered to an underwriter for sale in connection with the Registration Statement (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters; and (ii) an opinion, dated such date, from counsel representing the Company for purposes of such Registration Statement, in form and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investor. (k) The Company shall make available for inspection by the Investor, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such Investor or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (iii) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto, substantially in the form of this Section 3(k). The Investor agrees that it shall, upon -5- learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein shall be deemed to limit the Investor's ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations. (l) The Company shall use its best efforts either to (i) cause all the Registrable Securities covered by the Registration Statement to be listed on a national securities exchange and on each additional national securities exchange on which similar securities issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation of all the Registrable Securities covered by the Registration Statement as a National Association of Securities Dealers Automated Quotations System ("Nasdaq") "national market system security" within the meaning of Rule llAa2-1 of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the Registrable Securities on the Nasdaq National Market System or, if, despite the Company's best efforts to satisfy the preceding clause (i) or (ii), the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to secure listing on a national securities exchange or Nasdaq authorization and quotation for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. (m) The Company shall cooperate with the Investor and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be sold pursuant to the denominations or amounts as the case may be, and registered in such names as the managing underwriter or underwriters, if any, or the Investor may reasonably request; and, within five business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investor whose Registrable Securities are included in such Registration Statement) instructions to the transfer agent to issue new stock certificates without a legend and an opinion of such counsel that the Common Shares have been registered. 4. OBLIGATIONS OF THE INVESTOR. In connection with the registration of the Registrable Securities, the Investor shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the Investor that the Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of the Registrable Securities and shall execute such documents -6- in connection with such registration as the Company may reasonably request. At least five (5) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Investor of the information the Company requires from such Investor (the "Requested Information") if such Investor elects to have any of such Investor's Registrable Securities included in the Registration Statement. If within two (2) business days prior to the filing date the Company has not received the Requested Information from the Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor. (b) The Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless the Investor has notified the Company in writing of the Investor's election to exclude all of the Investor's Registrable Securities from the Registration Statement. (c) In the event the Investor determines to engage the services of an underwriter as provided in Section 3(e), the Investor agrees to enter into and perform the Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless the Investor has notified the Company in writing of the Investor's election to exclude all of the Investor's Registrable Securities from the Registration Statement. (d) The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), the Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, the Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in the Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (e) The Investor may not participate in any underwritten registration hereunder unless the Investor (i) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (ii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses of the underwriter applicable with respect to its Registrable Securities. -7- (f) Subject to such other reasonable requirements as may be imposed by the underwriter as a condition of inclusion of a holder's Registrable Securities in the registration statement, each holder of Registrable Securities agrees by acquisition of such Registrable Securities, if so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of, except as part of such underwritten registration, any equity securities of the Company, during such reasonable period of time requested by the underwriter. 5. EXPENSES OF REGISTRATION. All reasonable expenses, including underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company, shall be borne by the Investor. The Investor shall bear the fees and disbursements of its counsel. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless the Investor, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls the Investor within the meaning of the 1933 Act or the Exchange Act, any underwriter (as defined in the 1933 Act) for the Investor, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each person, if any, who controls any such underwriter within the meaning of the 1933 Act or the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, expenses or liabilities (joint or several) (collectively "Claims") to which any of them become subject under the 1933 Act insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, or any state securities law or any rule or regulation (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (A) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with -8- information furnished to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (B) with respect to any preliminary prospectus shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if a prospectus was timely made available by the Company pursuant to Section 3(c) hereof; and (C) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Persons and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 8. (b) In connection with any Registration Statement in which the Investor is participating, the Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act or the Exchange Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the 1933 Act or the Exchange Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the 1933 Act, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with information furnished to the Company by the Investor for use in connection with such Registration Statement, and the Investor will promptly reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 8. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. (c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be -9- made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and this indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying parties. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. 7. CONTRIBUTION. To the extent any indemnification provided for herein is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investor to transferees or assignees of all or any portion of such securities only if (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within three (3) business days after such assignment, (ii) the Company is, within three (3) business days after such transfer or assignment, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws, (iv) at or before the time the Company received the written notice contemplated by clause (ii) of this sentence, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, (v) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement, and (vi) such transferee shall be an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act. 9. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Investor and the Company. -10- 10. MISCELLANEOUS. (a) CONFLICTING INSTRUCTIONS. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) NOTICES. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (with return receipt requested) or delivered personally or by courier (including a nationally recognized overnight delivery service) or by facsimile transmission. Any notice so given shall be deemed effective three days after being deposited in the U.S. Mail, or upon receipt if delivered personally or by courier or facsimile transmission, in each case addressed to a party at the following address or such other address as each such party furnishes to the other in accordance with this Section 10(b): IF TO THE COMPANY: Visual Edge Systems Inc. Attn: Mr. Earl T. Takefman, CEO 2424 North Federal Highway, Suite 100 Boca Raton, Florida 33431 Telephone: (561) 750-7559 Telecopy: (561) 750-7299 with a copy to: Morgan, Lewis & Bockius LLP Attn: David W. Pollak, Esq. 101 Park Avenue, 45th Floor New York, NY 10178-0060 Telephone: (212) 309-6058 Telecopy: (212) 309-6273 IF TO THE INVESTOR: Marion Interglobal, Ltd. 12803 Water Point Blvd. Telephone: (407) 876-5550 Telecopy: (407) 876-5117 -11- (c) WAIVER. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) GOVERNING LAW. This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of New York applicable to the agreements made and to be performed entirely within such state, without giving effect to rules governing the conflict of laws, and any disputes arising hereunder will be adjudicated in federal or state court situated therein. Each party hereto consents to such venue in New York and to the personal and subject matter jurisdiction of said courts and, to the extent permitted by applicable law, agrees to waive any objection as to such jurisdiction or venue, and agrees not to assert any defense based on lack of jurisdiction or venue. (e) SEVERABILITY. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (f) ENTIRE AGREEMENT. This Agreement and the Purchase Agreement (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. (g) SUCCESSORS AND ASSIGNS. Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (h) USE OF PRONOUNS. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (i) HEADINGS. The headings and subheadings in the Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (j) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission, and facsimile signatures shall be binding on the parties hereto. -12- (k) FURTHER ACTS. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (l) CONSENTS. All consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities. -13- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. COMPANY: VISUAL EDGE SYSTEMS INC. By: /s/ Earl Takefman ----------------------------------- Name: Earl Takefman Title: Chief Executive Officer INVESTOR: MARION INTERGLOBAL, LTD. By: /s/ Ron Seale ----------------------------------- Name: Ron Seale Title: Senior Managing Director -14- EX-10.18 4 SECOND AMENDMENT TO BRIDGE SECURITY PURCHASE Exhibit 10.18 AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT AND RELATED DOCUMENTS THIS AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT AND RELATED DOCUMENTS (the "Amendment") dated as of March __, 1998 among VISUAL EDGE SYSTEMS INC., a Delaware corporation (the "Company"), INFINITY INVESTORS LIMITED, INFINITY EMERGING OPPORTUNITIES LIMITED, SUMMIT CAPITAL LIMITED (as the transferee from SANDERA PARTNERS, L.P.) and GLACIER CAPITAL LIMITED (as the transferee from LION CAPITAL PARTNERS, L.P.) (collectively, the "Purchasers"). R E C I T A L S: A. The Company and the Purchasers have entered into that certain Bridge Securities Purchase Agreement dated as of June 13, 1997 (the "Initial Purchase Agreement"), as amended by that certain First Amendment to Bridge Securities Purchase Agreement and Related Documents (the "First Amendment") dated as of December 31, 1997. B. The Company and the Purchasers have entered into that certain Agreement dated as of March 13, 1998 pursuant to which, among other items, the Company issued to the Purchasers 1,550 additional shares of Preferred Stock (the "Letter Agreement") (the Initial Purchase Agreement, as amended by the First Amendment, the Letter Agreement and this Amendment being referred to herein as the "Purchase Agreement"). C. The Company and the Purchasers now desire to amend the Purchase Agreement, and certain of the related Financing Documents (as defined in the Purchase Agreement) executed and delivered in connection therewith in order to (i) provide for the issuance of additional shares of Common Stock to the Purchasers, (ii) make certain amendments to the Financing Documents and (iii) confirm the continued legality, validity and binding effect of the Financing Documents, as amended by this Amendment. D. Contemporaneous herewith, the Company and Marion Interglobal, Ltd. ("Marion") have entered into and consummated the transactions contemplated by that certain Purchase Agreement in the form annexed hereto as Exhibit A (the "Marion Agreement"), pursuant to which, among other things, Marion has agreed to invest up to $11,000,000 in the Company, including $3,000,000 of gross cash proceeds in a first tranche (the "Initial Marion Investment"). - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 1 (Visual Edge Systems Inc.) NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Purchase Agreement. ARTICLE II AGREEMENTS The Company and the Purchasers hereby agree as follows: SECTION 2.1 CONVERSION TO COMMON STOCK. (a) The Purchasers shall not, during the period commencing on the date hereof and ending on December 31, 1998, unless a Material Transaction has occurred, convert any shares of Preferred Stock or the principal amount of any of the Convertible Notes into shares of Common Stock (the "Principal Moratorium"). (b) A Material Transaction shall mean (i) the occurrence of a Change of Control of the Company, (ii) a transfer of all or substantially all of the assets of the Company to any Person in a single transaction or series of related transactions, or (iii) a consolidation or merger of the Company with or in to another Person (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of the outstanding shares of Common Stock or in which the Company is the surviving entity, or which is effected solely to change the jurisdiction of incorporation of the Company). A Change of Control shall mean after the date of this Amendment and after giving effect to the consummation of all transactions contemplated under the Marion Agreement, any Person or group of Persons (within the meaning of Sections 13 and 14 of the Exchange Act and the rules and regulations of the Commission relating to such sections) shall have acquired beneficial ownership (within the meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to the Exchange Act) of 50.1% or more of the outstanding shares of Common Stock of the Company. (c) The Principal Moratorium shall not apply and the Purchasers shall be entitled, at their option, to convert all or any shares of Preferred Stock or the principal amount of all or any of the Convertible Notes into shares of Common Stock contemporaneous with or immediately preceding any Material Transaction. - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 2 (Visual Edge Systems Inc.) (d) The Principal Moratorium shall be subject to and conditioned upon consummation of the Initial Marion Investment on the terms set forth in the Marion Agreement, with the Company supplying to the Purchasers evidence thereof reasonably satisfactory to the Purchasers (which may include, at the request of the Purchasers, a written certification from Marion to that effect). SECTION 2.2 ADDITIONAL COMMON STOCK; REGISTRATIONS. (a) Contemporaneous herewith, the Company shall issue 100,000 shares of Common Stock (the "New Shares") to the Purchasers, allocated among the Purchasers as set forth on SCHEDULE 1 hereto. In addition, if the Company has not exercised its voluntary redemption right set forth in Section 3.4 of the Purchase Agreement and redeemed on or before the First Call Date all of the Preferred Shares and repaid the entire sum due and owing on all of the Convertible Notes in accordance with the terms thereof (the "Complete Redemption Event"), then on July 1, 1998 the Company shall issue 200,000 shares of Common Stock (the "Additional New Shares") to the Purchasers, allocated among the Purchasers in the same ratios as the New Shares are allocated among the Purchasers as set forth on SCHEDULE 1 hereto. (b) The Company hereby covenants and agrees to include within the resale registration statement to be filed by the Company on Form S-3 with the Commission contemplated by the Marion Agreement (the "Marion Registration Statement") all shares of Common Stock (i) owned by the Purchasers as of the date of this Amendment (including the New Shares and, to the extent legally permissible, the Additional New Shares), (ii) issuable upon exercise of all Warrants owned by the Purchasers as of the date of this Amendment, and (iii) issued as dividends or interest on or before March 31, 1998 with respect to the Preferred Shares and the Convertible Notes, in each case which have not previously been registered for resale with the Commission pursuant to Registration No. 333-40415 as declared effective by the Commission on November 21, 1997 (the "Existing Registration Statement"). The shares of Common Stock owned by or issuable to the Purchasers which the parties expect to be included in the Marion Registration Statement are summarized on SCHEDULE 2 attached hereto. (c) On or before July 31, 1998 (the "Required Filing Date"), the Company shall file an additional resale registration statement on Form S-3 with the Commission (the "Additional Registration Statement") covering (i) any Additional New Shares (if not included in the Marion Registration Statement) and (ii) any shares of Common Stock issuable (x) upon conversion of the Preferred Shares and Convertible Notes or (y) as dividends or interest thereon, not included in the Existing Registration Statement or the Marion Registration Statement. The Required Filing Date, shall be extended until August 15, 1998 if, on or about the Required Filing Date the Company provides written notice to the Purchasers that the Company reasonably expects (based upon an executed letter of intent, term sheet or similar document) to secure Qualified Equity Financing in an amount sufficient to effect a Complete Redemption Event on or before August 15, 1998. (d) The Company shall use its best lawful efforts to cause the Marion Registration Statement and the Additional Registration Statement to be declared effective by the Commission as - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 3 (Visual Edge Systems Inc.) soon as possible. The Company further covenants and agrees to maintain the effectiveness of the Existing Registration Statement, the Marion Registration Statement and the Additional Registration Statement for the periods contemplated by the Registration Rights Agreement. (e) The Company covenants and agrees to promptly file a post effective amendment to the Existing Registration Statement (and to include in the Marion Registration Statement and the Additional Registration Statement) a change from Sandera Partners L.P. to Summit Capital Limited, and from Lion Capital Partners, L.P. to Glacier Capital Limited, as the selling shareholders thereunder. SECTION 2.3 PURCHASERS SALE RESTRICTIONS. (a) The Purchasers hereby agree that they shall not sell or otherwise transfer (including any direct or indirect short sale) in any public resale under the Existing Registration Statement, Marion Registration Statement or Additional Registration Statement or pursuant to Rule 144 (the "Resale Limitation") any shares of Common Stock of the Company owned by them or acquired by them under the terms of any of the Financing Documents prior to the earlier to occur of (i) the consummation of a Material Transaction or (ii) March 31, 1999. The parties acknowledge that the number of issued and outstanding shares of Common Stock owned by the Purchasers as of the date hereof is as summarized on Schedule 2 hereto. (b) The Purchasers may, at any time from and after June 30, 1998, resell in a private transaction exempt from the registration requirements of the Securities Act any shares of Common Stock owned by the Purchasers or acquired by them under the terms of any of the Financing Documents without the consent of the Company, Marion or any other party (the "Private Sale Right"); PROVIDED, HOWEVER, the transferee thereof must agree in writing to be bound by the Resale Limitation and the Option Right (as hereafter defined). The Purchasers hereby authorize the Company to add a legend to all shares of Common Stock owned by the Purchasers referring to the Resale Limitation, the Option Right and the Right of First Refusal (as hereafter defined) (including a reference that the Resale Limitation, Option Right and Right of First Refusal are binding upon any transferee thereof). (c) The Purchasers hereby grant to the Company an option (the "Option Right"), exercisable by the Company or by Marion (as the assignee thereof from the Company) by written notice to the Purchasers (the "Option Notice") on or before March 31, 1999 to acquire all, but not less than all, of the shares of Common Stock of the Company then owned by the Purchasers for a purchase price equal to (x) if such exercise occurs on or before the First Call Date, $4.50 per share of Common Stock and (y) if such exercise occurs after the First Call Date, the greater of (i) $4.50 per share of Common Stock or (ii) the product of 90% multiplied by the weighted average trading price as reported by Bloomberg, L.P. for the Common Stock for the twenty (20) Trading Days ending on the date immediately preceding the delivery of the Option Notice (the "Option Price"). Within three (3) Business Days following the delivery of the Option Notice, (x) the Company or Marion, as applicable, shall deliver to the Purchasers the applicable - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 4 (Visual Edge Systems Inc.) Option Price, and (y) the Purchasers shall deliver to the Company or Marion, as applicable, the certificates representing the shares of Common Stock acquired pursuant to the Option Notice. SECTION 2.4 RIGHT OF FIRST REFUSAL. (a) If prior to March 31, 1999 the Purchasers receive an offer from a third party (a "Private Offer") to purchase any or all of the shares of Common Stock then owned by the Purchasers, less any shares previously sold or transferred by the Purchasers in compliance with the terms of this Amendment (the "Remaining Shares"), and the Purchasers desire to accept such Private Offer, the Purchasers shall promptly send via facsimile a Notice of Offer (as hereafter defined) to the Company, offering to sell such Remaining Shares to the Company in accordance with Section 2.4(b) below. Such Notice of Offer shall be irrevocable for a period of 24 hours from the receipt via facsimile of the Notice of Offer by the Company. The term "Notice of Offer" shall mean a document setting forth the price and any other material terms and conditions of the Private Offer, as well as the name and address of the third party offeror. (b) Whenever a Private Offer to purchase the Remaining Shares has been received by the Purchasers which the Purchasers desire to accept, and a Notice of Offer thereof has been sent to the Company, the parties shall comply with the following procedures. For a period of 24 hours from its receipt of such Notice of Offer via facsimile, the Company shall have the right, in its discretion, without obligation, to purchase all (but not less than all) of the Remaining Shares so offered (the "Right of First Refusal") at a price equal to and on the terms specified in the Notice of Offer. If the Company elects to purchase all of the Remaining Shares so offered, it must send written notice thereof to the Purchasers within such 24 hour period. Upon exercise by the Company of such election, the Company shall purchase the Remaining Shares so offered effective as of the date of delivery of the written notice to the Purchasers, with the closing thereof occurring within three (3) Business Days thereafter. If the Company does not elect to purchase the Remaining Shares so offered within this prescribed time period, the Purchasers shall have the right to sell (the "Sale Option") the Remaining Shares subject to such Private Offer within three (3) Business Days after the delivery of the Notice of Offer to the Company, with the transferee taking such Remaining Shares subject to the terms of the Resale Limitation and the Option Right. Upon exercise of the Sale Option, the Purchasers shall be required to consummate such sale at the same price set forth in the Notice of Offer. In the event such Sale Option is not fully consummated within three (3) Business Days after the delivery of the Notice of Offer, the provisions of this Section 2.4 must again be complied with by the Purchasers prior to any disposition of the Remaining Shares prior to March 31, 1999. (c) The Company may, at its option, assign the Right of First Refusal to Marion. SECTION 2.5 INTEREST AND DIVIDEND PAYMENTS. The Company shall on March 31, 1998, pay to the Purchasers in shares of Common Stock all accrued and unpaid dividends through March 31, 1998 on the Preferred Stock and all accrued and unpaid interest on the Convertible Notes through March 31, 1998. Upon the occurrence of a Complete Redemption Event on or prior to the - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 5 (Visual Edge Systems Inc.) First Call Date, the Purchasers hereby agree to waive and forgive the obligation of the Company to pay accrued dividends on the Preferred Shares and accrued interest on the Convertible Note for the period April 1, 1998 through June 30, 1998. SECTION 2.6 WARRANTS. (a) The New Warrants (as such term is defined in the Purchase Agreement) are hereby amended by changing the exercise price set forth therein from $4.00 per share to $3.25 per share. (b) The Existing Warrants (as such term is defined in the First Amendment) (including the 30,000 Existing Warrants previously transferred to Alpine Capital Partners) are hereby amended by changing the exercise price set forth therein from $10.675 per share to $3.25 per share. The Buyers acknowledge and agree that no further amendment to the exercise price of the Existing Warrants (or issuance of additional common stock purchase warrants), pursuant to the Black-Scholes model or otherwise, is required in accordance with the exercise price reset provisions contained in Schedule 1 to the Existing Warrants. SECTION 2.7 DEFINITION IN PURCHASE AGREEMENT. (a) Effective as of the date hereof, the definitions of "Equity Financing" and "Qualified Equity Financing" in Section 1.1 of the Purchase Agreement are amended to read in their entirety as follows: "Equity Financing" means a financing resulting in the receipt solely of cash proceeds by the Company consummated through the issuance of equity securities (or securities convertible into or exchangeable for equity securities) of the Company." "Qualified Equity Financing" means an Equity Financing (x) with Marion resulting in the receipt of $5,000,000 or less of gross cash proceeds by the Company consummated in accordance with the terms of the Marion Agreement (the "Retained Equity Proceeds") and (y) with Marion , 100% of the Net Cash Proceeds of which in excess of the Retained Equity Proceeds are used to repay the Convertible Notes and redeem the shares of Preferred Stock pursuant to Section 3.4 below." (b) As specified in the First Amendment, the Retained Equity Proceeds may be retained by the Company and not utilized to redeem a portion of the Preferred Stock without causing a decrease in the Conversion Price to 50% of the lowest Closing Bid Price during the 30 Trading Days immediately preceding the consummation thereof, as contemplated therein. SECTION 2.8 VOLUNTARY PREPAYMENTS. - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 6 (Visual Edge Systems Inc.) (a) Effective as of the date hereof, Section 3.4 of the Purchase Agreement is amended to read in its entirety as follows: "SECTION 3.4. VOLUNTARY PREPAYMENTS. (a) Subject to the terms of this Section 3.4, the Company may, at its option, following three (3) days prior written notice to the Purchasers (the expiration of such three (3) day period being referred to as the "Prepayment Date"; PROVIDED, HOWEVER, if such date is not a Business Day, the Prepayment Date shall be the next Business Day thereafter) prepay all or any portion of the Convertible Instruments remaining unconverted on the Prepayment Date, specifying the amount of the prepayment pursuant to the terms of this Article III. Partial prepayments shall be in an aggregate principal amount of $500,000 or increments of $10,000 in excess thereof. The Company's voluntary redemption right specified in this Section 3.4 may only be exercisable for $2,500,000 aggregate principal amount of the Convertible Instruments on or before April 30, 1998, an additional $2,500,000 aggregate principal amount of the Convertible Instruments on or before May 31, 1998, and an additional $2,500,000 aggregate principal amount of the Convertible Instruments from and after June 1, 1998. (b) If the Prepayment Date is on or before June 30, 1998 (the "First Call Date"), the price to be paid by the Company to prepay or redeem the Convertible Instruments shall be the Stated Redemption Price. The Stated Redemption Price shall mean the sum of (x) the product of the aggregate principal amount of the Convertible Notes or liquidation preference of the Preferred Shares, as applicable, being redeemed multiplied by 80%, plus (y) any accrued and unpaid interest on the Convertible Notes or dividends on the Preferred Shares, as applicable, being redeemed, through the applicable date of consummation of the prepayment (as specified in Section 3.6 below), unless, with respect to clause (y), the redemption results in a Complete Redemption Event, in which event no such accrued and unpaid dividends or interest shall be owed thereon. (c) If the Prepayment Date is after June 30, 1998 but on or before December 31, 1998 (the "Second Call Date"), the price to be paid by the Company to prepay the Convertible Instruments shall be the Interim Redemption Price. The Interim Redemption Price shall mean the aggregate principal amount of the Convertible Notes or liquidation preference of the Preferred Shares, as applicable, being redeemed multiplied by the following applicable percentage based upon the Prepayment Date, plus any accrued and unpaid interest on the Convertible Notes or dividends on the Preferred Shares, as applicable, being - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 7 (Visual Edge Systems Inc.) redeemed, through the applicable date of consummation of the prepayment redemption: Prepayment Date Applicable Percentage --------------- --------------------- July 1 through July 31 82% August 1 through August 31 84% September 1 through September 30 86% October 1 through October 31 88% November 1 through December 31 90% (d) If the Prepayment Date is after the Second Call Date, the price to be paid by the Company to prepay the Convertible Instruments shall be the Formula Price. The "Formula Price" shall mean the greater of (I) the aggregate principal amount of the applicable Convertible Notes or the liquidation preference of the Preferred Shares, as applicable, being repaid through the date of consummation of the prepayment (as specified in Section 3.6 below) and (II) the sum of (x) the product of (i) the number of shares of Common Stock into which the Convertible Instruments being redeemed are then convertible at the then current Conversion Price and (ii) the average Closing Bid Price for the five (5) Trading Days ending two (2) Business Days immediately preceding the applicable date of consummation of the redemption as specified in Section 3.6 below, and (y) the applicable amount of accrued but unpaid interest on the Convertible Notes or dividends on the Preferred Shares, as applicable, being repaid through the date of consummation of the prepayment (as specified in Section 3.6 below)." (b) As specified in Section 3.6(c) of the Purchase Agreement, the Company shall be required to redeem all of the Preferred Shares issued and outstanding prior to the redemption of any of the Convertible Notes. SECTION 2.9 DELETION OF LIMITATION ON CONVERSION. Effective as of the date hereof, Section 10.5 of the Purchase Agreement (setting forth the Limitation on Conversion described therein) is hereby deleted in its entirety, and all references to the Limitation on Conversion contained in any Financing Document are hereby deleted in their entirety. SECTION 2.10 AMENDMENT TO CERTIFICATE OF DESIGNATION. Promptly after the execution and delivery of this Amendment, the Purchasers and the Company hereby agree to amend the Amended Certificate of Designation consistent with the terms of this Amendment. SECTION 2.11 REIMBURSEMENT FEE. Contemporaneous herewith, the Company shall pay to the Purchasers an aggregate of $20,000 in readily available funds, representing (i) the remainder of the Reimbursement Fee provided for in Section 2.18 of the First Amendment and (ii) an agreed - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 8 (Visual Edge Systems Inc.) upon reimbursement of estimated fees and expenses incurred by the Purchasers in connection with the First Amendment and this Amendment. SECTION 2.12 COMPLIANCE WITH LAWS. (a) Each Purchaser covenants and agrees that in the exercise of the Private Sale Right it shall comply with all applicable securities laws. (b) The Company covenants agrees that in the exercise of either the Option Right or the Right of First Refusal it shall comply with all applicable securities laws. ARTICLE III CONDITIONS PRECEDENT SECTION 3.1 CONDITIONS PRECEDENT. The obligation of the Purchasers to enter into this Amendment is subject to the conditions precedent that on or before the date hereof the Purchasers shall have received all of the following in form and substance acceptable to it and its counsel: (a) this Amendment dated as of the date hereof duly executed by the Company; (b) a certificate of the secretary of the Company setting forth resolutions of its board of directors with respect to the authorization, execution, delivery and performance of this Amendment, the issuance of the New Shares and the other transactions contemplated hereby (collectively, the "Amendment Agreements"), as the case may be, the officers of the Company authorized to sign such agreements and instruments, and specimen signatures of the officers so authorized; (c) evidence that the Company shall have issued the New Shares to the Purchasers; and (d) payment to the Purchasers of the amount set forth in Section 2.11 above; and (e) verification of the consummation of the Initial Marion Investment (as described in Section 2.1(d) above). ARTICLE IV RATIFICATIONS: REPRESENTATIONS AND WARRANTIES SECTION 4.1 RATIFICATIONS. The terms and provisions of the Financing Documents, as modified by this Amendment, are ratified and confirmed and shall continue in full force and effect. The Company acknowledges and agrees that each of the Financing Documents, as amended hereby, is and shall remain in full force and effect and is and shall continue to be the legal, valid and binding obligation of the Company, enforceable against it in accordance with their respective terms. SECTION 4.2 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Purchasers that (a) the Company does not own any equity interest in any Person and does not have any Subsidiaries; (b) the execution, delivery and performance of each of the Amendment Agreements and all other documents executed and/or delivered in connection herewith and all transactions and documents contemplated hereby and thereby have been authorized - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 9 (Visual Edge Systems Inc.) by all requisite corporate action on the part of the Company; (c) each of the Amendment Agreements and all other documents executed and/or delivered in connection herewith constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, subject to or limited by liquidation, bankruptcy, conservatorship, insolvency, reorganization, rearrangement, moratorium, or other similar laws relating to or affecting the rights of creditors generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (d) there is no provision of law, in the charter or bylaws of the Company, and no provision of any existing mortgage, contract, lease, indenture or agreement binding on any of them, which would be contravened by the making or delivery of any of the Amendment Agreements or any other document executed and/or delivered in connection herewith, or by the performance or observance of any of the terms hereof or thereof; (e) the execution, delivery and performance of the Amendment Agreements and the transactions contemplated hereby and thereby do not require any approval or consent of, or filing or registration with, any governmental or any other agency or authority, of stockholders, or of any other party or, if such approval or consent is required, the same has been obtained; (f) except as set forth on Schedule 4.2 hereto, each of the representations and warranties of the Company contained in ARTICLE V of the Purchase Agreement, as amended hereby, are true and correct on and as of the date hereof as though made on such date except for those limited by their terms to the date given or another specific date; (g) except as set forth on Schedule 4.2 hereto, as of the date hereof, no Event of Default has occurred and is continuing.; and (h) the Marion Agreement attached hereto as Exhibit A is a true and correct copy of all agreements between the Company and Marion , and there exist no other oral or written agreements between Marion and the Company other than the agreements embodied in the Marion Agreement. ARTICLE V MISCELLANEOUS SECTION 5.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations, warranties and covenants made in this Amendment or any other document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment, and no investigation by the Purchasers or any closing shall affect the representations, warranties and covenants or the right of the Purchasers to rely upon them. SECTION 5.2 REFERENCES TO FINANCING DOCUMENTS. The Financing Documents and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Financing Documents, as amended hereby, are hereby amended so that any reference therein to the Financing Documents shall mean a reference to the Financing Documents as amended hereby. SECTION 5.3 FURTHER ASSURANCES. The Company agrees that at any time and from time to time, upon the written request of the Purchasers, it will execute and deliver such further documents and do such further acts and things as the Purchasers may reasonably request in order to - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 10 (Visual Edge Systems Inc.) fully effect the purposes of this Amendment and to provide for the continued perfection and priority of the security interests granted to the Purchasers in the Financing Documents. SECTION 5.4 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. SECTION 5.5 APPLICABLE LAW. This Amendment and all other documents executed pursuant hereto shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5.6 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of the Purchasers and the Company, and their respective successors and assigns, except the Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Purchasers. SECTION 5.7 EFFECT OF WAIVER. No consent or waiver, express or implied, by the Purchasers to or for any breach of or deviation from any covenant, condition or duty by the Company shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. SECTION 5.8 ENTIRE AGREEMENT. THE PURCHASE AGREEMENT AS AMENDED HEREBY, THE OTHER FINANCING DOCUMENTS AND ALL AGREEMENTS EXECUTED IN CONNECTION WITH THIS AMENDMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 5.9 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. [SIGNATURE PAGE FOLLOWS] - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 11 (Visual Edge Systems Inc.) EXECUTED as of the date first written above. VISUAL EDGE SYSTEMS INC. By: /s/ Earl Takefman ---------------------------------- Name: Earl Takefman -------------------------------- Title: Chief Executive Officer ------------------------------- INFINITY INVESTORS LIMITED By: /s/ J.A. Loughran ---------------------------------- Name: J.A. Loughran -------------------------------- Title: Director ------------------------------- INFINITY EMERGING OPPORTUNITIES LIMITED By: /s/ J.A. Loughran ---------------------------------- Name: J.A. Loughran -------------------------------- Title: Director ------------------------------- SUMMIT CAPITAL LIMITED By: /s/ James E. Martin ---------------------------------- Name: James E. Martin -------------------------------- Title: President ------------------------------- GLACIER CAPITAL LIMITED By: /s/ James E. Martin ---------------------------------- Name: James E. Martin -------------------------------- Title: President ------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 12 (Visual Edge Systems Inc.) SCHEDULE 1 TO AGREEMENT AND SECOND AMENDMENT Name Number of Shares Infinity Investors Limited 60,000 Infinity Emerging Opportunities Limited 13,334 Glacier Capital Limited 13,333 Summit Capital Limited 13,333 ------- Total 100,000 ------- ------- - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 13 (Visual Edge Systems Inc.) SCHEDULE 2 TO AGREEMENT AND SECOND AMENDMENT Shares to Be Included in Marion Registration Statement - ------------------------------------------------------ 1. Additional Grant Shares 73,973 2. Interest Shares for interest paid on and 12/31/97 65,671 3. Interest Shares (assumed number to be registered that will cover actual interest payable on March 31, 52,000 4. Shares underlying New Warrants 200,000 5. New Shares (of which 100,000 will be issued at Closing) 300,000 ------- Total 691,644 ------- ------- Issued and Outstanding Shares Owned as of Date Hereof by Purchasers - ------------------------------------------------------------------- 1. Original Grant Shares 93,677 2. Additional Grant Shares 180,296 3. Interest Shares for interest paid through 12/31/97 65,671 4. Interest Shares (assumed/estimated number) for interest payable 3/31/98 52,000 5. New Shares as of 3/27/98 100,000 6. Less Estimated Number of Shares previously sold by Purchasers ( 27,500) ------- ------- - -------------------------------------------------------------------------------- AGREEMENT AND SECOND AMENDMENT TO BRIDGE SECURITIES PURCHASE AGREEMENT - PAGE 14 (Visual Edge Systems Inc.) EX-27 5 FDS
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 224,429 1,080,000 23,917 0 72,771 1,968,342 3,529,180 896,354 5,701,322 1,180,019 0 0 0 53,167 (1,190,829) 5,701,322 1,381,111 1,381,111 1,567,473 7,929,850 1,243,418 0 508,080 9,756,570 0 9,756,570 0 999,000 0 10,755,570 2.26 2.26
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