FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _____________
Commission file number 000-21659
EDnet, Inc.
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(Name of small business issuer in its charter)
Colorado 84-1273795
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Union Street, San Francisco, California 94111
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (415) 274-8800
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [
] (See Disclosure Items Omitted)
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of 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 Form 10-KSB. [ ]
<PAGE>
The Issuer's revenues for the twelve months ended June 30, 1998 were
$4,004,341.
As of September 8, 1998, the aggregate market value of the Common Stock
of the Registrant based upon the closing bid prices of the Common Stock, as
quoted on the OTC Bulletin Board, held by non-affiliates of the Registrant was
approximately $2,739,447.17
As of September 8, 1998, 16,761,836 shares of $0.001 par value Common
Stock, of the Registrant were outstanding.
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
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Summary of Business
EDnet, Inc., ("EDnet" or, the "Company"), a Colorado corporation, develops and
markets integrated systems for the delivery, storage and management of
professional-quality digital communications for media-based applications,
including audio and video production for the North American advertising and
entertainment industry. The Company has established a private wide-area network
through strategic alliances with long distance carriers, regional telephone
companies, satellite operators and independent fiber optic telecommunications
providers, which enables the exchange of high quality audio, compressed video
and multimedia data communications. The Company provides engineering services,
application-specific technical advice, and audio, video and networking hardware
and software as part of its business. Additionally, through its subsidiary,
Internet Business Solutions Inc. ("IBS"), the Company provides Internet web site
development and hosting to businesses conducting Internet commerce.
Industry Overview
The digital communications industry originated in the 1970s based on the ability
of digital technology to support new and advanced communication capabilities.
Digital data can be compressed, enabling data-dense applications such as the
instantaneous exchange of large amounts of data and high-quality concurrent (or
real-time) interactive communication over any distance. The Company's primary
expertise is in systems integration using telecommunications and Internet
technology.
Business of the Company
Principal Markets. The Company sells its services to the advertising and
entertainment industry, including production and post-production companies,
advertisers, producers, directors and talent. The Company's networking
technology makes it possible for producers, directors and talent to interact in
real time, with less interruption of their schedules, despite being in separate
locations. The Company's management ("Management") believes that this is of
growing importance in the entertainment industry because, while the production
of audio and video entertainment is inherently a creative process requiring the
collaboration of many parties, increasingly, the participants in this process
are in separate locations. Traditionally, this fact has accounted for frequent
travel and delay being a necessary element of the audio and video production
process. The Company's technology is designed to address this situation by
allowing the collaborative process to go forward despite physical separation.
The Company has established a "network" of recording studios; to join this
network a studio generally enters into an agreement with the Company to become
part of the network for a term of three years. Being part of the Company's
network allows a studio (which the Company refers to as an "affiliate studio")
to establish a link with, and therefore transmit audio and/or video information
to, any other affiliate studio. An affiliate studio may also participate in
joint promotional and advertising activities describing the Company's network of
affiliate studios, and has access to certain technical support described below
and a software directory of affiliate studios. Affiliate studios also are
charged lower link-up rates than those charged to non-affiliate studios to
connect to studios with incompatible equipment. Currently, the network is
composed of over 450 studios across North America, with major concentrations in
California, Seattle, St. Louis, Chicago, Minneapolis, Atlanta and on the East
Coast from Washington, D.C. to New York and Boston. By granting access to its
network, the Company earns one-time fees from customers for the sale and
installation of its equipment and ongoing fees for the use of the network.
<PAGE>
Audio and Video Network System Development Process. The Company has standardized
its process for developing audio and video network communications systems for
its customers. At the time that the Company contracts with a new audio or video
network customer, the Company's personnel obtain and determine technical
information and specifications regarding the customer's existing facility,
equipment and communications requirements. Based on those specifications, the
Company determines the configuration of the new system, selects the appropriate
equipment components, makes necessary modifications to the software and/or
hardware and performs final quality control procedures. The Company then
packages and ships the system to the customer. Installation of the system can
usually be performed by affiliated technicians with telephonic support from
Company engineers. Upon installation of the system, the Company's technical
personnel typically perform a routine series of system checks and diagnostics
from its headquarters facilities via the remote network connection to ensure
that the newly-installed equipment functions properly.
Technical Support. The Company maintains a staff of technical support personnel
to respond to customer inquiries during business hours. For emergency support
during non-business hours, domestic customers can contact Company personnel
through a toll-free 800 number, while a special direct-dial telephone number is
available for international customers. The Company can resolve the vast majority
of technical support issues directly through its network connection, which
enables Company personnel to perform remote diagnostics directly on a customer's
equipment. In the event that the Company is unable to diagnose and service a
hardware or software problem via the remote network connection, a customer can
ship equipment to the Company for on-site, or "bench", diagnostics and service.
The company maintains a small supply of field replacement equipment for
occasional emergency customer needs. These services are included as part of the
customer's usage fee structure.
Key Suppliers and Alliances. The Company functions as a systems integrator by
acquiring other companies' technologies and integrating them into an effective
communications solution. The Company does not manufacture any of the components
used in its network, but rather purchases digital communications equipment
components directly from their manufacturers, including Dolby Labs, Telos,
Musicam USA, APT, PictureTel and Cosmic Inventions, Inc. The Company performs
installation services and further equipment integration. Because the individual
components used in the Company's systems are available from more than one
reliable source or manufacturer, Management believes the risk of an adverse
impact to the Company's business from an interruption in supply from any single
supplier is minimal. The Company also maintains a small ongoing inventory of all
of the components of its various communications products. Most of the Company's
suppliers have offices and/or distribution points near the Company's San
Francisco headquarters. In the event that the Company does not have sufficient
inventory on-hand to fulfill a system hardware order, the Company can usually
order and receive additional inventory with turnaround times of as little as
twenty-four hours and generally no more than four weeks.
Marketing. The Company markets its services through a direct full-time sales
staff and by appearing at industry trade shows.
<PAGE>
Description of Current and Developing Products
Audio Media Networking Services. The Company develops integrated system
solutions (its "Audio Media Communications Service") which provide compression
and transmission of studio quality audio signals over fiber optic lines (i.e.,
telephone digital data lines) between separate studios. The audio data can also
be accompanied by time codes so that operators at the different studios can
synchronize the audio to film projectors or VCR machines in order to allow the
real time editing of movies and video. Upon installation of an audio media
communications system and the requisite sound equipment, a studio becomes an
"affiliate studio", equipped with a device to digitize, compress, send, receive
and decompress audio media (known as a "codec"). In addition, the studio becomes
a part of the Company's network of media production and post production studios.
The purchase price of these audio media communications systems ranges from
$4,500 to $18,000. The Company pays local telephone service providers telephone
connection installation charges (depending upon bandwidth requirements, from
$250 to $1,000) and monthly recurring connection charges (from $50 to $300),
most of which is reimbursed to the Company by its customers. Outside customers
(non-affiliates) seeking to access media production facilities or otherwise
review or edit an audio clip with the assistance of a person in a different
location can do so through these affiliate studios. By using the Company's
Electronic Directory Software, someone in an affiliate studio can determine
whether that studio, or another affiliate studio, operates equipment that is
compatible with the needs of the customer. Once the appropriate affiliate studio
is chosen, the customer can schedule an appointment to use the network. If
nearby studios do not have compatible equipment, the Company's personnel in San
Francisco can digitally "bridge" the studios together. The customer then pays a
network access fee to the Company. The primary market for the Audio Media
Communications Service are radio and television advertisers, motion picture and
television program production companies and music recording companies.
Video Media Networking Services. The Company has entered into negotiations with
Cosmic Inventions, Inc., of Columbus, Ohio to market its Spot Rocket Systems as
part of EDnet's Video Media Networking System. The Spot Rocket is similar in
concept to the Company's Audio Media Communications Service. Through the use of
similar equipment located at affiliate studios, the Company manages the
transmission of approval-quality video segments between studios. The Spot Rocket
system transmits video information using 128 to 512 kilobit ISDN data lines.
Using its direct-dial feature, Spot Rocket operates on the same principle as the
Company's existing Audio Media Communications Service, except that the
transmission does not happen in "real time." However, using this technology,
video media producers and their customers can efficiently and effectively
transmit edits, approvals, or modifications to video and other types of media,
including special effects media and graphic media (including prints and logos).
Management believes the Spot Rocket system is similar to e-mail for video and,
compared to conventional methods of transmitting video, i.e., mail or physical
travel, can significantly increase the speed and efficiency of the video editing
process.
As with the Company's Audio Networking Services, outside customers
(non-affiliates) seeking to access media production facilities or otherwise
review or edit video with the assistance of a person in a different location
could do so by paying a fee to use an affiliate studio. The customer would also
pay a network access fee to the Company. The purchase price of the Spot Rocket
Video System ranges from $12,000 to $25,000. The Company pays local telephone
service providers telephone connection installation charges (depending upon
bandwidth requirements, from $200 to $400) and monthly recurring connection
charges (from $40 to $150), most of which is reimbursed to the Company by its
customers. The primary market for the Spot Rocket Video System includes
television advertisers, motion picture and television series production
companies and other corporate video users. Management believes that over 50% of
the Company's current audio network clients will have the need to send videos
utilizing the same ISDN lines they are presently using on the audio network. The
Company is currently finalizing plans with Cosmic Inventions, Inc. to be the
exclusive dealer of the Spot Rocket video communications system.
<PAGE>
Internet Website Development and Hosting Services. The Company is also in the
Internet services marketplace through its subsidiary, IBS, an Internet services
provider specializing in the development and hosting of web sites for companies
doing business on the Internet. When IBS merged with and into a subsidiary of
the Company, the Company improved its ability to integrate numerous technologies
to yield cost-effective media communications solutions. IBS's services include
strategy consulting; Intranet, Extranet and web site design, deployment and
hosting; E-Commerce business system analysis and design; technology integration;
graphic design and user interface development; and maintenance and support.
IBS markets its services to medium and large sized companies.
Internet Audio. Vastly improved technology now enables the delivery of CD
quality audio via the Internet. In order to provide its professional customers
with services utilizing this technology, the Company has entered into marketing
partnerships with Liquid Audio and Real Audio to sell, support and host
professional services using their encoding and compression technology. EDnet
creates "Virtual Studios" for these Internet audio service companies. With this
technology, users will be able to search for and sample very high quality audio
clips, make selections and download the full length audio from an EDnet server
for replaying or further editing at a convenient time, even in an uncompressed
form, if necessary. Record companies, recording studios, producers and
distributors of radio and TV commercials, artists, producers, broadcasters,
Internet music shopping services, and many other Internet users can utilize the
Company's Virtual Studios for the transfer of audio for direction, approval,
editing, production, distribution, and webcasting - broadcasting over Internet
connections. Music and sound effects libraries can market to much larger
audiences, and musicians will have completely new opportunities for the direct
consumer distribution of new recordings via the world wide web. With its Virtual
Studios, EDnet may be able to provide many of its audio service company
customers all of their required connectivity, encoding and decoding software,
library and server hosting and access, along with technical and marketing
support.
Competition
Audio and Video Networking. Competition in the audio and video networking
business is based on the ability to provide systems compatibility and
proprietary off-the-shelf codecs. Due to the difficulty and expense of
developing and maintaining private digital networks, Management believes that
the number of competitors is, and will remain, small. The Company's principal
competitor in audio networking has been Globe Cast or 3D2, a division of IDB,
which is owned by French Telecom. Until March 31, 1995, 3D2 was the exclusive
North American distributor of apt-X codecs manufactured by Audio Processing
Technology ("APT"), which were in demand in the radio voice-over market. In
April 1995, the Company became one of APT's few distributors and through
aggressive marketing, within six months became APT's largest worldwide
distributor. The Company's primary video networking competitors will be VYVX, a
division of Williams Co., and WAM!NET, a private Minnesota company. These
companies offer video networking services utilizing more expensive,
higher-bandwidth fiber connections than the Company's networking services.
Patents & Trademarks
The Company does not own any patents and relies instead on a combination of
statutory and common law copyright, trademark and trade secret laws to protect
its rights in its proprietary technologies. The Company has registered "EDnet"
and "Entertainment Digital Network" as trademarks with the U.S. Patent and
Trademark Office. The Company also owns the registered trademark "ZeroC."
<PAGE>
Research and Development
The Company made no research and development expenditures in 1998. In 1997, the
Company's research and development spending totaled $1,017,233, all of which was
related to the development of software by the Company's subsidiary, IBS. The
software development component of IBS's business was sold to a new business in a
reorganization of IBS in early 1997 (see "IBS Reorganization - Breakthrough
Software"). The Company did not spend any funds on material customer-sponsored
research and development during the past two years.
Governmental Approvals and Regulation
The Company's products and services are currently not subject to regulation by
any government agency or regulatory body.
History and Organization
Background. Prior to founding the Company, two members of the current management
team were employed by Skywalker Sound ("Skywalker"), the post production
division of LucasArts/Lucasfilm Ltd. ("LucasArts"). In 1991, while at Skywalker,
they made a breakthrough in the application of digital communications
technology. They were able to send four channels of compressed,
professional-quality digital audio over T-1 fiber-optic telephone lines
(individual DSO or channels over a single line) from a Skywalker studio in
Northern California to a Skywalker studio in Southern California. The group
thereafter sent the audio mix for the movie Backdraft, then under production,
between the two studios on a daily basis. The result was that Backdraft was the
first film in which the director reviewed movie audio from a remote studio on
the same day it was produced.
Based upon this success (and with the acknowledgment of LucasArts), the
Company's management organized Entertainment Digital Network ("EDN") as a Nevada
corporation on June 26, 1992, set up a trial network of seven studios, and
developed other proprietary technology to market digital communications systems
and services to the music, movie and television industries. On January 25, 1993,
EDN was re-incorporated in the State of California.
Effective August 27, 1993, EDN acquired the assets of Digital Patch Systems
("Digital Patch"), an unrelated networking service provider. At that time,
Digital Patch used MPEG-based audio-compression, switched 56 and ISDN data
lines, which the Company has since adopted, and continues to use, as its primary
technology. Management believed that ISDN, which had become the standard in the
telecommunications industry in Europe, Japan and many parts of the Pacific Rim,
would likewise become the standard in the U.S. ISDN is, in fact, now common in
most areas of the world.
Merger With AP Office Equipment. On or about September 20, 1995, EDN's
management determined that it was in EDN's best interests to effect a business
combination with a company whose shares were publicly-traded in order to access
the public capital markets. Toward this end, EDN, its seven largest shareholders
and AP Office Equipment, Inc. ("AP"), an unrelated company, entered into a Stock
Purchase Agreement pursuant to which such shareholders exchanged their EDN
common and preferred stock for 1,275,818 shares of AP common stock, par value
$.001 per share (the "Common Stock"). In addition, (a) outstanding non-qualified
options to purchase an aggregate of 263,420 shares of EDN common stock at an
exercise price of $.10 per share were converted into options to purchase an
aggregate of 230,479 shares of Common Stock at an exercise price of $.11 per
share, and (b) outstanding warrants to purchase an aggregate of 347,343 shares
of EDN common stock at $2.625 per share, which terminated as of October 31,
1996, were converted into warrants to purchase an aggregate of 303,908 shares of
Common Stock at an exercise price of $3.00 per share. The closing of these
transactions was contingent upon the sale of an additional 1,500,000 shares of
Common Stock at a price of $0.665 per share, which AP successfully completed
later that year.
<PAGE>
By means of an Amendment of Articles of Incorporation which was filed with the
Colorado Secretary of State on September 29, 1995, AP changed its name to
"EDnet, Inc." Finally, pursuant to a Stock Purchase Agreement executed by the
Company and the remaining shareholders of EDN, dated as of October 18, 1995,
such shareholders sold their EDN common stock to the Company in exchange for
243,720 shares of Common Stock. EDN thereby became, and remains, a wholly-owned
subsidiary of the Company.
IBS Transaction. The Company acquired all of the outstanding shares of common
stock of Internet Business Services, Inc. ("IBS"), an unrelated Internet
services provider, through a merger of IBS into a subsidiary of the Company
pursuant to an Agreement and Plan of Reorganization dated June 24, 1996 (the
"IBS Agreement"). As consideration for such merger, the Company issued to the
two IBS shareholders, Trevor Stout and Randall Schmitz: (i) two promissory notes
in the aggregate principal amount of $250,000 (the "First IBS Notes"); (ii) two
promissory notes in the aggregate principal amount of $250,000 (the "Second IBS
Notes"); and (iii) 311,284 shares of Common Stock. The First IBS Notes were due
sixty (60) days after the closing of the IBS Agreement and were repaid by the
Company in August 1996. The Second IBS Notes originally provided for interest of
eight percent (8%) and maturity on the earlier of one year from the closing of
the IBS Agreement or fifteen (15) days after the closing of a public offering by
the Company of its Common Stock. In addition, pursuant to an earn-out plan,
Messrs. Stout and Schmitz were originally entitled to receive up to an aggregate
of 500,000 shares of Common Stock if IBS met certain specified performance goals
during a period commencing on the effective date of the IBS Agreement and ending
120 days after June 30, 1999 (the "Earnout"), and Messrs. Stout and Schmitz
entered into three-year employment agreements with the Company and IBS
(collectively, the IBS Employment Agreements). Finally, the Company granted to
three employees of IBS options to purchase an aggregate of 50,000 shares of
Common Stock under the Company's Non-Qualified Stock Option Plan at $1.25 per
share, which options vest over a three year period. The merger was accounted for
as a purchase.
IBS Reorganization - Breakthrough Software, Inc. Subsequently, the Company
determined that the cost of supporting IBS in researching, developing and
marketing certain software related to the development, operation and maintenance
of world-wide web sites (the "IBS Website Software") was, in Management's view,
prohibitively expensive. Accordingly, pursuant to an Amendment to the Agreement
and Plan of Reorganization dated as of January 31, 1997 and certain collateral
documents: (i) IBS licensed the IBS Website Software to a new entity,
Breakthrough Software, Inc., a California corporation ("Breakthrough"); (ii) the
Company agreed to lend up to $250,000 to Breakthrough to be used for specified
purposes, as represented by an unsecured promissory note made by Breakthrough in
favor of the Company, payable 30 days after demand after July 1, 1997 or upon
the date that Breakthrough closed a financing of not less than $1,000,000 (the
"Breakthrough Note"); (iii) Breakthrough issued to the Company 2,000,000 shares
of convertible Series A Preferred Stock (the "Breakthrough Series A Preferred
Shares") representing (after conversion into Breakthrough common stock) 40% of
Breakthrough's outstanding common stock (the remainder of Breakthrough's Common
Stock was held by Mr. Stout and Mr. Schmitz); (iv) the Company canceled the
Second Notes; and, (v) the Company reduced the number of shares of Common Stock
subject to the Earnout from 500,000 to 125,000.
<PAGE>
In November, 1997, the Company sold the Company's 2,000,000 shares of
Breakthrough Series A Preferred Stock for $415,000. The first payment of
$250,000 for the sale of the Series A Preferred Stock was received on November
7, 1997, a second payment of $67,995.04 was received on December 19, 1997 and
the balance of $97,004.96 was received on January 21, 1998. (See Note 1 to
Consolidated Financial Statements). The Breakthrough Note was amended as of
December 19, 1997. The Note was reduced by a debt transfer by IBS and assumption
by Breakthrough of certain of the Company's outstanding debts to vendors or
suppliers which were connected with the IBS Website Software development
business. These included a debt of $91,891.65 to Global Automation, Inc., and an
overdue account with the San Jose Mercury News of $2,000, both of which were
assumed by Breakthrough. The balance of $156,108.35 in principal due on the
Breakthrough Note was canceled and, in its place, the Company received a
Convertible Subordinated Promissory Note and warrants to purchase shares of
Breakthrough's common stock. (See Note 4 to Consolidated Financial Statements).
On March 13, 1998, the company sold this note to an outside investor for $80,000
(See Note 1 to Consolidated Financial Statements).
Investment by Visual Data Corporation. Faced with substantial short- and
long-term liabilities at the beginning of the 1998 fiscal year, the Company
pursued a number of fundraising opportunities over the year to finance
operations and reorganize its past due liabilities to allow the Company to
continue as a going concern. Toward the end of the fiscal year the Company
identified a suitable investor and strategic partner in Visual Data Corporation
("VDC"), a Pompano Beach, Florida multimedia development and production company.
VDC specializes in the production, marketing and distribution of full-motion
visual information on various media, including digital video discs, the
Internet, other on-line services and, eventually, interactive television. VDC
develops full-motion video libraries containing short concise vignettes relating
to various topics, including travel, business education, health, fitness,
medicine and consumer products.
VDC was a potential customer of the Company's video network, and VDC's own
customers were also potential customers of the Company's video network.
Believing that an ownership interest in the Company's networking services would
be useful in its own distribution efforts, VDC was amenable to a proposal that
it invest in EDnet. Subject to the detailed terms and conditions stated in that
certain securities purchase agreement between VDC and the Company effective as
of June 20, 1998 (the "VDC Purchase Agreement"), VDC agreed to acquire a
majority interest in the Company's outstanding shares of common stock (the "VDC
Transaction").
Under the VDC Purchase Agreement, VDC acquired 8,563,417 million shares of the
Company's common stock, equal to a 51% interest in the Company. As a result,
EDnet has approximately 16.7 million shares outstanding. In order to ensure that
VDC retain ownership of a majority interest in the Company's Common Stock, VDC
was also given an option which mirrors each option and/or warrant outstanding
for EDnet common stock as of the closing date, whereby, for every outstanding
option and/or warrant existing at the closing date subsequently exercised, VDC
can purchase one additional share of common stock at $0.10 per share.
In consideration, the Company received $698,004.32 in cash, 75,000 shares of VDC
common stock and warrants to purchase up to 50,000 shares of VDC common stock
(valued at $418,250.00); and a promissory note in the principal amount of
$283,745.68, secured by certain real property in Florida, for a total
acquisition price of $1.4 million.
<PAGE>
An additional term of the VDC Transaction, as well as one of EDnet's primary
goals in finding an investor, was that the Company restructure certain accounts
payable debt the Company had incurred over the prior three years. Therefore, the
Company used a substantial portion of the proceeds of the VDC Transaction to
repay certain outstanding liabilities and to make current certain delinquent
accounts with suppliers. The Company paid certain creditors a total of $414,020
in cash, and assigned others 75,000 shares of VDC common stock and warrants to
purchase an additional 50,000 shares of VDC Common Stock, in order to settle
claims based on overdue accounts totaling $643,562.47, and to settle claims for
repayment of principal and interest of $904,019 on certain promissory notes.
(See Part II, Item 5, The Market for the Registrant's Common Stock and Related
Stockholder Matters - Recent Sales of Unregistered Securities - Private
Placement of Note Participations - Settlement with Morgan Fuller Capital Group
LLC.)
As an additional term of its investment, VDC received the right to name four
members to the Company's Board of Directors. With the concurrent resignation of
one of the existing directors, this was intended to give VDC effective control
of the Board. VDC's four nominees began acting as directors at a meeting of the
EDnet Board of Directors held on August 6, 1998. At the same time, one of the
former Board members, Avi Fogel, resigned from the EDnet Board of Directors. Tom
Kobayashi, Chairman of the Board prior to the VDC investment, stepped down as
Chairman and was replaced by Randy Selman, President of VDC. In addition, the
Company has appointed one of the VDC nominees, Brian Service, to a Director
position with particular focus on investor relations, strategic, funding, and
cash management issues. The Company has entered into a one year consulting
agreement with Mr. Service, under which Mr. Service receives a monthly fee of
$6,000.
ITEM 2 PROPERTY
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Description of property
The Company's principal business offices are located at One Union Street, in San
Francisco, California. This office is a 5,000 square foot facility that operates
as administrative headquarters and provides the centralized network hub for
electronically bridging affiliate studios, as well as overall network
management. The Company leases this facility pursuant to a Sublease dated
November 1, 1993 with Varitel Video, Inc. ("Varitel"), an unaffiliated entity.
This sublease provides for a term of five years that commenced November 15, 1993
(with an option to extend for an additional five year term), with monthly lease
payments of $8,296.42, plus the Company's proportionate share of rent
adjustments under the master lease. In lieu of a security deposit, the Company
granted Varitel a security interest in certain of the Company's equipment with
an aggregate purchase price of approximately $75,000. Varitel may terminate this
sublease upon 90 days prior written notice upon a change in the principal
ownership of the Company or in the event that the Company engages in a
"competing type of film or video service business like or similar to Varitel"
excluding, however, any "networking service application" which the Company
offers in connection with its audio, video and other multimedia networking
services. Varitel has agreed not to terminate the lease due to the VDC
Transaction.
The IBS subsidiary operates from an office located in Mountain View, California.
The Mountain View office, located at 2083 Landings Drive, Mountain View,
California, is a 2,000-plus square foot facility that operates as its
administrative and operations headquarters. IBS leases this facility pursuant to
a Building Lease dated August 28, 1995, as amended by a Modification No.1 dated
February 13, 1996, with Landmark Investments, Limited, an entity unaffiliated
with either IBS or the Company. This lease includes a total of 2,174 square feet
of office space, its term currently expires March 3, 2000, and the current
monthly payment is $6,413.30, which will increase by three percent on March 4,
1999.
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
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The Company is not a party to any legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No items were submitted to the shareholders for a vote during the fiscal year
ending June 30, 1998.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
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Price range of common stock
The Company's common stock is traded on the OTC electronic bulletin board under
the symbol DNET. The reported high and low bid information as quoted on the OTC
bulletin board for the period July 1, 1996, through June 30, 1998, is shown
below. The high and low bid information as quoted on the OTC bulletin board
represents prices between brokers and dealers and does not include retail
markups, markdowns or commissions to the broker-dealer.
<PAGE>
High and Low Bid Price for Registrant's Common Stock
July 1, 1996 through June 30, 1998
Period High Low
- ------ ---- ---
Quarter ended June 30, 1998 .46 .46
Quarter ended March 31, 1998 .10 .10
Quarter ended December 31, 1997 .19 .15
Quarter ended September 30, 1997 .75 .53
Quarter ended June 30, 1997 2.06 .50
Quarter ended March 31, 1997 2.19 1.06
Quarter ended December 31, 1996 3.44 1.00
Quarter ended September 30, 1996 3.75 3.00
The number of holders of record of the Company's common stock as of July 22,
1998, was approximately 610.
Dividends
The Company has never paid cash dividends on its common stock, and intends to
utilize current resources to expand its operations. Moreover, outstanding
warrants restrict the ability of the Company to pay dividends. Therefore, the
Company anticipates that cash dividends will not be paid on the Common Stock in
the foreseeable future.
Recent Sales of Unregistered Securities
Investment by Visual Data Corporation. As discussed more fully in Part I - Item
1. Description of Business - History and Organization - Investment by Visual
Data Corporation, pursuant to the VDC Purchase Agreement, as of June 20, 1998,
VDC acquired 8,563,417 million shares of the common stock of EDnet, Inc., equal
to a 51% interest in the company. In consideration, the Company received
$698,004.32 in cash, 75,000 shares of VDC common stock and warrants to purchase
an additional 50,000 shares of VDC common stock, valued at $418,250.00, and a
secured promissory note in the principal amount of $283,745.68, totaling $1.4
million. VDC was also given an option which mirrors each option and/or warrant
outstanding for EDnet common stock as of the closing date of the VDC
Transaction, whereby, for every outstanding option and/or warrant existing at
such closing date, subsequently exercised, VDC can purchase one additional share
of common stock at $0.10 per share. As a result of this transaction, EDnet has
approximately 16.7 million shares outstanding.
Private Placement of Note Participations - Settlement with Morgan Fuller Capital
Group LLC. With funds and securities obtained by the Company from the sale of
Common Stock to VDC, the Company was able to retire certain outstanding debt to
Morgan Fuller Capital Group LLC ("Morgan Fuller"), an investment banker the
Company had retained for financial advisory services during the prior fiscal
year when the Company conducted a private placement offering of participations
in secured promissory notes. As of March 31, 1997, Morgan Fuller had purchased
an aggregate of $1,000,000 of participations in the secured notes, for resale to
investors, and the Company had agreed to pay Morgan Fuller a cash fee of one and
one half percent of the aggregate principal amount of the promissory notes
issued by the Company. Morgan Fuller also received a series of warrants to
<PAGE>
purchase shares of Common Stock on varying terms. As of June 30, 1997 the
Company had granted Morgan Fuller: (i) warrants to purchase 250,000 shares of
Common Stock at an exercise price of $6.37 per share, in exchange for general
advisory services; (ii) warrants to purchase 39,255 shares of Common Stock at an
exercise price of $4.25 per share and warrants to purchase 42,205 shares of
Common Stock at $3.69 per share in connection with the sale of the
participations in the secured notes; and (iii) warrants to purchase an
additional 55,970 shares of Common Stock at $2.68 per share, in consideration of
an extension of the term of the note participations.
On June 20, 1998, concurrently with the closing of the VDC Transaction, the
Company settled its debt with Morgan Fuller related to the sums due on the notes
and unpaid advisory fees by assigning to Morgan Fuller 75,000 shares of VDC
common stock, valued at $3.75 per share, and warrants to purchase 50,000 shares
of VDC stock at $2.74 per share, for a total agreed value of $418,250.
Additionally, the Company repriced certain EDnet warrants held by Morgan Fuller
and the noteholders by reducing the exercise price to $0.25 per share, and
Morgan Fuller foregave the balance of the debt still owing in the amount of
$381,269.
T Bar W Ranch Investments, Inc. Under a subscription agreement signed July 10,
1997, the Company received a commitment by T Bar W Ranch Investments, Inc. ("T
Bar W") to purchase 3,750,000 shares of Common Stock at a price of $0.20 per
share. Each share came with a warrant (with anti-dilutive rights) to purchase an
additional share of Common Stock at an exercise price of $1.00 and an expiration
date five years from the date of issuance. However, the amount invested by T Bar
W totaled only $147,596, and the Company was unable to obtain the full amount of
T Bar W's funding commitment.
At the time of the investment by VDC, the Company and T Bar W agreed that T Bar
W would receive only a number of shares reflecting the amount of funds actually
invested at $0.20 per share. Thus, on June 19 1998, the Company issued T Bar W
738,000 shares of Common Stock and a warrant (without anti-dilutive rights) to
purchase an additional 738,000 shares of Common Stock at an exercise price of
$0.10 with an expiration date five years from the date of issuance (See Note 1
to Consolidated Financial Statements).
Curtis Mathes Holding Corporation (now known as uniView Technologies, Corp.). On
December 23, 1997, Curtis Mathes Holding Corporation ("Curtis") and the Company
entered into a Letter of Intent wherein Curtis stated its intention to acquire
all of the outstanding shares of the Company. In this acquisition, the
outstanding Company common stock would have been exchanged for newly issued
shares of common stock of Curtis on a one for one basis. As a result of the
acquisition, the Company would have become a wholly-owned subsidiary of Curtis.
However, on January 29, 1998, Curtis informed the Company that it had decided
not to proceed with the acquisition based on its opinion that certain
contingencies in the Letter of Intent did not occur.
Instead, under a Revolving Credit and Security Agreement executed on December
30, 1997, (the "Credit Agreement") Curtis established a revolving credit in
favor of the Company in an outstanding aggregate principal amount not exceeding
$1,000,000 at any one time. The amount of any borrowing could be repaid in whole
or in part within one year from the date of funding, and such repaid amounts
thereafter could be re-borrowed. All principal and accrued interest due on such
borrowing was to be repaid within one year from date of funding. The annual rate
of interest was the rate equivalent to the rate described by the Wall Street
Journal as the prime rate in effect from time to time, plus one and one-half
percent. Additionally, the Company granted Curtis a security interest in the
Company's accounts receivable, inventory, equipment, and certain other
intangible property rights as collateral for the loan.
<PAGE>
The Company borrowed $75,000 under the Credit Agreement on December 30, 1997,
and an additional $275,000 from January 1, 1998 to January 22, 1998. Through
January 27, 1998, the Company had repaid Curtis a total of $221,493.58 against
the balance due under the Credit Agreement, leaving a balance due on the
principal of $129,987.74 and accrued interest as of June 19, 1998 of $5,012.26.
With funds received from VDC in advance of its acquisition of Common Stock under
the VDC Purchase Agreement, the Company terminated its Credit Agreement with
Curtis. Thus, on June 19, 1998, the Company paid Curtis a total of $100,000 in
settlement of all sums due and outstanding under the Credit Agreement, and the
balance of outstanding principal plus interest, totaling $35,000, was discharged
at the same date. (See Note 1 to Consolidated Financial Statements).
Private Placement of Series A Preferred Stock; Conversion to Common Stock. The
Company has only issued one class of preferred stock, its Series A Preferred
Stock. In early 1997, the Company raised $150,000 in capital financing from the
sale to a single investor of 150 shares of its Series A Preferred Stock at $1000
per share. This securities offering was exempt from federal securities
registration requirements under Regulation S of the Securities Act. The Series A
Preferred shares were converted to 150,000 shares of the Company's common stock
at $1.00 per share on January 8, 1998.
Charles W. Clark Consulting Agreement. In conjunction with a Consulting
Agreement entered into on June 30, 1997 with Charles W. Clark ("Clark") in July,
1997, the Company issued 400,000 shares of Common Stock as compensation for
restructuring the Company's Senior Secured Notes and certain other activities
more fully described in Part III - Item 12 - Certain Relationships and Related
Transactions - Consulting Agreement With Charles W. Clark. This agreement was
terminated by mutual agreement on November 17, 1997.
Irawan Onggara. As discussed further in Part III - Item 12. Certain
Relationships and Related Transactions - Investment Banking and Brokerage
Services - Century Financial Partners, Inc., EDN entered into a consulting
agreement, dated July 31, 1995, with Century Financial Partners, Inc.
("Century"). As payment for Century's services, this consulting agreement
provided that EDN would grant to Mr. Irawan Onggara an investor in Century, and
a shareholder of the Company holding an aggregate of 100,000 shares of Common
Stock, options to purchase 1,000,000 shares of the common stock of any publicly
traded entity into which EDN would merge, at $1.25 per share, and the agreement
provided that Mr. Onggara would have registration rights with respect to the
shares of stock issuable upon exercise of those options.
Mr. Onggara's rights under this consulting agreement were renegotiated on or
about June 30, 1997, when the Company granted Mr. Onggara warrants to purchase
1,000,000 shares of Common Stock exercisable at $1.25 per share and expiring
five years from the date of issuance. In consideration thereof, Mr. Onggara
released any claims to any other securities under the original terms of the
Century consulting agreement. Additionally, pursuant to an agreement dated
August 20, 1997, Mr. Onggara foregave certain outstanding loans he made to the
Company in principal amounts totaling $340,000 in consideration of the issuance
to him of 1,000,000 shares of Common Stock. (See also Part III - Item 12.
Certain Relationships and Related Transactions - Short-Term Loans from Officers,
Directors and Shareholders; Guarantee of Lease.)
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
report.
Overview
During most of fiscal year 1998, the Company was burdened by substantial credit
restrictions from many of its major suppliers, and the Company also faced
substantial outstanding debts to financial consultants and investors. However,
with the proceeds received from the VDC Transaction at the end of the current
fiscal year, the Company paid off or restructured its past due accounts
payables, notes payables and liens and thereby corrected many of these problems.
The majority of the Company's suppliers have now eased their credit restrictions
and are allowing the Company to resume purchasing equipment on credit.
Similarly, the Company has settled all of the substantial outstanding claims of
third parties based on services performed for the Company and based on various
promissory notes previously issued by the Company. As a result of the
restructuring, the Company has greater access to vendors and is able to
negotiate better terms. These advantages are expected to contribute to enhanced
profitability and increased revenues during the next fiscal year.
The Company expanded its Audio Media Networking Services from 345 to 455
affiliates and associates during fiscal year 1998. This was an increase of 32%
in the audio network from fiscal year 1997 to fiscal year 1998. The Company's
Internet subsidiary, IBS, continued to develop high-end database-oriented web
sites for major and medium sized corporate clients. Additionally, the Company's
two subsidiaries, IBS and EDN, collaborated with a number of audio recording
studios to develop web sites for advertising, casting of talent and transmission
of completed radio commercials over the Internet to advertising agencies and
advertisers for approval. Management expects that such collaboration will
continue, and that the Company will continue to grow its audio network. In
addition, the Company has begun to offer video networking services to current
and new customers.
Liquidity And Capital Resources At June 30, 1998
At June 30, 1998, the Company's principal sources of liquidity included $32,911
in cash and investments and an unsecured $10,000 revolving line of credit, which
expires in February 1999. The Company's current ratio was greatly improved over
year-end fiscal 1997 as a result of the restructuring discussed above. At June
30, 1998 the current ratio (current assets divided by current liabilities) was
.87, whereas at June 30, 1997 it was .20.
Net cash provided by investing activities of $557,646 for fiscal year 1998
related primarily to sale of certain of the Company's assets (including the sale
of the Company's investment in Breakthrough Software). Financing activities
provided a net amount of $569,925 for fiscal year 1998, primarily due to
issuance of common stock for $739,124, less $115,481 for the repayment of notes
payable, $25,755 for payment on lines of credit and $27,963 for payment on
capital leases.
At June 30, 1998, the Company's accumulated deficit was $6,191,090 and its
working capital deficit was $96,354. The Company has not been able to generate
any operating profit since inception, however the loss from operations was
reduced dramatically from $3,252,885 in fiscal year 1997 to $755,731 in fiscal
year 1998. This was attributed to cancellation of all research and development
projects following the restructuring of the Company's subsidiary IBS and the
termination of the Company's involvement in software development, as well as
reduction in personnel, and increased revenues from higher margin activities.
The Company realized a net profit from the forgiveness of debts, sale of
investments and gain from debt restructuring.
<PAGE>
Results Of Operations: Year Ended June 30, 1998 and Year Ended June 30, 1997
The following table sets forth for the periods indicated the percentage of net
sales represented by certain line items from the Company's consolidated
statements of income:
Year Ended June 30,
------------------------
1998 1997
--------- ---------
Revenues 100.0% 100.0%
Cost of sales 64.9% 59.8%
--------- ---------
Gross profit 35.01% 40.2%
Operating expenses:
Research and development 0.0% 26.7%
Sales and marketing 16.6% 24.9%
General and administrative 37.2% 74.0%
--------- ---------
Total operating expenses 53.8% 125.6%
--------- ---------
Loss from operations -18.8% -85.4%
--------- ---------
Other income (expenses) 14.1% -26.6%
--------- ---------
Loss before income taxes and
extraordinary item -4.7% -112.0%
Provision for income taxes 0.1% 0.1%
--------- ---------
Loss before extraordinary item -4.8% -112.1%
Extraordinary item 17.7%
--------- ---------
Net income (loss) 12.9% -112.1%
========= =========
Revenues. Net Sales for 1998 increased 5% to $4,004,341 as compared to
$3,807,370 in 1997. Revenues from the Company's IBS subsidiary were $1,117,421
compared to $1,178,517 in 1997. Management attributes increases in revenue to
increases in network access and usage fees associated with a larger installed
base and the addition of web development and hosting revenues. The equipment
component of revenue declined in the period ended June 30, 1998 due to vendor
credit restrictions. With the investment by VDC and the restructuring of the
Company's past due accounts payables, notes payables and liens at the end of the
fiscal year, the majority of the suppliers eased their credit restrictions and
allowed the Company to resume purchasing equipment on credit. This will allow
the Company to purchase equipment for inventory or to order equipment in advance
on credit.
<PAGE>
Gross Profit. Gross Profit decreased to $1,401,847 or 35 % of sales, in the year
ended June 30, 1998 compared to $1,530,252, or 40% of sales in the year ended
June 30, 1997. Decreases in gross profit as a percentage of sales compared to
the prior fiscal year are primarily due to increased costs associated with
programming web sites and website hosting services.
No revenue or gross profit impact is expected as a result of the licensing of
the Company's IBS Internet software product to Breakthrough Software Inc. IBS's
share of the Company's revenues and gross profit is expected to remain static at
approximately 25%.
Operating Expenses. Operating expenses (including Research & Development, Sales
& Marketing, and General & Administrative) decreased to $2,157,578 in 1998
compared to $4,783,137 in 1997. The decrease was primarily due to a significant
reduction in general and administrative expenditures in fiscal year 1998.
Operating expenses for 1997 included $1,107,233 for the expenditures on Research
and Development and also included $1,666,786 in costs, representing significant
legal and accounting costs associated with the BSI transaction, the filing of a
Form 10-SB registration statement with the SEC, the Company's initial three-year
audit, and an investor relations consulting agreement. The Company did not incur
any research and development expense during the year of 1998 primarily due to
the termination of the Company's involvement in software development when it
licensed the IBS Internet software product to Breakthrough Software Inc. Other
operating expenses include reallocation of $480,638 of IBS web development cost
and hosting service expenses that are now included in the cost of sales for web
development and hosting services.
Other Income and Expenses. Other income and expenses increased to a positive
$565,779 in the year of 1998, compared to a negative $1,013,396 in the
equivalent prior period. The Company attributes the increase to sale of its
investment in Breakthrough Software, Inc., totaling $422,225 (See Note 1 to the
Consolidated Financial Statements), and to the forgiveness of debt relating to
certain unsecured notes payable to an outside investor in the principal amount
of $200,000. The other expenses for 1997 were included $147,166 of interests
expenses associated with the Senior Notes (Notes 1 and 6 to the Consolidated
Financial Statements) and $867,214 of fully amortized Goodwill (See Note 2 to
the Consolidated Financial Statements).
Net Income or Loss. For fiscal year 1998, the Company incurred a net loss before
extraordinary items of $192,352, or $0.024 per share based on a weighted average
of 7,936,358 shares outstanding. Fiscal year 1998 net income including
extraordinary items was $518,136 or $0.089 per share based on a weighted average
of 7,936,358 shares outstanding, compared to a net loss of $4,269,547, or $0.857
per share based on a weighted average of 4,979,156 shares outstanding in the
prior year.
Readiness for Year 2000.
The Company is still assessing the nature and extent of the Year 2000 ("Y2K")
issues that it must address, and it is confident that it has already taken or
will be able to complete the work required to make its systems, products and
infrastructure Y2K ready. The Company has determined that the primary impact, if
any, of Y2K problems would be relegated to certain management information
systems, not to any revenue generating systems or services that it provides.
Nevertheless, the Company plans upgrades by the end of fiscal year 1999 that are
necessary for the accounting system to handle Y2K issues. There may be certain
computer hardware and software replacements that are necessary to handle Y2K
issues as well. The costs for these upgrades will not be material, and they are
easily obtained. There are no technological issues in the hardware or software
that the Company sells or rents to its clients that will be affected by Y2K
issues.
<PAGE>
The Company also plans to evaluate the Y2K readiness of its consultants, vendors
and suppliers. Where the Company determines that critical suppliers are not Y2K
ready, the Company will monitor their progress and take appropriate actions. In
particular, the telephone companies that supply the Company with services must
be Y2K ready in order to avoid major billing errors. Though the Company may
experience some temporary delay in its ability to accurately rebill its
customers, it does not foresee any permanent liability, should some error occur
on the part of these suppliers. The Company believes that the Y2K date change
will not significantly affect its ability to deliver products and services to
its customers on a timely basis; however, given the uncertain consequences of
failure to resolve significant Y2K issues, there can be no assurance that any
one or more such failures would not have a material adverse effect on the
Company.
Forward-Looking Statements.
This Annual Report on Form 10-KSB contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include those set forth below under the caption "Factors that May Affect
Future Results."
Factors That May Affect Future Results.
Following the investment by VDC, and the settlement of overdue accounts,
outstanding notes payable and related liabilities, the Company intends to focus
on expanding its international audio media networking equipment sales and
services and launching, nationally and internationally, its video media
networking equipment sales and services. Significant opportunities exist in the
audio media area and in the video media area as a result of its affiliation with
VDC and the potential use of the video network by customers of VDC's video
newswire product. The Company expects to be able to fund its expanded activities
from within its own cash flow and lines of credit facilities.
Audio Media Networking Services. The Company utilizes hardware, software and
both public switched and Internet Protocol ("IP") networks in providing audio
networking services to its customers. This service participates in a industry
which undergoes rapid changes with new products and services. The Company
presently does not develop hardware or software or build wide area networks.
Instead, the Company buys commercially available equipment, purchases network
time from long distance carriers, integrates this equipment and time into full
time or "24 x 7" network service, and resells this service to its customers.
Because the Company does not develop software or manufacture hardware itself,
the Company can adapt new hardware or network offerings to its customers' needs
and integrate new equipment and new network access mechanisms into its services
with a minimum of cost, provided that customers are willing to pay to upgrade to
such new network service or equipment. The Company will need to be aware of new
products and services, since any delay or failure to anticipate or respond to
any new technology could have an affect upon the anticipated operating results
of the Company.
Video Media Networking Services. The Company has provided limited video
networking services in the past five years. This service has been limited to
short form video (commercials, special affects and animation) due to the size of
the files for video compared to audio and the high cost of wider bandwidth
needed for video transmission, which the Company must procure from telephone
companies. To the Company's knowledge, several long distance and regional
telephone companies have offered video wide area networking services to their
clients from time to time, but, to the Company's knowledge, such efforts have
mainly produced negative results.
<PAGE>
The Company believes that there be opportunities for growth with this service,
although there is also likely to be an increase in the number of competitors
providing wide band services for moving video. The Company will continue to
pursue the video networking business as long as it complements the Company's
overall business plan and is cost effective.
ITEM 7 FINANCIAL STATEMENTS
- ------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of EDnet, Inc.
We have audited the accompanying consolidated balance sheets of EDnet, Inc. and
subsidiaries as of June 30, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EDnet, Inc. and
subsidiaries as of June 30, 1998 and 1997 and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/Burr, Pilger & Mayer
San Francisco, California
July 23, 1998
<PAGE>
<TABLE>
<CAPTION>
EDNET, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
------------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash $ 32,911 $ 31,067
Accounts receivable, net of allowance for doubtful accounts of
$17,502 and $31,875 in 1998 and 1997, respectively (Note 3) 471,341 445,121
Inventories 87,157 202,913
Prepaid expenses 58,823 -
Other current assets 16,665 25,523
----------- -----------
Total current assets 666,897 704,624
Note receivable-related party (Notes 1 and 4) 283,746 -
Property and equipment, net (Note 5) 391,481 556,533
Investment (Note 1) - 166,667
Other assets 13,711 7,237
Deferred tax asset, net of valuation allowance of $376,000 and
$1,134,000 in 1998 and 1997, respectively (Note 8) - -
----------- -----------
$ 1,355,835 $ 1,435,061
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 388,325 $ 1,648,165
Accrued expenses 294,980 313,241
Deferred revenue 21,286 69,193
Line of credit (Note 7) 8,872 34,627
Notes payable-related party (Note 6) 40,500 55,500
Notes payable (Note 6) - 1,440,000
Current portion of capital lease obligations (Note 9) 9,288 27,817
----------- -----------
Total current liabilities 763,251 3,588,543
Capital lease obligations (Note 9) 11,470 20,904
----------- -----------
Total liabilities 774,721 3,609,447
----------- -----------
Commitments and contingency (Notes 9 and 15).
Stockholders' equity:
Convertible preferred stock; $1,000 par value; 1,750 shares authorized;
150 shares issued and outstanding in 1997 - 117,541
Common stock; $0.001 par value; 50,000,000 shares authorized;
16,761,836 and 5,740,465 shares issued and outstanding in 1998
and 1997, respectively 16,761 5,740
Additional paid-in capital 6,755,443 4,411,559
Accumulated deficit (6,191,090) (6,709,226)
----------- -----------
Total stockholders' equity (accumulated deficit) 581,114 (2,174,386)
----------- -----------
$ 1,355,835 $ 1,435,061
=========== ===========
</TABLE>
The accompanying notes are in integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EDNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1998 and 1997
------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Equipment sales $ 874,785 $ 961,677
Installation and monthly fees 610,514 541,856
Usage fees 1,617,291 1,305,992
Web design and consulting 784,528 862,525
Rental fees 99,384 117,993
Other 17,839 17,327
----------- -----------
4,004,341 3,807,370
Cost of sales 2,602,494 2,277,118
----------- -----------
Gross profit 1,401,847 1,530,252
Sales and marketing 666,985 948,549
Research and development -- 1,017,233
Operating expenses 1,490,593 2,817,355
----------- -----------
Loss from operations before other income (expenses) and provision
for income taxes and extraordinary item (755,731) (3,252,885)
----------- -----------
Other income (expenses)
Interest income 4,166 1,837
Interest expense (63,772) (147,166)
Gain (loss) on sale of equipment 3,160 (853)
Goodwill write-off, net (Note 1) -- (867,214)
Gain on sale of investment (Note 1) 422,225 --
Forgiveness of debt 200,000 --
----------- -----------
Total other income (expenses) 565,779 (1,013,396)
----------- -----------
Loss before provision for income taxes and extraordinary item (189,952) (4,266,281)
Provision for income taxes (Note 8) 2,400 3,266
----------- -----------
Loss before extraordinary item (192,352) (4,269,547)
Extraordinary item-gain on restructuring of debt (no applicable income taxes)
(Note 1) 710,488 --
----------- -----------
Net income (loss) $ 518,136 $(4,269,547)
=========== ===========
Basic and diluted earnings (loss) per share:
Loss from operations before extraordinary item $ (0.024) $ (0.857)
Extraordinary item 0.089 --
----------- -----------
Net income (loss) $ 0.065 $ (0.857)
=========== ===========
</TABLE>
The accompanying notes are in integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EDNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 1998 and 1997
------------
Common Stock Preferred Stock
Shares Amount Shares Amount Paid-in Capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996 4,468,322 $ 4,468 -- -- $ 2,758,644
Common shares issued under IBS earn-out agreement 125,000 125 -- -- 195,188
Common shares issued under Regulation D offerings 582,143 582 -- -- 755,792
Common shares issued pursuant to consulting agreement 500,000 500 -- -- 652,000
Common shares issued under conversion of Viscorp notes 65,000 65 -- -- 49,935
Preferred shares issued under Regulation S offering -- -- 150 $ 117,541 --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Ending balance, June 30, 1997 5,740,465 5,740 150 117,541 4,411,559
Common shares issued under Regulation D offering 738,000 738 -- -- 126,382
Common shares issued under S-8 offering 400,000 400 -- -- 399,600
Common shares issued to Rusell & Onggara 1,000,000 1,000 -- -- 374,000
Conversion of preferred shares to common 150,000 150 (150) (117,541) 117,391
Common shares issued pursuant to consulting service 169,954 170 -- -- 21,074
Common shares issued to VDC 8,563,417 8,563 -- -- 1,305,437
Net income -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Ending balance, June 30, 1998 16,761,836 $ 16,761 -- -- $ 6,755,443
=========== =========== =========== =========== ===========
(restubbed table)
<CAPTION>
Additional Accumulated
Deficit Total
------------ -----
<S> <C> <C>
Balance, July 1, 1996 $(2,439,679) $ 323,433
Common shares issued under IBS earn-out agreement -- 195,313
Common shares issued under Regulation D offerings -- 756,374
Common shares issued pursuant to consulting agreement -- 652,500
Common shares issued under conversion of Viscorp notes -- 50,000
Preferred shares issued under Regulation S offering -- 117,541
Net loss (4,269,547) (4,269,547)
----------- -----------
Ending balance, June 30, 1997 (6,709,226) (2,174,386)
Common shares issued under Regulation D offering -- 127,120
Common shares issued under S-8 offering -- 400,000
Common shares issued to Rusell & Onggara -- 375,000
Conversion of preferred shares to common -- --
Common shares issued pursuant to consulting service -- 21,244
Common shares issued to VDC -- 1,314,000
Net income 518,136 518,136
----------- -----------
Ending balance, June 30, 1998 $(6,191,090) $ 581,114
=========== ===========
</TABLE>
The accompanying notes are in integral
part of these consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EDNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1998 and 1997
------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 518,136 $ (4,269,547)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Stock issued in lieu of consideration for services 421,244 847,813
Goodwill write-off - 867,213
Depreciation and amortization 199,458 409,171
(Gain) loss on sale of fixed assets (3,160) 853
Gain on sale of investment (422,225) -
Gain on write-off of note payable (200,000) -
Inventory write-off 49,061 -
Noncash debt restructure (773,026) -
(Increase) decrease in assets:
Accounts receivable (26,220) 32,955
Inventories 66,695 (55,504)
Prepaid expenses (58,823) -
Other current assets 8,858 (11,225)
Other assets (6,474) 72,105
Increase (decrease) in liabilities:
Accounts payable (868,083) 988,456
Accrued expenses 16,739 (76,761)
Deferred revenue (47,907) (430)
----------- ------------
Net cash used in operating activities (1,125,727) (1,194,901)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (31,246) (256,259)
Sale of investment 588,892 -
Change in investment from spin-off - (166,667)
----------- ------------
Net cash provided by (used in) investing activities 557,646 (422,926)
----------- ------------
Cash flows from financing activities:
Proceeds from borrowing - 750,000
Principal payments on long-term debt (115,481) (195,491)
Payments on capital leases (27,963) (19,394)
Sale of common stock 739,124 756,374
Sale of preferred stock - 117,541
Change in line of credit (25,755) 17,989
----------- ------------
Net cash provided by financing activities 569,925 1,427,019
----------- ------------
Net increase (decrease) in cash 1,844 (190,808)
Cash at beginning of year 31,067 221,875
----------- ------------
Cash at end of year $ 32,911 $ 31,067
=========== ============
</TABLE>
Supplemental disclosure of cash flow information (see Note 14).
The accompanying notes are in integral
part of these consolidated financial statements.
<PAGE>
EDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
1. The Company
Summary of Business
EDnet, Inc. (the Company), a Colorado corporation, and its subsidiaries
develop and market integrated systems for the delivery, storage, and
management of professional-quality digital communications for
media-based applications, including audio and video production for the
U. S. entertainment industry. The Company, through strategic alliances
with long-distance carriers, regional telephone companies, satellite
operators, and independent fiber optic telecommunications providers,
has established a worldwide network that enables the exchange of high
quality audio, video, multimedia, and data communications. The Company
provides engineering services and application-specific technical
advice, audio, video, and networking hardware and software as part of
its business. Additionally, through one of its wholly owned
subsidiaries, the Company provides Internet web site development and
hosting services.
Organization
The Company's principal subsidiary, Entertainment Digital Network
(EDN), was originally incorporated in the state of Nevada in June 1992.
In January 1993, EDN was reincorporated in the state of California.
During September and October of 1995, EDN's stockholders exchanged 100%
of their shares of common stock for 1,519,538 shares of common stock of
AP Office Equipment (APO), a public company with no operations and no
significant assets or liabilities. At the time of the exchange, APO, a
Colorado corporation that was incorporated in May 1994, had 747,500
shares of common stock outstanding. Concurrently, APO sold 1,500,000
shares of common stock to a group of investors for $.665 per share. APO
then changed its name to EDnet, Inc. EDN became a subsidiary of the
Company as a result of this transaction. For accounting purposes, this
transaction has been treated as a recapitalization of EDN, recognizing
the issuance of shares of common stock for the net assets of EDN. The
historical financial statements prior to this transaction are those of
EDN.
Investment by Visual Data Corporation
On June 20, 1998, the Company entered into an agreement with Visual
Data Corporation (VDC), an SEC registrant, to sell a 51% (8,563,417
shares) ownership interest in the Company's common stock. The form of
payment consisted of:
<TABLE>
<S> <C>
Cash $ 698,004
VDC stock: 75,000 shares (valued at $3.75 per share) 281,250
VDS warrants: 50,000 (valued at $2.74 per warrant) 137,000
Secured note receivable (see Note 4) 283,746
------------
1,400,000
Less expenses 86,000
Net investment $ 1,314,000
============
</TABLE>
<PAGE>
1. The Company, continued
Investment by Visual Data Corporation, continued
In addition, the Company issued a blanket mirror option covering
6,542,722 shares (3,304,979 options and 3,237,743 warrants), which
entitles VDC to acquire shares equal to those actually purchased upon
exercise of options and warrants by others at 10 cents per share (see
Note 10). In addition, the Company gave the investment banker who
organized the transaction 750,000 warrants at an exercise price of
$.145.
The transaction was contingent upon certain restructuring of accounts
payable debt the Company had incurred over the prior three years.
The following table summarizes the adjustments made according to the
settlement agreement:
<TABLE>
<CAPTION>
Amount Debt Amount
Due Discharge Settled
--- --------- -------
<S> <C> <C> <C>
EDnet, Inc.:
Trade and unsecured claims $ 257,376 $ 137,817 $ 119,559
Notes payable (see Note 6) 904,019 381,269 522,750
Entertainment Digital Network:
Trade and unsecured claims 179,664 109,435 70,229
Internet Business Solutions:
Trade and unsecured claims 201,699 81,967 119,732
----------- --------- --------- =
Total $ 1,542,758 $ 710,488 $ 832,270
=========== ========= =========
</TABLE>
Regulation D Equity Placements
The Company has offered three Regulation D equity placements in the
past two fiscal years.
In August 1996, the Company had offered up to a maximum of $3,000,000
in units (each consisting of one share of its common stock and one
warrant) at a price per unit of the lesser of $3.00 or the average
closing bid price of its common stock during a consecutive 30-day
period immediately preceding the termination date less 30%. Each share
of stock came with a warrant to purchase common stock through July 31,
1999 at a price of the lesser of $4.75 or the average closing bid price
during a consecutive 30-day period immediately preceding the
termination date as explained above. This offering was closed as of
November 30, 1996, with 317,143 units sold at a price of $1.75 per
share and a warrants exercise price of $2.50 per share.
In December 1996, the Company had offered up to a maximum of $5,000,000
in shares at a price of $1.00 per share. The offering terminated in
early 1997 with the sale of 265,000 shares at a price of $1.00 per
share. Holders of this common stock will have piggyback and Form S-3
registration rights.
<PAGE>
1. The Company, continued
Regulation D Equity Placements, continued
On July 10, 1997, the Company offered up to a maximum of 3,750,000
units (each consisting of one share of common stock and one warrant)
for T Bar W Ranch Investments (T Bar) to purchase shares of the Company
at a price of $.20 per unit. Each warrant is exercisable until the
fifth (5th) anniversary of the date of its issuance and entitles the
holder to purchase one share at an exercise price of $1.00 per share.
The warrants had an antidilution clause in its terms. T-Bar invested
$147,600 to acquire 738,000 shares and 738,000 warrants. The Company
negotiated an agreement with T-Bar in June 1998 to reduce the warrant
exercise price to $.10 per share in exchange for removal of the
antidilution clause.
The Regulation D equity placement for these three offerings totaled as
follows:
Offering Date Common Shares Warrants
------------- ------------- --------
August 1996 317,143 317,143
December 20, 1996 265,000 -
July 10, 1997 738,000 738,000
----------- -----------
Total 1,320,143 1,055,143
=========== ===========
Regulation S Equity Offering
On February 3, 1997, the Company offered up to $1,750,000 of its Series
A Preferred Stock at $1,000 per share in an offering exempt from
registration under Regulation S of the Securities Act of 1933. The
shares were convertible into common stock at any time until the third
anniversary of their issuance at the lesser of 70% of the market price
or the closing price but subject to the floor of $1.00 per share. One
hundred fifty shares were purchased on February 27, 1997 and converted
to 150,000 common shares on May 29, 1998. The discount of 30% off of
the market price on the conversion of stock was not recorded because
the stock was converted at $1.00 per share (the minimum), which was
greater than the current price at the conversion rate.
Acquisition of Internet Worldwide Business Solutions
On June 24, 1996, the Company acquired all the outstanding shares of
common stock of Internet Worldwide Business Solutions (IBS) in a
business combination accounted for as a purchase. IBS is primarily an
Internet service provider specializing in the development and hosting
of web sites. The results of operations of IBS are included in the
accompanying financial statements since the date of acquisition. The
purchase price of $1,162,568 included 311,284 shares of the Company's
common stock, notes payable in the aggregate amount of $500,000 and
$40,000 of acquisition related costs. The purchase price exceeded the
estimated fair value of the net tangible assets of IBS by $1,088,568.
The excess was reflected as goodwill on the balance sheet and was
originally amortized using the straight-line method over a five-year
period. During fiscal year 1997 the Company reevaluated the recovery of
its goodwill and determined that the remaining balance be written off.
<PAGE>
1. The Company, continued
Acquisition of Internet Worldwide Business Solutions, continued
In conjunction with the acquisition, under the terms of its
nonstatutory stock option plan, options to purchase an aggregate of
50,000 shares of common stock of the Company were granted to certain
IBS employees at $1.25 per share.
On December 31, 1996, the Company amended the terms of its previously
consummated acquisition of its wholly owned subsidiary, Internet
Business Solutions (IBS) by dividing IBS into two separate
corporations. IBS's inherent service business continues to operate as
IBS. IBS licensed the IBS website software to Breakthrough Software,
Inc. (BSI) and agreed to lend up to $250,000 to BSI. In consideration,
IBS issued certain convertible preferred stock, which, after conversion
into BSI nonvoting common stock, represented 40% of BSI's outstanding
common stock. At December 31, 1996, the Company recorded its net book
value allocated to BSI of $166,667 as its investment. Also as part of
the amendment, remaining acquisition notes payable from the Company to
the founders of IBS in the amount of $250,000 were canceled, and the
remaining term of an earn-out plan to such founders was also canceled.
Following is a summary of net goodwill write-off at June 30, 1997:
<TABLE>
<S> <C>
Original value of goodwill $ 1,088,568
Addition to goodwill for cancelation of options per
earn-out agreement 195,313
Reduction to goodwill for write-off of debt (250,000)
Reduction to goodwill for net book value allocated to
investment for BSI (166,667)
Remaining net goodwill written off $ 867,214
============
</TABLE>
In November 1997, new investors of BSI agreed to purchase the preferred
shares owned by the Company for $415,000 in cash and the assumption of
certain liabilities of $93,892. This transaction was completed in
January 1998. In addition, the Company also received $80,000 from
another investor from the sale of a fully reserved note receivable
related to BSI. A recap of the total consideration shown in the fiscal
1998 financial statements is as follows:
<TABLE>
<S> <C>
Cash proceeds $ 415,000
Assumption of debt 93,892
Note settlement 80,000
----------
Net proceeds and consideration 588,892
Net book value of investment 166,667
Gain on sale of investment $ 422,225
==========
</TABLE>
<PAGE>
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries EDN and IBS. Material inter-company
transactions and balances have been eliminated.
Revenue Recognition
A significant component of revenues relate to the sale of equipment
which is recognized when the equipment is installed. Installation fees
are recognized when the installation has been completed and usage fees
are recognized over the period the equipment is used based on the
relative usage level. Deferred revenues represent billings in excess of
revenue recognized.
Allowance for Doubtful Accounts
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts
receivable.
Inventories
Inventories are valued at the lower of cost or market with cost being
determined on the first-in, first-out basis.
Property and Equipment and Leasehold Improvements
Property and equipment are carried at cost and are depreciated on the
straight-line basis over their estimated useful lives, which range from
five to seven years. The costs of leasehold improvements are amortized
over the lesser of the length of the related leases or the estimated
useful lives of the assets. Expenditures for improvement or expansion
of property and equipment are capitalized. Repairs and maintenance are
charged to expense as incurred. When the assets are sold or retired,
their cost and related accumulated depreciation are removed from the
accounts with the resulting gain or loss reflected in the statement of
operations.
Advertising
Advertising costs are charged to operations as incurred. There were no
advertising expenses for the years ended June 30, 1998 and 1997.
Goodwill
Goodwill related to the acquisition of IBS was originally amortized
using the straight-line method over the estimated useful life of five
years. The Company evaluated the recovery of its goodwill by comparing
the aggregate estimated cash flows generated by those assets with their
carrying value. The carrying value exceeded the aggregate cash flow
amount, and goodwill was written off accordingly.
<PAGE>
2. Summary of Significant Accounting Policies, continued
Income Taxes
The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are computed annually for
differences between the financial reporting and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash,
accounts receivable, notes receivable, accounts payable, accrued
expenses, notes payable, and line of credit, approximate fair value as
of June 30, 1998 and 1997 because of the relatively short-term maturity
of these instruments.
Accounting for the Impairment of Long-Lived Assets
Long-lived assets such as intangible assets and property and equipment,
are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will
be written down to fair value. This standard had no material effect on
the financial statements for 1998. Except as explained in Note 1, the
Company wrote off goodwill of $867,213 in 1997.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect 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. Among the more significant
estimates included in these consolidated financial statements are the
estimated allowance for doubtful accounts receivable and the deferred
tax asset valuation allowance. Actual results could differ from those
and other estimates.
Accounting for Stock-Based Compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock issued to Employees. Under
the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the
stock. The Company makes pro forma disclosures of the net income and
earnings per share as if the fair value based method of accounting had
been applied as required by statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation. (Note 10).
<PAGE>
2. Summary of Significant Accounting Policies, continued
Earnings (Loss) per Share
The Company adopted Statement of Financial Accounting Standard No. 128
(FAS 128), Earnings per Share, during the year ended June 30, 1998.
There is no effect of FASB #128 on prior financial statements.
Earnings (loss) per share has been calculated using the weighted
average number of shares outstanding for the period, which were
7,936,358 for 1998 and 4,979,156 for 1997. Common stock equivalents
(stock options and warrants) have been excluded from the calculation
because they are anti-dilutive.
New Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board issued a new
disclosure standard, SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for the reporting and displaying of
comprehensive income, its components, and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. This new standard is effective for financial statements for
periods beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. This standard is not
expected to materially impact the Company's disclosures when it is
adopted.
In 1997, the FASB issued a new disclosure standard, SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information,
which establishes standards for the reporting and displaying of
operating business segments. The statement defines operating segments
operating as distinct revenue-producing components of the enterprise
about which separate financial information is produced internally and
whose operating results are regularly reviewed by the enterprise. This
new standard is effective for financial statements for periods
beginning after December 15, 1997. The Company is currently reviewing
the impact of this new disclosure of its financial statements.
Reclassification
Certain reclassifications have been made to the prior year financial
statements in order for them to conform to the current-year
presentation.
<PAGE>
3. Accounts Receivable
Accounts receivable at June 30, 1998 and 1997 comprise the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Receivables $ 444,243 $ 379,529
Rebillable charges 44,600 97,467
---------- ----------
488,843 476,996
Less allowance for doubtful accounts (17,502) (31,875)
---------- ----------
Total $ 471,341 $ 445,121
========== ==========
</TABLE>
Allowances are made as a percentage of sales adjusted annually based
upon review of the individual accounts receivable. Accounts are written
off when deemed to be worthless. Total bad debt expense was $1,501 and
$13,706 for the years ended June 30, 1998 and 1997, respectively.
4. Note Receivable-Related Party
Secured note receivable at the face value of $283,746 due from Visual
Data Corporation is part of the payment resulting from VDC's investment
(Note 1). Principal of $56,749 plus interest is due annually commencing
July 1, 1999 until July 1, 2003; the note bears a fixed interest rate
of 7% per annum.
5. Property and Equipment
Property and equipment are summarized by major category as follows as
of June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Network and related equipment $ 881,473 $ 854,383
Furniture and fixtures 234,984 245,963
Computer software 16,802 7,954
Leasehold improvements 26,183 26,183
----------- -----------
Subtotal 1,159,442 1,134,483
Depreciation and amortization (767,961) (577,950)
----------- -----------
Property and equipment, net $ 391,481 $ 556,533
=========== ===========
</TABLE>
Depreciation and amortization included in the statements of income
amounted to $199,458 and $187,816 for the years ended June 30, 1998 and
1997, respectively.
The Company leases some equipment to customers under terms that are
accounted for as operating leases. Under the operating method, rental
revenue from leases are recognized ratably over the life of the lease
and the related equipment is depreciated over its estimated useful
life.
<PAGE>
6. Notes Payable
<TABLE>
<CAPTION>
Notes payable consist of the following as of June 30, 1998 and 1997:
1998 1997
---- ----
<S> <C> <C>
Notes payable to an outside investor totaling $200,000. The notes bear
no interest and are uncollateralized. The repayment of these notes
was disputed by the Company and in 1998, when the debt could no
longer be legally collected, the notes were written off. - $ 200,000
Senior notes payable to Morgan Fuller Capital Group LLC with interest
at 18% per annum. The original amounts were $500,000, $300,000, and
$200,000. The Company repaid $100,000 in February 1997. The notes
are collateralized by the Company's assets. The balance was settled
and repaid in 1998 (Note 1). - 900,000
Notes payable to Mr. Irawan Onggara, a shareholder and financial
advisor, with original amounts of $250,000, $100,000, and $75,000 at
7% interest rate, collateralized by assets of the Company
subordinated to equipment covered by individual capital leases, due
August 8, 1996, October 18, 1996, and November 20, 1996,
respectively. The balance plus accrued interest of $35,000 was
converted to 1,000,000 shares of the Company's common stock and
warrants to purchase an additional 1,000,000 shares at $.375. - 340,000
- 1,440,000
Notes payable-related party to an officer and employees, interest
at 6% per annum, uncollateralized. Accrued interest
payable as of June 30, 1998 is $13,293. $ 40,500 55,500
$ 40,500 $1,495,500
=======================
</TABLE>
The related party notes payable are overdue as of October 21, 1996. The
payee has agreed not to declare a default under these notes for an
indefinite period and to accept repayment by the Company at a future
date.
The carrying value of these financial instruments approximates fair
value due to the relatively short maturity.
7. Line of Credit
The Company has a line of credit of $10,000 with a financial
institution, of which $8,872 and $9,627 was outstanding as of June 30,
1998 and 1997, respectively. It bears interest at 15.25% as of June 30,
1998.
The Company's wholly owned subsidiary IBS had a $25,000 line of credit
with a financial institution. The line of credit was terminated in
January 1998.
<PAGE>
8. Income Taxes
The provision for income taxes consists of currently payable California
franchise taxes of $2,400.
<TABLE>
<CAPTION>
A reconciliation of the expected and reported provision for income
taxes follows:
Year Ended June 30
------------------
1998 1997
---- ----
<S> <C> <C>
Benefit (provision) expected based on federal
statutory rate 34.0% 34.0%
State taxes, net of federal benefit 6.1 6.1
Valuation allowance, net (40.2) (40.2)
------- ------
Net income tax provision 0.1% 0.1%
======= ======
</TABLE>
Although the Company has Federal and California loss carryforwards
totaling approximately $6.1 million and $2.6 million, the utilization
of these net operating loss carryforwards is limited due to a change of
ownership as defined in the Internal Revenue Code. As a result, the
federal NOL can be utilized at the rate of $68,000 a year through 2013.
The state NOL can be utilized at the rate of $68,000 a year through
2003.
The tax effects of significant temporary differences representing
deferred tax assets as of June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Federal State Federal State
------- ----- ------- -----
<S> <C> <C> <C> <C>
Total operating loss carryforwards $ 6,090,000 $ 2,673,000 $ 6,608,000 $ 3,304,000
Less amount that cannot be utilized (5,070,000) (2,333,000) (3,488,000) (2,264,000)
------------ ------------ ------------ ------------
Net operating loss carryforwards 1,020,000 340,000 3,120,000 1,040,000
Property and equipment 23,800 4,300 23,800 4,300
------------ ------------ ------------ ------------
Total deferred items 1,043,800 344,300 3,143,800 1,044,300
Tax rate, net 34.0% 6.1% 34.0% 6.1%
------------ ------------ ------------ -------------
Tax-deferred asset 355,000 21,000 1,070,000 64,000
Valuation allowance (355,000) (21,000) (1,070,000) (64,000)
------------ ------------ ------------ ------------
Net deferred tax asset - - - -
============ ============ ============ ============
</TABLE>
<PAGE>
9. Lease Commitments
As of June 30, 1998, the Company leases office space and certain
equipment under various noncancelable capital and operating leases. The
leases begin to expire in March 2000. Future minimum lease payments
required under the noncancelable leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending June 30: Leases Leases
-------- -------
<S> <C> <C>
1999 $176,517 $13,824
2000 157,277 10,106
2001 99,557 -
2002 99,557 -
2003 99,557 -
-------- -------
Total minimum lease payments $632,465 23,930
========
Less amount representing interest 3,172
-------
Present value of net minimum lease payments 20,758
Less current portion 9,288
-------
Long-term portion $11,470
=======
</TABLE>
As of June 30, 1998, the Company has equipment purchased under
noncancelable capital leases with a cost of $76,990 and accumulated
amortization of $37,649.
Total rental expense for all operating leases for the years ended June
30, 1998 and 1997 amounted to $195,925 and $192,509, respectively.
10. Options and Warrants
Nonqualified Options to Key Employees and Directors-September 19, 1995
Plan
On September 19, 1995, EDN granted a total of 263,420 non-qualified
options to certain employees and directors to purchase shares in EDN at
$.10 per share. As a result of the recapitalization discussed in Note
1, the EDN options were converted into options to purchase the
Company's stock at a conversion of .87495 per share for each EDN share.
As a result, at June 30, 1998, there were 230,479 options outstanding
at a price of $.11 per share. These options expire on September 19,
2000. There were no options exercised during the period.
Nonqualified Stock Options-November 10, 1995 Plan
On November 10, 1995, the Company adopted a nonstatutory stock option
plan whereby 565,000 shares of the Company's common stock was reserved
for issuance. Under the terms of the plan, the options must be granted
prior to December 31, 1996; the price shall be determined by the
Company's Compensation Committee (CC); the period of option shall not
exceed five years from the date of grant; and the option must be paid
in cash when exercised unless a payment plan is authorized by the CC.
As of June 30, 1998, 74,500 options were outstanding at $1.25 per
share.
<PAGE>
10. Options and Warrants, continued
Incentive Stock Options
On April 3, 1998, the Company established another Stock Option Plan for
its employees, board members, and certain other consultants in order to
motivate them to maintain their commitment to the Company at this stage
of development. The Plan allows the Company to grant incentive or
nonqualified options up to three million (3,000,000) shares of common
stock. As of June 30, 1998, incentive stock options to purchase
2,041,500 shares were outstanding at an exercise price of $0.10 per
share. These expire five years from the date of grant.
Warrants to Note-holders
In May 1996, the Company entered into an investment banking
relationship with Morgan Fuller Capital Group (Morgan). Under the terms
of the agreement, Morgan will provide the Company with financial
advisor services as well as arranging for equity and debt funding. A
series of senior notes were issued and the note-holders received
warrants totaling 432,600 shares. The warrants entitle the holders to
purchase shares of the Company's common stock at a price of $0.25 per
share to be exercised prior to June 2003.
Warrants to Shareholders
As described in Note 1, on August 26, 1996, the Company, pursuant to
the Regulation D offering, issued 317,143 warrants at an exercise price
of $2.50 per warrant.
As discussed in Note 1, the Company renegotiated the exercise price to
$.10 on 738,000 warrants in exchange for the investor removing the
antidilution clause.
As the result of the debt restructuring discussed in Note 6, the
Company gave the note-holder 1,000,000 warrants at an exercise price of
$.375.
Warrants to Consultants
Pursuant to a Consulting Agreement dated June 16, 1998, between the
Company and McKenzie Shea, Inc., the Company granted warrants to
purchase 750,000 shares of common stock at $0.145 per share (see Note
1). The warrants shall expire five years after their issuance.
<PAGE>
10. Options and Warrants, continued
A recap of the options and warrants outstanding as of June 30, 1998,
1997, and 1996 is as follows:
<TABLE>
<CAPTION>
June 30, 1998: Quantity Reserved Outstanding Price
----------------- ----------- -----
<S> <C> <C> <C>
Options:
Nonqualified September 15, 1995 Plan 230,479 230,479 $.11
Nonqualified November 10, 1995 Plan 74,500 74,500 1.25
Employee Incentive Stock Option Plan and
Nonstatutory Stock Option Plan dated
April 3, 1998 3,000,000 2,041,500 .10
VDC mirror options 3,304,979 3,304,979 .10
---------- -----------
Total options 6,609,958 5,651,458
---------- -----------
Warrants:
Regulation D warrants, June 1996 317,143 317,143 $2.50
Senior note warrants, November 1996 432,600 432,600 .25
Regulation D warrants, July 1997 738,000 738,000 .10
Conversion of notes, August 1997 1,000,000 1,000,000 .375
Investment banking warrants, June 1998 750,000 750,000 .145
VDC mirror warrants 3,237,743 3,237,743 .10
---------- -----------
Total warrants 6,475,486 6,475,486
---------- -----------
Total warrants and options 13,085,444 12,126,944
========== ===========
June 30, 1997:
Options:
Nonqualified September 15, 1995 plan 230,479 230,479 $.11
Nonqualified November 10, 1995 plan 565,000 556,667 1.25
Century Financial Partners options 805,000 - 1.25
---------- -----------
Total options 1,600,479 787,146
========== ===========
Warrants:
Morgan warrants 367,568 367,568 1.50
Senior notes warrants 65,032 65,032 2.68-3.69
Regulation D warrants 317,143 317,143 2.50
---------- -----------
Total warrants 749,743 749,743
========== ===========
June 30, 1996:
Options:
Employee EDN options converted 230,479 230,479 $.11
Employee incentive options 500,000 500,000 1.25
Nonstatutory options 565,000 272,000 1.25
--------- ----------
Total options 1,295,479 1,002,479
========= ==========
Warrants:
Employee warrants 303,908 303,908 $3.00
Morgan warrants 250,000 250,000 6.37
--------- ----------
Total warrants 553,908 553,908
========= ==========
</TABLE>
<PAGE>
10. Options and Warrants, continued
Statement of Financial Standards No. 123, Accounting for Stock-based
Compensation (SFAS 123), requires the Company to provide pro forma
information regarding net income and net income per common share as if
compensation costs for the Company's stock option plans had been
determined in accordance with the fair value method described in SFAS
No. 123. Had compensation expense been recorded under the provisions of
SFAS No. 123, the impact on the Company's net income and earnings per
share would have been:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Reported net earnings (loss) $ 518,136 $ (4,269,547)
Pro forma compensation expense, net of tax - -
---------- -------------
Pro forma net earnings (loss) $ 518,136 $ (4,269,547)
========== =============
Pro forma earnings (loss) per share-basic and diluted $ 0.065 $ (0.857)
========= =============
</TABLE>
The fair value of each option granted is estimated on the date of the
grant using the Black & Scholes option pricing model with the following
weighted average assumptions: dividend yield 0.00%, risk-free interest
rate of 5.52%, an expected life of options of three years for five-year
options, and a volatility of 227.9% for all grants.
11. Earnings (Loss) Per Share
The calculation of basic earnings per share and fully diluted earnings
per share is the same for 1998 and 1997. A recap of earnings (loss) per
share for the years ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Earnings (loss) per common share:
Income from operations before extraordinary items $ (0.024) $ (0.857)
Extraordinary items 0.089 -
-------- ---------
Net income (loss) $ 0.065 $ (0.857)
======== ========
</TABLE>
12. Employment Contracts
The Company and its subsidiaries have entered into employment contracts
with several of their key employees that expire at different times
through December 31, 2000. At June 30, 1998 the commitment under all of
the contracts was approximately $1,050,000.
<PAGE>
13. Concentration of Credit Risk
The Company and its subsidiaries maintain cash in bank deposit accounts
at accredited financial institutions. The balances in these accounts
may, at times, exceed federally insured limits.
14. Supplemental Disclosures of Noncash Investing and Financing Activities
The following noncash activity occurred during the periods under audit
as follows:
For fiscal year 1998:
The Company issued 569,954 of its shares of common stock in
consideration for consulting services performed. At the time of
issuance these shares were valued at $421,244.
The Company issued 1,000,000 common shares to a note-holder (see
Note 6) in exchange for the cancelation of the note of $340,000 and
accrued interest of $35,000.
As part of the VDC investment (see Note 1) the Company received
shares and warrants in VDC and a note receivable from VDC in the
amount of $283,746. The shares and warrants in VDC worth $418,250
were used to settle a note payable.
Cash paid during the year for interest was $97,193. Cash paid
during the year for taxes was $2,400.
For fiscal year 1997:
The Company issued 500,000 shares of its common stock in
consideration for consulting services. These shares were valued at
$652,500.
The Company issued 65,000 shares of its common stock in
exchange for the cancelation of $50,000 of debt.
The Company issued 125,000 shares of its common stock valued at
$195,313 for consideration of the IBS earn-out agreement.
Cash paid during the year for interest was $113,563. Cash paid
during the year for taxes was $3,268.
15. Contingency
The State Board of Equalization is auditing the Company's sales and use
tax liability for the period from July 1, 1994 through June 30, 1997. A
determination of any additional liability will be made by August 24,
1998. The Company is unable to determine the extent of loss, if any.
However, an accrual in the amount of $30,000 has been recorded on the
financial statements for the year ended June 30, 1998 and 1997.
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------
There have been no changes in or disagreements with the Company's accountants
regarding accounting and financial disclosure.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
- --------------------------------------------------------
The following sets forth the names, ages and current positions with the Company
held by Directors, Executive Officers and Significant Employees, together with
the year such positions were assumed. Tom Kobayashi, the Chief Executive
Officer, and David Gustafson, President and Chief Operating Officer, are
brothers-in law. Other than as described in the preceding sentence, there is no
immediate family relationship between or among any of the Directors, Executive
Officers or Significant Employees and the Company is not aware of any
arrangement or understanding between any Director or Executive Officer and any
other person pursuant to which he was elected to his current position.
Randy S. Selman, age 42, has served as the Chairman of the Board of Directors of
EDnet since August 6, 1998. Mr. Selman also has served as the Chief Executive
Officer, President, and Chairman for Visual Data Corp. (VDC) since its inception
in May 1993, and since September 1996, as VDC's acting Chief Financial Officer.
From March 1985 through May 1993, Mr. Selman was Chairman of the Board,
President and Chief Executive Officer of SK Technologies Corporation
(SKTC-Nasdaq Small Cap Market), a publicly-traded software development company.
SKTC develops and markets software for point-of-sale with complete back office
functions such as inventory, sales analysis and communications. Mr. Selman
founded SKTC in 1985 and was involved in the company's initial public offering
in 1989. Mr. Selman's responsibilities included management of SKTC, public and
investor relations, finance, high level sales and general overall
administration.
Tom Kobayashi, age 69, has served as Chief Executive Officer and a Director of
the Company from 1992 to present. From June 1992 to July, 1998, Mr. Kobayashi
served as the Chairman of the Board of Directors of the Company. From 1986 to
1993, he was Vice President and General Manager of Skywalker Sound division of
LucasArts. During his tenure at Skywalker, the sending of digital audio over
fiber optic telephone lines was developed and the idea for an entertainment
digital network was formulated. In 1992, with George Lucas approval, Mr.
Kobayashi utilized the technology first developed at Skywalker to found EDN.
Previously, he was with Glen Glenn Sound, a major sound recording studio in
Hollywood. He began with Glen Glenn in 1964 as Vice President of Finance, later
served as Vice President of Business Affairs and Executive Vice President and in
1983 was appointed President and Chief Operating Officer. Mr. Kobayashi is a
member of the American Engineering Society, the Society of Motion Picture and
Television Engineers, the Society of Professional Audio Recording Studios (of
which he has been a member of the Board of Governors for over seven years), the
Academy of Motion Picture Arts and Sciences and the Academy of Television Arts
and Sciences. Mr. Kobayashi earned a Bachelor of Science degree at the
University of Southern California.
<PAGE>
David Gustafson, age 51, has served as the President and Chief Operating Officer
of the Company from March 1996 to present, and as Vice President, Marketing and
Sales, from July 1992 to March 1996. He has served as a Director of the Company
since 1992. Previously, he was President and Chief Operating Officer of SLT,
Inc., a private New York-based apparel manufacturer; Corporate Vice President
and Director of Wacoal America, Inc., a $35 million division of the $1 billion
Wacoal Corp., a multi-national consumer products company based in Kyoto, Japan,
where his responsibilities included Merchandising and Design, Sales, Marketing
and Advertising; Vice President of Marketing and Merchandising for the Olga
Company; Management Information Systems Consultant with Deloitte, Haskins &
Sells in Los Angeles; and a computer Systems Engineer and Manager at EDS Corp.,
working in New York, Miami and Dallas. Mr. Gustafson received his Bachelors
degree from Westmont College in Santa Barbara, California and further training
in Marketing and Executive Management from the graduate business schools at both
the University of California, Los Angeles and the University of Southern
California.
Thomas Scott, age 54, has served as the Vice President-Chief Technology Officer
of the Company since 1992. From 1985 to 1992, he was Chief Engineer for
Skywalker Sound, the post production division of LucasArts/Lucasfilm Ltd.
Previously, he was Chief Engineer of The Record Plant and eventually worked in
film sound on the picture Apocalypse Now. Mr. Scott has been involved with
motion pictures since then, being employed at American Zoetrope, Dolby
Laboratories and LucasArts as Director of Engineering. During this period Mr.
Scott received two Oscar Academy Awards for Best Sound on the films The Right
Stuff and Amadeus. His last LucasArts project was the supervision of the
EditDroid and SoundDroid revolutionary computer-based picture and sound editing
equipment. Previously, he was Chief Engineer and Director of Remote Operations
at Wally Heider Recording, one of the first independent recording studios, and
an engineer with the Peace Corps in Venezuela. Mr. Scott is active in numerous
professional organizations and standards committees, including the American
Engineering Society, Society of Motion Picture and Television Engineers, the
Society of Professional Audio Recording Studios, the National Academy of
Recording Arts and Sciences and the Academy of Motion Picture Arts and Sciences.
Mr. Scott earned his Bachelor of Science degree from the Massachusetts Institute
of Technology.
Mark L. Wallin, age 28, has served as the President of IBS since February 1,
1997. Previously, he served as the Technical Director of Web Services from June
1996 to February 1, 1997. From 1992 to 1996, he was a Project Manager, Technical
Team Leader and Application Integrator for IBM. He graduated from Stanford
University in 1993 with a degree in Computer Systems Engineering.
Robert J. Wussler, age 60, has served as a Director of the Company since 1995.
From 1994 to the present, he has been the President and Chief Executive Officer
of Affiliate Enterprises, Inc., the company formed by ABC Television affiliates
to pursue new business opportunities, including emerging technology
applications. From 1990 to 1993, he was President and Chief Executive Officer of
COMSAT Video Enterprises, where he managed the acquisition of the NBA Denver
Nuggets. Previously, from 1980 to 1990, he was Senior Vice President of Turner
Broadcasting, where he oversaw the launch of CNN, Headline News and TNT, in
addition to serving as President of SuperStation TBS, and from 1974 to 1978, he
was the President of the CBS Television Network and CBS Sports.
<PAGE>
Brian K. Service, age 51, has served as Executive Director of EDnet since August
6, 1998. Mr. Service also is an international business consultant with clients
in North and South America, the United Kingdom, Asia, Australia and New Zealand.
From October 1992 to October 1994 Mr. Service was CEO and Managing Director of
Salmond Smith Biolad, a New Zealand publicly-traded company. From October 1986
to October 1992 he was CEO and Executive Chairman of Milk Products Holding
(North America) Inc., a wholly-owned subsidiary of the New Zealand Dairy Board
in Santa Rosa California, which was the sole marketer of New Zealand dairy
products in North America. Mr. Service has served as a member of the Board of
Directors and of the audit committee of Visual Data Corp. since July 1997.
Alan M. Saperstein, age 39, has served as Director of EDnet since August 6,
1998. Mr. Saperstein also has served as the Senior Vice President, Executive
Producer, Secretary and a director of VDC since its inception in May 1993. From
March 1989 until May 1993, Mr. Saperstein was a free-lance producer of video
film projects. Mr. Saperstein has provided consulting services for corporations
which have set up their own sales and training video departments. From 1983
through 1989, Mr. Saperstein was the Executive Director/Entertainment Division
of NFL Films where he was responsible for supervision of all projects, budgets,
screenings and staffing.
David E. Goodman, age 40, has served as a Director of EDnet since August 6,
1998. Mr. Goodman also has been Executive Vice President and Chief Operating
Officer of VDC since August 1997. From January 1997 until joining VDC, Mr.
Goodman was founder, President and Chief Executive Officer of Edenark Group,
Inc., an advisory services and development management firm specializing in
start-ups, reorganizations, mergers and acquisitions with a geographic focus on
the southeast United States, Mexico, Central America and the Caribbean Basin.
From March 1988 until December 1996 Mr. Goodman was with LaSalle Partners and as
a partner in the firm he held various senior line positions including Managing
Director of the firm's McCoy Group joint venture and Equity Vice President/Group
Manager of Florida and Latin America for the firm's Management Services Group.
From 1985 until 1988, Mr. Goodman was Manager of New Product Development for the
Beecham Cosmetics subsidiary of Beecham plc. where he managed the marketing and
advertising strategies for consumer products in 36 countries.
Employment contracts
The Company maintains employment contracts with key management and employees as
listed below. All referenced contracts contain identical non-competition
provisions:
Name, Title Date of Agreement Expiration Date
- ----------- ----------------- ---------------
Tom Kobayashi, CEO September 1, 1995 December 31, 2000
David Gustafson, President & COO September 1, 1995 December 31, 2000
Mark Wallin, President COO (IBS) February 28, 1997 January 31, 2000
Jeff Dobkins, VP Sales (IBS) February 28, 1997 January 31, 2000
Thomas A.Scott, VP Engineering July 7, 1997 December 31, 2000
<PAGE>
Each contract provides that for the designated period following the date of the
employment agreement, the employee will not, directly or indirectly, within any
county, city or part thereof and other areas in the United States of America
(collectively, the "Locations"), so long as the Company continues to be engaged
in the same or similar business or activity (the "Business") in such Location:
(i) own, manage, operate, control, or be connected in any manner with the
ownership, management, operation or control of any person or entity that engages
in the same or similar type of Business as the Business or engages in a business
competitive with the Business (a Competitive Business), which includes but is
not limited to, acting as a director, officer, agent, employee, consultant,
partner or stockholder of a Competitive Business; (ii) engage in any activity
which is the same as, similar to or in competition with the Business; (iii)
interfere with, disrupt or attempt to disrupt the business relationship,
contractual, employment or otherwise, between the Company and any customer or
prospective customer, supplier, lessee or employee of the Company, including
without limitation the customers and suppliers of the Business prior to the date
of the employment agreement; (iv) solicit employment for or of employees of the
Company or induce any employee to leave the employ of the Company; (v) lend or
allow his name or reputation to be used by or in connection with any Competitive
Business; or (vi) otherwise allow his skill, knowledge or experience to be used
in or by any Competitive Business. Each employment agreement provides that the
employee may invest in up to 5% of the shares of any public corporation without
violating the non-competition provisions, and that such non-competition
provisions will survive the termination of the employment agreement, other than
where (a) the employee exercises his right to terminate the employment agreement
upon a sale or transfer of substantially all of the assets of the Company, or a
change in control of the Company, (b) when the Company exercises its right to
terminate the employment agreement upon 30 days written notice, or (c) the
Company breaches the employment agreement and fails to cure such breach within
thirty (30) days of receipt of written notice thereof. A court applying
California law may decline to enforce (or may partially enforce) these
non-competition provisions.
Compliance with Section 16(a) of the Exchange Act
Under the Securities Laws of the United States, the Company's Directors, its
Executive (and certain other) Officers, and any persons holding more than ten
percent (10%) of the Company's Common Stock are required to report their
ownership of the Company's Common Stock and any changes in that ownership to the
Securities and Exchange Commission and the NASDAQ stock market. Specific due
dates for these reports have been established and the Company is required to
disclose in this report any failure to file by these dates during the preceding
fiscal year.
All of these filing requirements were satisfied by its Officers and Directors
and ten percent (10%) holders, except the following: Prior to the VDC
Transaction, (See Part I, Item 1 - Description of Business, History and
Organization - Investment by Visual Data Corporation) Charles Clark, a Director
from July 7 1997 to April 2, 1998, and John Wampler, a 10% holder by definition
of Section 16, failed to file with the Commission, on a timely basis, an Initial
Statement of Beneficial Ownership of Securities on Form 3. Additionally, Mr.
Clark may have failed to file on a timely basis subsequent Statements of Changes
in Beneficial Ownership on Form 4. In making these statements, the Company has
relied on the representation of its Directors and Officers or copies of the
reports that they have filed with the Commission. Due to an administrative
oversight Messrs. Selman, Sapperstien, Service and Goodman failed to file on a
timely basis an Initial Statement of Beneficial Ownership of Securities on Form
3, and subsequent Statements of Changes in Beneficial Ownership on Form 4. As of
the date of this report, these forms have been filed.
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth information concerning all annual compensation
paid to the Company's Chief Executive Officer and each of the four highest paid
persons other than the Chief Executive Officer who were officers or directors of
the Company for the fiscal year ended June 30, 1998:
Name and title of individual Year Salary Bonus Additional
or identity of group remuneration
Tom Kobayashi 1998 $131,000 (1)
Chief Executive Officer 1997
and Director 1996
David Gustafson
President and Chief Operating 1998 $131,000(2)
and Director 1997
1996
Jeffrey Dobkins 1998 $92,572(3)
Vice President of Sales, IBS 1997
1996
Mark Wallin 1998 $99,500(4)
President and Chief 1997
Operating Officer, IBS 1996
Tom Scott 1998 $90,000(5)
Vice President, 1997
Chief Technical Officer 1996
Total of above 1998 $544,072
1997
1996
(1) Mr. Kobayashi has an Employment Agreement with the Company which
provides for a five-year term expiring December 31, 2000, with a base
salary of $10,416 per month from September 1, 1995 to February 28,
1996, with an increase to market rate at March 1, 1996 and every year
thereafter. FY 1998 compensation includes $6,000 of auto allowance.
(2) Mr. Gustafson has an Employment Agreement with the Company which
provides for a five-year term expiring December 31, 2000, with a base
salary of $10,416 per month from September 1, 1995 to February 28,
1996, with an increase to market rate at March 1, 1996 and every year
thereafter. FY 1997 compensation includes $6,000 of auto allowance.
(3) Mr. Dobkins has an Employment Agreement with the Company which provides
for a three-year term expiring January 31, 2000, with a base salary of
$7,714 per month plus commissions.
(4) Mr. Wallin has an Employment Agreement with the Company which provides
for a two-year term expiring January 31, 2000, with a base salary of
$7,917 per month. FY 1998 compensation includes $4,500 of commission.
(5) Mr. Scott has an Employment Agreement with the Company which provides
for a three-and-one-half-year term expiring December 31, 2000, with a
base salary of $7,500 per month.
<PAGE>
With the exception of Mr. Service, who has a one year consulting contract under
which he receives $ 6,000 per month, Directors of the Company do not receive any
compensation for their services as directors other than reimbursement by the
Company of reasonable out-of-pocket travel expenses incurred in connection with
attending director meetings in person.
Stock options
On September 19, 1995, the Company granted a total of 263,420 non-qualified
options to employees and directors to purchase common stock at $0.10 per share.
As a result of the recapitalization and merger with AP Office Equipment, these
options were converted into options to purchase Common Stock at a conversion of
.87495 per share for each Company share, resulting in 230,479 options
outstanding on June 30, 1998 at a price of $.11 per share. These fully vested
option expire on September 29, 2000. There were no options exercised during the
period.
The Company's initial nonqualified option plan was terminated as of April 3,
1998. At that time, the Board of Directors of the Company adopted and approved
the Company's 1998 Stock Option Plan (the "Plan") for its employees, board
members and certain other consultants in order to motivate them to maintain
their commitment to the Company. Options under this Plan may be either Incentive
Stock Options or Nonstatutory Stock Options and may be exercised no later than
five (5) years from the date of their grant. The Plan is administered by the
Board of Directors of the Company. The Board has directed the officers of the
Company to reserve three million (3,000,000) shares of Common Stock for issuance
upon exercise of options granted pursuant to the Plan. As of June 30, 1998, the
Company had granted options under the Plan to purchase a total of 2,041,500
shares of Common Stock at a price of $.10 per share. There were no options
exercised during this period. The Plan is currently subject to the approval of
the Company's shareholders at its upcoming annual shareholders' meeting.
Other than as discussed herein, the Company does not have any pension,
profit-sharing, stock bonus, or other benefit plans. In addition, the Company
makes available certain non-monetary benefits to its executive officers with a
view to acquiring and retaining qualified personnel and facilitating job
performance. The Company considers such benefits to be ordinary and incidental
business costs and expenses.
<PAGE>
The following table sets forth certain information concerning the granting of
stock options during the last completed fiscal year to each of the named
executive officers:
<TABLE>
<CAPTION>
Shares of % of Total
Common Stock Options
Underlying Granted to
Options Employees Exercise
Name Granted (#) in Fiscal Year Price Expiration Date
- ---- ----------- -------------- ----- ---------------
<S> <C> <C> <C> <C> <C>
Tom Kobayashi 400,000 22.4% $0.10 4/2/03
David Gustafson 350,000 19.6% $0.10 4/2/03
Tom Scott 300,000 16.8% $0.10 4/2/03
Mark Wallin 175,000 9.8% $0.10 4/2/03
Jeffrey Dobkins 57,500 3.2% $0.10 4/2/03
---------
Total 1,282,500
=========
</TABLE>
There were no options exercised during the fiscal year.
ITEM 11 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
- ---------------------------------------------------------------------
The following table sets forth information, as of September 7, 1998, regarding
shares of Common Stock (a) held of record and (b) that the named owner has the
right to acquire within sixty days from options, warrants, rights, conversion
privilege or similar obligations by: (i) officers or directors of the Company;
(ii) all officers and directors as a group; and (iii) each shareholder who owns
more than 5% of any class of the Company's securities, including those shares
subject to outstanding options and warrants. Unless indicated otherwise, each
shareholder exercises sole voting and investment power with respect to shares
owned.
<TABLE>
<CAPTION>
Amount Owned or
Title Name and Address Right to Acquire Percent
of Class of Owner Within 60 Days of Class (1)
-------- -------- -------------- ------------
<S> <C> <C>
Common Tom Kobayashi 637,473(2) 3.80 %
One Union Street
San Francisco, CA 94111
Common David Gustafson 388,684(3) 2.32%
One Union Street
San Francisco, CA 94111
Common Tom Scott 322,802(4) 1.93%
One Union Street
San Francisco, CA 94111
Common Robert Wussler 180,000(5) 1.07%
One Union Street
San Francisco, CA 94111
Common Randy Selman 180,000(6) 1.07%
1291 SW 29th Avenue
Pompano Beach, FL 33069
Common Alan Saperstein 180,000(7) 1.07%
1291 SW 29th Avenue
Pompano Beach, FL 33069
Common David Goodman 180,000(8) 1.07%
1291 SW 29th Avenue
Pompano Beach, FL 33069
Common Brian K Service 410,000(9) 2.45%
BKS International Consulting
123 Red Hill Circle
Tiburon, CA 94920
Common Liviakis Financial 880,000 5.25%
Communications, Inc.
2118 "P" Street, Suite C
Sacramento, CA 95816
Common T Bar W Ranch Investments 1,476,000(10) 8.81%
101 E Brand
Mineola, TX 75773
Common Visual Data Corporation 8,563,417 51.00%
---------------------------------------------------------------------------------------------
Common All officers and
directors as a group (3) 2,478,959 14.78%
</TABLE>
<TABLE>
<S> <C>
(1) Based upon 16,762,376 shares of Common Stock issued and outstanding as of June 30, 1998.
(2) Includes right to acquire 212,426 shares within 60 days from options.
(3) Includes right to acquire 252,923 shares within 60 days from options.
(4) Includes right to acquire 157,917 shares within 60 days from options.
(5) Includes right to acquire 180,000 shares within 60 days from options.
(6) Includes right to acquire 180,000 shares within 60 days from options, excludes VDC shares.
(7) Includes right to acquire 180,000 shares within 60 days from options, excludes VDC shares.
(8) Includes right to acquire 180,000 shares within 60 days from options, excludes VDC shares.
(9) Includes right to acquire 410,000 shares within 60 days from options and warrants,
excludes VDC shares.
(10) Includes right to acquire 738,000 shares within 60 days from warrants.
</TABLE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Investment Banking and Brokerage Services
All of the agreements described below were negotiated with unrelated third
parties on an arms-length basis.
<PAGE>
Century Financial Partners, Inc. Pursuant to a Consulting Agreement, dated July
31, 1995, between EDN and Century, EDN hired Century to advise EDN with respect
to a merger of EDN with an entity whose securities were publicly traded. Such
consulting agreement granted Century the exclusive right to represent EDN, on a
best efforts basis, to prospective investors for financing and general corporate
advisory services for a period of three years, and a right of first refusal to
provide investment banking services for a period of three years. Century advised
the Company with respect to the transaction with AP (see Part I - Item 1.
Description of Business - History and Organization - Merger with AP Office
Equipment). Century has verbally consented to the Company's agreements with
Morgan Fuller and others (described below).
As payment for Century's services, the Century consulting agreement provided
that EDN would grant to Mr. Onggara, an investor in Century, and a shareholder
of the Company holding an aggregate of 100,000 shares of Common Stock, an option
to purchase 1,000,000 shares of the common stock of any publicly traded entity
into which EDN would merge, at $1.25 per share, which option shares would be
registered immediately by EDN with the SEC on Form S-8. Management does not
believe that such a registration is legally possible due to the fact that Mr.
Onggara is not an employee of the Company. On August 20, 1997, the Company
provided warrants for 1,000,000 shares of the Company's common stock at $1.25
per share as part of a negotiated settlement of Mr. Onggara's outstanding loan
to the Company of $340,000. See Short-Term Loans from Officers, Directors and
Shareholders; Guarantee of Lease).
Liviakis Financial Communications, Inc. Pursuant to a Consulting Agreement,
dated as of January 12, 1996, between the Company and Liviakis, Liviakis agreed
to provide public relations consulting services to the Company for a term of one
year ending on January 11, 1997. As payment for its services, Liviakis received
390,000 unregistered shares of Common Stock from the Company. At the end of the
term of the consulting agreement, Liviakis could demand that the Company use its
best efforts to register such shares with the Securities and Exchange
Commission. Pursuant to an additional Consulting Agreement effective as of
January 12, 1997, between the Company and Liviakis, Liviakis agreed to provide
consulting services to the Company for a term of one year ending on January 2,
1998. As payment for its services, Liviakis received 490,000 shares of Common
Stock. At the end of the term of the consulting agreement, Liviakis was to have
the same demand registration rights to register such shares with the SEC as
given to investors in a private placement offering by the Company of shares of
Common Stock in December, 1996. On September 18, 1997, Liviakis resigned as
EDnet's investor public relations consultant.
Morgan Fuller Capital Group L.L.C. Pursuant to engagement letters dated May 20,
June 25, June 28, June 28, November 19 and November 21, 1996, the Company
retained Morgan Fuller to provide investment banking services to, and raise
capital for, the Company. As discussed more fully in Part II - Item 5 - Market
For The Registrants Common Stock And Related Stockholder Matters - Recent Sales
of Unregistered Securities, as of October 10, 1997, the Company had: (i) granted
Morgan Fuller 250,000 Warrants at an exercise price of $6.37 per share for
general investment advisory services; (ii) delivered the Company's Senior
Secured Notes payable to Morgan Fuller in the aggregate principal amount of
$1,000,000 (for resale to investors); (iii) paid Morgan Fuller a loan fee of
five percent (5%) of the amount of the Senior Secured Notes; and (iv) granted
Morgan Fuller warrants to purchase 39,255 shares of Common Stock at an exercise
price of $4.25 and warrants to purchase 25.205 shares of Common Stock at an
exercise price of $3.69 in connection with the sale of participations in the
notes (the "Participations"). The June 28, 1996 engagement letter provides that
in the event that the Company fails to proceed with a subsequent Regulation S
financing, the Company is obligated to pay to Morgan Fuller a cash fee of
$140,000 and $200,000 in Warrants to purchase Common Stock at an exercise price
equal to the lesser of: (i) $3.00; or (ii) sixty percent (60%) of the average
closing bid price of the Common Stock during a consecutive ten (10) day period
immediately preceding the issuance date of the Warrants. In connection with the
extension of the Participations, the Company agreed to pay to Morgan Fuller a
cash fee of one and one-half percent (1.5%) of the amount of the Senior Secured
Notes and granted Morgan Fuller three-year warrants to purchase 55,970 sharese
of Common Stock at an exercise price of $2.68. In connection with a Loan
Modification Agreement effective June 30, 1997 (see Part II Item 5 Market for
the Registrants Common Stock and Related Stockholder Matters - Recent Sale of
Unregistered Securities - Private Placement of Note Participations) the Company
amended its agreement with Morgan Fuller and agreed to re-price the warrants
held by Morgan Fuller to $1.50.
<PAGE>
On June 20, 1998, the Morgan Fuller agreed to accept for property valued at
$418,250 by assigning to Morgan Fuller 75,000 shares of VDC stock at $3.75 per
share, and warrants to purchase 50,000 shares of VDC stock at $2.74 per share,
totaling $418,250, in consideration of forgiving the balance of the debt
remaining to Morgan Fuller, totaling $331,750. Additionally, the EDnet warrants
held by Morgan Fuller and the noteholders were re-priced at the exercise price
of $.25 per share.
Consulting Agreement with Charles W. Clark. On June 30, 1997, the Company
entered into a consulting agreement with Mr. Clark, pursuant to which Mr. Clark
agreed to serve the Company in advising and assisting in the structuring of debt
and liabilities, joint venture, acquisitions or merger partners, business
development and developing long term financial plans. The Company agreed to pay
Mr. Clark for re-structuring and re-organizing the Company's senior notes and
debts on the Company's balance sheet four hundred thousand (400,000) shares of
Common Stock. These shares were issued to Mr. Clark and registered with the
Securities and Exchange Commission under a Form S-8 registration on July 25,
1997. This agreement was mutually terminated as of November 17, 1997. Charles
Clark was elected to the Board of Directors of EDnet, Inc., on July 7, 1997. On
April 2, 1998, Charles W. Clark submitted his resignation as a director of
EDnet, Inc.
Consulting Agreement with B.K. Service International Business Consultancy. On
July 1, 1998, the Company entered into a consulting agreement with Mr. Service,
pursuant to which Mr. Service agreed to serve the Company in preparing SEC
filings, corporate governance, financial planning, cash management, and investor
relations. The Company has agreed to pay Mr. Service a monthly fee of $6,000.
The term of this agreement is for one (1) year.
Consulting Agreement with Mackenzie Shea Inc. On June 16, 1998, the Company
entered into an agreement with Mackenzie Shea, Inc. ("MSI"), pursuant to which
MSI introduced EDnet to Visual Data Corporation and assisted in effecting the
closing of the VDC Transaction. The Company agreed to compensate MSI for its
services in a lump sum of $66,000, which equals 5% of $1 Million and 4% of
$400,000, and two months of $10,000 per month retainer, in cash at the closing.
MSI shall also will receive a fee equal to 4% of any additional shares issued to
VDC as a result of the exercise of any of the outstanding options and /or
warrants. At the beginning of each quarter, EDnet shall send to MSI a report on
how many options and warrants have been exercised during the preceding three
months. MSI also received warrants to purchase an aggregate of 750,000 shares of
Common Stock at a per share price of $0.145.
<PAGE>
Short-Term Loans from Officers, Directors and Shareholders; Guaranty of Lease
Several of the officers and directors of the Company have made short term loans
to the Company pursuant to promissory notes each providing for maturity ninety
days after the date thereof and simple interest of 6% on unpaid principal. Such
promissory notes are overdue. Mr. Kobayashi made loans in the aggregate amount
of $36,000, as evidenced by promissory notes dated from June 11, 1993 to
February 10, 1994. As of June 30, 1998, unpaid principal (excluding interest) of
$24,000 was due on Mr. Kobayashi's notes. Mr. Scott, the Vice President and
Chief Technical Officer of the Company, made loans in the aggregate amount of
$43,050, as evidenced by promissory notes dated from August 6, 1993 to June 12,
1995. As of June 30, 1998, unpaid principal (excluding interest) of $16,550 was
due on Mr. Scott's notes. Each of these individuals has agreed not to declare a
default under these notes for an indefinite period and to accept repayment by
the Company at a future date.
Mr. Onggara has made three loans to the Company in the aggregate amount of
$425,000, pursuant to: (a) a promissory note in the principal amount of $250,000
dated February 8, 1996 with a maturity date of August 8, 1996; (b) a promissory
note in the principal amount of $100,000 dated April 18, 1996 with a maturity
date of October 18, 1996; and (c) a promissory note in the principal amount of
$75,000 dated May 20, 1996 with a maturity date of November 20, 1996. All such
promissory notes provide for interest of 7% on unpaid principal and are secured
by a subordinate security interest in the accounts receivable, chattel paper,
accounts and certain other assets of the Company. In August, 1996, the Company
made aggregate principal payments of $120,000 to Mr. Onggara on the first note.
Mr. Onggara has verbally agreed to extend the maturity date of such notes for an
indefinite period and to accept repayment by the Company at a future date, and
advanced $35,000 to the Company under the first note. On August 20, 1997, an
agreement was reached with Mr. Onggara whereby the $340,000 in outstanding
principal owed to Mr. Onggara, plus accrued interest of $35,000, was converted
to shares of the Company's Common Stock at $.375 per share, resulting in
1,000,000 shares. EDnet addressed an unresolved commitment of options by issuing
1,000,000 warrants priced at $1.25 each. (See Part II - Item 5. Market for the
Registrants Common Stock and Related Stockholder Matters - Recent Sale of
Unregistered Securities - Onggara Option.) The warrants are convertible over 3
years and are transferable and divisible.
Mr. Kobayashi executed a Guaranty of Lease in favor of Lantana pursuant to which
Mr. Kobayashi personally guaranteed EDN's obligations under its lease for the
Company's Los Angeles office premises. Mr. Kobayashi's guaranty was limited to
$48,225 for so long as he remains the chief executive officer, and maintains
voting control, of the Company. Because Mr. Kobayashi does not currently have
voting control of the Company, his guarantee was therefore unlimited. On June
23, 1998, the balance of the lease was canceled, per mutual agreement by Lantana
and EDnet, Inc. and the guarantee by Mr. Kobayashi was canceled. (See Part II -
ITEM 2 - PROPERTY.)
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
Exhibit No. Type of Exhibit
(10) Material Contracts.
(a) VDC Securities Purchase Agreement. FILED HEREWITH.
(b) Form 8-K dated July 25, 1997 to report the issuance of
S-8 shares to Charles W. Clark per consulting agreement.
PREVIOUSLY FILED.
(c) Form 8-K dated December 8, 1997 and amended Form 8-KA
dated December 19, 1997 to report resignation of Coopers
& Lybrand L.L.P. as Company's principal accountant.
PREVIOUSLY FILED.
(d) Form (14f1) for the Changes in Control of Registrant by
and among EDnet, Inc. and Visual Data Corporation, dated
as July 22, 1998. PREVIOUSLY FILED.
(e) Form 8-K of Appointment for New EDnet Directors by EDnet,
Inc., dated as July 22, 1998. PREVIOUSLY FILED.
(f) EDnet 1998 Stock Option Plan. FILED HEREWITH.
(27) Financial Data Schedule. FILED HEREWITH.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
EDnet, INC.
(Registrant)
Date: October 13, 1998 By: /s/Tom Kobayashi
-----------------
Tom Kobayashi,
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: October 13, 1998 By: /s/Tom Kobayashi
-----------------
Tom Kobayashi,
Chief Executive Officer
and Director
Date: October 13, 1998 By: /s/David Gustafson
-------------------
David Gustafson,
President, Chief Operating
Officer and Director
Date: October 13, 1998 By: /s/David Gustafson
-------------------
David Gustafson,
Principal Accounting Officer
Date: October 13, 1998 By: /s/Brian Service
-----------------
Brian Service,
Director
Date: October 13, 1998 By: /s/Randy Selman
----------------
Randy Selman,
Chairman of the Board of
Directors
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT (the "Agreement"), effective as of June
20, 1998, between Visual Data Corporation, a Florida corporation, with
headquarters located at 1291 Southwest 29th Avenue, Pompano Beach, Florida 33069
(the "Buyer"), and EDNET, Inc., a Colorado corporation with headquarters at One
Union Street, San Francisco, California 94111 (the "Company").
WHEREAS:
A. The Company and the Buyer are executing and delivering this
Agreement in reliance upon an exemption from securities registration under the
Securities Act of 1933, as amended (the "1933 Act");
B. The Company has authorized the issuance of up to 15,106,139 shares
of Common Stock, par value $0.001 per share (the "Common Stock");
C. The Buyer wishes to purchase, upon the terms and conditions stated
in this Agreement, an aggregate of 8,563,417 of the shares of Common Stock on
the Closing Date (as defined below); and
D. Subject to the terms and conditions set forth in this Agreement, the
Buyer shall be granted options to purchase up to an additional 6,542,722 shares
of Common Stock.
NOW THEREFORE, the Company and the Buyer hereby agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK.
---------------------------------
(a) Purchase of Common Stock. Subject to satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to Buyer and Buyer agrees to purchase from the Company 8,563,417
Shares of Common Stock (the "Closing"). The purchase price (the "Purchase
Price") of each share of Common Stock at the Closing shall be $0.164.
(b) The Closing Date. The date and time of the Closing (the
"Closing Date") shall be 10:00 a.m. Daylight Savings Time, within two (2)
business days following the date hereof, subject to notification of satisfaction
(or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below
(or such later date as is mutually agreed to by the Company and the Buyer). The
Closing shall occur on the Closing Date at the offices of Atlas, Pearlman, Trop
& Borkson, P.A., 200 East Las Olas Boulevard, 19th Floor, Fort Lauderdale,
Florida 33301 or such other place as the parties shall agree.
(c) Form of Payment. On the Closing Date, (i) Buyer shall pay
the Purchase Price to the Company for the Common Stock to be issued and sold to
Buyer at the Closing, by
1
<PAGE>
(w) wire transfer of $320,225.52 of immediately available funds in accordance
with the Company's written wire instructions (prior to Closing the Buyer has
wired $201,546.29 to the Escrow Agent established for the payment of certain
Company creditors and otherwise advanced to the Company a total of $176,232.51,
(x) a secured promissory note of Buyer in the aggregate principal amount of
$283,745.68 (the "Promissory Note") in the form of Exhibit 1(c) attached hereto,
(y) five year warrants to purchase 50,000 shares of Buyer's restricted common
stock, valued at $2.74 per warrant and (z) 75,000 shares of restricted common
stock of Buyer having a value of $3.75 per share; and (ii) the Company shall
deliver to Buyer, stock certificates (in the denominations as Buyer shall
request) (the "Stock Certificates") representing such number of the shares of
Common Stock which Buyer is purchasing. Such Stock Certificates shall bear the
restrictive legends required pursuant to Section 2(f).
(d) The Options. Upon the Closing Date, the Buyer shall be
granted Options of Company to acquire, at the exercise price of $0.10 per share,
the number of shares actually purchased upon exercise of each option, warrant
and other convertible securities ("Outstanding Option") set forth on Schedule
3(c) of the Company. The Buyer's rights to effect such exercise shall accrue on
the date of exercise of the corresponding Outstanding Option and shall expire
upon the first anniversary of the exercise date of such Outstanding Option.
Pursuant to the Options and subject to the prior exercise of the outstanding
Options, Buyer shall be granted the right to purchase up to an aggregate of
6,542,722 shares of Common Stock, subject to the anti-dilutive provision in the
Stock Option Agreement. The form of the option agreement shall be as set forth
on Exhibit 1(d) attached hereto.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
Buyer represents and warrants with respect to only itself
that:
(a) Investment Purpose. Buyer (i) is acquiring the Common
Stock and (ii) upon exercise of the Options, will acquire the shares of Common
Stock (the "Option Shares") then issuable (the Common Stock and the Option
Shares collectively are referred to herein as the "Securities"), for its own
account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, the Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
(b) Reliance on Exemptions. The Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of Buyer to
acquire such securities.
(c) Information. Buyer has been furnished with all materials
relating to the
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<PAGE>
business, finances and operations of the Company and materials relating to the
offer and sale of the Securities which have been requested by Buyer. Buyer has
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by Buyer or its
advisors, if any, or its representatives shall modify, amend or affect Buyer's
right to rely on the Company's representations and warranties contained in
Section 3 below. Buyer understands that its investment in the Securities
involves a high degree of risk.
(d) No Governmental Review. Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
(e) Transfer or Resale. Buyer understands that: (i) the
Securities have not been and are not being registered under the 1933 Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) Buyer shall have
delivered to the Company an opinion of counsel, in a form reasonably acceptable
to the Company, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, or (C) Buyer provides the Company with assurance reasonably
acceptable to the Company that such Securities can be sold, assigned or
transferred pursuant to Rule 144 promulgated under the 1933 Act (or a successor
rule thereto) ("Rule 144"); (ii) any sale of the Securities made in reliance on
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 the Securities under circumstances
in which the seller (or the person through whom the sale is made) may be deemed
to be an underwriter (as that term is defined in the 1933 Act) may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the Securities and Exchange Commission ("SEC") thereunder; and
(iii) neither the Company nor any other person is under any obligation to
register such Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
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<PAGE>
(f) Legends. Buyer understands that the certificates or other
instruments representing the Common Stock, Options and, the stock certificates
representing the Option Shares, except as set forth below, shall bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of such Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that such
Securities can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold.
(g) Authorization; Enforcement. This Agreement has been duly
and validly authorized, executed and delivered on behalf of Buyer and is a valid
and binding agreement of Buyer enforceable against such Buyer in accordance with
its terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to the Buyer that:
(a) Organization and Qualification. The Company and its
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in Schedule 3(a)) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now
-4-
<PAGE>
being conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "Material Adverse Effect" means any material adverse
effect on the business, properties, assets, operations, results of operations,
prospects or financial condition of the Company and its Subsidiaries, if any,
taken as a whole, or on the transactions contemplated hereby or by the
agreements and instruments to be entered into in connection herewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined below).
(b) Authorization; Enforcement; Compliance with Other
Instruments. (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Options and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "Transaction
Documents"), and to issue the Common Stock, Options and Option Shares in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
the Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including without limitation the
issuance of the Common Stock and the reservation for issuance and the issuance
of the Option Shares issuable upon conversion of the Options, have been duly
authorized by the Company's Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
stockholders to carry-out the Agreement and the Transaction contemplated hereby,
(iii) the Transaction Documents have been duly executed and delivered by the
Company, and (iv) the Transaction Documents constitute the valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms.
(c) Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 50,000,000 shares of Common Stock, of
which as of the date hereof, 8,227,591 shares were issued and outstanding,
5,000,000 shares of Preferred Stock authorized, of which as of the date hereof
none were outstanding, 4,304,979 shares are issuable and reserved for issuance
pursuant to the Company's stock option plan(s) and 2,237,743 shares are issuable
and reserved for issuance pursuant to securities exercisable or exchangeable
for, or convertible into, shares of Common Stock. All of such outstanding shares
have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Schedule 3(c) sets forth a list of all outstanding options,
warrants or convertible securities, the holder thereof, the conversion or
exercise price and the date of expiration. Except as disclosed in Schedule 3(c),
(i) no shares of the Company's capital stock are subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or permitted by
the Company, (ii) there are no outstanding debt securities, (iii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
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<PAGE>
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its Subsidiaries, (iv) there
are no agreements or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of their securities under
the 1933 Act, (v) there are no outstanding securities of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries, (vi) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities as described in this Agreement, and
(vii) the Company does not have any stock appreciation rights or "phantom stock"
plans or agreements or any similar plan or agreement. The Company has furnished
to the Buyer true and correct copies of the Company's Articles of Incorporation,
as amended and as in effect on the date hereof (the "Articles of
Incorporation"), and the Company's By-laws, as in effect on the date hereof (the
"By-laws"), Schedule 3(c) contains the terms of all securities convertible into
or exercisable for Common Stock and the material rights of the holders thereof
in respect thereto.
(d) Issuance of Securities. The Common Stock is duly
authorized and, upon issuance in accordance with the terms hereof, shall be
validly issued, fully paid and non-assessable, free from all taxes, liens and
charges with respect to the issue thereof. A number of shares of Common Stock
equal to the number of Option Shares issuable upon conversion of the Outstanding
Options (assuming all such Outstanding Options were fully exercisable on the
Closing Date regardless of any limitation on the timing or amount of such
options) initially have been duly authorized and reserved for issuance (subject
to adjustment pursuant to the Company's covenant set forth in Section 4(f)
below) upon conversion of the Options. Upon exercise of the Outstanding Options,
the Option Shares will be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock.
(e) No Conflicts. Except as disclosed in Schedule 3(e), the
execution, delivery and performance of the Transaction Documents by the Company,
and the consummation by the Company of the transactions contemplated hereby and
thereby will not (i) result in a violation of the Articles of Incorporation, or
the By-laws or (ii) 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 material agreement, indenture or material instrument to which the Company or
any of its Subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the principal market or
exchange on which the Common Stock is traded or listed) applicable to the
Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected. Except as disclosed in
Schedule 3(e), neither the Company nor its Subsidiaries is in violation of any
term of or in default under the Articles of Incorporation, or the By-laws or
their organizational charter or by-laws, respectively, or any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries. The business of the Company and its Subsidiaries is not being
conducted in violation of any law, ordinance, regulation of any
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<PAGE>
governmental entity having authority or jurisdiction over the Company. Except as
specifically contemplated by this Agreement, 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 or contemplated by the Transaction Documents in accordance
with the terms hereof or thereof. Except as disclosed in Schedule 3(e), all
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof.
(f) SEC Documents; Financial Statements. Except as disclosed
on Schedule 3(f), since June 30, 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 "1934 Act") (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the "SEC Documents"). The Company has delivered to the Buyer or
their respective representatives true and complete copies of the SEC Documents.
Except as disclosed on Schedule 3(f), as of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
SEC Documents and the Company's unaudited consolidated balance sheet, statement
of income and changes in stockholders' equity, and cash flow as of and for the
eleven (11) months ended May 31, 1998, have been prepared in accordance with
generally accepted accounting principles, consistently applied, 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 may exclude footnotes or may be condensed or
summary statements) and fairly present the financial position of the Company as
of the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). No other information provided by or on behalf of
the Company to the Buyer which is not included in the SEC Documents, including,
without limitation, information referred to in Section 2(c) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading.
(g) Absence of Certain Changes. Except as disclosed in
Schedule 3(g) or in the SEC Documents, there has been no material adverse change
and no material adverse development in the business, properties, operations,
financial condition, prospects, or results of operations of the Company or its
Subsidiaries. The Company has not taken any steps, and does not currently expect
to take any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or its Subsidiaries have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings.
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<PAGE>
(h) Absence of Litigation. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company, the common stock or any of the Company's Subsidiaries or
any of the Company's or the Company's Subsidiaries' officers or directors in
their capacities as such, except as set forth in Schedule 3(h).
(i) Acknowledgment Regarding Buyer' Purchase of Common Stock.
The Company acknowledges and agrees that the Buyer is acting solely in the
capacity of arm's length purchaser with respect to the Transaction Documents and
the transactions contemplated thereby. The Company further acknowledges that
Buyer is not acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by the Buyer or any of
their respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to
Buyer's purchase of the Common Stock and Options. The Company further represents
to Buyer that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.
(j) No Undisclosed Events, Liabilities, Developments or
Circumstances. No event, liability, development or circumstance has occurred or
exists with respect to the Company or its Subsidiaries or their respective
business, properties, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a
registration statement filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.
(k) No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Common Stock and Options.
(l) No Integrated Offering. The Company has not, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Common Stock, Options and Option Shares under the 1933 Act or cause this
offering to be integrated with prior offerings by the Company for purposes of
the 1933 Act or any applicable stockholder approval provisions, nor will the
Company or any of its Subsidiaries take any action or steps that would require
registration of the Common Stock, Options and Option Shares under the 1933 Act
or cause this offering to be integrated with other offerings.
(m) Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. Neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that
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<PAGE>
relations with their employees are good. No executive officer (as defined in
Rule 501(f) of the 1933 Act) has notified the Company that such officer intends
to leave the Company or otherwise terminate such officer's employment with the
Company.
(n) Intellectual Property Rights. The Company and its
Subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Schedule 3(n) contains a description of all the
agreement referred to in the foregoing sentence. Except as set forth on Schedule
3(n), none of the Company's trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, government authorizations, trade secrets or other
intellectual property rights necessary to conduct its business as now or as
proposed to be conducted have expired or terminated, or are expected to expire
or terminate within two years from the date of this Agreement. The Company and
its Subsidiaries do not have any knowledge of any infringement by the Company or
its Subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 3(n), there is no claim, action or
proceeding being made or brought against, or to the Company's knowledge, being
threatened against, the Company or its Subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its Subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties.
(o) Environmental Laws. The Company and its Subsidiaries (i)
are in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the three
foregoing cases, the failure to so comply would have, individually or in the
aggregate, a Material Adverse Effect.
(p) Title. The Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(p). Any real
property and facilities held under lease by the Company or any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.
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<PAGE>
(q) Insurance. Neither the Company nor any such Subsidiary has
been refused any insurance coverage sought or applied for and neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely affect
the condition, financial or otherwise, or the earnings, business or operations
of the Company and its Subsidiaries, taken as a whole.
(r) Regulatory Permits. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
(s) No Materially Adverse Contracts, Etc. Neither the Company
nor any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has a Material Adverse Effect. Neither the
Company nor any of its Subsidiaries is a party to any contract or agreement
which in the reasonable judgment of the Company's officers has or is expected to
have a Material Adverse Effect.
(t) Tax Status. Except as set forth on Schedule 3(t), the
Company and each of its Subsidiaries has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
(u) Certain Transactions. Except as set forth on Schedule 3(u)
and in the SEC Documents filed at least ten days prior to the date hereof 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 and other than the grant of stock
options disclosed on Schedule 3(c), none of the officers or directors of the
Company is presently a party to any transaction with the Company or any of its
Subsidiaries (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 or
director or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any officer or director has a substantial
interest or is an officer, director, trustee or partner.
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<PAGE>
(v) Dilutive Effect. The Company understands and acknowledges
that the number of Option Shares issuable upon exercise of the Options will
increase in certain circumstances. The Company further acknowledges that,
subject to such limitations as are expressly set forth in the Transaction
Documents, its obligation to issue Option Shares upon exercise of the Options in
accordance with this Agreement is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company.
(w) No Other Agreements. The Company has not, directly or
indirectly, made any agreements with Buyer relating to the terms or conditions
of the transactions contemplated by the Transaction Documents except as set
forth in the Transaction Documents.
(x) Accounts Receivable. All accounts receivable of the
Company are reflected properly on their books and records, are valid receivables
subject to no setoffs or counterclaims, are current and collectible, and will be
collected in accordance with their terms at their recorded amounts, subject only
to the reserve for bad debts set forth on the face of the most recent balance
sheet as adjusted for the passage of time through the Closing Date in accordance
with the past custom and practice of the Company.
(y) Disclosure. The representations and warranties contained
in this Section 3 do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
4. COVENANTS.
---------
(a) Best Efforts. Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in Sections
6 and 7 of this Agreement.
(b) Reporting Status. Until the earlier of (i) the date which
is one year after the date as of which the Buyer or any transferee thereof may
sell all of the Common Stock and the Option Shares without restriction pursuant
to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii)
the date on which the Buyer shall have sold all the Option Shares and the
Company shall file all reports required to be filed with the SEC pursuant to the
1934 Act, and the Company shall not terminate its status as an issuer required
to file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise permit such termination.
(c) Use of Proceeds. The Company will use the proceeds from
the sale of the Common Stock for substantially the same purposes and in
substantially the same amounts as indicated in Schedule 4(c).
(d) Change in Direction. The Company agrees to send to its
shareholders of record the information required by Securities and Exchange Act
Rule 14f-1 upon execution of this Agreement.
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<PAGE>
(e) Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than the number of shares of Common Stock needed to provide
for the issuance of the Option Shares.
(f) No Violation of Law. The Company and its Subsidiaries
shall conduct their business in accordance with all laws, ordinances,
regulations of any governmental entity having authority or jurisdiction over the
Company, except for possible violations the sanctions for which either
individually or in the aggregate would not have a Material Adverse Effect.
5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
(a) Closing Date. The obligation of the Company hereunder to
issue and sell the Common Stock and Option Shares to Buyer at the Closing is
subject to the satisfaction, at or before the 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 by
providing Buyer with prior written notice thereof:
(i) Buyer shall have executed each of the Transaction
Documents and delivered the same to the Company.
(ii) Buyer shall have delivered to the Company the
Purchase Price for the Common Stock being purchased by Buyer at the
Closing by (w) wire transfer of $320,225.52 of immediately available
funds pursuant to the wire instructions provided by the Company,
$201,546.29 which has been previously delivered to the Escrow Account
at Boyd & Chang LLP and $176,232.51 which has also been previously paid
to the Company), (x) delivery of a secured Promissory Note as set forth
on Exhibit 1(c), (y) 75,000 shares of the Buyer's restricted Common
Stock valued at $3.75 per share and (z) 50,000 warrants of Buyer valued
at $2.74.
(iii) The representations and warranties of Buyer
shall be true and correct as of the date when made and as of the
Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and Buyer shall have
performed, satisfied and complied with the covenants, agreements and
conditions required by the Transaction Documents to be performed,
satisfied or complied with by Buyer at or prior to the Initial Closing
Date.
6. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE.
--------------------------------------------
Closing Date. The obligation of Buyer hereunder to purchase
the Common Stock and Option Shares at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for Buyer's sole benefit and may
be waived by Buyer at any time in its sole discretion:
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<PAGE>
(a) The Company shall have executed each of the Transaction
Documents, and delivered the same to Buyer.
(b) The Company shall have complied with the provisions of
Exchange Act 14f-1.
(c) Company shall have delivered in a form reasonably
satisfactory to Buyer, evidence of satisfaction of indebtedness and payables as
set forth on Exhibit 6(c) hereto.
(d) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date) and the Company shall have performed, satisfied and complied with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. The Buyer shall have received a certificate, executed by the Chief
Executive Officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by Buyer
including, without limitation, an update as of the Initial Closing Date
regarding the representation contained in Section 3(c) above.
(e) Company shall have delivered, in a form reasonably
satisfactory to Buyer, evidence of revisions of the agreement with T-Bar Ranch
Investments to remove any anti-dilution rights and the exchange of the stock
held by T-Bar Ranch Investments in the amount of 3,750,000 for a certificate
representing 738,000 shares.
(f) Buyer shall have received the opinion of the Company's
counsel dated as of the Initial Closing Date, in form, scope and substance
reasonably satisfactory to Buyer and in substantially the form of Exhibit 6(f)
attached hereto.
(g) The Company shall have executed and delivered to Buyer (a)
the Stock Certificates (in such denominations as Buyer shall request) for the
Common Stock being purchased by Buyer at the Closing and (b) Option Certificates
for the Options.
(h) The Board of Directors of the Company shall have adopted
resolutions in a form reasonably acceptable to Buyer.
(i) As of the Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Options, a number of shares of Common Stock
equal to at least the number of Option Shares issuable upon conversion of the
Options outstanding on the Closing Date (assuming all such Options were fully
convertible or exercisable on such date regardless of any limitation on the
timing or amount of such conversions or exercises).
(j) The Company shall have delivered to Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in such corporation's state of incorporation issued by the Secretary
of State of such state of incorporation as of a date within 10 days of the
Closing.
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<PAGE>
(k) The Company shall have delivered to Buyer a certified copy
of its Articles of Incorporation as certified by the Secretary of State of the
State of Colorado within ten days of the Closing Date.
(l) The Company shall have delivered to Buyer a secretary's
certificate, dated as the Closing Date, as to (i) the resolutions described in
Section 6(h), (ii) the Articles of Incorporation and (iii) the Bylaws, each as
in effect at the Closing.
(m) The Company shall have delivered to Buyer, in a form
reasonably acceptable to Buyer, evidence appointing four (4) individuals
designated by Buyer, as directors of the Company upon the Closing.
(n) The Company shall have modified the employment contracts
with Tom Kobayashi, David Gustafson, Tom Scott and Mark Wallen in form and
substance reasonably satisfactory to the Buyer.
(o) The Company shall have delivered to Buyer such other
documents relating to the transactions contemplated by this Agreement as Buyer
or its counsel may reasonably request.
7. INDEMNIFICATION. In consideration of Buyer's execution and delivery
of the Transaction Documents and acquiring the Common Stock, Options and Option
shares thereunder and in addition to all of the Company's other obligations
under the Transaction Documents, the Company shall defend, protect, indemnify
and hold harmless Buyer and all of their stockholders, officers, directors,
employees and direct or indirect investors and any of the foregoing person's
agents or other representatives (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents, instrument or document contemplated hereby or thereby, or
(c) any cause of action, suit or claim brought or made against such Indemnitee
and arising out of or resulting from the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby or (d) the status of Buyer as an
investor in the Company. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
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<PAGE>
8. GOVERNING LAW; MISCELLANEOUS.
----------------------------
(a) Governing Law. The corporate laws of the State of Colorado
shall govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of Florida without regard to the principles of
conflict of laws. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting the County of Broward, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. 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 in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
(b) Counterparts. This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
(c) Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) 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 in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement; Amendments. This Agreement supersedes
all other prior oral or written agreements between the Buyer, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and 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 Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and Buyer, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
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<PAGE>
(f) Notices. Any notices consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically generated and kept on
file by the sending party); or (iii) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Buyer:
Visual Data Corporation
1291 Southwest 29th Avenue
Pompano Beach, Florida 33069
Telephone: (954) 917-6655
Facsimile: (954) 917-6660
Attention: Randy S. Selman
With a copy to:
Atlas Pearlman Trop & Borkson, P.A.
200 East Las Olas Boulevard, Suite 1900
Fort Lauderdale, Florida 33301
Telephone: (954) 763-1200
Facsimile: (954) 766-7800
Attention: Joel D. Mayersohn, Esq.
If to the Company:
EDNET, Inc.
One Union Street
San Francisco, California 94111
Telephone: (415) 274-8800
Facsimile: (415) 274-8802
Attention: Tom Kobayashi
With a copy to:
Gerald Niesar
Niesar & Diamond
90 New Montgomery Street, 9th Floor
San Francisco, California 94105
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<PAGE>
Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
(g) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns. No party may assign its rights hereunder without the consent of the
other party.
(h) No 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.
(i) Survival. Unless this Agreement is terminated under
Section 9(l), the representations and warranties of the Company and the Buyer
contained in Sections 2 and 3, the agreements and covenants set forth in
Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8,
shall survive the Closing. Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
(j) Publicity. The Company and Buyer shall have the right to
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Buyer shall be entitled, without the prior approval of Company, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although Company shall be consulted
by the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
(k) 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.
(l) Termination. In the event that the Closing shall not have
occurred with respect to a Buyer on or before July 31, 1998 (21) days from the
date hereof due to the Company's or Buyer's failure to satisfy the conditions
set forth in Sections 6 and 7 above (and the nonbreaching party's failure to
waive such unsatisfied condition(s)), the nonbreaching party shall have the
option to terminate this Agreement with respect to such breaching party at the
close of business on such date without liability of any party to any other
party; provided, however, that if this Agreement is terminated pursuant to this
Section 9(l), the Company shall remain obligated to reimburse the Buyer for the
expenses described in Section 4(i) above.
(m) No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.
* * * * * *
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<PAGE>
IN WITNESS WHEREOF, the Buyer and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
Buyer: Company:
VISUAL DATA CORPORATION EDNET, INC.
By:/s/ Randy S. Selman By:/s/Tom Kobayashi
------------------- ----------------
Name: Randy S. Selman Name: Tom Kobayashi
Its: President Its: CEO
-18-
EDNET, INC.
1998 STOCK OPTION PLAN
1. Introduction
This Stock Option Plan (the "Plan") has been adopted effective as of
April 3, 1998 to encourage stock ownership by directors and employees of EDnet,
Inc. (the "Company"), a Colorado corporation, and its subsidiaries
(collectively, the "Subsidiaries" and individually, a "Subsidiary"), in order to
increase their proprietary interest in the success of the Company and to
encourage them to provide future services to the Company. Options granted under
this Plan may be either Incentive Stock Options (as defined and provided for in
Section 5(a) of this Plan) or Nonstatutory Stock Options (as defined and
provided for in Section 5(b) of this Plan). The term "option" when used
hereinafter shall refer to either Incentive Stock Options or Nonstatutory Stock
Options, or both. The term "Award" when used hereinafter shall refer to options
awarded under the Plan.
2. Administration
(a) This plan shall be administered by the Board of Directors of the
Company (the "Board") or, if the Board so determines, by a duly appointed
committee of the Board (the "Committee"), provided that except as otherwise
provided below, in the case of any Awards to directors or officers that are or
become subject to Section 16 of the Securities Exchange Act of 1934, the
Committee shall have exclusive responsibility for and authority to administer
the Plan unless the Board expressly determines otherwise. Subject to the
foregoing and to the express provisions of this Plan, the Board or the
Committee, as applicable, shall have plenary authority, in its sole discretion:
(i) To determine the time or times at which, and the
directors and employees to whom, options shall be awarded under this Plan;
(ii) To determine, as the case may be, the Incentive Stock
Option Price or Nonstatutory Stock Option Price (both as defined herein) of, and
the number of shares of Stock (as defined herein) to be covered by, options
granted under this Plan;
(iii) To determine the time or times at which each option
granted under this Plan may be exercised, including whether such option may be
exercised in whole or in installments; provided, however, that options granted
hereunder must be exercisable at the rate of at least 20% per year over 5 years
from the date of grant;
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<PAGE>
(iv) To determine the restrictions, if any, applicable to
shares of Stock obtained upon the exercise of any option granted hereunder;
provided, however, that if such restrictions restrict the transfer of such
shares and give the Company the right to repurchase all (but not less than all)
of such shares upon a Grantee's termination of employment, the following
restrictions shall apply:
(1) If the repurchase price is equal to the higher
of the original Option Price or the fair market value of the shares of Stock on
the date of termination of employment, the right to repurchase must be exercised
for cash or cancellation of purchase money indebtedness within 90 days of
termination of employment or exercise of the option, whichever is later, and
such right must terminate when the Stock becomes publicly traded; or
(2) If the repurchase price is equal to the original
Option Price, the right to repurchase shall be nontransferable by the Company
and must lapse at the rate of at least 20% per year over 5 years from the date
the option is granted (without respect to the date the option was exercised or
became exercisable), and must be exercised for cash or cancellation of purchase
money indebtedness within 90 days of termination of employment or exercise of
the option, whichever is later.
(v) To interpret this Plan and to prescribe, amend and
rescind rules and regulations relating to it; and
(vi) To make all other determinations which the Board or
Committee shall deem necessary or advisable for the administration of this Plan.
(b) The membership of the Committee shall at all times consist of not
less than two members of the Board and shall be constituted to permit the Plan
to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934
(the "Exchange Act"), or any successor rule ("Rule 16b-3"), if the Board
determines it to be in the best interests of the Company to qualify the Plan for
the exemptions from Section 16 of the Exchange Act afforded by Rule 16b-3.
Without limiting the foregoing, from and after the date the Board determines to
bring the Plan into compliance with Rule 16b-3, no director shall serve on the
Committee at any time within one year following such director's receipt of any
grant or award of an equity security of the Company or any related entity if
such grant or award prevents such director from qualifying as a "disinterested
person" within the meaning of Rule 16b-3(c)(2).
The Committee shall have all of the powers and duties set forth herein,
as well as such additional powers and duties as the Board may delegate to it;
provided, however, that the Board expressly retains the right (i) to determine
whether the shares of Stock reserved for issuance upon the exercise of options
awarded under this Plan shall be issued shares or unissued shares, (ii) to
appoint the members of the Committee, and (iii) to terminate or amend this Plan.
The Board may from time to time appoint members of the Committee in substitution
for or in addition to members previously appointed, may fill vacancies in the
Committee, however caused, and may discharge the Committee. Duly authorized
actions of the Committee shall constitute actions of the Board for the purposes
of this Plan and the administration thereof.
2
<PAGE>
3. Stock
Except as provided in Section 9 of this Plan, the number of shares
which may at any time be made subject to options, or which may be issued upon
the exercise of options granted under this Plan, shall be limited to three
million (3,000,000) shares of the Common Stock, of the Company (the "Stock").
The shares reserved for issuance pursuant to this Plan may consist either of
authorized but previously unissued shares of Stock, or of issued shares of Stock
which have been reacquired by the Company, as determined from time to time by
the Board.
Except as otherwise provided in Section 9 of this Plan, if any option
granted under this Plan expires, terminates or is canceled for any reason
without having been exercised in full, the shares of Stock allocable to the
unexercised portion of such option may again be made subject to an option award
under this Plan.
4. Eligibility
Awards may be granted under this Plan to such directors and employees
of the Company or a Subsidiary as shall be designated by the Board or the
Committee in accordance with Section 2 of this Plan, provided that Incentive
Stock Options, as defined below, may be awarded only to regular full time
employees of the Company or a Subsidiary (including, but not limited to,
employees who serve as officers or directors). Any person granted an Award under
this Plan shall remain eligible to receive one or more additional grants
thereafter, notwithstanding that options previously granted to such person
remain unexercised in whole or in part.
5. Terms of Options
This Plan is intended to authorize the Board or the Committee to grant,
in its discretion, options that qualify as incentive stock options pursuant to
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
(such qualifying options being referred to herein as "Incentive Stock Options")
or options that do not so qualify (such nonqualifying options being referred to
herein as "Nonstatutory Stock Options"). Each option granted under this Plan
shall be evidenced by a written option agreement which shall be executed and
delivered as provided in Section 11 of this Plan and which shall specify whether
the option granted therein is an Incentive Stock Option or a Nonstatutory Stock
Option.
(a) Terms of Incentive Stock Options. Each stock option agreement
covering an Incentive Stock Option granted under this Plan and any amendment
thereof, other than an amendment to convert an Incentive Stock Option into a
Nonstatutory Stock Option, shall conform to the provisions of Section 5(a)(i) -
(iv) below, and may contain such other terms and provisions consistent with the
requirements of this Plan as the Board or the Committee shall deem appropriate:
3
<PAGE>
(i) Incentive Stock Option Price. The purchase price of each
of the shares of Stock subject to an Incentive Stock Option (the "Incentive
Stock Option Price") shall be a stated price which is not less than the fair
market value of such share of Stock, determined in accordance with Section 7 of
this Plan, as of the date such Incentive Stock Option is granted; provided,
however, that if an employee, at the time an Incentive Stock Option is granted
to him, owns stock representing more than 10% of the total combined voting power
of all classes of stock of the Company or of the parent corporation (as defined
in Section 424(e) of the Code), if any, of the Company, or any of the
Subsidiaries (or, under Section 424(d) of the Code, is deemed to own stock
representing more than 10% of the total combined voting power of all such
classes of stock, by reason of the ownership of such classes of stock, directly
or indirectly, by or for any brother, sister, spouse, ancestor, or lineal
descendent of such employee, or by or for any corporation, partnership, estate
or trust of which such employee is a shareholder, partner or beneficiary), then
the Incentive Stock Option Price of each share of Stock subject to such
Incentive Stock Option shall be at least 110% of the fair market value of such
share of Stock, as determined in the manner stated above.
(ii) Term of Incentive Stock Options. Incentive Stock Options
granted under this Plan shall be exercisable for such periods as shall be
determined by the Board or the Committee at the time of grant of each such
Incentive Stock Option, but in no event shall an Incentive Stock Option be
exercisable after the expiration of 10 years from the date of grant; provided,
however, that an Incentive Stock Option granted to any employee as to whom the
Incentive Stock Option Price of each share of stock subject thereto is required
to be 110% of the fair market value of such share of Stock pursuant to Section
5(a)(i) above, shall not be exercisable after the expiration of 5 years from the
date of grant. Each Incentive Stock Option granted under this Plan shall also be
subject to earlier termination as provided in this Plan.
(iii) Vesting of Incentive Stock Options. Notwithstanding any
other provision of this Plan, no employee shall be granted an Incentive Stock
Option in any calendar year which causes such employee's "annual vesting amount"
to exceed $100,000. An employee's "annual vesting amount" is the aggregate fair
market value of the shares of Stock subject to Incentive Stock Options
(determined in accordance with Section 7 of this Plan as of the respective dates
of grant of individual options) with respect to which such options are first
exercisable during the calendar year. For purposes of the foregoing, the
aggregate fair market value of shares of Stock with respect to which Incentive
Stock Options are first exercisable during the calendar year shall be determined
by taking into account all Incentive Stock Options granted to the employee under
all current stock option plans of the Company, and its parent corporation (as
defined in Section 424(e) of the Code), if any.
(iv) Exercise of Incentive Stock Options.
(A) Subject to the provisions of Sections 5(a)
(iv)(E), 8 and 9 of this Plan, Incentive Stock Options granted under this Plan
may be exercised in whole or in installments, to such extent, and at such time
or times during the terms thereof, as shall be determined by the Board or the
Committee at the time of grant of each such option.
4
<PAGE>
(B) Incentive Stock Options granted under this Plan
shall be exercisable only by delivery to the Company of written notice of
exercise, which notice shall state the number of shares with respect to which
such Incentive Stock Option is exercised, the date of grant of the Incentive
Stock Option, the aggregate purchase price for the shares with respect to which
the Incentive Stock Option is exercised and the effective date of such exercise,
which date shall not be earlier than the date the notice is received by the
Company nor later than the date upon which such Incentive Stock Option expires.
The written notice of exercise shall be sent together with the full Incentive
Stock Option Price of the shares purchased, which may be paid (i) in cash, (ii)
in shares of any class of issued and outstanding stock of the Company held for
more than six months by the option holder, whether preferred or common, (iii) by
the delivery of any other lawful consideration approved by the Board or the
Committee, or (iv) by any combination of the foregoing. If any portion of the
Incentive Stock Option Price is paid in shares of stock of the Company, such
shares shall be valued at their fair market value, as determined in accordance
with Section 7 of this Plan, as of the effective date of exercise of the
Incentive Stock Option.
(C) Except as provided to the contrary in Section 8
of this Plan, an Incentive Stock Option granted hereunder shall remain
outstanding and shall be exercisable only so long as the person to whom such
Incentive Stock Option was granted remains an officer or employee of the
Company, the parent corporation, if any, of the Company, or any of the
Subsidiaries.
(D) All Incentive Stock Options granted under this
Plan shall be nontransferable, except by will or the laws of descent and
distribution, and shall be exercisable during the lifetime of the person to whom
granted only by such person (or his duly appointed, qualified, and acting
personal representative).
(E) No Incentive Stock Option may be exercised as to
fewer than 100 shares of Stock at any one time without the consent of the Board
or the Committee, unless the number of shares to be purchased upon such exercise
is the total number of shares at the time available for purchase under such
Incentive Stock Option.
(b) Terms of Nonstatutory Stock Options. Each stock option agreement
covering a Nonstatutory Stock Option granted under this Plan and any amendment
thereof shall conform to the provisions of Section 5(b)(i) - (iii) below, and
may contain such other terms and provisions consistent with the requirements of
this Plan as the Board or the Committee shall deem appropriate:
(i) Nonstatutory Stock Option Price. The purchase price of
each of the shares of Stock subject to a Nonstatutory Stock Option (the
"Nonstatutory Stock Option Price") shall be a stated price which is not less
than 85% of the fair market value of such share of Stock, determined in
accordance with Section 7 of this Plan, as of the date such Nonstatutory Option
is granted; provided, however, that if an employee or director at the time a
Nonstatutory Stock Option is granted to him, owns stock representing more than
10% of the total combined voting power of all classes of stock of the Company or
of the parent corporation (as defined in Section 424(e) of the Code), if any, of
the Company, or any of the Subsidiaries (or, under Section 424(d) of the Code,
is deemed to own stock representing more than 10% of the total combined voting
power of all such classes of stock, by reason of the ownership of such classes
of stock, directly or indirectly, by or for any brother, sister, spouse,
ancestor, or lineal descendent of such employee, or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary), then the Nonstatutory Stock Option Price of each share of Stock
subject to such Nonstatutory Stock Option shall be at least 110% of the fair
market value of such share of Stock, as determined in the manner stated above.
5
<PAGE>
(ii) Term of Nonstatutory Stock Options. Nonstatutory Stock
Options granted under this Plan shall be exercisable for such periods as shall
be determined by the Board or the Committee at the time of grant of each such
Nonstatutory Stock Option, but in no event shall a Nonstatutory Stock Option be
exercisable after the expiration of 10 years from the date of grant. Each
Nonstatutory Stock Option granted under this Plan shall also be subject to
earlier termination as provided in this Plan.
(iii) Exercise of Nonstatutory Stock Options.
(A) Subject to the provisions of Sections 5(b)
(iii)(E), 8 and 9 of this Plan, Nonstatutory Stock Options granted under this
Plan may be exercised in whole or in installments, to such extent, and at such
time or times during the terms thereof, as shall be determined by the Board or
the Committee at the time of grant of each such option.
(B) Nonstatutory Stock Options granted under this
Plan shall be exercisable only by delivery to the Company of written notice of
exercise, which notice shall state the number of shares with respect to which
such Nonstatutory Stock Option is exercised, the date of grant of the
Nonstatutory Stock Option, the aggregate purchase price for the shares with
respect to which the Nonstatutory Stock Option is exercised and the effective
date of such exercise, which date shall not be earlier than the date the notice
is received by the Company nor later than the date upon which such Nonstatutory
Stock Option expires. The written notice of exercise shall be sent together with
the full Nonstatutory Stock Option Price of the shares purchased, which may be
paid (i) in cash, (ii) in shares of any class of issued and outstanding stock of
the Company held for more than six months by the option holder, whether
preferred or common, (iii) by the delivery of any other lawful consideration
approved by the Board or the Committee, or (iv) by any combination of the
foregoing. If any portion of the Nonstatutory Stock Option Price is paid in
shares of stock of the Company, such shares shall be valued at their fair market
value, as determined in accordance with Section 7 of this Plan, as of the
effective date of exercise of the Nonstatutory Stock Option.
(C) Except as provided to the contrary in Section 8
of this Plan, a Nonstatutory Stock Option granted hereunder shall remain
outstanding and shall be exercisable only so long as the person to whom such
Nonstatutory Stock Option was granted remains either a director or employee of
the Company, the parent corporation, if any, of the Company, or any of the
Subsidiaries.
(D) All Nonstatutory Stock Options granted under this
Plan shall be nontransferable, except by will or the laws of descent and
distribution, and shall be exercisable during the lifetime of the person to whom
granted only by such person (or his duly appointed, qualified, and acting
personal representative).
(E) No Nonstatutory Stock Option may be exercised as
to fewer than 100 shares at any one time without the consent of the Board or the
Committee, unless the number of shares to be purchased upon such exercise is the
total number of shares at the time available for purchase under such
Nonstatutory Stock Option.
6
<PAGE>
6. Rights of Grantees
No holder of an option shall be deemed to be the holder of, or to have
any of the rights of a holder with respect to, any shares of Stock subject to
such option unless and until his option shall have been exercised pursuant to
the terms thereof, the Company shall have issued and delivered to the holder of
the option the shares of Stock as to which he has exercised his option, and his
name shall have been entered as a stockholder of record on the books of the
Company. Thereupon, such person shall have full voting and other ownership
rights with respect to such shares of Stock.
7. Determination of Fair Market Value
For the purposes of this Plan, the fair market value of a share of
stock of the Company shall be determined as follows: (i) if on the date as of
which such determination is made the class of stock being valued is admitted to
trading on a national securities exchange or exchanges for which actual sale
prices are regularly reported, or actual sales prices are otherwise regularly
published for such stock, the fair market value of a share of such stock shall
be deemed to be equal to the average of the closing sale prices reported for
such stock on each of the five (5) trading dates immediately preceding the date
as of which such determination is made; or (ii) if on the date as of which such
determination is made no such closing sales prices are reported, but quotations
for the class of stock being valued are regularly listed on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or
another comparable system, the fair market value of a share of such stock shall
be deemed to be equal to the mean of the average of the closing bid and asked
prices for such stock quoted on such system on each of the five (5) trading
dates immediately preceding the date as of which such determination is made; or,
(iii) if no such quotations or actual sales prices are available, the fair
market value of a share of such stock shall be deemed to be the average of the
closing bid and asked prices furnished by a professional securities dealer
making a market in such shares, as selected by the Board of Directors, for the
trading date as of which such determination is made (or the immediately
preceding trading date if the date of determination is not a trading date);
provided, however, that if none of Sections (i) through (iii) above are
applicable, or the Board or the Committee determines in good faith that the
approach specified in those Sections does not properly reflect the fair market
value of such stock, the Board or the Committee may determine the fair market
value of a share of stock of the Company on the basis of such factors as it
shall deem appropriate.
8. Retirement, Termination of Employment or Death of Holders of Options
(a) Death, Retirement or Disability. If an employee to whom an Award
has been granted under this Plan dies while providing services to the Company or
a Subsidiary, retires from employment with the Company or a Subsidiary after
attaining his retirement date (as may be prescribed by the Company), or
terminates employment with the Company or a Subsidiary as a result of "permanent
and total disability" (as that term is defined by Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended), any restrictions then applicable to
such Award shall continue as if the employee had not terminated employment and
such Award shall thereafter be exercisable, in whole or in part, by the person
to whom granted (or by his duly appointed, qualified, and acting personal
representative, his estate, or by a person who acquired the right to exercise
such option by bequest or inheritance from the Grantee) in the manner set forth
in Section 5 of this Plan, at any time within the remaining term of such Award.
7
<PAGE>
(b) Other Termination of Service or Employment. Except as otherwise
provided in Section 8(a) above, if a person to whom an option has been granted
under this Plan ceases to be either a director or employee of the Company or a
Subsidiary, such option shall continue to be exercisable to the same extent that
it was exercisable on the last day on which such person was either a director or
employee for a period of 30 days thereafter, or for such longer period as may be
determined by the Board or the Committee at the time of grant, whereupon such
option shall terminate and shall not thereafter be exercisable. No Award made
under this Plan shall be affected by any change of duties or position of the
person to whom such Award was made or by any temporary leave of absence granted
to such person by the Company or any of its Subsidiaries.
(c) Termination with Board Approval. If a Grantee ceases to be either a
director or employee of the Company or a Subsidiary for any reason covered by
Section 8(b) above, and the Board or the Committee expressly determines that for
purposes of this Section 8(c) such termination of service or employment is in
the best interests of the Company, then notwithstanding anything herein to the
contrary, an option awarded to such Grantee hereunder shall be exercisable by
such Grantee or by the estate of such Grantee, or by a person who acquired the
right to exercise such option by bequest or inheritance from the Grantee, for
such additional period following termination of service or employment as shall
be determined by the Board or the Committee, but in no event later than the date
upon which such option would have expired absent such termination of service or
employment. Any such extended option shall be exercisable only to the extent and
in the manner exercisable by such Grantee at the time of such termination of
service or employment.
9. Adjustment Upon Changes in Capitalization
(a) In the event of any change in the number of shares of the
outstanding Stock of the Company effected without the receipt of full and
adequate consideration by the Company, as a consequence of a stock split, stock
dividend, combination or reclassification of shares, recapitalization, merger,
or similar event, the Board or the Committee shall adjust proportionally the
number and kind of shares subject to this Plan, and the number, kind, and per
share Incentive Stock Option Price or Nonstatutory Stock Option Price (as the
case may be) of shares then subject to Awards outstanding under the Plan. Any
such adjustment shall be made without a change in the aggregate purchase price
of the shares of Stock subject to the unexercised portion of any option. In the
event of any other change affecting any class of stock of the Company subject to
Awards made under the Plan or any distribution (other than normal cash
dividends) to holders of such stock, such adjustments as may be deemed equitable
by the Board or the Committee, including adjustments to avoid fractional shares,
shall be made to give proper effect to such event.
8
<PAGE>
(b) Upon the effective date of the dissolution or liquidation of the
Company, or of a reorganization, merger or consolidation of the Company with one
or more other corporations in which the Company is not the surviving
corporation, or of the transfer of all or substantially all of the assets or
shares of the Company to another person or entity (any such transaction being
referred to hereinafter as a "Terminating Event"), this Plan and any Award
theretofore made hereunder shall terminate unless provision is made in writing
in connection with such Terminating Event for the continuance of this Plan and
for the assumption of Awards theretofore granted hereunder, or the substitution
for such Awards of new awards issued by the successor corporation, or a parent
or subsidiary thereof, with such appropriate adjustments as may be determined or
approved by the Board or the Committee, in which event this Plan and the Awards
theretofore granted or substituted therefor shall continue in the manner and
under the terms so provided.
10. Effectiveness of the Plan
This Plan shall become effective upon its adoption by the Board;
provided, however, that the effectiveness of this Plan shall be subject to the
approval of the stockholders of the Company by the affirmative vote of not less
than the holders of a majority of the shares of the Company's Voting Stock
present in person or represented by proxy at a duly held meeting at which a
quorum is present (or by such greater vote as may be required by applicable law,
regulation or provision of the Certificate of Incorporation or Bylaws of the
Company), or by written consent.
11. Manner of Grant
Nothing contained in this Plan or in any resolution heretofore or,
except as provided in this Plan, hereafter adopted by the Board or any committee
thereof or by the stockholders of the Company with respect to this Plan shall
constitute the granting of an Award under this Plan. The granting of an Award
under this Plan shall be deemed to occur only upon the date on which the Board
or the Committee shall approve the grant of such Award. All Awards granted under
this Plan shall be evidenced by a written agreement, in such form as shall be
determined by the Board or the Committee, signed by a representative of the
Board or the Committee and the recipient thereof.
12. Compliance with Law and Regulations
The obligation of the Company to sell and deliver any shares of Stock
under this Plan shall be subject to all applicable laws, rules and regulations,
and the obtaining of all approvals by or permits from governmental agencies
deemed necessary or appropriate by the Board or the Committee. Except as
otherwise provided in Section 2 and Section 15 herein, the Board may make such
changes in the Plan and the Board or the Committee may include such terms in any
Award agreement as may be necessary or appropriate, in the opinion of counsel to
the Company, to comply with the rules and regulations of any governmental
authority, or to obtain for employees granted Incentive Stock Options the tax
benefits under the applicable provisions of the Code and the regulations
thereunder.
9
<PAGE>
13. Tax Withholding
The company for whom services are performed (whether the Company or a
Subsidiary) by a director or employee granted an Award under this Plan shall
have the right to deduct or otherwise effect a withholding of any amount
required by federal or state laws to be withheld with respect to the grant,
vesting or exercise of any Award or the sale of stock acquired upon the exercise
of an Incentive Stock Option in order for such company to obtain a tax deduction
otherwise available as a consequence of such grant, vesting, exercise or sale,
as the case may be.
14. Nonexclusivity of the Plan
Neither the adoption of this Plan by the Board nor the submission of
this Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options, stock appreciation rights or restricted stock
otherwise than under this Plan, and such arrangements may be either applicable
generally or only in specific cases.
15. Amendment
The Board at any time, and from time to time, may amend this Plan,
subject to any required regulatory approvals and subject to the limitation that,
except as provided in Section 9 hereof, no amendment shall be effective unless
approved within 12 months after the date of the adoption of such amendment by
the affirmative vote of the holders of a majority of the shares of the Company's
Voting Stock present in person or represented by proxy at a duly held meeting at
which a quorum is present (or by such greater vote as may be required by
applicable law, regulation or provision of the Certificate of Incorporation or
Bylaws of the Company), or by written consent, if such amendment would, in the
absence of shareholder approval, cause Awards that would otherwise qualify as
Incentive Stock Options to fail to qualify as such or cause the Plan to fail to
comply with the requirements of Rule 16b3 after the Board determines to bring
the Plan into compliance with the requirements of such Rule.
Except as provided in Section 9 hereof, rights and obligations under
any Awards granted before amendment of this Plan shall not be altered or
impaired by amendment of this Plan, except with the consent of the person to
whom the Award was granted.
16. Termination or Suspension
The Board at any time may suspend or terminate this Plan. This Plan,
unless sooner terminated, shall terminate on the 10th anniversary of its
adoption by the Board, but such termination shall not affect any Award
theretofore granted. No Award may be granted under this Plan while this Plan is
suspended or after it is terminated.
Except as otherwise expressly provided herein, no rights or obligations
under any Award granted while this Plan is in effect shall be altered or
impaired by suspension or termination of this Plan, except with the consent of
the person to whom the Award was granted. Any Award granted under this Plan may
be terminated by agreement between the holder thereof and the Company and, in
lieu of the terminated Award, a new Award may be granted.
10
<PAGE>
17. Continuation of Employment
Nothing contained in this Plan (or in any written Award agreement)
shall obligate the Company or any Subsidiary to continue for any period to elect
any individual as a director or to employ an employee to whom an Award has been
granted, or interfere with the right of the Company or any Subsidiary to vary
the terms of such person's service or employment or reduce such person's
compensation.
18. Exculpation and Indemnification
To the extent permitted by applicable law and regulation, the Company
shall indemnify and hold harmless the members of the Board and the members of
the Committee from and against any and all liabilities, costs, and expenses
incurred by such persons as a result of any act, or omission to act, in
connection with the performance of such persons' duties, responsibilities, and
obligations under this Plan, other than such liabilities, costs and expenses as
may result from the negligence, gross negligence, bad faith, willful misconduct,
or criminal acts of such persons.
19. Provision of Information to Award Recipients
The Company shall provide each holder of an Award with Company
financial statements at least annually, except that the Company need not provide
such information to a holder of an Award who is an employee of the Company whose
duties insure that such holder of an Award has access to equivalent information.
20. Headings
Headings are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Plan.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 32,911
<SECURITIES> 0
<RECEIVABLES> 488,843
<ALLOWANCES> 17,502
<INVENTORY> 87,157
<CURRENT-ASSETS> 666,897
<PP&E> 1,159,442
<DEPRECIATION> 767,961
<TOTAL-ASSETS> 1,355,835
<CURRENT-LIABILITIES> 763,251
<BONDS> 20,758
0
0
<COMMON> 16,761
<OTHER-SE> 564,353
<TOTAL-LIABILITY-AND-EQUITY> 1,355,835
<SALES> 874,785
<TOTAL-REVENUES> 4,004,341
<CGS> 641,490
<TOTAL-COSTS> 4,760,072
<OTHER-EXPENSES> 502,007
<LOSS-PROVISION> 17,502
<INTEREST-EXPENSE> 63,772
<INCOME-PRETAX> (189,952)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (192,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 710,488
<CHANGES> 0
<NET-INCOME> 518,136
<EPS-PRIMARY> (0.065)
<EPS-DILUTED> 0.065
</TABLE>
