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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
UNITED STATES
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________
Commission File Number: 0-20995
VISUAL EDGE SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3778895
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2424 NORTH FEDERAL HIGHWAY, SUITE 100, BOCA RATON, FLORIDA 33431
(Address of principal executive offices) (Zip Code)
(561) 750-7559
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
REDEEMABLE WARRANTS, EACH TO PURCHASE ONE SHARE OF COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No__________
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
The Registrant's revenue for its most recent fiscal year: $2,632,213
The aggregate market value of the Registrant's Common Stock (the "Common
Stock"), $.01 par value, held by non-affiliates as of March 23, 1999, based on
the last sale price of the Common Stock as reported on the Nasdaq SmallCap
Market, was: $4,182,875.
As of March 23, 1999, there were 10,398,440 shares of the Registrant's Common
Stock and 1,930,000 redeemable warrants outstanding, of which 1,495,000 are
publicly traded.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Registrant's fiscal year ended December 31, 1998 are
incorporated by reference into Part III of this Form 10-KSB.
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VISUAL EDGE SYSTEMS INC.
TABLE OF CONTENTS
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PAGE
PART I
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ITEM 1. Description of Business 4
ITEM 2. Description of Property 14
ITEM 3. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Securityholders 15
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 16
ITEM 6. Management's Discussion and Analysis or Plan of Operation 17
ITEM 7. Financial Statements 20
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 42
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 43
ITEM 10. Executive Compensation 43
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 43
ITEM 12. Certain Relationships and Related Transactions 43
ITEM 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K 44
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Visual Edge Systems Inc. (the "Company") was organized to
develop and market personalized videotape golf lessons
featuring ONE-ON-ONE instruction by leading professional
golfer Greg Norman. The Company has developed video production
technology which digitally combines actual video footage of a
golfer's swing with a synchronized "split-screen" comparison
to Greg Norman's golf swing to produce a 45-minute ONE-ON-ONE
videotape golf lesson. The Company's ONE-ON-ONE personalized
videotape golf lesson analyzes a golfer's swing by comparing
it to Greg Norman's swing at several different club positions
from two camera angles using Greg Norman's pre-recorded
instructional commentary and analysis and computer graphics to
highlight important golf fundamentals intended to improve a
golfer's performance. The Company sells its products under the
name "ONE-ON-ONE WITH GREG NORMAN."
INDUSTRY OVERVIEW
Golf has become an increasingly popular form of sport and
entertainment in recent years. According to the National Golf
Foundation, consumer spending on golf-related activities,
including green fees, golf equipment and related merchandise,
increased from approximately $12.7 billion in 1989 to
approximately $15.1 billion in 1994 to approximately $16.3
billion in 1998. The number of golfers and golf courses and
driving ranges has also increased and golf industry
participants have sought to increase public awareness and
provide greater access to golfers of all ages and income
levels.
PRODUCTS
The Company has developed six full swing personalized
ONE-ON-ONE golf lessons with Greg Norman for both right- and
left-handed golfers. The Company's personalized products
include a lesson stressing basic golf fundamentals for either
males or females, a lesson geared towards senior golfers, an
advanced lesson for lower-handicap players and a "follow-up"
lesson which measures a golfer's improvement from prior
lessons. The Company also plans to eventually develop
additional videotape golf lessons, such as short game, sand
play and putting lessons.
RELATIONSHIP WITH GREG NORMAN
Pursuant to a license agreement, as amended, by and among the
Company, Greg Norman and Great White Shark Enterprises, Inc.
(the "Greg Norman License"), Greg Norman granted to the
Company a worldwide license to use his name, likeness and
endorsement and certain trademarks owned by him in connection
with the production and promotion of the Company's products.
The Greg Norman License originally required the Company to
make minimum guaranteed royalty payments to Mr. Norman;
however, as a result of a recent amendment, there are no
longer any guaranteed payments required, a royalty of all the
Company's sales of its products. As of December 31, 1998, the
Company has paid Mr. Norman $1,300,000 in cash and has issued
to him 602,000 shares of Common Stock, as well as an option to
purchase 125,000 shares of the Company's Common Stock at $1.00
per share. The original term of the Greg
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Norman License expires on December 31, 2001. The Company's
business and prospects are dependent upon the Company's
continued association with Greg Norman.
The Greg Norman License prohibits Greg Norman from granting
similar rights to any person with respect to any concept which
is the same as or confusingly similar to the Company's concept
or products and does not prohibit the Company from entering
into similar endorsement agreements with other athletes or
instructors.
MARKETING AND DISTRIBUTION
The Company's marketing strategy is to sell ONE-ON-ONE
videotapes to (a) various organizers of amateur corporate,
charity and member golf tournaments (who typically offer gifts
to tournament participants), golf professionals at private and
daily fee golf courses and driving ranges and indoor event
planners who organize trade shows, conventions, sales
meetings, retail store openings and promotions and automobile
dealer showroom promotions, (b) corporations who will give the
ONE-ON-ONE WITH GREG NORMAN lesson as customer and employee
appreciation gifts instead of gifts such as golf balls with
logos, fruit baskets or chocolates, (c) individual golfers or
persons who wish to give a gift to a golfer via the Internet
or a planned thirty minute infomercial, and (d) corporations
who will use the ONE-ON-ONE product as an incentive to entice
individuals to purchase or use their product or service. To
implement its marketing and business strategy, the Company has
built 17 mobile ONE-ON-ONE production facilities ("vans")
equipped with video and personal computer equipment to market,
promote and produce the Company's products. The Company
locates its ONE-ON-ONE vans in selected geographic areas that
service golf courses and driving ranges throughout the United
States, and has placed its first vans in Arizona, California,
Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan,
New Jersey, New York, Ohio, Pennsylvania, Texas and Ontario,
Canada. The Company has also opened authorized ONE-ON-ONE
videotaping centers in key cities throughout the country which
allow recipients of ONE-ON-ONE infomercial or gift
certificates to redeem their certificates and receive their
personalized ONE-ON-ONE video golf lesson. These centers are
permanent, part time locations which the Company has developed
in partnership with existing retail establishments such as
driving ranges, golf courses, retailers and automobile
dealerships. The Company is marketing the gift certificate
program as corporate incentives and promotional products and
is selling direct to golfers via the Company's web site. Sales
to corporations are handled by the Company's sales force and
independent sales representatives. The Company also plans to
test its infomercial in the second quarter of 1999.
FINANCING TRANSACTIONS
MARCH FINANCING
In March 1997, the Company consummated a bridge financing (the
"March Bridge Financing") pursuant to which it issued to 13
investors (including Status-One Investments Inc., a company
controlled by the family of the Chief Executive Officer of the
Company), a non-cash financing fee of (i) 100,000 shares of
common stock and (ii) 100,000 warrants to purchase 100,000
shares of common stock at a price of $10.00 per share, subject
to adjustment in certain circumstances. As consideration for
such securities, the investors in the March Bridge Financing
pledged an aggregate of $3,500,000 in cash and other
marketable securities as cash collateral (the "Cash
Collateral") to various banks, which in turn issued stand-by
letters of
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credit (the "Letters of Credit") to the Company in the
aggregate amount of up to $3,500,000. The Company used the
Letters of Credit to secure a $3,500,000 line of credit (the
"Line of Credit") from a bank. In June 1997, the Company used
a portion of the proceeds from the issuance and sale of
certain securities, outlined hereafter in note 5(b), to repay
the remaining outstanding balance due and owing on the Line of
Credit and returned the Letters of Credit to the various
banks, which in turn returned all of the Cash Collateral to
the March Bridge Financing investors.
INFINITY FINANCING
On June 13, 1997, the Company arranged a three-year $7.5
million debt and convertible equity facility (the "Infinity
Financing") with a group of investment funds (the "Funds").
The Company issued and sold to the Funds the following
securities pursuant to the Securities Purchase Agreement,
dated June 13, 1997 (the "Agreement"), among the Company and
the Funds: (i) 8.25% unsecured convertible notes (the "Notes")
in the aggregate principal amount of $7,500,000 with a
maturity date of three years from the date of issuance,
subject to the mandatory automatic exchange of $5 million of
the Notes for Preferred Stock, par value $.01 per share, which
Notes were convertible into shares of Common Stock (the "Note
Conversion Shares") at any time and from time to time
commencing January 1, 1998 at the option of the holder thereof
subject to certain limitations on conversion set forth in the
Agreement; (ii) 93,677 shares of Common Stock subject to
adjustment (the "Grant Shares"); and (iii) five-year warrants
(the "June Warrants") to purchase 100,000 shares of Common
Stock (the "Warrant Shares") at an exercise price equal to
$10.675. The net proceeds to the Company from the sale of the
Notes, Grant Shares and June Warrants was $7,236,938. In
addition, the Company issued 14,052 shares (the "IPO
Underwriters Shares") of Common Stock to the underwriter in
the Company's initial public offering as a fee for services
rendered in connection with the transactions contemplated by
the Agreement.
Pursuant to the Agreement, the Company was required to issue
additional Grant Shares (the "Additional Grant Shares") to the
Funds in the event that the closing bid price of Common Stock
for each trading day during any consecutive 10 trading days
from June 13, 1997, through December 31, 1997, did not equal
at least $10.00 per share. The Company issued 180,296
Additional Grant Shares during the fourth quarter of 1997.
Interest payments on the Notes are, at the option of the
Company, payable in cash or in shares of Common Stock. During
1997 and 1998 the Company issued an aggregate of 65,671 shares
and 80,989 shares (collectively, the "Interest Shares"),
respectively, for payment of interest due.
On February 6, 1998, the Company entered into the First
Amendment to the Securities Purchase Agreement and Related
Documents, dated December 31, 1997 (the "First Amendment"),
among the Company and the Funds. Pursuant to the First
Amendment, the Funds converted $6 million aggregate principal
amount of the Notes into the Company's Series A Convertible
Preferred Stock (the "Preferred Stock"). In addition, the
"Maximum Conversion Price" (as defined in the First Amendment)
at which shares of Preferred Stock are convertible into Common
Stock (the "Stock Conversion Shares") is $6.00, subject to
adjustment in certain circumstances.
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Dividends on the Preferred Stock and the Series A-2 Preferred
Stock (as hereinafter defined) are, at the option of the
Company, payable in cash or in shares of Common Stock. During
1998, the Company issued an aggregate of 302,755 shares (the
"Dividend Shares") for payment of dividends.
The remaining $1.5 million of outstanding Notes held by the
Funds have become secured debt pursuant to a Security
Agreement, dated as of February 6, 1998 (the "Security
Agreement"), between the Company and H.W. Partners, L.P., as
agent for and representative of the Funds. With respect to
such $1.5 million in outstanding Notes, the Funds have been
granted a security interest in the collateral described in the
Security Agreement, which includes all of the Company's
unrestricted cash deposit accounts, accounts receivable,
computer software, inventory and equipment and fixtures
excluding the vans.
The Company issued to the Funds an aggregate of 200,000
warrants (the "New Warrants"), each to purchase one share of
Common Stock (collectively, the "New Warrant Shares") at an
exercise price equal to $4.00 per share.
On March 16, 1998, the Company sold an additional 1,550 shares
of Preferred Stock to the Funds in exchange for marketable
securities with an aggregate value of $1,550,000. In
connection therewith, the Funds as the holders of the majority
of the outstanding shares of Preferred Stock, obtained the
right to appoint one director to the Company's Board of
Directors, although they had not named such director as of
December 31, 1998.
As a condition to the consummation of the Marion Equity
Financing (as defined in and described in "Marion Equity
Financing" and Note 5(c) in the accompanying financial
statements), the Company entered into the Agreement and Second
Amendment to Bridge Securities Purchase Agreement and Related
Documents (the "Second Amendment"), dates March 27, 1998,
among the Company and the Funds. Pursuant to the Second
Amendment, the Funds agreed that they would not convert, prior
to December 31, 1998, any shares of Preferred Stock or any
principal amount of the Notes into shares of Common Stock,
unless a "Material Transaction" (defined as a change of
control of the Company, a transfer of all or substantially all
of the Company's assets or a merger of the Company into
another entity) has occurred. Further, the Funds agreed that
they would not, prior to March 31, 1999, publicly sell any
shares of Common Stock owned or acquired by the Funds, unless
a Material Transaction has occurred; the Funds are permitted,
after June 30, 1998, and subject to the Company's right of
first refusal, to privately sell any shares of Common Stock
that they own or acquire, provided the purchaser agrees in
writing to be bound by the same resale restrictions.
The Funds have granted to the Company an option to redeem the
Preferred Stock and the Notes owned by the Funds. The Company
is required to redeem all of the Preferred Stock outstanding
prior to redemption of any of the Notes. In addition, the
Funds have granted to the Company and to Marion (as hereafter
defined) an option to acquire, on or before March 31, 1999,
all of the shares of Common Stock owned by the Funds.
In connection with the Second Amendment, the Funds received
100,000 shares of Common Stock. Furthermore, because the
Company did not redeem all of the Preferred Stock and Notes
owned by the Funds by June 30, 1998, the Funds received
200,000 additional shares of Common Stock. Further, the
exercise price of the June Warrants was reduced from $10.675
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per share to $3.25 per share and the exercise price of the New
Warrants was reduced from $4.00 per share to $3.25 per share.
On December 29, 1998, the Company entered into the Third
Amendment to Bridge Securities and Purchase Agreement and
Related Documents (the "Third Amendment"), among the Company
and Funds (or, if applicable, their respective transferees)
(the "New Funds"). Pursuant to the Third Amendment, the
Company agreed to retire all of the issued and outstanding
shares of its Series A Convertible Preferred Stock and, in
exchange therefor, issue to the New Funds a new class of
Series A-2 Convertible Preferred Stock (the "Series A-2
Preferred Stock"). The Series A-2 Preferred Stock is senior to
the Common Stock with respect to dividends, liquidation and
dissolution. Prior to January 1, 2000, no dividends shall
accrue or be payable on the Series A-2 Preferred Stock.
Beginning on January 1, 2000, each share of Series A-2
Preferred Stock shall entitle the holder to an annual dividend
of 8.25%, payable on a quarterly basis, which dividend shall
increase to 18% in certain situations as specified in the
Certificate of Designation with respect to the Series A-2
Preferred Stock.
The Third Amendment also revised the conversion price at which
the Notes may be convertible into Common Stock and at which
the Series A-2 Preferred Stock may be convertible into Common
Stock (the "Series A-2 Conversion Shares"). The "Conversion
Price" (as defined in the Third Amendment) applicable to the
Company's outstanding Convertible Notes is $2.50 until January
1, 2000, inclusive, and $1.25 thereafter. The Conversion Price
applicable to the Series A-2 Preferred Stock is (i) for the
first $2,000,000 of aggregate liquidation preference of the
Series A-2 Preferred Stock, $1.25, (ii) for the next
$1,000,000 of aggregate liquidation preference of the Series
A-2 Preferred Stock, $2.00 until June 30, 1999, inclusive,
$1.375 from July 1, 1999 until January 1, 2000, inclusive, and
$1.25 thereafter, and (iii) for any excess amounts of
aggregate liquidation preference of the Series A-2 Preferred
Stock, $2.50 until June 30, 1999, inclusive, $2.00 from July
1, 1999 until January 1, 2000, inclusive, and $1.25
thereafter.
The New Funds agreed to a limitation on their conversion
rights, such that they may not convert any amount of
convertible instruments or exercise any portion of warrants
that would result in the sum of (a) the number of shares of
Common Stock beneficially owned by the New Funds and their
affiliates and (b) the number of shares of Common Stock
issuable upon conversion of convertible instruments or
exercise of warrants, exceeding 9.99% of the outstanding
shares of Common Stock after giving effect to such conversion
or exercise. The Third Amendment removed resale limitations on
the New Funds.
Furthermore, as a means of retaining the Company's management
and as an incentive for such management to pursue the
Company's long-term goals, the Third Amendment provided that
all outstanding stock options granted to the Chief Executive
Officer, the President and Chief Operating Officer, and the
Vice President of Operations and Technology be repriced to
$1.00 per share and that all such options shall be immediately
vested. The Company also agreed to reprice to $1.00 per share
approximately 82,000 existing employee stock options, all such
options to be immediately vested. In addition, the New Funds
agreed to return to the Company the June Warrants and the New
Warrants to purchase an aggregate of 284,000 shares, and the
Company repriced 16,000 of these warrants to market value at
$.781 per share that were exercised pursuant to the Third
Amendment (as described below), provided that options to
purchase 200,000 shares of Common Stock be granted to the
President and Chief Operating Officer and options to purchase
100,000 shares of Common Stock be granted to the Vice
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President of Operations and Technology, all such options to be
immediately vested and to have an exercise price of $1.00 per
share. Moreover, the Company granted 200,000 new stock options
to the President and Chief Operating Officer all such options
to be immediately vested and to have an exercise price of
$1.00 per share.
Lastly, the New Funds agreed in the Third Amendment to
exercise warrants to purchase shares of Common Stock to result
in a total exercise price of approximately $12,500.
MARION EQUITY FINANCING
In March 1998, the Company entered into a Purchase Agreement
(the "Marion Agreement") with Marion Interglobal, Ltd., an
investment group ("Marion"), or its assigns. The Marion
Agreement called for the Company to receive up to $11,000,000
from Marion in exchange for shares of Common Stock as
explained herein. Pursuant to the Marion Agreement, the
purchase of Common Stock was to occur in three tranches as
follows: (i) on March 27, 1998, the Company sold to Marion
1,200,000 shares of Common Stock for an aggregate
consideration of $3,000,000 which was received on April 16,
1998; (ii) on June 30, 1998, the Company sold to Marion
800,000 shares of Common Stock for an aggregate consideration
of $2,000,000; and (iii) on or prior to September 30, 1998 the
Company was to sell a number of shares of Common Stock (to be
determined by when the closing occurs, which would range from
2,666,667 shares to 3,200,000 shares) for an aggregate
consideration of $6,000,000. The third tranche was contingent
on Marion's satisfaction that the Company met or exceeded
certain unspecified financial targets expected by Marion, in
its sole discretion. Marion was under no firm obligation to
complete this tranche. The third tranche of the Marion
Agreement was not completed by Marion due to market
conditions. The Company paid transaction fees to Marion upon
completion of each tranche as follows: (i) 1,200,000 shares of
Common Stock for the first $3,000,000 tranche; and (ii)
800,000 shares of Common Stock for the second $2,000,000
tranche. The Company issued an additional 10,000 shares as a
finders fee in connection with this financing.
Further, upon the consummation of the second tranche of the
Marion Agreement, Mr. Alan Lubell, a former director of the
Company, transferred 250,000 shares of Common Stock to Marion,
which shares were registered under the Securities Act of 1933,
as amended, effective April 15, 1998.
Pursuant to the Marion Agreement, Marion represented a group
of investors and was entitled to assign its rights to receive
shares of Common Stock from the Company and Mr. Lubell. Marion
exercised this right and allocated the shares of Common Stock
from the Company and Mr. Lubell to various unrelated investors
and retained 876,000 shares for its own account. Marion is
controlled by Ronald Seale who became Chairman of the Board of
the Company on June 3, 1998, and presently holds 976,000
shares of Common Stock.
COMPETITION
The Company faces competition for consumer discretionary
spending from numerous other businesses in the golf industry
and related market segments. The Company competes with a
variety of products and services which are used as participant
gifts at golf events or provide golf instruction, including
instructional golf videotapes, golf software used to analyze
golf swings and golf courses, schools and professionals who
offer video golf lessons, certain of
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which may be less expensive or provide other advantages to
consumers. In addition, certain companies offer both hardware
and software to golf professionals for use in connection with
golf lessons. Moreover, the instructional golf video segment
of the industry has no substantial barriers to entry and,
consequently, the Company expects that other companies which
have developed software technologies may seek to enter the
Company's target markets and compete directly against the
Company. There can be no assurance that other companies are
not developing or will not seek to develop similar products.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company has filed a patent application with the United
States Patent and Trademark Office covering certain aspects of
its digital video editing and videotape production process.
There can be no assurance, however, as to the breadth or
degree of protection which patents may afford the Company,
that any patent applications will result in issued patents or
that patents will not be circumvented or invalidated. Rapid
technological developments in the computer software industry
result in extensive patent filings and a rapid rate of
issuance of new patents. In addition, there can be no
assurance that the Company will have financial or other
resources necessary to enforce its own patent or defend a
patent infringement action and the Company could, under
certain circumstances, become liable for damages, which also
could have a material adverse effect on the Company. The
Company relies on proprietary processes and employs various
methods to protect the concepts, ideas and documentation of
its products. However, such methods may not afford complete
protection and there can be no assurance that others will not
independently develop such processes or obtain access to the
Company's proprietary processes, ideas and documentation.
Furthermore, although the Company has entered into
confidentiality agreements with certain of its employees,
there can be no assurance that such arrangements will
adequately protect the Company.
EMPLOYEES
At December 31, 1998, the Company employed (directly or
indirectly) four executive employees and 49 employees engaged
in the operation of its offices and vans.
EXECUTIVE OFFICERS OF THE COMPANY
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NAME AGE POSITION
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Earl T. Takefman 49 Chief Executive Officer and Director
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Richard Parker 37 President and Chief Operating Officer
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Thomas Peters 53 Vice President of Operations and
Technology
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Melissa Forzly 40 Chief Financial Officer
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EARL T. TAKEFMAN, a co-founder of the Company, has been Chief
Executive Officer of the Company since March 1995. Prior to
founding the Company, Mr. Takefman was Co-Chief Executive
Officer of SLM International, Inc. ("SLM"), a publicly traded
toy and sporting goods company, from December 1989 to August
1994. From 1980 to 1989, prior to joining SLM, Mr. Takefman
was Chief Operating Officer of Charan Industries ("Charan"), a
publicly traded Canadian toy and sporting goods company. Mr.
Takefman received a Bachelor of Architecture degree in 1971
and a Masters of Business Administration degree from McGill
University in Montreal, Canada in 1973.
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RICHARD PARKER has been the Company's President and Chief
Operating Officer since July 1996. From February 1990 until
his appointment as Chief Operating Officer of the Company, Mr.
Parker was the founder, owner and President of Diomo Marketing
Inc. and Devrew Merchandising Inc., companies engaged in
marketing and selling consumer products in Canada. From August
1984 to February 1990, Mr. Parker held various positions,
including Vice President at Charan. Mr. Parker graduated from
Vanier College in Montreal in 1980.
THOMAS PETERS has been Vice President of Operations and
Technology of the Company since May 1996. Since July 1992, Mr.
Peters has been the owner of Smart View ("Smart View"), a
company he founded to design and develop computer golf
software to be used by golf professionals when giving video
golf lessons. In March 1995, Smart View was engaged as an
independent consultant to the Company and was principally
responsible for the development of the software used in the
Company's products. Smart View also developed operating
systems used by Golf Academy at PGA National and at the Doral
Golf Learning Center, each in Florida. Prior to founding Smart
View, Mr. Peters, for 26 years, held various positions at IBM
Corporation, including Manager of Application Development from
July 1989 to July 1992 and Personal Computer Product Planning
Manager from 1984 to 1989. Mr. Peters graduated from Harper
College at University of New York in 1967, with a B.A. in
mathematics.
MELISSA FORZLY has been the Chief Financial Officer of the
Company since March 1998 and joined the Company as Controller
in June 1997. Prior to joining the Company, Ms. Forzly was
Controller of Big Entertainment, a public company trading on
the Nasdaq SmallCap market, which is a diversified
entertainment company involved in the licensing of
entertainment properties, the operation of retail stores, and
the publishing and packaging of books. Ms. Forzly graduated
from Boston University in 1981 with a B.S. in Business
Administration with concentrations in accounting and finance.
RISK FACTORS
Readers of this annual report or any of the Company's press
releases should carefully consider the following risk factors,
in addition to the other information contained herein. This
annual report and the Company's press releases contains
certain statements of a forward-looking nature relating to
future events or the future financial performance of the
Company within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and which are intended to be
covered by the safe harbors created thereby. Readers are
cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating
such statements, readers should specifically consider the
various factors identified herein, including the matters set
forth below, which could cause actual results to differ
materially from those indicated by such forward-looking
statements.
SIGNIFICANT AND CONTINUING LOSSES. For the period from July
15, 1994 (inception) to December 31, 1998, the Company
incurred an accumulated deficit of $20,302,283. The Company
incurred a net loss of $4,846,792 for the year ending December
31, 1998 and it believes that it will incur continuing losses
in 1999. Such losses will continue until, at the earliest, the
Company generates sufficient revenues to offset the operating
costs associated with commercializing its products.
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UNCERTAINTY OF PROPOSED PLAN OF OPERATION AND MARKET
ACCEPTANCE. The Company's plan of operation and prospects are
largely dependent upon the Company's ability to achieve
significant market acceptance for its products, establish and
maintain satisfactory relationships with those who arrange
golf events, successfully hire and retain skilled technical,
marketing and other personnel, and successfully develop, equip
and operate ONE-ON-ONE vans on a timely and cost effective
basis. There can be no assurance that the Company will be able
to continue to implement its business plan. Failure to
implement its business plan would have a material adverse
effect on the Company.
The Company's ONE-ON-ONE personalized videotape golf lesson
is a new business concept and, accordingly, demand and market
acceptance for the Company's products is subject to a high
level of uncertainty. Achieving market acceptance for the
Company's products will require significant efforts and
expenditures by the Company to create awareness and demand.
The Company's prospects will be significantly affected by its
ability to successfully build an effective sales organization
and develop a significant number of ONE-ON-ONE vans. The
Company had limited marketing and technical experience and
limited financial, personnel and other resources to
independently undertake extensive marketing activities. The
Company's strategy and preliminary and future marketing plans
may be subject to change as a result of a number of factors,
including progress or delays in the Company's marketing
efforts, changes in market conditions. To the extent that the
Company enters into third-party marketing and distribution
arrangements in the future, it will be dependent on the
marketing efforts of such third parties and in certain
instances on the popularity and sales of their products. There
can be no assurance that the Company's strategy will result in
successful product commercialization or that the Company's
efforts will result in initial or continued market acceptance
for the Company's products.
CAPITAL RESOURCES. As a result of the Company's continuing
losses and the low market price of its Common Stock, the
Company believes that it will be very difficult, if not
impossible, for it to raise additional capital in the future.
As of March 24, 1999, the Company had a total of cash and cash
equivalents and certificates of deposit of approximately
$1,429,500. Thus, if the Company is unable to successfully
implement its business plan and become profitable in the near
future, it may exhaust its cash resources and will be unable
to continue in business.
MINIMUM BID PRICE. On March 1,1999, the minimum bid price of
the Company's shares had been less than $1.00 per share for
thirty consecutive business days and in accordance with
Nasdaq's listing requirements, the Company received notice
from Nasdaq regarding the minimum bid price of the Company's
shares. The Company must achieve compliance with Nasdaq's
rules by June 1, 1999 or the Company's Common Stock will be
delisted. According to Nasdaq's rules, the Company can achieve
compliance if the minimum bid price of the Company's shares is
above $1.00 per share for at least ten consecutive business
days during the ninety-day compliance period. The Company may
attempt to meet Nasdaq's rules by effecting a reverse stock
spilt. Exclusion of our shares from Nasdaq would adversely
affect the market price and liquidity of our equity
securities.
DEPENDENCE ON GREG NORMAN LICENSE. Pursuant to the Greg Norman
License (including several recent amendments), Greg Norman
agreed to grant to the Company a worldwide license to use his
name, likeness, endorsement and certain trademarks in
connection with the production and promotion of the Company's
products. The original term of the Greg Norman License expires
on December 31, 2001. There may be a material adverse effect
to the
12
<PAGE> 13
Company if Greg Norman dies, becomes disabled, retires from
tournament play, experiences a significant decline in the
level of his tournament play, commits a serious crime or
performs any act which adversely affects his reputation. The
Company has obtained "key-man" insurance on the life of Greg
Norman in the amount of $10,000,000.
POTENTIAL INFLUENCE ON MARKET OF SALE OF SHARES; DILUTION. As
part of the Infinity Financing, the Company issued to the
Funds, through December 31, 1998, an aggregate of 1,039,388
shares of Common Stock. In addition, the Company will be
obligated to issue to the Funds additional shares if they
decide to convert their Notes or shares of Preferred Stock
into Common Stock. Conversion of some or all of the Notes or
Preferred Stock would have a dilutive effect on the Company's
stockholders. While no prediction can be made as to the effect
that the sale of any of these shares will have on market
prices of the Common Stock, the possibility that a substantial
number of shares of Common Stock may be sold in the public
market may adversely affect prevailing market prices and could
impair the Company's ability to further raise capital through
the sale of its equity securities. Additionally, there are
currently outstanding options to purchase an aggregate of
1,874,039 shares of Common Stock at exercise prices ranging
from $1.00 to $10.75 per share, and outstanding warrants
(including the IPO warrants) to purchase an aggregate of
1,930,000 shares of Common Stock at exercise prices ranging
from $3.25 to $10.00. Exercise of any of the foregoing options
or warrants will have a dilutive effect on the Company's
stockholders. Furthermore, holders of such options or warrants
are more likely to exercise them at times when the Company
could obtain additional equity capital on terms that are more
favorable to us than those provided in the options or
warrants. As a result, exercise of the options or warrants may
adversely affect the terms of such financing.
DEPENDENCE ON LIMITED PRODUCT LINE AND PRODUCT OBSOLESCENCE.
The Company is entirely dependent on the sales of a limited
product line to generate revenues and on the commercial
success of its products. There can be no assurance that the
Company's products will prove to be commercially viable.
Failure to achieve commercial viability would have a material
adverse effect on the Company. The markets for the Company's
products may be characterized by rapidly changing technology
which could result in product obsolescence or short product
life cycles. Accordingly, the ability of the Company to
compete may be dependent upon the Company's ability to
continually enhance and improve its software. There can be no
assurance that competitors will not develop technologies or
products that render the Company's products obsolete or less
marketable.
DEPENDENCE ON KEY PERSONNEL. The prospects of the Company are
dependent on the personal efforts of Earl T. Takefman, its
Chief Executive Officer, Richie Parker, its President and
Chief Operating Officer, and Tom Peters, its Vice President of
Operations and Technology. The loss of the services of any of
these executives could have a material adverse effect on the
Company's proposed business and prospects. The Company has
entered into employment agreements with all of these
executives and has obtained "key-man" insurance on the life of
Mr. Takefman in the amount of $5,000,000.
INDUSTRY FACTORS. The Company's future operating results will
depend on numerous factors beyond its control, including the
popularity, price and timing of competitors' products being
introduced and distributed, national, regional and local
economic conditions (particularly recessionary conditions
adversely affecting consumer spending), changes in consumer
demographics, the availability and relative popularity of
other forms of sports and
13
<PAGE> 14
entertainment, and public tastes and preferences, which may
change rapidly and cannot be predicted. The Company's ability
to plan for product development and promotional activities may
be affected by the Company's ability to anticipate and respond
to relatively rapid changes in consumer tastes and
preferences. To the extent that the Company targets consumers
with limited disposable income, the Company may find it more
difficult to price its products at levels which result in
profitable operations. In addition, seasonal weather
conditions limiting the playing seasons in certain geographic
areas may result in fluctuations in the Company's future
operating results.
VOLATILITY OF MARKET PRICE OF COMMON STOCK AND WARRANTS. Since
the IPO, the market prices of the Company's publicly traded
securities have been highly volatile as has been the case with
the securities of other emerging companies. Factors such as
the Company's operating results and announcements by the
Company or its competitors may have a significant impact on
the market price of the Company's securities. In addition, in
recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of
many companies have experienced wide price fluctuations which
have not necessarily been related to the operating performance
of such companies.
LIMITATIONS OF LIABILITY OF DIRECTORS AND OFFICERS. The
Company's Certificate of Incorporation includes provisions to
limit, to the full extent permitted by Delaware law, the
personal liability of directors of the Company for monetary
damages arising from a breach of their fiduciary duties as
directors. The Certificate of Incorporation also includes
provisions to the effect that (subject to certain exceptions)
the Company shall, to the maximum extent permitted from time
to time under the law of the State of Delaware, indemnify, and
upon request shall advance expenses to, any director or
officer to the extent permitted under such law as it may from
time to time be in effect. In addition, the Company's By-Laws
require the Company to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the
Company for acts which such person reasonably believes are not
in violation of the Company's corporate purposes as set forth
in the Certificate of Incorporation. As a result of such
provisions in the Certificate of Incorporation and the By-Laws
of the Company, stockholders may be unable to recover damages
against the directors and officers of the Company for actions
taken by them which constitute negligence, gross negligence or
a violation of their fiduciary duties, which may reduce the
likelihood of stockholders instituting derivative litigation
against directors and officers and may discourage or deter
stockholders from suing directors, officers, employees and
agents of the Company for breaches of their duty of care, even
though such an action, if successful, might otherwise benefit
the Company and its stockholders.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 4,400 square feet of office
space in Boca Raton, Florida for its executive offices. The
lease of this office space provides for a monthly rent of
approximately $9,580 and expires on September 30, 1999, with
one option to renew for an additional three years. The Company
believes that suitable additional space, if required, is
readily available on terms that will be reasonably acceptable
to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending or, to
the Company's knowledge, threatened.
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS SUBMISSION OF
MATTERS TO A VOTE OF SECURITYHOLDERS
MARKET FOR COMMON STOCK
The Company's Common Stock and warrants are traded on the
Nasdaq SmallCap Market under the symbols "EDGE" and "EDGEW,"
respectively (see Risk Factor - Minimum Bid Price). The
Company completed the IPO in July 1996 at an offering price of
$5.00 per share for its Common Stock and $.10 per warrant. The
following table sets forth, for the periods indicated, the
range of high and low last reported sale prices for the Common
Stock and the warrants.
<TABLE>
<CAPTION>
COMMON STOCK: HIGH LOW
------------- ---- ---
<S> <C> <C>
Fiscal Year 1996
Third Quarter (from July 24, 1996) $ 8.00 $4.38
Fourth Quarter 7.63 5.63
Fiscal Year 1997
First Quarter $12.38 $5.75
Second Quarter 13.75 8.63
Third Quarter 10.25 6.50
Fourth Quarter 8.25 3.06
Fiscal Year 1998
First Quarter $ 4.38 $2.63
Second Quarter 4.69 2.81
Third Quarter 3.47 1.38
Fourth Quarter 1.97 .63
IPO WARRANTS: HIGH LOW
------------- ---- ---
Fiscal Year 1996
Third Quarter (from July 24, 1996) $4.13 $1.00
Fourth Quarter 3.16 1.88
Fiscal Year 1997
First Quarter $7.56 $1.88
Second Quarter 8.63 4.00
Third Quarter 5.13 3.00
Fourth Quarter 3.44 .75
Fiscal Year 1998
First Quarter $1.69 $ .69
Second Quarter 1.25 .00
Third Quarter .88 .25
Fourth Quarter .69 .06
</TABLE>
16
<PAGE> 17
HOLDERS OF COMMON STOCK
On March 23,1999, the last reported sale price of the Common
Stock on the Nasdaq SmallCap Market was $.719 per share and
the last reported sale price of the warrants on the Nasdaq
SmallCap Market was $.188 per warrant. At March 23, 1999,
there were 128 holders of record of the Company's Common Stock
and 6 holders of record of the Company's warrants. The Company
believes that there are more than 700 beneficial holders of
the Company's Common Stock.
DIVIDENDS
The Company does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future and intends to
retain its earnings, if any, to finance the expansion of its
business and for general corporate purposes. Any payment of
future dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions and other
factors that the Company's Board of Directors deems relevant.
In addition, the payment of cash dividends is limited by the
terms of the Preferred Stock and may be further limited or
prohibited by the terms of future loan agreements or the
future issuance of other series of Preferred Stock, if any.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in
conjunction with the Company's Financial Statements and the
Notes thereto included in Part II, Item 7 of this Report.
RESULTS OF OPERATIONS
For the year ended December 31, 1998 ("Y-98") as compared to the year
ended December 31, 1997 ("Y-97")
Sales for Y-98 increased 91% to $2,632,213 as compared to
$1,381,111 for Y-97. The increase in sales in 1998 as compared
to 1997 is primarily due to the Company's marketing efforts.
In addition, the Company had more vans in use for all of 1998
as compared to 1997.
The Company's gross profit increased to $168,273 for Y-98 as
compared to a gross loss of $186,362 for Y-97, or a gross
margin of 6% in Y-98 as compared to a gross margin of -13% in
Y-97. The increase in gross profit in 1998 as compared to
1997 is primarily due to significant training costs for van
operators that were incurred in 1997 and were significantly
decreased in 1998, as well as low initial sales during the
Company's start-up phase in 1997.
Operating expenses for Y-98 decreased 42% to $4,577,034 as
compared to $7,929,850 for Y-97. The decrease in operating
expenses reflects reductions in corporate overhead and
start-up expenses that were incurred in 1997.
Operating loss for Y-98 decreased 46% to $4,408,761, as
compared to $8,116,212 for Y-97.
The Company earned $119,647 in interest income for Y-98, as
compared to $111,140 for Y-97. Interest expense for Y-98 was
$251,566, as compared to $508,080 for Y-97. The decrease in
17
<PAGE> 18
interest expense is primarily due to the conversion of the
June Financing Notes to Preferred Stock (see note 5(b)).
Net loss before extraordinary item for Y-98 decreased 50% to
$4,846,792, as compared to $9,756,570 for Y-97. Net loss per
share for Y-98 decreased 64% to $.81, as compared to $2.26 for
Y-97. The decreases in operating and net loss in 1998 as
compared to 1997 resulted from increased gross profit and
decreased operating expenses in 1998. The decrease in net loss
per share in 1998 as compared to 1997 is attributable to both
a decrease in net loss and an increase in the number of shares
outstanding which is partially offset by Preferred Stock
dividends recorded in 1998.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1998, the Company had cash and cash
equivalents of $244,346, unrestricted short-term investments
(certificates of deposit) of $1,750,000 and working capital of
$1,269,548, as compared to cash and cash equivalents of
$224,429, unrestricted short-term investments (certificates of
deposit) of $1,080,000 and working capital of $788,323 at
December 31, 1997. Net cash used in operating activities for
Y-98 was $3,176,816, which was used to fund the Company's
losses. Net cash used in investing activities was $1,017,737
and $4,214,470 was provided by financing activities for a
total increase in cash and cash equivalents of $19,917. Net
cash used in operating activities for Y-97 was $5,997,342. Net
cash used in investing activities in Y-97 was $95,124 and
$6,083,778 was provided by financing activities, for a total
decrease in cash and cash equivalents in Y-97 of $8,688.
On December 31, 1998, the Company had stockholders' equity of
$3,549,880, as compared to a stockholders' deficit of
$1,137,662 at December 31, 1997.
The Company anticipates that its current capital resources,
when combined with anticipated cash flows from operations will
be sufficient to satisfy the Company's contemplated working
capital requirements for the year ending December 31, 1999.
However, there can be no guarantee that the Company's
anticipated cash flow from operations and sales will be
realized. If the Company is unable to realize the anticipated
cash flows, or raise additional equity, it may exhaust its
cash resources by the year-end (See Risk Factors - Uncertainty
of Proposed Plan of Operation and Market Acceptance and Risk
Factors - Capital Resources).
THIRD PARTY REPORTS AND PRESS RELEASES
The Company does not make financial forecasts or projections
nor endorse the financial forecasts or projections of third
parties nor does it comment on the accuracy of third party
reports. The Company does not participate in the preparation
of the reports or the estimates given by the analysts.
Analysts who issue financial reports are not privy to
non-public financial information. Any purchase of the
Company's securities based on financial estimates provided by
analysts or third parties is done entirely at the risk of the
purchaser.
The Company periodically issues press releases to update
shareholders on new developments. These releases may contain
certain statements of a forward-looking nature relating to
future events or the future financial performance of the
Company within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and which are intended to be
covered by the safe harbors created thereby.
18
<PAGE> 19
Readers are cautioned that such statements are only
predictions and that actual events or results may differ
materially. In evaluating such statements, readers should
specifically consider the various risk factors identified
which could cause actual results to differ materially from
those indicated by such forward-looking statements.
YEAR 2000 ISSUE
The Company has completed its assessment of the impact of Year
2000 on its business including its readiness of internal
accounting and operating systems and communicated with key
suppliers regarding their exposure to Year 2000 issues. The
Company anticipates that its business operations will
electronically interact with third parties very minimally, if
at all. The majority of the Company's systems consist of
packaged software purchased from vendors which are already
Year 2000 compliant, based on representations from the
vendors. The Company is not presently aware of any significant
expenditures which will be necessitated in order to be ready
for the Year 2000, although there can be no assurances that
significant expenditures may not be required in the future.
The Company presently believes that the Year 2000 issue will
not have a material impact on the Company's business or
operations; however, there can be no guarantee in the level of
timely compliance by key suppliers or vendors which could have
a insignificant impact on the Company's operations including,
but not limited to, disruptions to the Company's business.
19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants 21
Balance Sheets as of December 31, 1997 and December 31, 1998 22
Statements of Operations for the Years Ended December 31, 1997
and 1998 23
Statements of Changes in Stockholders' Equity (Deficit) for the
Years Ended December 31, 1997 and 1998 24
Statements of Cash Flows for the Years Ended December 31, 1997 and 1998 25
Notes to Financial Statements 26
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Visual Edge Systems Inc.:
We have audited the accompanying balance sheets of Visual Edge Systems
Inc. as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Visual Edge
Systems Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity
with general accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 24, 1999.
21
<PAGE> 22
VISUAL EDGE SYSTEMS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 224,429 $ 244,346
Certificates of Deposit 1,080,000 1,750,000
Accounts Receivable 23,917 26,893
Inventory 72,771 103,142
Prepaid Expenses - Advance Royalties 350,000 220,577
Other Current Assets 217,225 107,345
------------ ------------
Total Current Assets 1,968,342 2,452,303
Fixed Assets, net 2,632,826 2,248,514
Intangible Assets, net 286,986 167,777
Prepaid Expenses - Advance Royalties 449 680,157
Investments-Restricted (Note 5(d)) 812,719 587,108
------------ ------------
Total Assets $ 5,701,322 $ 6,135,859
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 344,884 $ 201,617
Accrued Expenses 173,605 167,795
Other Current Liabilities 121,266 218,259
Current Maturities of Equipment Loans 540,264 595,084
------------ ------------
Total Current Liabilities 1,180,019 1,182,755
Equipment Loans 661,939 149,951
Convertible Debt 4,997,026 1,253,273
------------ ------------
Total Liabilities 6,838,984 2,585,979
------------ ------------
Commitments and Contingencies
(Notes 5 and 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 5,000,000 shares
authorized: Series A-2 convertible, none issued and
outstanding at December 31, 1997 and
6,000 shares issued and outstanding at December 31, 1998 -- 6,000,000
Common Stock, $.01 par value, 20,000,000 shares authorized,
5,316,696 shares issued and outstanding at
December 31, 1997 and 10,378,440 issued and
outstanding at December 31, 1998 53,167 103,784
Additional Paid in Capital 12,427,394 17,748,379
Accumulated Deficit (13,618,223) (20,302,283)
------------ ------------
Total Stockholders' Equity (Deficit) (1,137,662) 3,549,880
------------ ------------
Total Liabilities & Stockholders' Equity (Deficit) $ 5,701,322 $ 6,135,859
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Sales $ 1,381,111 $ 2,632,213
Cost of Sales 1,567,473 2,463,940
------------ ------------
Gross (Loss) Profit (186,362) 168,273
------------ ------------
Operating Expenses:
General and Administrative 4,565,007 3,024,271
Selling and Marketing 2,072,537 1,036,713
Financing Fees 1,049,049 223,242
Non-cash Stock Compensation Expense 243,257 292,808
------------ ------------
Total Operating Expenses 7,929,850 4,577,034
------------ ------------
Operating Loss (8,116,212) (4,408,761)
------------ ------------
Other Income (Expenses):
Interest Income 111,140 119,647
Interest Expense (508,080) (251,566)
Amortization of Deferred Financing Fees (1,243,418) (306,112)
------------ ------------
Total Other Income (Expenses) (1,640,358) (438,031)
------------ ------------
Net Loss before Extraordinary Item (9,756,570) (4,846,792)
Extraordinary Item - write off of financing fees in
connection with extinguishment of debt (999,000) --
------------ ------------
Net Loss (10,755,570) (4,846,792)
Preferred Stock dividend -- (1,837,268)
------------ ------------
Net Loss to common stockholders $(10,755,570) $ (6,684,060)
============ ============
Basic and Diluted Loss per Share:
Net Loss per Share before Extraordinary Item (2.05) (0.81)
Extraordinary Item (0.21) --
------------ ------------
Net Loss per Share $ (2.26) $ (0.81)
============ ============
Weighted average common shares outstanding 4,758,605 8,238,208
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PREFERRED PAID-IN ACCUMULATED
SHARES AMOUNT STOCK CAPITAL DEFICIT TOTAL
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,615,000 $ 46,150 $ -- $ 6,481,159 $ (2,862,653) $ 3,664,656
Common stock issued in connection
with the March bridge financing 100,000 1,000 -- 999,000 -- 1,000,000
Warrants issued in connection with
the March bridge financing -- -- -- 665,000 -- 665,000
Common stock issued in connection with
the Infinity financing 288,025 2,880 -- 1,755,619 -- 1,758,499
Warrants issued in connection with the
Infinity financing -- -- -- 962,012 -- 962,012
Common stock issued for services 270,000 2,700 -- 997,300 -- 1,000,000
Options and warrants issued by for services -- -- -- 458,237 -- 458,237
Exercise of options 25,000 250 -- 127,750 -- 128,000
Issuance of common stock for payment of
interest on convertible debt 65,671 657 -- 333,101 -- 333,758
Repurchase and cancellation of
common stock (47,000) (470) -- (351,784) -- (352,254)
Net loss -- -- -- -- (10,755,570) (10,755,570)
------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 5,316,696 53,167 -- 12,427,394 (13,618,223) (1,137,662)
Preferred stock Series A convertible issued
in connection with the Infinity financing -- -- 6,000,000 (2,178,942) -- 3,821,058
Cancellation of Preferred stock Series A
convertible issued in connection with
the Infinity financing -- -- (6,000,000) 6,000,000 -- --
Preferred stock Series A-2 convertible
issued in connection with the Infinity
financing -- -- 6,000,000 (6,000,000) -- --
Preferred stock embedded dividend -- -- -- 1,350,000 (1,350,000) --
Sale of preferred stock in connection
with the Infinity financing -- -- 1,550,000 -- -- 1,550,000
Redemption of preferred stock in connection
with the Infinity financing -- -- (1,550,000) -- -- (1,550,000)
Issuance of common stock for payment
of dividends on preferred stock 302,755 3,028 -- 484,240 (487,268) --
Issuance of common stock for payment of
interest on convertible debt 80,989 809 -- 123,972 -- 124,781
Common stock and warrants issued in
connection with the Infinity financing
amendments 350,000 3,500 -- 260,909 -- 264,409
Common stock issued in connection
with the Marion equity financing 4,010,000 40,100 -- 4,678,678 -- 4,718,778
Common stock and warrants issued in
connection with the Greg Norman
agreement 272,000 2,720 -- 290,088 -- 292,808
Issuance of common stock for payment of
prepaid royalties 30,000 300 -- 299,700 -- 300,000
Exercise of options 16,000 160 -- 12,340 -- 12,500
Net loss -- -- -- -- (4,846,792) (4,846,792)
------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 1998 10,378,440 $ 103,784 $ 6,000,000 $ 17,748,379 $(20,302,283) $ 3,549,880
============ =========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $(10,755,570) $ (4,846,792)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash stock compensation expense 243,257 292,808
Non-cash stock financing fees 1,036,000 95,242
Non-cash interest expenses 333,758 124,781
Depreciation and amortization 1,128,964 851,258
Amortization of deferred financing expenses 1,243,418 306,112
Extraordinary Item 999,000 --
Changes in assets and liabilities:
Increase in accounts receivable (23,917) (2,976)
(Increase)/decrease in other current assets (136,469) 109,880
(Increase)/decrease in prepaid expense - advance royalties (50,000) 129,423
Increase in inventory (36,024) (30,371)
Increase in other assets -- (154,097)
Increase/(decrease) in accounts payable 11,770 (143,267)
Decrease in accrued expenses (111,295) (5,810)
Increase in other current liabilities 119,766 96,993
------------ ------------
Net cash used in operating activities (5,997,342) (3,176,816)
------------ ------------
Investing activities:
Capital expenditures (71,457) (347,737)
Purchases of short-term investments (3,523,667) (3,750,000)
Proceeds from the sale of short-term investments 3,500,000 3,080,000
------------ ------------
Net cash used in investing activities (95,124) (1,017,737)
------------ ------------
Financing activities:
Proceeds from the issuance of common stock -- 4,718,778
Exercise of options 128,000 12,500
Repurchase common stock (352,254) --
Repayment of borrowings (4,351,968) (516,808)
Payments of financing costs (340,000) --
Proceeds from borrowings 11,000,000 --
------------ ------------
Net cash provided by financing activities 6,083,778 4,214,470
------------ ------------
Net change in cash and cash equivalents (8,688) 19,917
Cash and cash equivalents at beginning of period 233,117 224,429
------------ ------------
Cash and cash equivalents at end of period $ 224,429 $ 244,346
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 174,069 $ 117,279
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
VISUAL EDGE SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(1) BACKGROUND
Visual Edge Systems Inc. (the "Company") was organized to
develop and market personalized videotape golf lessons
featuring ONE-ON-ONE instruction by professional golfer Greg
Norman. The Company has developed video production technology
which digitally combines actual video footage of a golfer's
swing with a synchronized "split-screen" comparison to Greg
Norman's golf swing to produce a ONE-ON-ONE videotape golf
lesson. The Company sells its products under the name
"ONE-ON-ONE WITH GREG NORMAN".
The Company was incorporated in July 1994 and commenced
developmental operations in January 1995. From the Company's
inception through the end of December 31, 1996, it was
primarily engaged in product development, market development,
technology testing, recruitment of key personnel, capital
raising and preparation of the software, hardware and
videotape coaching instructions used in the production of its
products. As a consequence, the Company did not generate any
revenue and operated as a development stage company through
December 31, 1996. The Company emerged from its development
stage and commenced generating revenue from its primary
business activities during the first quarter of fiscal 1997.
The Company's marketing strategy is to sell ONE-ON-ONE
videotapes to (a) various organizers of amateur corporate,
charity and member golf tournaments (who typically offer gifts
to tournament participants), golf professionals at private and
daily fee golf courses and driving ranges and indoor event
planners who organize trade shows, conventions, sales
meetings, retail store openings and promotions and automobile
dealer showroom promotions, (b) corporations who will give the
ONE-ON-ONE WITH GREG NORMAN lesson as customer and employee
appreciation gifts instead of gifts such as golf balls with
logos, fruit baskets or chocolates, (c) individual golfers or
persons who wish to give a gift to a golfer via the Internet
or a planned thirty minute infomercial, and (d) corporations
who will use the ONE-ON-ONE product as an incentive to entice
individuals to purchase or use their product or service. To
implement its marketing and business strategy, the Company has
built 17 mobile ONE-ON-ONE production facilities ("vans")
equipped with video and personal computer equipment to market,
promote and produce the Company's products. The Company
locates its ONE-ON-ONE vans in selected geographic areas that
service golf courses and driving ranges throughout the United
States, and has placed its first vans in Arizona, California,
Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan,
New Jersey, New York, Ohio, Pennsylvania, Texas and Ontario,
Canada. The Company has also opened authorized ONE-ON-ONE
videotaping centers in key cities throughout the country which
allow recipients of ONE-ON-ONE infomercial or gift
certificates to redeem their certificates and receive their
personalized ONE-ON-ONE video golf lesson. These centers are
permanent, part time locations which the Company has developed
in partnership with existing retail establishments such as
driving ranges, golf courses, retailers and automobile
dealerships. The Company is marketing the gift certificate
program as corporate incentives and promotional products and
is selling direct to golfers via the Company's web site. Sales
to corporations are handled by the Company's sales force and
26
<PAGE> 27
independent sales representatives. The Company also plans to
test its infomercial in the second quarter of 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(b) REVENUE RECOGNITION
Revenue from sale of event days or individual personalized
videotapes is recognized when the Company completes the event
day or delivers the videotapes to the individual customer.
Deposits received in advance of videotape delivery are
recorded as cutomer deposits which are included in other
current liabilities in the accompanying balance sheets.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be
cash equivalents. At December 31, 1997 and 1998, substantially
all cash and cash equivalents are interest-bearing deposits.
(d) INVENTORIES
The Company's inventory consists of videotapes, which are
priced using the weighted average method.
(e) FIXED AND INTANGIBLE ASSETS
Fixed assets are stated at cost. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the
assets which range from 3 to 5 years. Intangible assets
consist primarily of video production costs. The costs of
video production are amortized on a straight-line basis over a
period of 4 years, the estimated useful lives of the
intangible assets.
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Under the provisions of this statement, the Company has
evaluated its long-lived assets for financial impairment, and
will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets
may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets
and certain identifiable intangibles to be held and used by
measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with them.
At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not
sufficient to
27
<PAGE> 28
recover the carrying value of such assets, the assets are
adjusted to their fair values. Based on these evaluations,
there were no adjustments to the carrying value of long-lived
assets in 1997 or 1998.
The Company evaluates the recoverability of long-lived assets
held for sale by comparing the asset's carrying amount with
its fair value less cost to sell. No assets were held for sale
as of December 31, 1997 or 1998.
(f) PREPAID EXPENSES-ADVANCE ROYALTIES
As described in Note 9(a), prior to December 31, 1998, the
Company was required to pay minimum guaranteed advances
against a royalty of 8% of all revenues. On December 31, 1998
an amendment to the royalty agreement was signed which
eliminated the post December 31, 1998 minimum guaranteed
royalty payments and increased the royalty to 13% of all
revenues (8% to be paid annually/quarterly/monthly in cash and
5% to be applied against past royalty amounts). Once the
Company's revenues exceed $24,172,000 the royalty is to be
reduced to 8%. The guaranteed minimum royalty payments were
capitalized and expensed as the related revenues were earned.
Additionally, the Company continually evaluates the expected
realization of the carrying value of the prepaid royalty and,
if necessary, reduces the carrying value to reflect
management's best estimate of the amounts to be recovered in
future periods.
Through December 31, 1998 payments in cash and shares of the
Company's common stock of $1,600,000 had been made under the
agreement of which $250,000 and $449,266 was expensed in cost
of goods sold in the accompanying statement of operations
during the years ended December 31, 1997 and 1998,
respectively, and $350,000 and $900,734, is included in
prepaid expenses and other assets in the accompanying balance
sheets as of December 31, 1997 and 1998, respectively.
(g) INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income
Taxes," deferred tax assets or liabilities are computed based
upon the difference between the financial statement and income
tax basis of assets and liabilities using the enacted marginal
tax rate applicable when the related asset or liability is
expected to be realized or settled. Deferred income tax
expense or benefit is based on the changes in the asset or
liability from period to period. If available evidence
suggests that it is more likely than not that some portion or
all of the deferred tax assets will not be realized, a
valuation allowance is established to reduce the deferred tax
assets to the amount that is more likely than not to be
realized. Future changes in such valuation allowance would be
included in the provision for deferred income taxes in the
period of change.
(h) CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance sheet
concentrations of credit risk.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents,
certificates of deposit, investments, accounts receivable, and
other current assets as well as accounts payable, accrued
expenses and other current liabilities as reflected in the
accompanying balance sheets approximate fair value due to the
short-term maturity of these instruments. The fair value of
equipment loans and the
28
<PAGE> 29
convertible debt is estimated using an appropriate valuation
method and approximates the carrying amounts reported in the
accompanying balance sheets.
(j) LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" during
1997. SFAS No. 128 establishes standards for computing and
presenting basic and diluted earnings per share. Basic loss
per share is calculated by dividing loss available to Common
Stockholders by the weighted average number of shares of
Common Stock outstanding during each period. Diluted loss per
share includes the potential impact of dilutive common share
equivalents using the treasury stock method. As of December
31, 1997 and 1998 shares of Common Stock issuable upon
conversion of convertible debt and Preferred Stock and the
exercise of outstanding options and warrants have been
excluded from the computation of diluted loss per share in the
accompanying statements of operations as their impact is
antidilutive.
(k) STOCK OPTION PLAN
Under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," companies can either measure the
compensation cost of equity instruments issued under employee
compensation plans using a fair value based method, or can
continue to recognize compensation cost using the intrinsic
value method under the provisions of Accounting Principles
Board ("APB") Opinion No. 25. The Company intends to recognize
compensation costs, where appropriate, under the provisions of
APB No. 25, and has provided the expanded disclosure required
under SFAS No. 123 for the years ending December 31, 1997 and
1998 (see Note 8).
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" which is
required to be adopted in fiscal years beginning after
December 15, 1997. This statement requires the reporting and
display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive
income is defined as the change in equity during the financial
reporting period of a business enterprise resulting from
non-owner sources. The Company adopted SFAS No. 130 on January
1, 1998. The adoption of SFAS No. 130 did not have a material
impact on the Company's financial position or results of
operations as comprehensive income is equal to net income for
all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This
statement establishes standards for reporting information
about operating segments in annual financial statements and
requires reporting of selected information about operating
segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about
products and services, geographical areas and major customers.
The Company adopted SFAS No. 131 effective December 31, 1998.
The adoption of SFAS No. 131 did not affect the Company's
disclosure requirements since the Company operates in only one
segment.
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", is effective for fiscal years ending
after June 15, 1999. This statement establishes accounting and
reporting
29
<PAGE> 30
standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or a
liability at its fair value. The Company adopted SFAS 133 in
1999 and expects that the adoption of this pronouncement will
not have a material impact on the Company's financial position
since the Company does not presently have any derivative or
hedging-type investment as defined by SFAS 133.
In April 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued a Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
SOP 98-5 requires all costs associated with pre-opening,
pre-operating and organization activities to be expensed as
incurred. The Company's accounting policies conform with the
requirements of SOP 98-5, therefore adoption of this statement
will not impact the Company's financial position or results of
operations.
(3) FIXED ASSETS, NET
Fixed assets, including equipment and mobile production units
acquired under capital leases, consist of the following at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
LIVES
1997 1998 (YEARS)
---- ---- -------
<S> <C> <C> <C>
Mobile video-tape production units $ 2,394,704 $ 2,696,553 5
Product development equipment 489,149 523,224 3 - 5
Training and processing equipment 116,271 117,725 5
Office furniture and equipment 382,399 392,759 5
Trade show exhibits 146,657 146,657 5
--------------------------
3,529,180 3,876,918
Less accumulated depreciation (896,354) (1,628,404)
--------------------------
Fixed assets, net 2,632,826 2,248,514
==========================
</TABLE>
(4) INTANGIBLE ASSETS, NET
Intangible assets consist of the following at December 31,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Video and marketing production costs $447,404 $447,404
Deferred organizational costs 29,428 29,428
---------------------
476,832 476,832
Less accumulated amortization (189,846) (309,055)
---------------------
Intangible assets, net $286,986 $167,777
=====================
</TABLE>
(5) FINANCINGS
(a) MARCH 1997 BRIDGE FINANCING
In March 1997, the Company consummated a bridge financing (the
"March Bridge Financing") pursuant to which it issued to 13
investors (including Status-One Investments Inc., a company
controlled by the family of the Chief Executive Officer of the
Company), a non-cash financing fee of (i) 100,000 shares of
common stock and (ii) 100,000 warrants to purchase 100,000
shares of common stock at a price of $10.00 per share, subject
to adjustment in certain
30
<PAGE> 31
circumstances. As consideration for such securities, the
investors in the March Bridge Financing pledged an aggregate
of $3,500,000 in cash and other marketable securities as cash
collateral (the "Cash Collateral") to various banks, which in
turn issued stand-by letters of credit (the "Letters of
Credit") to the Company in the aggregate amount of up to
$3,500,000. The Company used the Letters of Credit to secure a
$3,500,000 line of credit (the "Line of Credit") from a bank.
In June 1997, the Company used a portion of the proceeds from
the issuance and sale of certain securities, outlined
hereafter in note 5(b), to repay the remaining outstanding
balance due and owing on the Line of Credit and returned the
Letters of Credit to the various banks, which in turn returned
all of the Cash Collateral to the March Bridge Financing
investors.
The Company valued the non-cash financing fee in accordance
with SFAS No. 123, which resulted in the recording of original
issue discounts and financing fees of $1,665,000. At the time
of the repayment of the outstanding balance due under the Line
of Credit, the Company had amortized $666,000 of the fees. The
remaining fees of $999,000 are reflected as an extraordinary
item in the accompanying statement of operations for the year
ended December 31, 1997.
(b) INFINITY FINANCING
On June 13, 1997, the Company arranged a three-year $7.5
million debt and convertible equity facility (the "Infinity
Financing") with a group of investment funds (the "Funds").
The Company issued and sold to the Funds the following
securities pursuant to the Securities Purchase Agreement,
dated as of June 13, 1997 (the "Agreement"), among the Company
and the Funds: (i) 8.25% unsecured convertible notes (the
"Notes") in the aggregate principal amount of $7,500,000 with
a maturity date of three years from the date of issuance,
subject to the mandatory automatic exchange of $5 million of
the Notes for Preferred Stock, par value $.01 per share, which
Notes were convertible into shares of Common Stock (the "Note
Conversion Shares") at any time and from time to time
commencing January 1, 1998 at the option of the holder thereof
subject to certain limitations on conversion set forth in the
Agreement; (ii) 93,677 shares of Common Stock subject to
adjustment (the "Grant Shares"); and (iii) five-year warrants
(the "June Warrants") to purchase 100,000 shares of Common
Stock (the "Warrant Shares") at an exercise price equal to
$10.675. The net proceeds to the Company from the sale of the
Notes, Grant Shares and June Warrants was $7,236,938. In
addition, the Company issued 14,052 shares (the "IPO
Underwriters Shares") of Common Stock to the underwriter in
the Company's initial public offering as a fee for services
rendered in connection with the transactions contemplated by
the Agreement.
Pursuant to the Agreement, the Company was required to issue
additional Grant Shares (the "Additional Grant Shares") to the
Funds in the event that the closing bid price of Common Stock
for each trading day during any consecutive 10 trading days
from June 13, 1997 through December 31, 1997 did not equal at
least $10.00 per share. The Company issued 180,296 Additional
Grant Shares during the fourth quarter of 1997.
Interest payments on the Notes are, at the option of the
Company, payable in cash or in shares of Common Stock. During
1997 and 1998 the Company issued an aggregate of 65,671 shares
and 80,989 shares, respectively, (collectively, the "Interest
Shares") for payment of interest due.
31
<PAGE> 32
On February 6, 1998, the Company entered into the First
Amendment to the Securities Purchase Agreement and Related
Documents, dated December 31, 1997 (the "First Amendment"),
among the Company and the Funds. Pursuant to the First
Amendment, the Funds converted $6 million aggregate principal
amount of the Notes into the Company's Series A Convertible
Preferred Stock (the "Preferred Stock"). In addition, the
"Maximum Conversion Price" (as defined in the First Amendment)
at which shares of Preferred Stock are convertible into Common
Stock (the "Stock Conversion Shares") is $6.00, subject to
adjustment in certain circumstances.
Dividends on the Preferred Stock and the Series A-2 Preferred
Stock (as hereinafter defined) are, at the option of the
Company, payable in cash or in shares of Common Stock. During
1998 the Company issued an aggregate of 302,755 shares (the
"Dividend Shares") for payment of dividends.
The remaining $1.5 million of outstanding Notes held by the
Funds have become secured debt pursuant to a Security
Agreement, dated as of February 6, 1998 (the "Security
Agreement"), between the Company and H.W. Partners, L.P., as
agent for and representative of the Funds. With respect to
such $1.5 million in outstanding Notes, the Funds have been
granted a security interest in the collateral described in the
Security Agreement, which includes all of the Company's
unrestricted cash deposit accounts, accounts receivable,
inventory and equipment and fixtures excluding the vans.
In connection with the First Amendment, the Company issued to
the Funds an aggregate of 200,000 warrants (the "New
Warrants"), each to purchase one share of Common Stock
(collectively, the "New Warrant Shares") at an exercise price
equal to $4.00 per share.
The issuance of the Grant Shares, Additional Grant Shares,
June Warrants, IPO Underwriters Shares and the New Warrants
resulted in the recording of financing costs of $2,720,511.
Additionally, the Company paid financing costs of $340,000 in
connection with the Agreement. As $5 million of the Notes were
automatically convertible to Preferred Stock as of January 1,
1998, the total financing fees incurred were allocated to
equity and debt costs on a pro rata basis consistent with the
portion of the Notes subject to the automatic conversion
feature. Part of the financing has been recorded as a
reduction of the carrying value of the Notes, while the
portion of the financing fees attributable to debt costs are
recorded as an original issue discount and are being amortized
using a method which approximates the interest method over the
term of the Notes.
On March 16, 1998, the Company sold an additional 1,550 shares
of Preferred Stock to the Funds in exchange for marketable
securities with an aggregate value of $1,550,000. In
connection therewith, the Funds as the holders of the majority
of the outstanding shares of Preferred Stock, obtained the
right to appoint one director to the Company's Board of
Directors, although they had not named such director as of
December 31, 1998.
As a condition to the consummation of the Marion Equity
Financing (as defined and described under "Marion Equity
Financing" in Note 5(c)), the Company entered into the
Agreement and Second Amendment to Bridge Securities Purchase
Agreement and Related Documents (the "Second Amendment"),
dated March 27, 1998, among the Company and the Funds.
Pursuant to the Second Amendment, the Funds agreed that they
would not convert, prior to December 31,
32
<PAGE> 33
1998, any shares of Preferred Stock or any principal amount of
the Notes into shares of Common Stock, unless a "Material
Transaction" (defined as a change of control of the Company, a
transfer of all or substantially all of the Company's assets
or a merger of the Company into another entity) has occurred.
Further, the Funds agreed that they would not, prior to March
31, 1999, publicly sell any shares of Common Stock owned or
acquired by the Funds, unless a Material Transaction has
occurred; the Funds are permitted, after June 30, 1998 and
subject to the Company's right of first refusal, to privately
sell any shares of Common Stock that they own or acquire,
provided the purchaser agrees in writing to be bound by the
same resale restrictions.
The Funds have granted to the Company an option to redeem the
Preferred Stock and the Notes owned by the Funds. The Company
is required to redeem all of the Preferred Stock outstanding
prior to redemption of any of the Notes. In addition, the
Funds have granted to the Company and to Marion (as hereafter
defined) an option to acquire, on or before March 31, 1999,
all of the shares of Common Stock owned by the Funds.
In connection with the Second Amendment, the Funds received
100,000 shares of Common Stock. Furthermore, because the
Company did not redeem all of the Preferred Stock and Notes
owned by the Funds by June 30, 1998, the Funds received
200,000 additional shares of Common Stock. Further, the
exercise price of the June Warrants was reduced from $10.675
per share to $3.25 per share and the exercise price of the New
Warrants was reduced from $4.00 per share to $3.25 per share.
The fair values of the issuances of Common Stock and the
repricing of the warrants have been recorded as an original
issue discount and are being amortized using a method which
approximates the interest method over the term of the Notes.
The unamortized portion of the original issue discount was
$246,727 at December 31, 1998.
On December 29, 1998, the Company entered into the Third
Amendment to Bridge Securities and Purchase Agreement and
Related Documents (the "Third Amendment"), among the Company
and Funds (or, if applicable, their respective transferees)
(the "New Funds"). Pursuant to the Third Amendment, the
Company agreed to retire all of the issued and outstanding
shares of its Series A Convertible Preferred Stock and, in
exchange therefor, issue to the New Funds 6,000 shares of a
new class of Series A-2 Convertible Preferred Stock (the
"Series A-2 Preferred Stock"). The Series A-2 Preferred Stock
is senior to the Common Stock with respect to dividends,
liquidation and dissolution. Prior to January 1, 2000, no
dividends shall accrue or be payable on the Series A-2
Preferred Stock. Beginning on January 1, 2000, each share of
Series A-2 Preferred Stock shall entitle the holder to an
annual dividend of 8.25%, payable on a quarterly basis, which
dividend shall increase to 18% in certain situations as
specified in the Certificate of Designation with respect to
the Series A-2 Preferred Stock.
The Third Amendment also revised the conversion price at which
the Notes may be convertible into Common Stock and at which
the Series A-2 Preferred Stock may be convertible into Common
Stock (the "Series A-2 Conversion Shares"). The "Conversion
Price" (as defined in the Third Amendment) applicable to the
Company's outstanding Convertible Notes is $2.50 until January
1, 2000, inclusive, and $1.25 thereafter. The Conversion Price
applicable to the Series A-2 Preferred Stock is (i) for the
first $2,000,000 of aggregate liquidation preference of the
Series A-2 Preferred Stock, $1.25, (ii) for the next
$1,000,000 of aggregate liquidation preference of the Series
A-2 Preferred Stock, $2.00 until June 30, 1999, inclusive,
$1.375 from July 1, 1999 until January 1, 2000, inclusive, and
$1.25 thereafter, and (iii) for any excess
33
<PAGE> 34
amounts of aggregate liquidation preference of the Series A-2
Preferred Stock, $2.50 until June 30, 1999, inclusive, $2.00
from July 1, 1999 until January 1, 2000, inclusive, and $1.25
thereafter.
The New Funds agreed to a limitation on their conversion
rights, such that they may not convert any amount of
convertible instruments or exercise any portion of warrants
that would result in the sum of (a) the number of shares of
Common Stock beneficially owned by the New Funds and their
affiliates and (b) the number of shares of Common Stock
issuable upon conversion of convertible instruments or
exercise of warrants, exceeding 9.99% of the outstanding
shares of Common Stock after giving effect to such conversion
or exercise. The Third Amendment removed resale limitations on
the New Funds.
Furthermore, as a means of retaining the Company's management
and as an incentive for such management to pursue the
Company's long-term goals, the Third Amendment provided that
all outstanding stock options granted to be repriced to $1.00
per share and that all such options shall be immediately
vested. The Company also agreed to reprice to $1.00 per share
approximately 82,000 existing employee stock options, all such
options to be immediately vested. In addition, the New Funds
agreed to return to the Company the June Warrants and the New
Warrants to purchase an aggregate of 284,000 shares, options
to purchase 200,000 shares of Common Stock be granted to the
President and Chief Operating Officer and options to purchase
100,000 shares of Common Stock be granted to the Vice
President of Operations and Technology, all such options to be
immediately vested and to have an exercise price of $1.00 per
share. The unamortized portion amounting to $65,000 of the
original issue discount associated with these warrants has
been fully amortized in 1998. Moreover, the Company granted
200,000 new stock options to the President and Chief Operating
Officer, all such options to be immediately vested and to have
an exercise price of $1.00 per share.
In connection with the Third Amendment the Company paid
financing costs of $25,000, issued 50,000 shares of Common
Stock and issued 100,000 options, 50,000 with an exercise
price of $3.00 per share and 50,000 with an exercise price of
$1.00 per share, for the facilitation of the agreement. The
fair market value of these payments and issuances of $95,125
are recorded as financing fees in the accompanying 1998
statements of operations.
Lastly, the New Funds agreed in the Third Amendment to
exercise warrants to purchase shares of Common Stock to result
in a total exercise price of approximately $12,500. Pursuant
to this provision 16,000 shares were issued.
(c) MARION EQUITY FINANCING
In March 1998, the Company entered into a Purchase Agreement
(the "Marion Agreement") with Marion Interglobal, Ltd., an
investment group ("Marion"), or its assigns. The Marion
Agreement called for the Company to receive up to $11,000,000
from Marion in exchange for shares of Common Stock as
explained herein. Pursuant to the Marion Agreement, the
purchase of Common Stock was to occur in three tranches as
follows: (i) on March 27, 1998, the Company sold to Marion
1,200,000 shares of Common Stock for an aggregate
consideration of
34
<PAGE> 35
$3,000,000 which was received on April 16, 1998; (ii) on June
30, 1998, the Company sold to Marion 800,000 shares of Common
Stock for an aggregate consideration of $2,000,000; and (iii)
on or prior to September 30, 1998 the Company was to sell a
number of shares of Common Stock (to be determined by when the
closing occurs, which would range from 2,666,667 shares to
3,200,000 shares) for an aggregate consideration of
$6,000,000. The third tranche was contingent on Marion's
satisfaction that the Company met or exceeded certain
unspecified financial targets expected by Marion, in its sole
discretion. Marion was under no firm obligation to complete
this tranche. The third tranche of the Marion Agreement was
not completed by Marion due to market conditions. The Company
paid transaction fees to Marion upon completion of each
tranche as follows: (i) 1,200,000 shares of Common Stock for
the first $3,000,000 tranche; and (ii) 800,000 shares of
Common Stock for the second $2,000,000 tranche. The Company
issued an additional 10,000 shares as a finders fee in
connection with this financing.
Further, upon the consummation of the second tranche of the
Marion Agreement, Mr. Alan Lubell, a former director of the
Company, transferred 250,000 shares of Common Stock to Marion,
which shares were registered under the Securities Act of 1933,
as amended, effective April 15, 1998.
Pursuant to the Marion Agreement, Marion represented a group
of investors and was entitled to assign its rights to receive
shares of Common Stock from the Company and Mr. Lubell. Marion
exercised this right and allocated the shares of Common Stock
from the Company and Mr. Lubell to various unrelated investors
and retained 876,000 shares for its own account. Marion is
controlled by Ronald Seale who became Chairman of the Board of
the Company on June 3, 1998 and presently holds 976,000 shares
of Common Stock.
As a condition to the consummation of this equity financing,
the Company renegotiated the terms of its outstanding Notes
and Preferred Stock with the Funds (see Infinity Financing and
Note 5(b) for details).
(d) EQUIPMENT LOANS
In August 1997, the Company entered into an equipment
financing facility whereby the Company will be provided with
up to $2.5 million in financing. The facility provides the
Company with equipment financing of $100,000 per van for 25
vans, each of which is anticipated to cost approximately
$150,000. The Company drew $800,000 on the facility to finance
eight vans purchased in May 1997. The outstanding balance
bears interest at the rate of 11.62% and is payable in 36
consecutive monthly payments of $25,328 which commenced in
August 1997, followed by one balloon payment of $47,040. The
Company has pledged to the lender a certificate of deposit in
the aggregate amount of $200,000 in connection with the
financing of the first eight vans which is included in
"Investments-Restricted" in the accompanying December 31, 1997
and 1998 balance sheets.
The Company acquired certain fixed assets under capital leases
totaling $913,170. As a condition of the leases the Company is
required, throughout the term of the leases, to post letters
of credit in the aggregate amount of, the lesser of $538,902
or the outstanding aggregate loan balance, for collateral on
the leases. The letters of credit were issued from the
Company's bank and the Company pledged one of its investment
funds with a balance of $612,719 and
35
<PAGE> 36
$387,108 for the years ending December 31, 1997 and 1998,
respectively, as security, which is included in
"Investments-Restricted" in the accompanying December 31, 1997
and 1998 balance sheets.
Future payments under the facility and capital leases are as
follows:
<TABLE>
<CAPTION>
FACILITY CAPITAL LEASE TOTAL
-------- ------------- -----
<S> <C> <C> <C> <C>
For the year ended December 31,
1999 $ 353,172 $ 303,936 $ 657,108
2000 41,957 224,336 266,293
--------- --------- ---------
395,129 528,272 923,401
Less amount representing interest (52,991) (25,915) (78,906)
--------- --------- ---------
Present value payments 342,138 502,357 844,495
Less current portion (265,406) (329,678) (595,084)
--------- --------- ---------
Non current portion $ 76,732 $ 172,679 $ 249,411
========= ========= =========
</TABLE>
In connection with the Equipment Financing, the Company issued
warrants to purchase 75,000 shares of the Company's common
stock at a price per share of $10.00 (subject to adjustment in
certain circumstances) at any time prior to August 20, 2000.
The fair value of the warrants ($178,980) was recorded as an
original issue discount and is being amortized using a method
which approximates the interest method over the term of the
equipment financing. The unamortized portion of the original
issue discount is $159,099 and $99,460 at December 31, 1997
and 1998, respectively.
(e) FINANCING FEES
In 1997 two companies provided consulting services to the
Company in an attempt to identify financing sources. One of
the companies, in exchange for its services, received 270,000
shares of the Company's common stock with a fair market value
of $1,000,000, which is included in financing fees in the
accompanying 1997 statement of operations. The other company,
in exchange for its services, received 10,548 options to
purchase the Company's common stock at an exercise price of
$7.50 per share, with a fair market value of $36,000, which is
included in financing fees in the accompanying 1997 statement
of operations. The 10,548 options were cancelled in 1998.
(6) COMMON STOCK
In the July 1996, the Company sold 1,395,000 shares of common
stock and 1,495,000 redeemable warrants (the "IPO Warrants) to
the public. The IPO Warrants are exercisable and grant the
holder the right to purchase one share of Common Stock at a
price of $5.00 per share, subject to adjustment in certain
circumstances. The IPO Warrants are redeemable by the Company,
upon the consent of the IPO underwriter, at a price of $.10
per Warrant, and subject to the terms set forth therein. In
the event that the Company calls the IPO Warrants for
redemption, it will be economically advantageous for the
warrant holders to exercise the IPO Warrants, resulting in the
issuance by the Company of up to 1,495,000 additional shares
of Common Stock. As of December 31, 1998, none of the warrants
issued in connection with the Company's IPO have been
exercised. In addition, the Company issued to the IPO
underwriters 260,000 warrants to purchase Common Stock at a
price of $6.90 per share.
36
<PAGE> 37
A summary of Common Stock reserved for potential future
issuances as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
IPO warrants at $5.00 per share (Note 6) 1,495,000
Warrants issued to the IPO underwriter at $6.90 per share 260,000
Stock option plan for officers, directors and employees
consultants (Note 8) 1,649,039
Warrants issued in connection with 1997 March Bridge Financing at
$10.00 per share (Note 5a) 100,000
Equipment financing warrants at $10.00 per share (Note 5d) 75,000
Options granted to Greg Norman at $1.00 per share (Note 9a) 125,000
Options granted to consultants in accordance with the
Infinity Financing Third Amendment at $1.00 per share
(Note 5b) 50,000
Options granted to consultants in accordance with the
Infinity Financing Third Amendment at $3.00 per share
(Note 5b) 50,000
------------
3,804,039
============
</TABLE>
(7) INCOME TAXES
As of December 31, 1997 and December 31, 1998, the Company had
approximately $5,011,000 and $6,893,000, respectively, of net
deferred tax assets resulting primarily from net operating
loss carryforwards. Due to the uncertainty of the Company's
ability to generate sufficient taxable income in the future to
utilize such loss carryforwards, the net deferred assets have
been fully reserved as of December 31, 1997 and 1998.
As of December 31, 1998 the Company's net operating loss
carryforward is approximately $19,137,000 and expires as
follows:
2011 $ 3,067,000
2012 10,557,000
2013 5,513,000
-----------
$19,137,000
===========
(8) STOCK OPTION PLAN
In April 1996, the Company adopted the 1996 Stock Option Plan
(the "Plan"), which provides for the granting to directors,
officers, key employees and consultants the greater of 800,000
shares of common stock (reduced by the number of options which
may be granted to two executive officers pursuant to their
employment agreements) or 12% of the aggregate number of the
Company's common stock outstanding, whichever is greater. Grants
of options may be incentive stock options (to a maximum of
300,000) or non-qualified stock options and will be at such
exercise prices, in such amounts, and upon such terms and
conditions, as determined by the compensation committee of the
board of directors. The term of any option may not exceed ten
years (unless granted as an incentive stock option to a 10% or
more stockholder, which terms may not exceed five years). In
February of 1997, the Plan was amended to increase the number of
shares reserved for issuance to the greater of 1,200,000 or 12%
of the Company's common stock outstanding and to include a
provision allowing the compensation committee to issue options
under the Plan at below fair market value.
37
<PAGE> 38
The Plan also provides for the automatic grant of 5,000
non-qualified stock options upon commencement of service of a
non-employee director and 2,500 options per year per director
thereafter. The exercise price of the option may not be less
than 100% of the market value of the Company's common stock at
the time of grant. Such options vest one-third on the date of
the grant and one-third on the first two anniversary dates and
have a term of five years.
The Company applies APB Opinion No. 25 in accounting for its
Plan. Had the Company determined compensation cost based on fair
value at the grant date for its stock options under SFAS No.
123, the Company's net loss and net loss per share for the years
ended December 31, 1997 and 1998 would have increased to
$12,575,665 and $2.64 and $7,525,041 and $.91, respectively.
Stock option activity during the periods is indicated as
follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------- --------------
<S> <C> <C>
Balance at December 31, 1996 787,871 $ 5.00
Granted 223,548 $ 7.07
Exercised (25,000) $ 5.12
Forfeited (38,000) $ 5.75
---------- --------
Balance at December 31, 1997 948,419 $ 5.46
Granted 1,321,500 $ 1.00
Forfeited (395,880) $ 5.45
---------- --------
Balance at December 31, 1998 1,874,039 $ 2.32
========== ========
</TABLE>
At December 31, 1997 and December 31, 1998, 504,124 and
1,780,633 options were exercisable, respectively.
At December 31, 1998, the weighted-average exercise price and
weighted-average remaining contractual life of outstanding
options was as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------- ---------------------------
WEIGHTED-
WEIGHTED AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICE SHARES PRICE LIFE SHARES PRICE
----- ------ ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 1,734,889 $1.00 8.44 1,732,389 $1.00
3.00 50,000 3.00 1.50 -- --
5.00-5.75 84,150 5.04 7.53 44,911 5.03
10.75 5,000 10.75 3.00 3,333 10.75
----------- --------- --------- ------ ---------- -------
$1.00-10.75 1,874,039 $ 1.26 8.20 1,780,633 $ 1.12
=========== ========= ========= ====== ========== =======
</TABLE>
The fair value of each option grant is estimated on the date of
grant using an option pricing model with the following
assumptions used for grants in 1997 and 1998: risk free interest
rate of 6.3% for 1997 and 4.8% for 1998; expected lives of 1.5
to 5 years; and expected volatility of 70%.
38
<PAGE> 39
(9) COMMITMENTS AND CONTINGENCIES
(a) LICENSE AGREEMENT
In 1995 the Company entered into a license agreement (the
"Norman Agreement") with Greg Norman, a professional golfer,
and Great White Shark Enterprises, Inc. ("Great White Shark"),
pursuant to which the Company was granted a worldwide license
to use Mr. Norman's name, likeness, endorsement and certain
trademarks in connection with the production and promotion of
the Company's products. Under the Norman Agreement, Mr. Norman
received guaranteed minimum payments against royalties of 8%
of all net revenues, as defined, derived from the sale of
ONE-ON-ONE videotapes.
In 1996 certain principal stockholders of the Company
transferred an aggregate of 300,000 shares of Common Stock
owned by them to Mr. Norman pursuant to an option held by Mr.
Norman.
In 1997 the Norman Agreement was further amended to
restructure the terms of the guaranteed minimum payments due
to Mr. Norman under the Norman Agreement. The Company granted
to Mr. Norman 25,000 options to purchase shares of the
Company's Common Stock at an exercise price of $10.00 per
share and recorded non-cash marketing expenses of $93,132
related to the options.
On December 31, 1998, the Norman Agreement was further
amended to eliminate the guaranteed minimum payments to Mr.
Norman; increase the royalty to Mr. Norman to (i) 13% of all
revenue derived from aggregate sales of the ONE-ON-ONE WITH
GREG NORMAN products commencing January 1, 1999, until
aggregate sales shall total $24,172,000, and (ii) 8% of all
revenue derived from aggregate sales of the ONE-ON-ONE WITH
GREG NORMAN products thereafter. Payments are to be paid 8%
in cash and 5% applied to offset the excess of prior
guaranteed minimum payments over 8% of net revenues in prior
years. After the initial term, which ends on December 31,
2001, the Company has the option to renew the Norman
Agreement for two additional five-year periods with a fee of
$500,000 per renewal term. The accompanying balance sheets
include prepaid royalties of $350,000 and $900,734 at
December 31, 1997 and 1998, respectively. The amount that is
expected to be amortized within twelve months has been
classified as a current asset of $220,577 on the accompanying
1998 balance sheet. The remaining balance of the payments
made to Mr. Norman is a long-term prepaid royalty of $680,157
which is included in the accompanying 1998 balance sheet.
As consideration for entering into the December 1998
amendment, the Company paid Mr. Norman a fee equal to (i)
272,000 shares of the Company's Common Stock, (ii) an option
to purchase 100,000 shares of the Company's Common Stock with
an exercise price of $1.00 per share, such options to be
immediately vested, and (iii) 25,000 options currently held by
Mr. Norman, repriced to $1.00 per share. The Company recorded
a non-cash compensation expense of $292,808 related to the
December 1998 amendment.
Through December 31, 1997, the Company made payments to Mr.
Norman amounting to $600,000. These payments, less $250,000
which was expensed and is included in the 1997 statement of
operations as a cost of sales, are presented in the
accompanying 1997 balance sheet as prepaid expenses-advance
royalties. The remaining $350,000 is included in the
accompanying 1997 balance sheet as prepaid expenses-advance
royalties. Through December 31, 1998 the Company made
additional payments to Mr. Norman totaling $1,000,000, of
which $700,000 was paid in cash and the balance in the form of
30,000 shares of the Company's
39
<PAGE> 40
Common Stock valued at $10.00 per share. The Company expensed
$450,000 of the advance royalty which is presented in the 1998
statement of operations as a cost of sales. The remaining
balance is included in current assets-prepaid royalties and
other assets-prepaid royalties in the accompanying 1998
balance sheet.
(b) EMPLOYMENT AGREEMENTS
The Company currently has employment agreements with three
executive employees which expire on December 31, 2000. The
agreements provide for aggregate minimum annual compensation
of approximately $463,750 in 1998, $540,000 in 1999 and
$600,000 in 2000. The agreements are automatically renewed
thereafter for additional one-year periods unless the Company
or the employees provide timely notice of termination. The
agreements also provide for potential performance bonuses and
severance payments ranging from three to twelve months.
(c) OPERATING LEASES
The Company has one noncancelable operating lease for
corporate office space that expires in 1999. Rental payments
include minimum rentals plus building expenses. Rental expense
for these leases during 1997 and 1998 was $107,863 and
$108,374, respectively. Future minimum lease payments under
these leases are $78,398 in 1999.
(d) SIGNIFICANT AND CONTINUING LOSSES
For the period from July 15, 1994 (inception) to December 31,
1998, the Company incurred an accumulated deficit of
$20,302,283. The Company believes that it will incur
continuing losses until, at the earliest, the Company
generates sufficient revenues to offset the substantial
operating costs associated with commercializing its products.
(e) UNCERTAINTY OF PROPOSED PLAN OF OPERATION
The Company's plan of operation and prospects are largely
dependent upon the Company's ability to achieve significant
market acceptance for its products, establish and maintain
satisfactory relationships with those who arrange golf events,
successfully hire and retain skilled technical, marketing and
other personnel, and successfully develop, equip and operate
ONE-ON-ONE vans on a timely and cost effective basis. There
can be no assurance that the Company will be able to continue
to implement its business plan. Failure to implement its
business plan would have a material adverse effect on the
Company. The Company's ONE-ON-ONE personalized videotape golf
lesson is a new business concept and, accordingly, demand and
market acceptance for the Company's products is subject to a
high level of uncertainty. Achieving market acceptance for the
Company's products will require significant efforts and
expenditures by the Company to create awareness and demand.
The Company's prospects will be significantly affected by its
ability to successfully build an effective sales organization
and develop a significant number of ONE-ON-ONE vans. The
Company has limited marketing and technical experience and
limited financial, personnel and other resources to
independently undertake extensive marketing activities. The
Company's strategy and preliminary and future marketing plans
may be subject to change as a result of a number of factors,
including progress or delays in the Company's marketing
efforts, changes in market
40
<PAGE> 41
conditions. To the extent that the Company enters into
third-party marketing and distribution arrangements in the
future, it will be dependent on the marketing efforts of such
third parties and in certain instances on the popularity and
sales of their products. There can be no assurance that the
Company's strategy will result in successful product
commercialization or that the Company's efforts will result in
initial or continued market acceptance for the Company's
products. However, management believes that projected 1999
revenues, when combined with planned cost savings and existing
financial resources will be sufficient to fund operations
through at least January 1, 2000.
(f) CONTINUED COMPLIANCE WITH NASDAQ SMALLCAP LISTING REQUIREMENTS
On March 1, 1999, the minimum bid price of the Company's
shares had been less than $1.00 per share for thirty
consecutive business days and in accordance with Nasdaq's
listing requirements, the Company received notice from Nasdaq
regarding the minimum bid price of the Company's shares. The
Company must achieve compliance with Nasdaq's rules by June 1,
1999 or the Company's Common Stock will be delisted. According
to Nasdaq's rules, the Company can achieve compliance if the
minimum bid price of the Company's shares is above $1.00 per
share for at least ten consecutive business days during the
ninety-day compliance period. The Company may attempt to meet
Nasdaq's rules by effecting a reverse stock spilt. Exclusion
of the Company's shares from Nasdaq would adversely affect the
market price and liquidity of the Company's equity securities.
(10) SUPPLEMENTAL DISCLOSURE OF NON CASH RELATED ACTIVITIES
In 1997, the Company, in connection with the 1997 March Bridge
Financing and the Infinity Financing, recorded non-cash
financing fees of $1,665,000 and $2,720,511, respectively,
related to the issuance of the Company's securities.
In 1997, the Company, in connection with its Equipment
Financing, recorded non-cash financing fees of $178,980
related to the issuance of warrants to purchase the Company's
common stock.
In 1997 the Company entered into capital lease and equipment
financing transactions totaling $1,713,270 for the Company's
mobile production units.
In February 1998, the Company, in connection with the Infinity
Financing, recorded $1,350,000 as an imputed dividend on its
Preferred Stock, which has been fully amortized in 1998.
In the first quarter of 1998, $6,000,000 in principal amount
of the Company's convertible debt was converted to preferred
stock net of finance costs of $2,178,942.
In 1998 the Company issued 350,000 shares of common stock in
connection with the Infinity Financing Amendments.
In 1998, the Company issued 30,000 shares of common stock for
payment of royalties.
41
<PAGE> 42
In 1998, the Company issued 302,755 shares of common stock for
payment of dividends totaling $487,268 on its preferred stock.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE> 43
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 9 is set forth under the
caption "Election of Directors" in the Company's 1999 Proxy
Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information called for by Item 10 is set forth under the
caption "Executive Compensation" in the Company's 1999 Proxy
Statement, which is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 11 is set forth under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's 1999 Proxy Statement, which is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 12 is set forth under the
caption "Certain Relationships and Related Transactions" in
the Company's 1999 Proxy Statement, which is incorporated
herein by reference.
43
<PAGE> 44
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report as
required by Item 601 of Regulation S-B.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to Amendment No. 2
to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
4.1 Form of Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
4.2 Form of Specimen Redeemable Warrant Certificate (Incorporated
by reference to Exhibit 4.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
4.3 Form of Warrant Agreement between the Company and Whale
Securities Co., L.P. (Incorporated by reference to Exhibit 4.3
to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.4 Form of Warrant among American Stock Transfer & Trust Company,
the Company and Whale Securities Co., L.P. (Incorporated by
reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
4.5 Form of Warrant Certificate issued to investors in the March
1997 Bridge Financing (Incorporated by reference to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-24675) filed April 7, 1997)
4.6 Form of Common Stock Purchase Warrant issued to investors in
the Infinity Bridge Financing (Incorporated by reference to
Exhibit 99.4 to the Registrant's Current Report on Form 8-K
filed June 23, 1997)
4.7 Form of Convertible Note issued to investors in the Infinity
Bridge Financing (Incorporated by reference to Exhibit 99.5 to
the Registrant's Current Report on Form 8-K filed June 23,
1997)
4.8 Form of Common Stock Purchase Warrant issued to Vision
Financial Group, Inc. (Incorporated by reference to Exhibit
4.8 to the Registrant's Quarterly Report on Form 10-QSB filed
November 14, 1997)
44
<PAGE> 45
4.9 Form of Common Stock Purchase Warrant issued to investors in
the Infinity Bridge Financing in connection with the amendment
to such financing (Incorporated by reference to Exhibit 99.3
to the Registrant's Current Report on Form 8-K filed February
9, 1998)
10.1 License Agreement, dated March 1, 1995, between Great White
Shark Enterprises, Inc. and the Company, as supplemented
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.2 Amendment to License Agreement, dated as of June 3, 1997, by
and among the Company, Greg Norman and Great White Shark
Enterprises, Inc. (Incorporated by reference to Exhibit 99.1
to the Registrant's Current Report on Form 8-K/A filed June
27, 1997)
10.3 Employment Agreement, dated as of January 1, 1996, between
Earl Takefman and the Company, as amended (Incorporated by
reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996).
10.4 Employment Agreement, dated as of May 1, 1996, between Thomas
S. Peters and the Company, as amended (Incorporated by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.5 Amended and Restated 1996 Stock Option Plan (Incorporated by
reference to the Company's 1996 definitive Proxy Statement)
10.6 Employment Agreement, dated as of June 1, 1996, between
Richard Parker and the Company, as amended (Incorporated by
reference to Exhibit 10.9 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
10.7 Assignment, dated April 19, 1996 from Thomas S. Peters to the
Company (Incorporated by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
10.8 Share and Warrant Purchase Agreement, dated as of February 27,
1997, between the Company and Status-One Investments Inc.
(Incorporated by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-24675) filed April 7, 1997)
10.9 Bridge Securities Purchase Agreement, dated as of June 13,
1997, among the Company and Infinity Investors Limited,
Infinity Emerging Opportunities Limited, Sandera Partners,
L.P. and Lion Capital Partners, L.P. (collectively with their
transferees, the "Funds") (Incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K
filed June 23, 1997)
10.10 Registration Rights Agreement, dated as of June 13, 1997,
among the Company and the Funds (Incorporated by reference to
Exhibit 99.2 to the Registrant's Current Report on Form 8-K
filed June 23, 1997)
10.11 Transfer Agent Agreement, dated as of June 13, 1997, among the
Company, the Funds and American Stock Transfer & Trust Company
(Incorporated by reference to Exhibit 99.3 to the Company's
Report on Form 8-K filed June 23, 1997).
45
<PAGE> 46
10.12 Purchase Agreement, dated as of March 27, 1998, among the
Company and Marion Interglobal, Ltd. (Incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.13 Registration Rights Agreement, dated as of March 27, 1998,
among the Company and Marion Interglobal, Ltd. (Incorporated
by reference to Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
10.14 First Amendment to Bridge Securities Purchase Agreement and
Related Documents, dated as of December 31, 1997, among the
Company and the Funds (Incorporated by reference to Exhibit
99.1 to the Registrant's Current Report on Form 8-K filed
February 9, 1998)
10.15 Second Amendment to Bridge Securities Purchase Agreement and
Related Documents, dated as of March 27, 1998, among the
Company, Infinity Investors Limited, Infinity Emerging
Opportunities Limited, Summit Capital Limited (as the
transferee of Sandera Partners, L.P.) and Glacier Capital
Limited (as the transferee of Lion Capital Partners, L.P.)
(Incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.16 Third Amendment to Bridge Securities Purchase Agreement and
Related Documents, dated as of December 29, 1998, among the
Company, Infinity Investors Limited, IEO Holdings Limited (as
the transferee from Infinity Emerging Opportunities Limited),
Summit Capital Limited (as the transferee of Sandera Partners,
L.P.) and Glacier Capital Limited (as the transferee of Lion
Capital Partners, L.P.) (Incorporated by reference to Exhibit
99.1 to the Registrant's Current Report on Form 8-K filed
January 8, 1999).
10.17 Security Agreement, dated February 6, 1998, between the
Company and HW Partners, L.P., as agent for and representative
of the Funds. (Incorporated by reference to Exhibit 99.2 to
the Registrant's Current Report on Form 8-K filed February 6,
1998).
10.18 Form of Warrant Certificate. (Incorporated by reference to
Exhibit 99.3 to the Registrant's Current Report on Form 8-K
filed February 6, 1998).
10.19* Amendment, dated as of December 31, 1998, to License Agreement
dated as of March 1, 1995, by and between Greg Norman and
Great White Shark Enterprises, Inc. and the Company, as
amended on April 19, 1996, October 18, 1996 and June 3, 1997.
16 Letter, dated November 14, 1997, from KPMG Peat Marwick LLP to
the Securities and Exchange (Incorporated by reference to
Exhibit 1 to the Registrant's Current Report on Form 8-K/A
filed November 19, 1997)
24 Power of Attorney (included with the signature page hereof)
27* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
None
46
<PAGE> 47
SIGNATURES
In accordance with the Section 13 or 15(d) of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VISUAL EDGE SYSTEMS INC.
/s/ Earl T. Takefman
------------------------------------
Earl T. Takefman
March 25, 1999 Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and constitutes Earl
Takefman and Alan Lubell, and each of them singly, his true and lawful
attorneys-in-fact with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities to sign and file any
and all amendments to this report with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and he
hereby ratifies and confirms all that said attorneys-in-fact or any of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
<S> <C> <C>
/s/ Earl Takefman Director, Chief Executive Officer (Principal March 25, 1999
- ---------------------- Executive Officer)
Earl Takefman
/s/ Melissa Forzly Chief Financial Officer (Principal Financial and March 25, 1999
- --- ------------------ Accounting Officer)
Melissa Forzly
/s/ Ron Seale Chairman of the Board March 25, 1999
- --- ------------------
Ron Seale
/s/ Mark Hershhorn Director March 25, 1999
- ----------------------
Mark Hershhorn
/s/ Beryl Artz Director March 25, 1999
- ----------------------
Beryl Artz
/s/ Richard Parker Director March 25, 1999
- ----------------------
Richard Parker
</TABLE>
47
<PAGE> 1
EXHIBIT 10.19
AMENDMENT
AMENDMENT, dated as of December 31, 1998, to License Agreement
("Agreement"), dated as of March 1, 1995, by and between Greg Norman and Great
White Shark Enterprises, Inc. (collectively, "Norman") and Visual Edge Systems
Inc. ("Licensee"), as amended on April 19, 1996, October 18, 1996 and June 3,
1997.
Norman and Licensee hereby agree as follows:
1. (a) As consideration for entering into this Amendment, Licensee
agrees to pay to Norman a fee equal to:
(i) 200,000 shares of common stock of Licensee;
(ii) an option to purchase 100,000 shares of
common stock of Licensee, with an exercise
price of $1.00 per share, such options to be
immediately vested;
(iii) 25,000 options currently held by Norman,
repriced to $1.00 per share; and
(iv) 72,000 shares of common stock of Licensee,
representing the portion of 102,000 shares
of common stock of Licensee previously
purchased by Norman but not yet delivered to
Norman.
(b) During each year of a Renewal Term (as defined in the
Agreement), Licensee shall pay to Norman a guaranteed non-refundable fee of
$500,000 in cash.
(c) Notwithstanding the foregoing, if a Change of Control (as
defined below) shall occur, the parties shall determine the aggregate amount
paid by Licensee to Norman between January 1, 1999 and June 30, 2000. If such
amount is less than $1,680,000, then Norman, at its sole discretion, may request
that the new controlling persons of Licensee pay to Norman the amount of such
difference within thirty days after June 30, 2000. For purposes hereof, "Change
of Control" means (i) all or substantially all of the assets of Licensee are
sold or disposed of, in one or in a series of transactions, to any "Person" or
"Group" (as such terms are used in Sections 14(d)(2) and 13(d)(3), respectively,
of the Securities Exchange Act of 1934, as amended); or (ii) an event or series
of events (whether a stock purchase, merger, amalgamation,
1
<PAGE> 2
consolidation or other business combination or otherwise) by which any "Person"
or "Group" (as such terms are used in Sections 14(d)(2) and 13(d)(3),
respectively, of the Securities Exchange Act of 1934, as amended) is or becomes
the "beneficial owner" (as defined under Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) directly or indirectly of thirty percent (30%)
or more of the combined voting power of the then outstanding common stock of
Licensee, other than Infinity Investors Limited, any of its affiliates or Marion
Interglobal, Ltd.
2. Paragraph 1.1.17 of the Agreement is deleted and replaced in its
entirety by the following:
"1.1.17 "Net Revenues" means total revenues, computed in
United States Dollars, derived by Licensee and its Affiliates
from the Sale of the Product at retail to Customers."
3. Paragraph 1.1.22 of the Agreement is deleted and replaced in its
entirety by the following:
"1.1.22 "Product" or "Products" means severally a videotape,
CD-ROM or other similar medium (or the printed version
thereof), sold by the Licensee under the name "One-on-One with
Greg Norman," that is given or sold to a consumer upon use of
the Concept in which Greg Norman's golf swing is compared to
the user's golf swing using audio and video analysis of both
swings."
4. Paragraph 2.2 of the Agreement is amended by deleting the first
sentence thereof and replacing it with the following:
"The first term shall be from July 1, 1996 to December 31,
2001 (the "First Term")."
5. Paragraph 5.1 of the Agreement is deleted in its entirety.
6. Paragraph 5.2 of the Agreement is deleted and replaced in its
entirety by the following:
"5.2 (a) Subject to clause (b) below, on the fifteenth day of
each calendar month, Licensee shall pay to Norman a royalty
payment equal to (i) 13% of all Net Revenue derived from
aggregate Sales of the Product commencing January 1, 1999,
until such Sales shall total $24,172,000, and (ii) 8% of all
Net Revenue derived from aggregate Sales of the Product
commencing January 1, 1999 in excess of $24,172,000.
2
<PAGE> 3
(b) To the extent Licensee must make royalty payments at a
rate of 13% pursuant to clause (a)(i) above, Licensee shall
(i) pay in cash the portion of such payments equal to 8% of
Net Revenue derived from Sales of the Product and (ii) apply
all additional amounts to payments previously made by Licensee
to Norman.
7. Paragraphs 5.3 and 5.10 of the Agreement are deleted in their
entirety.
8. Paragraph 5.12 of the Agreement is amended by deleting the reference
to "$10.00" contained therein and replacing it with "$1.00".
9. This Amendment may be executed by one or more of the parties hereto
on any number of separate counterparts and all of such counterparts taken
together shall be deemed to constitute one and the same instrument. A facsimile
copy of the signature of any party hereto shall be as effective as an original
copy of such signature.
10. Except as expressly modified hereby, the Agreement, as amended to
date, shall remain in full force and effect.
[signature page follows]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
---------------------------------------
Greg Norman
GREAT WHITE SHARK ENTERPRISES, INC.
By:
------------------------------------
VISUAL EDGE SYSTEMS INC.
By:
------------------------------------
Earl Takefman
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 244,346
<SECURITIES> 1,750,000
<RECEIVABLES> 26,893
<ALLOWANCES> 0
<INVENTORY> 103,142
<CURRENT-ASSETS> 2,452,303
<PP&E> 3,876,918
<DEPRECIATION> 1,628,404
<TOTAL-ASSETS> 6,135,859
<CURRENT-LIABILITIES> 1,182,755
<BONDS> 0
0
6,000,000
<COMMON> 103,784
<OTHER-SE> (2,553,904)
<TOTAL-LIABILITY-AND-EQUITY> 6,135,859
<SALES> 2,632,213
<TOTAL-REVENUES> 2,632,213
<CGS> 2,463,940
<TOTAL-COSTS> 4,577,034
<OTHER-EXPENSES> 306,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 251,566
<INCOME-PRETAX> 4,846,792
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,846,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,846,792
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
