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