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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
<TABLE>
<S> <C>
DELAWARE 13-3778895
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
901 YAMATO ROAD,
SUITE 175,
BOCA RATON, FLORIDA 33431
(Address of principal executive offices) (Zip Code)
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(561) 750-7559
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
REDEEMABLE WARRANTS, EACH TO PURCHASE ONE SHARE OF COMMON STOCK
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Registrant's revenue for its most recent fiscal year: $2,333,642
The aggregate market value of the Registrant's common stock, $.01 par value,
held by non-affiliates as of April 10, 2000, based on the average bid and asked
price of the common stock as of April 10, 1999, was: $1,366,612.
As of April 10, 2000 there were 10,398,440 shares of the Registrant's
common stock outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Visual Edge Systems, Inc. was organized to develop, market and sell
personalized CD-ROM and videotape golf lessons featuring One-on-One instruction
by leading professional golfer Greg Norman. Visual Edge has developed video
production technology that 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 golf lesson. Our One-on-One personalized golf lesson
analyzes a golfer's swing by comparing it to Greg Norman's swing at several
different club positions from two camera angles. Greg Norman's pre-recorded
instructional commentary, analysis and computer graphics highlight important
golf fundamentals intended to improve a golfer's performance. Golf instructor
Jim McLean provides pre-recorded drills and instruction designed to correct the
specific errors made by the golfer. We sell our products under the name
"One-on-One with Greg Norman." Visual Edge was incorporated in Delaware in July
1994.
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, has increased from approximately $12.7 billion in 1989 to
approximately $15.1 billion in 1994 to approximately $30.1 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
Visual Edge has developed six personalized One-on-One golf lessons with
Greg Norman for both right-and left-handed golfers. Our 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.
RELATIONSHIP WITH GREG NORMAN
Under the terms of a license agreement among Visual Edge, Greg Norman and
Great White Shark Enterprises, Inc., Greg Norman granted to Visual Edge a
worldwide license to use his name, likeness and endorsement and certain
trademarks owned by him in connection with the production and promotion of our
products. 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 our concept or products and does not prohibit Visual Edge
from entering into similar endorsement agreements with other athletes or
instructors.
The Greg Norman license originally required Visual Edge to make minimum
guaranteed royalty payments to Mr. Norman; however, as a result of an amendment
to the agreement, guaranteed payments are no longer required from Visual Edge.
For the year ended December 31, 1999, a total of $186,095 of royalties owed by
Visual Edge under the Greg Norman license were accrued, although no payments
were made. By letter dated July 30, 1999, Greg Norman and Great White Shark
notified Visual Edge of certain alleged defaults by Visual Edge with respect to
the Greg Norman license, and subsequently terminated the Greg Norman license.
Visual Edge, Greg Norman and Great White Shark Enterprises, Inc. have entered
into an amendment to the license agreement to allow Visual Edge to continue
using the rights under the Greg Norman license. Under this amendment, payments
on the accrued amounts as of December 31, 1999 are to be paid on a schedule of
twelve equal monthly payments beginning in March 2000. The original term of the
Greg Norman license expires on December 31, 2001, subject to prior termination
provided thereunder. Our business and future prospects are dependent upon our
continued association with Greg Norman.
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MARKETING AND DISTRIBUTION
Our marketing strategy is to sell One-on-One video golf lessons to:
- various organizers of amateur corporate, charity and member golf
tournaments (who typically offer gifts to tournament participants)
- golf professionals at private and daily fee golf courses and driving
ranges
- indoor event planners that organize trade shows, conventions, sales
meetings, retail store openings and promotions
To implement our marketing and business strategy, Visual Edge has developed
its product to be delivered to customers through CD-ROM and electronic mail.
Visual Edge representatives record a customer's golf swing and, at the same
time, give the customer a CD-ROM containing the golf swing lesson and transmit
the recording to the production facility located at Visual Edge's executive
office. At the production facility, Visual Edge processes the recording of the
customer's golf swing to compare it to Greg Norman's golf swing. Visual Edge
then transmits this comparative information to the customer using electronic
mail. In addition to delivering its product using electronic mail, Visual Edge
has mobile One-on-One production facilities which are housed in vans and other
types of vehicles. These One-on-One vehicles are equipped with video and
personal computer equipment to produce our products at the site where the
customer records his or her swing.
In the first quarter of 1999, Visual Edge signed an agreement to develop,
market and produce Visual Edge's product in the United Kingdom. In 1999,
approximately 7% of our revenue was derived from operations outside the United
States.
FINANCING TRANSACTIONS
For the past several years, Visual Edge sought financing through private
sources. In general, Visual Edge raised capital through a combination of debt
and equity issuances to private investor groups.
March Financing
In March 1997, Visual Edge obtained bridge financing (the "March Bridge
Financing") pursuant to which Visual Edge issued to 13 investors (including
Status-One Investments Inc., a company controlled by the family of a former
executive officer of Visual Edge), a non-cash financing fee of
- 100,000 shares of common stock and
- 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 to various banks, which in turn issued stand-by
letters of credit to Visual Edge in the aggregate amount of up to $3,500,000.
Visual Edge used the Letters of Credit to secure a $3,500,000 line of credit
from a bank. In June 1997, Visual Edge used a portion of the proceeds from the
issuance and sale of certain of its securities 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 investors involved in the March Bridge Financing.
Infinity Financing
On June 13, 1997, Visual Edge arranged a three-year $7.5 million debt and
convertible equity facility (the "Infinity Financing") with a group of
investment funds, which resulted in net proceeds to Visual Edge of approximately
$7.2 million. Under the Securities Purchase Agreement dated June 13, 1997,
including the amendments that have since been made to this agreement, Visual
Edge issued to the investment funds 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 original principal amount
of $1.5 million.
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As of April 10, 2000, the investment funds hold of record 298,538 shares of our
common stock subject to the recognition of the conversion by Infinity of 1,627
shares of Series A-2 Convertible Preferred Stock, which is described below.
The investment funds may convert their Series A-2 Convertible Preferred
Stock and Convertible Notes into additional shares of our common stock, subject
to our right to prepay or redeem any of those convertible instruments at any
time. Because Visual Edge's common stock has been delisted from the Nasdaq
SmallCap Market, an Event of Default exists under the Infinity Financing. As a
result, the investment funds may convert each share of Series A-2 Convertible
Preferred Stock into a number of shares of common stock based on a formula using
a percentage of the market price of the common stock. On August 30, 1999, one of
the investment funds delivered a notice of conversion to Visual Edge, to convert
1,627 of its 4,400 shares of our Series A-2 Convertible Preferred Stock into
9,594,857 shares of our common stock. The conversion was disputed, and
litigation ensued in the Delaware Court of Chancery. See "Item 3. -- Legal
Proceedings." In January 2000, the court dismissed the action, stating that the
claim relating to the conversion was moot because parties to the dispute had
resigned from their positions with Visual Edge. Currently, Visual Edge is in
discussions with Infinity regarding this conversion of series A-2 Convertible
Preferred Stock into common stock.
Because of the existing Event of Default under the Infinity Financing, the
investment funds may convert the Convertible Notes into common stock based on
the same formula used to convert the Series A-2 Convertible Preferred Stock into
shares of common stock during an Event of Default. As of the date of this
filing, the holders of the Convertible Notes have neither declared a default nor
given notice of acceleration of the amounts owed under the Convertible Notes.
Dividends on the Series A-2 Convertible Preferred Stock began accruing on
January 1, 2000 at the rate of 8.25% annually and are payable quarterly in cash
or in shares of common stock. To date, no dividends have been paid. The
investment funds are entitled to receive 495,000 shares of our common stock in
each of the year 2000 and 2001 as payment of dividends on the Series A-2
Convertible Preferred Stock.
The Convertible Notes mature in June 2000 and interest on the notes shall
be paid in cash. The notes are secured by all of our significant assets.
Marion Equity Financing
In March 1998, Visual Edge entered into a Purchase Agreement with Marion
Interglobal, Ltd., an investment group owned by Ronald Seale, a director and
executive officer of Visual Edge, and its nominee. Under this agreement, Marion
agreed 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,
Visual Edge issued to Marion an aggregate of two million shares of common stock
for $5 million. Marion opted not to proceed with the third phase. Visual Edge
paid certain transaction fees to Marion totaling two million additional shares
of common stock upon the completion of the first two phases. As of December 31,
1999, Marion beneficially owns 976,000 shares of our common stock for its own
account.
COMPETITION
Visual Edge faces competition for consumer discretionary spending from
numerous other businesses in the golf industry and related market segments.
Visual Edge competes with a variety of products and services that are used as
participant gifts at golf events or provide golf instruction, including
instructional CD ROM's and 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, Visual Edge expects that other companies that have
developed software technologies similar to those used by Visual Edge may seek to
enter our target markets and compete directly against Visual Edge. There can be
no assurance that other companies are not developing or will not seek to develop
similar products.
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PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
Visual Edge has obtained a patent from the United States Patent and
Trademark Office covering certain aspects of its digital video editing and
videotape production process. There can be no assurances that any patent
applications will result in issued patents, the breadth or degree of protection
which patents may afford Visual Edge or that our patent 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. Furthermore, there can be no assurance that Visual Edge will have
financial or other resources necessary to enforce its patent or defend a patent
infringement action. In addition to filing a patent application, Visual Edge
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 our proprietary
processes, ideas and documentation. Moreover, although Visual Edge has entered
into confidentiality agreements with certain of its employees, there can be no
assurance that such arrangements will adequately protect Visual Edge.
CHANGES IN MANAGEMENT OF VISUAL EDGE
On September 13, 1999, the holders of our Preferred Stock exercised their
rights under the Certificate of Designation relating to the Series A-2
Convertible Preferred Stock and appointed John A. Wagner to our board of
directors. The board of directors held a meeting on September 14, 1999 at which
the directors voted to remove Earl Takefman from his position as Chief Executive
Officer and Richard Parker from his position as President and Chief Operating
Officer. At the same meeting, the board of directors appointed our Chairman,
Ronald F. Seale, to the office of Chief Executive Officer. On September 21,
1999, Earl Takefman and Richard Parker resigned as members of the board of
directors. On November 19, 1999, the board of directors elected J. Keith
Benedict to the board of directors to the extent that he was not already a
director pursuant to the stockholder consent dated August 30, 1999. On November
19, 1999, the board of directors elected Thomas Peters to the office of
Executive Vice President and Chief Technology Officer. As is further explained
under Item 3 "Legal Proceedings" contained in this Report, the conversion of
shares of Series A-2 Convertible Preferred Stock, as well as the members of the
board of directors elected as a result of the conversion, has been disputed. To
confirm the members of the board of directors, the members of the board that
were still in office and that were elected by means other than as a result of
the conversion, elected Keith Benedict, Stuart Chasanoff and Tom Peters to fill
vacancies in the board of directors created from resignations from the board of
directors. Stuart Chasanoff submitted his resignation from the board of
directors in April 2000.
EMPLOYEES
At December 31, 1999, Visual Edge employed (directly or indirectly) two
executive employees and 18 employees engaged in the operation of its offices and
vans.
RISK FACTORS
Readers of this annual report or any of our press releases should carefully
consider the following risk factors, in addition to the other information
contained herein. This annual report on Form 10-K and our press releases contain
statements of a forward-looking nature relating to future events or the future
financial performance of Visual Edge 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.
Visual Edge has experienced significant and continuing losses. As of
December 31, 1999, Visual Edge had an accumulated deficit of $24,173,544. We
incurred a net loss of $3,237,570 for 1999. We believe that Visual Edge will
continue to incur losses until Visual Edge generates sufficient revenues to
offset the operating
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costs associated with commercializing its products. These losses could limit our
ability to grow and to raise new funds and could ultimately jeopardize our
ability to remain in business.
Our performance may prevent Visual Edge from obtaining additional
capital. As a result of our continuing losses, the low market price of our
common stock and the delisting of our common stock from the Nasdaq SmallCap
Market, we believe that it will be very difficult, if not impossible, for Visual
Edge to raise additional capital in the future. As of December 31, 1999, Visual
Edge had a total of cash and cash equivalents of approximately $19,274. Visual
Edge is unlikely to become profitable in the reasonably foreseeable future.
Accordingly, if Visual Edge cannot raise new funds, Visual Edge may exhaust its
cash resources and be unable to continue in business.
The value of Visual Edge's securities could decrease upon the issuance of
additional securities by Visual Edge. As a result of the decline in the market
price of the common stock and the delisting of our common stock from the Nasdaq
SmallCap Market, the holders of our Series A-2 Convertible Preferred Stock and
Convertible Notes have the right to convert their securities into shares of
common stock based on a formula using a percentage of the market price for the
common stock. Infinity, the holder of Series A-2 Convertible Preferred Stock and
Convertible Notes, has given notice to convert 1,627 shares of its Preferred
Stock into 9,594,857 shares of common stock. See "Item 1. -- Financing
Transactions" and "Item 3. -- Legal Proceedings." This conversion, if recognized
by Visual Edge, could result in substantial dilution to the other holders of
common stock. Any additional conversions using this formula would result in
additional substantial dilution to the other holders of common stock.
Additionally, as of December 31, 1999 there were a substantial number of
outstanding options and warrants to purchase shares of our common stock. The
exercise of any of these options or warrants will also have a dilutive effect on
our stockholders. Furthermore, holders of such options or warrants are more
likely to exercise them at times when Visual Edge 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. The sale of a substantial number
of our common stock may adversely affect the prevailing price of such common
stock in the public market and may impair our ability to raise capital through
the sale of its equity securities.
Visual Edge relies significantly on its license with Greg Norman. In
connection with the production and promotion of our products, Visual Edge uses,
under a worldwide license, Greg Norman's name, likeness, endorsement and certain
trademarks. During 1999, Greg Norman and Great White Shark notified Visual Edge
of defaults by Visual Edge under the Greg Norman license. The parties have since
entered into an amended license agreement to allow Visual Edge to continue to
use its rights under the Greg Norman license. The Greg Norman license expires on
December 31, 2001, subject to termination pursuant to the terms thereunder. Our
business may be adversely affected if the Greg Norman license is terminated in
the future or if Greg Norman dies, becomes disabled, retires from tournament
play, experiences a significant decline in his performance at golf tournaments,
reduces his participation in golf tournaments, commits a serious crime or
performs any act which adversely affects his reputation. Visual Edge has
obtained a "key-man" life insurance policy on Greg Norman in the amount of
$10,000,000.
Our common stock has been delisted from the Nasdaq Smallcap Market and is
subject to additional significant risks. Because we were unable to meet Nasdaq's
listing requirements, Visual Edge was delisted from the Nasdaq SmallCap Market
as of June 1, 1999. The delisting of our common stock means that, among other
things, fewer investors have access to trade our common stock which will limit
our ability to raise capital through the sale of its securities. In addition,
our common stock is subject to penny stock regulations, which could cause fewer
brokers and market makers to execute trades in our common stock. This is likely
to hamper our common stock trading with sufficient volume to provide liquidity
and could cause our stock price to further decrease.
The penny stock regulations require that broker-dealers who recommend penny
stocks to persons other than institutional accredited investors 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. Furthermore, the broker-
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dealer must obtain a signed and dated acknowledgement from the purchaser
demonstrating that the purchaser has actually received the required risk
disclosure document before effecting a transaction in penny stock. These
requirements have historically resulted in reducing the level of trading
activity in securities that become subject to the penny stock rules. Holders of
our common stock may find it more difficult to sell their shares of common
stock, which is expected to have an adverse effect of the market price of the
common stock.
We are at risk of securities class action litigation due to our stock price
volatility. In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price of
its securities. We may be the target of similar litigation. Securities
litigation may result in substantial costs and divert management's attention and
resources, which may seriously harm our business, prospects, financial condition
and results of operations.
We must be able to implement our business plan. Our plan of operation and
prospects are largely dependent upon our ability to achieve significant market
acceptance for our products, establish and maintain relationships with our
customers, successfully hire and retain skilled technical, marketing and other
personnel, and successfully develop, market and sell our products on a timely
and cost effective basis. There can be no assurance that Visual Edge will be
able to continue to implement our business plan. Failure to effectively
implement our business plan will have a material adverse effect on Visual Edge.
Our products may be subject to product obsolescence or short product life
cycles before they are accepted. The markets for our products may be
characterized by rapidly changing technology which could result in product
obsolescence or short product life cycles. Our competitors could develop
technologies or products that render our products obsolete or less marketable.
Accordingly, our ability to compete may be depend upon our ability to
continually enhance and improve our products.
Visual Edge depends on our officers and key personnel for our success. The
prospects of Visual Edge depend on the personal efforts of Ronald Seale, our
Chairman of the Board, Chief Executive Officer and President, and Thomas Peters,
our Executive Vice President and Chief Technology Officer, and other key
personnel to implement our operating and growth strategies. The loss of the
services of these executives could have a material adverse effect on our
business and prospects because of their experience and knowledge in the
industry.
Visual Edge has a limited product line. Visual Edge currently depends
entirely on the sales of a limited product line to generate revenues. Visual
Edge may develop other products in the future that may or may not be similar to
our current products. Visual Edge cannot assure that our current or future
products will prove to be commercially viable. Failure to achieve commercial
viability on a timely basis would cause Visual Edge to close our business.
Industry factors beyond our control could affect our financial
performance. Our future operating results will depend on numerous factors beyond
our control, including:
- the popularity, price and timing of competitors' products being
introduced and distributed
- national, regional and local economic conditions (particularly
recessionary conditions adversely affecting consumer spending)
- changes in consumer demographics
- the availability and relative popularity of other forms of sports and
entertainment
- public tastes and preferences, which may change rapidly and cannot be
predicted.
Our ability to plan for product development and promotional activities may
be affected by our ability to anticipate and respond to relatively rapid changes
in consumer tastes and preferences. To the extent that Visual Edge targets
consumers with limited disposable income, Visual Edge may find it more difficult
to price our products at levels which result in profitable operations.
Our products are subject to seasonality. Our business may be affected by
seasonal weather conditions that may limit the golf seasons in certain
geographic areas. Such seasonal factors may result in fluctuations in
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our future operating results. Our business has historically been seasonal with
higher sales in the second and third quarters of each fiscal year. Visual Edge
believes greater numbers of golf events are held during the warm months of the
year.
Visual Edge may not be able to carry out our acquisition strategy. Visual
Edge has recently adopted an acquisition strategy to expand our product
offerings. This strategy focuses 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 Visual Edge,
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 Visual Edge. We cannot assure you that Visual
Edge will be able to locate suitable acquisition targets or that Visual Edge
will be able to complete any acquisitions.
Our current financial condition prevents Visual Edge from financing an
acquisition independently. Our current financial condition will not allow Visual
Edge to finance an acquisition independently. If Visual Edge locates an
acquisition opportunity, it will have to depend on the profitability of the
target company and the efforts of some of our major stockholders to attract and
obtain financing. We cannot assure you that Visual Edge will be able to obtain
financing on acceptable terms or at all. If we cannot obtain financing, we will
not be able to complete any acquisitions.
The market price for our common stock and warrants is volatile. Since our
initial public offering, the market prices of our publicly traded securities
have been highly volatile as has been the case with the securities of other
emerging companies. The market price of our common stock may be affected by
certain factors such as our operating results and press releases or those of our
competitors. In addition, in recent years, the stock market has experienced a
high level of price and volume volatility and market prices for the securities
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
Visual Edge's principal executive office is a leased facility with
approximately 2,400 square feet of space in Boca Raton, Florida. Visual Edge
leases this space under a lease agreement that expires in July 2005. Visual Edge
believes that its existing facilities are well maintained and in good operating
condition and are adequate for its present and anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS
Proceedings with Stockholders
On August 2, 1999, Infinity filed suit in Delaware Chancery Court against
Visual Edge and three of our then current officers and directors, Earl Takefman,
Richard Parker, and Thomas Peters (Infinity Investors Limited v. Earl T.
Takefman, et al.; Civil Action No. 17347-NC, in the Court of Chancery of the
State of Delaware in and for New Castle County). In its original complaint in
that action, Infinity sought, among other things, injunctive relief to prevent
the defendants from interfering with Infinity's alleged rights to convert
Preferred Stock to common stock, as well as from interfering with the subsequent
removal of Messrs. Takefman, Parker, and Peters as directors and officers of
Visual Edge. The original complaint also disclosed Infinity's intention to
convert certain shares of our convertible Preferred Stock into approximately
9,600,000 shares of our common stock. Infinity asserts that an event of default
under Infinity's securities purchase agreement with Visual Edge occurred when
our common stock was delisted from the Nasdaq SmallCap Market and a listing on a
comparable market or exchange was not obtained within the applicable period.
Infinity further asserts that the occurrence of such an event provides it with
the aforementioned conversion rights.
On August 4, 1999, the parties in the Delaware action agreed to a
standstill stipulation approved by the Delaware Court. In the standstill
stipulation, Visual Edge and the individual defendants agreed, pending final
resolution, to refrain from taking certain actions without court approval, or in
certain other cases, without prior notice to Infinity. By letter dated August
16, 1999, the Delaware Court ordered that current management may
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continue to operate and manage Visual Edge on a day-to-day basis so long as it
does so consistent with the terms of the standstill stipulation.
On August 13, 1999, Infinity delivered a notice of conversion to Visual
Edge, pursuant to which Infinity alleges that it converted 1,627 of its 4,400
shares of our Series A-2 Cumulative Convertible and Redeemable Preferred Stock
into 9,594,857 shares of our common stock. Also on August 13, 1999, Infinity
dismissed Visual Edge from the Delaware lawsuit.
On August 30, 1999, Infinity delivered a stockholders' consent to Visual
Edge, pursuant to which Messrs. Parker, Peters, and Takefman were allegedly
removed from our board of directors, and Stuart J. Chasanoff and J. Keith
Benedict, affiliates of Infinity, were appointed as directors. On the same date,
the purported newly-appointed Board of directors caused a unanimous written
consent to be delivered to Visual Edge, pursuant to which, among other things,
Mr. Takefman was removed from his position as Chief Executive Officer, Mr.
Parker was removed from his position as President and Chief Operating officer,
and Mr. Peters was removed from his position as Vice President of Operations and
Technology.
On September 13, 1999, the Series A-2 Preferred Stockholders of Visual Edge
appointed John A. Wagner to our board, exercising their rights under the
applicable Certificate of Designation to appoint a representative to our board
of directors. To the extent that the alleged unanimous board consent of August
30, 1999 did not terminate Messrs. Takefman and Parker from their offices, our
board of directors held a meeting on September 14, 1999 and removed Messrs.
Takefman and Parker from their positions with Visual Edge. By letters dated
September 21, 1999, Messrs. Takefman and Parker resigned from our board of
directors effective immediately.
On November 5, 1999, Takefman and Parker filed a motion to dismiss
Infinity's Delaware action. By Memorandum Opinion issued January 28, 2000, the
Delaware Chancery Court granted that motion in part and denied it in part,
holding that Infinity could continue to pursue its claims against those two
individuals for tortious interference and for breach of their fiduciary duties
of care and loyalty with respect to their alleged interference with Infinity's
stock conversion and their alleged failure to disclose their intent to take
control of the Visual Edge Board of Directors. The Delaware Court also held that
Takefman and Parker necessarily conceded the validity of Infinity's conversion
and their subsequent removal from Visual Edge's board of directors.
PROCEEDINGS WITH FORMER OFFICERS AND DIRECTORS
On September 23, 1999, Messrs. Takefman and Parker filed suit in Florida
state court against Visual Edge, Infinity, HW Partners, L.P., Clark Hunt,
Barrett Wissman, John Wagner, Stuart Chasanoff and Keith Benedict (Earl
Takefman, et al. v. Visual Edge System, Inc., et al., Case No. CL 99-9086 AG, in
the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach
County, Florida). Messrs. Takefman and Parker allege that they are owed
severance payments pursuant to their respective employment agreements with
Visual Edge, and assert claims for breach of contract, tortious interference
with contract, and interference with employment. Visual Edge believes Takefman's
and Parker's claims are without merit and intends to vigorously defend itself
against those claims.
On October 12, 1999, Visual Edge filed suit in Delaware Chancery Court
against Messrs. Takefman and Parker for, among other things, breach of fiduciary
duty, breach of employment agreements, and tortious interference with contract
(Visual Edge Systems Inc. v. Earl T. Takefman, et al.; Civil Action No.
17472-NC, in the Court of Chancery of the State of Delaware in and for New
Castle County). On November 5, 1999, Messrs. Takefman and Parker moved to
dismiss the action or to stay the action in favor of the Florida suit. On
January 31, 2000, the Delaware Court granted the motion to stay until further
order of that Court. As a result, Visual Edge intends to assert its claims
against Takefman and Parker as counterclaims in the prior-filed Florida action,
which is described in the immediately preceding paragraph.
9
<PAGE> 10
PROCEEDINGS WITH GREG NORMAN AND HIS AFFILIATES
By letter dated July 30, 1999, Great White Shark Enterprises, Inc. placed
Visual Edge on notice of certain alleged defaults with respect to the License
Agreement, dated March 1, 1995, as amended, by and among Great White Shark, Greg
Norman, and Visual Edge, pursuant to which Great White Shark and Mr. Norman, as
licensors, have granted to Visual Edge, among other things, the right to use the
name and likeness of Greg Norman in connection with the One-on-One product sold
by Visual Edge. Mr. Norman alleged in that default notice that Visual Edge had
failed to pay certain royalties and had failed to comply with certain other
covenants of the Greg Norman license. Pursuant to its terms, the Greg Norman
license terminates, upon the option of Norman, 90 days following notice thereof
if a monetary default is not cured within 10 days, or a non-monetary default is
not cured within 30 days, from the date of notice of default. Therefore, the
possibility exists that Norman will declare the Greg Norman license to be
terminated because of our purported failure to timely cure the alleged defaults
within the applicable periods. In addition, Mr. Norman may seek to recover
damages and other relief against Visual Edge as a result of the alleged defaults
and/or any alleged termination of the License Agreement.
On August 11, 1999, Visual Edge filed a Complaint and Demand for a Jury
Trial, with the United States District Court, Southern District, West Palm Beach
Division, against Greg Norman, Great White Shark Enterprises, Inc., Greg Norman
Interactive LLC, and LibertyOne Limited for breach of contract, unfair and
deceptive trade practices, unjust enrichment and trademark infringement. In
October 1999, Visual Edge filed a Motion to Dismiss without Prejudice in this
action. Visual Edge has no current plans to pursue this lawsuit. See "Item
1 -- Description of Business Relationship with Greg Norman."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our common stock and warrants are traded on the over-the-counter market
under the symbols EDGE and EDGEW. Our common stock and warrants were traded on
the Nasdaq SmallCap Market until June 1, 1999. Visual Edge completed our initial
public offering in July 1996 at an offering price of $5.00 per share for our
common stock and $.10 per warrant. The following table sets forth
- for the periods from January 1998 through June 1, 1999, the range of high
and low last sale prices for the common stock and the warrants reported
on the Nasdaq SmallCap Market and
- for the period from June 2, 1999 through December 31, 1999, the range of
high and low bid prices for the common stock reported on the
over-the-counter bulletin board. The quotations from the over-the-
counter bulletin board reflect interdealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
- ------------ ----- -----
<S> <C> <C>
Fiscal Year 1998
First Quarter............................................. $4.38 $2.62
Second Quarter............................................ 4.69 2.81
Third Quarter............................................. 3.47 1.38
Fourth Quarter............................................ 2.00 .62
Fiscal Year 1999
First Quarter............................................. $1.25 $ .69
Second Quarter (through June 1, 1999)..................... .78 .38
Second Quarter (from June 2, 1999)........................ .45 .22
Third Quarter............................................. .56 .09
Fourth Quarter............................................ .16 .06
</TABLE>
<TABLE>
<CAPTION>
IPO WARRANTS: HIGH LOW
- ------------- ----- -----
<S> <C> <C>
Fiscal Year 1998
First Quarter............................................. $1.69 $ .62
Second Quarter............................................ 1.25 .50
Third Quarter............................................. .88 .00
Fourth Quarter............................................ .50 .00
Fiscal Year 1999
First Quarter............................................. $ .25 $ .00
Second Quarter (through June 1, 1999)..................... .19 .09
Second Quarter (from June 2, 1999)........................ .12 .12
Third Quarter............................................. .12 .00
Fourth Quarter............................................ .00 .00
</TABLE>
HOLDERS OF COMMON STOCK
At April 10, 2000, the last reported high bid price of the common was $.30
per share and the last reported sale price of the warrants was $.05 per warrant.
At April 10, 2000, there were 122 holders of record of our common stock and 8
holders of record of our warrants. Visual Edge believes that there are more than
3,900 beneficial holders of our common stock and 510 beneficial holders of our
warrants.
11
<PAGE> 12
DIVIDENDS
Visual Edge does not anticipate paying any cash dividends on our common
stock in the foreseeable future and intends to retain our earnings, if any, to
finance the expansion of our business and for general corporate purposes. Any
payment of future dividends will be at the discretion of our board of directors
and will depend upon, among other things, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions and other
factors that our board of directors deems relevant. In addition, the payment of
cash dividends is limited by the terms of our outstanding 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 OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included as Item 7 of this Annual
Report on Form 10-KSB. This discussion and analysis contains certain
forward-looking statements that involve risks and uncertainties. Visual Edge's
actual results and the timing of certain events could differ materially from
those discussed in the forward-looking statements as a result of certain factors
including those set forth in Visual Edge's filings with the Securities and
Exchange Commission, specifically including the risk factors set forth under
Item 1 of this Annual Report on Form 10-KSB.
GENERAL
Visual Edge was organized to develop, market and sell personalized CD-ROM
and videotape golf lessons featuring One-on-One instruction by leading
professional golfer Greg Norman. Visual Edge 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 golf lesson. Our One-on-One personalized golf lesson
analyzes a golfer's swing by comparing it to Greg Norman's swing at several
different club positions from two camera angles. Greg Norman's pre-recorded
instructional commentary and analysis and computer graphics highlight important
golf fundamentals intended to improve a golfer's performance. Golf instructor
Jim McLean provides pre-recorded drills and instruction designed to correct the
specific errors made by the golfer. We sell our products under the name
"One-on-One with Greg Norman".
Our marketing strategy is to sell One-on-One golf lessons to various
organizers of amateur corporate, charity and member golf tournaments (who
typically offer gifts to tournament participants), golf professionals at private
and daily fee golf courses and driving ranges and indoor event planners who
organize trade shows, conventions, sales meetings, retail store openings and
promotions.
At a One-on-One event, Visual Edge's team of technicians uses portable
video and computer equipment or a truck or other vehicle outfitted as a mobile
production facility. When portable equipment is used, the digitized swing
recordings are electronically forwarded to Visual Edge's production facility and
the completed product is delivered to the golfer using electronic mail. Visual
Edge locates its One-on-One vans in selected geographic areas that service golf
courses and driving ranges throughout the United States. When mobile production
vehicles are used, they are driven to golf courses and corporate events to film
participants and produce the One-on-One lessons on-site. In the first quarter of
1999, Visual Edge signed an agreement to develop, market and sell Visual Edge's
product in the United Kingdom. In 1999, sales outside the United States
accounted for approximately 7% of Visual Edge's revenues.
The majority of our cost of sales is contributed to Visual Edge's fixed
operating costs which includes operator salaries, vehicle storage and
depreciation and Visual Edge's fixed overhead expenses. Approximately 25% of the
cost of sales are variable costs related to sales and production. These costs
include the cost of the videotapes and CD-ROMs, royalties to Greg Norman and
sales commissions. Visual Edge believes that significantly higher sales levels
are needed before it may be able to generate profits. Management believes that
Visual Edge will not achieve such sales levels in 2000 and no assurance can be
given that Visual Edge will ever achieve such sales levels or that the variable
costs will remain constant as a percent of sales or that Visual Edge will not
incur additional fixed costs.
12
<PAGE> 13
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED YEAR ENDED DECEMBER 31, 1998
Sales for 1999 decreased 11.3% to $2,333,642, as compared to $2,632,213 for
1998. This decrease in sales in 1999, as compared to 1998, is primarily due to
decreased revenues from sales of Visual Edge's product in the United States,
which was partially offset by an increase in revenues derived from the agreement
to sell the product in the United Kingdom.
The cost of sales for 1999 increased 18.2% to 2,912,792, as compared to
$2,463,940 for 1998. This increase in the cost of sales is primarily
attributable to an earlier recognition during 1999 of certain prepaid expenses
and advance royalties relating to the Greg Norman license and a depreciation
charge relating to the mobile production vehicles used in our operations.
Operating expenses for 1999 decreased 33.9% to $3,026,938, as compared to
$4,577,034 for 1998. This decrease in 1999 operating expenses is attributable
primarily to a decrease in executive salaries and benefits and salaries and
benefits relating to processing facility personnel. This decrease was partially
offset by an increase in legal fees.
Operating loss for 1999 decreased 18.2% to $3,606,088, as compared to
$4,408,761 for 1998.
Visual Edge earned $67,098 in interest income for 1999, as compared to
$119,647 for 1998. Interest expense for 1999 was $119,142, as compared to
$251,566 for 1998. This decrease in interest expense is primarily due to reduced
equipment loans.
Net loss for 1999 decreased 20.1% to $3,871,261, as compared to $4,846,792
for 1998. Net loss per share for 1999 decreased 54.3% to $.37, as compared to
$.81 for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Visual Edge does not currently maintain a bank credit facility. Visual Edge
has historically financed its operations primarily through the sale of equity
securities or instruments convertible into equity securities. On December 31,
1999, Visual Edge had cash and cash equivalents of $19,724, no unrestricted
short-term investments (certificates of deposit) and working capital deficit of
$557,141, as compared to 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 at December 31, 1998. Net cash used in operating
activities for December 31, 1999 was $1,743,317. Net cash provided by investing
activities was $2,148,591, and $629,896 was used in financing activities for a
total decrease in cash and cash equivalents of $224,622. Net cash used in
operating activities for 1998 was $3,176,816. Net cash used in investing
activities in 1998 was $1,017,737, and $4,214,470 was provided by financing
activities, for a total increase in cash and cash equivalents in 1998 of
$19,917.
On December 31, 1999, Visual Edge had stockholders equity of $329,810, as
compared to stockholders equity deficit of $303,881 at December 31, 1998.
Visual Edge has not paid interest owed on Visual Edge's outstanding
Convertible Notes since March 31, 1999. As of March 31, 2000, the amount of
unpaid accrued interest on the Convertible Notes was approximately $123,000.
Visual Edge has outstanding $1,500,000 face amount of Convertible Notes held by
Infinity, Summit Capital Limited and Glacier Capital Limited. Interest on the
Convertible Notes is payable quarterly. The non-payment of such interest
constitutes an Event of Default under the Convertible Notes and related
agreements. As of the date of this filing, the holders of the Convertible Notes
have neither declared a default nor given notice of acceleration of the amounts
owed under the Convertible Notes.
Visual Edge will require further cash or a reduction in operating expenses
at the current revenue levels to satisfy Visual Edge's contemplated working
capital requirements for the year ending December 31, 1999. If Visual Edge is
unable to raise cash or finance its operations from cash flow, it may exhaust
its cash resources by the year-end and may be forced to curtail or cease its
operations.
13
<PAGE> 14
The financial statements have been prepared assuming that Visual Edge will
continue as a going concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
the amount of classification of liabilities that may result from the possible
inability of Visual Edge to continue as a going concern.
SEASONALITY
Visual Edge's business has historically been seasonal with higher sales in
the second and third quarters of each fiscal year. Visual Edge believes greater
numbers of golf events are held during the warm months of the year.
THIRD PARTY REPORTS AND PRESS RELEASES
Visual Edge does not make financial forecasts or projections nor does
Visual Edge endorse the financial forecasts or projections of third parties or
comment on the accuracy of third party reports. Visual Edge does not participate
in the preparation of the reports or the estimates given by analysts. Analysts
who issue financial reports are not privy to non-public financial information.
Any purchase of our securities based on financial estimates provided by analysts
or third parties is done entirely at the risk of the purchaser.
Visual Edge periodically issues press releases to update shareholders on
new developments relating to Visual Edge and our business. These releases may
contain certain statements of a forward-looking nature relating to future events
or the future financial performance of Visual Edge 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 materially differ with those statements. 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.
14
<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... 16
Balance Sheets as of December 31, 1998 and December 31,
1999...................................................... 17
Statements of Operations for the Years Ended December 31,
1998 and 1999............................................. 18
Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended December 31, 1998 and 1999................ 19
Statements of Cash Flows for the Years Ended December 31,
1998 and 1999............................................. 20
Notes to Financial Statements............................... 21
</TABLE>
15
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Visual Edge Systems Inc.:
We have audited the accompanying balance sheets of Visual Edge Systems
Inc., a Delaware corporation, as of December 31, 1998 and 1999, 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 28, 2000
(except with respect to the matter
discussed in Note 12, as to which
the date is April 12, 2000).
16
<PAGE> 17
VISUAL EDGE SYSTEMS INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 244,346 $ 19,724
Certificates of deposit................................... 1,750,000 --
Accounts receivable....................................... 26,893 32,765
Inventories............................................... 103,142 57,894
Prepaid expenses -- advance royalties..................... 220,577 150,000
Other current assets...................................... 107,345 49,407
------------ ------------
Total current assets.............................. 2,452,303 309,790
FIXED ASSETS, net........................................... 2,248,514 1,404,097
INTANGIBLE ASSETS, net...................................... 167,777 55,925
PREPAID EXPENSES -- ADVANCE ROYALTIES....................... 680,157 --
INVESTMENTS -- RESTRICTED................................... 587,108 200,000
------------ ------------
Total assets...................................... $ 6,135,859 $ 1,969,812
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 201,617 $ 137,772
Accrued expenses.......................................... 167,795 476,229
Other current liabilities................................. 218,259 78,151
Current maturities of equipment loans..................... 595,084 174,779
------------ ------------
Total current liabilities......................... 1,182,755 866,931
EQUIPMENT LOANS, net of current maturities.................. 149,951 --
CONVERTIBLE DEBT............................................ 1,253,273 1,406,762
------------ ------------
Total liabilities................................. 2,585,979 2,273,693
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5 and 10)
STOCKHOLDERS' EQUITY (DEFICIT):
Series A-2 Convertible Preferred stock, $.01 par value,
5,000,000 shares authorized, 6,000 shares issued and
outstanding at December 31, 1998 and 1999.............. 6,000,000 6,000,000
Common stock, $.01 par value, 20,000,000 shares
authorized, 10,378,440 issued and outstanding at
December 31, 1998 and 10,398,440 shares issued and
outstanding at December 31, 1999....................... 103,784 103,984
Additional paid in capital................................ 17,748,379 17,765,679
Accumulated deficit....................................... (20,302,283) (24,173,544)
------------ ------------
Total stockholders' equity (deficit).............. 3,549,880 (303,881)
------------ ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 6,135,859 $ 1,969,812
============ ============
</TABLE>
17
<PAGE> 18
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
SALES....................................................... $ 2,632,213 $ 2,333,642
COST OF SALES............................................... 2,463,940 2,912,792
----------- -----------
Gross profit (loss)............................... 168,273 (579,150)
----------- -----------
OPERATING EXPENSES:
General and administrative................................ 3,024,271 2,560,038
Selling and marketing..................................... 1,036,713 466,900
Financing fees............................................ 223,242 --
Noncash stock compensation expense........................ 292,808 --
----------- -----------
Total operating expenses.......................... 4,577,034 3,026,938
----------- -----------
Operating loss.................................... (4,408,761) (3,606,088)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 119,647 67,098
Interest expense.......................................... (251,566) (119,142)
Amortization of deferred financing fees................... (306,112) (213,129)
----------- -----------
Total other income (expense)...................... (438,031) (265,173)
----------- -----------
Net loss.......................................... (4,846,792) (3,871,261)
PREFERRED STOCK DIVIDENDS................................... (1,837,268) --
----------- -----------
Net loss attributed to common stockholders........ $(6,684,060) $(3,871,261)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE:
Net loss per share........................................ $ (0.81) $ (0.37)
=========== ===========
Weighted average common shares outstanding........ 8,238,208 10,395,329
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<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, 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
Issuance of common stock for
payment of services............. 20,000 200 -- 17,300 -- 17,500
Net loss.......................... -- -- -- -- (3,871,261) (3,871,261)
---------- -------- ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1999...... 10,398,440 $103,984 $ 6,000,000 $17,765,679 $(24,173,544) $ (303,881)
========== ======== =========== =========== ============ ===========
</TABLE>
19
<PAGE> 20
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(4,846,792) $(3,871,261)
Adjustments to reconcile net loss to net cash used in
operating activities --
Noncash stock compensation expense..................... 292,808 --
Noncash stock financing fees........................... 95,242 --
Noncash interest expense............................... 124,781 --
Depreciation and amortization.......................... 851,258 944,111
Amortization of deferred financing fees................ 306,112 230,629
Loss on disposal of fixed assets....................... -- 675
Changes in assets and liabilities:
Increase in accounts receivable...................... (2,976) (5,872)
(Increase) decrease in inventory..................... (30,371) 45,248
Decrease in prepaid expenses -- advance royalties.... 129,423 750,734
Decrease in other current assets..................... 109,880 57,938
Increase in other assets............................. (154,097) --
Decrease in accounts payable......................... (143,267) (63,845)
(Decrease) increase in accrued expenses.............. (5,810) 308,434
Increase (decrease) in other current liabilities..... 96,993 (140,108)
----------- -----------
Net cash used in operating activities............. (3,176,816) (1,743,317)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (347,737) (48,662)
Proceeds from sale of fixed assets........................ -- 60,145
Purchases of short-term investments....................... (3,750,000) --
Proceeds from the sale of short-term investments.......... 3,080,000 2,137,108
----------- -----------
Net cash (used in) provided by investing
activities...................................... (1,017,737) 2,148,591
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock................ 4,718,778 --
Exercise of options....................................... 12,500 --
Repayment of borrowings................................... (516,808) (629,896)
----------- -----------
Net cash provided by (used in) financing
activities...................................... 4,214,470 (629,896)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 19,917 (224,622)
CASH AND CASH EQUIVALENTS, beginning of period.............. 224,429 244,346
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 244,346 $ 19,724
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 117,279 $ 30,938
=========== ===========
</TABLE>
20
<PAGE> 21
VISUAL EDGE SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. COMPANY OPERATIONS
a. Background
Visual Edge Systems Inc. (the "Company") was organized to develop, market
and sell personalized CD-ROM and 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 golf lessons to
various organizers of amateur corporate, charity and member golf tournaments
(who typically offer gifts to tournament participants), golf professionals at
private and daily fee golf courses and driving ranges and indoor event planners
who organize trade shows, conventions, sales meetings, retail store openings and
promotions. As a result of continuing operating losses and changes in
management, the Company refocused its marketing and business strategy in the 4th
quarter of 1999. To implement its marketing and business strategy, the Company
has developed its product to be delivered to customers through CD-ROM and
electronic mail. The Company representatives record a customer's golf swing and,
at the same time, give the customer a CD-ROM containing the golf swing lesson
and transmit the recording to the production facility located at the Company's
executive office. At the production facility, the Company processes the
recording of the customer's golf swing to compare it to Greg Norman's golf
swing. The Company then transmits this comparative information to the customer
using electronic mail. In addition to delivering its product using electronic
mail, the Company has mobile One-on-One production facilities which are housed
in vans and other types of vehicles. These One-on-One vehicles are equipped with
video and personal computer equipment to produce our products at the site where
the customer records his or her swing.
b. Uncertainty of Proposed Plan of Operation
The Company's plan of operation and prospects are largely dependent upon
the Company's ability to achieve significant market acceptance for its products,
establish and maintain satisfactory relationships with those who arrange golf
events, successfully hire and retain skilled technical, marketing and other
personnel, and successfully implement its new business plan and strategy. There
can be no assurance that the Company will be able to continue to implement its
business plan. Failure to implement its business plan would have a material
adverse effect on the Company. The Company's One-on-One personalized CD-ROM and
videotape golf lesson is a new business concept and, accordingly, demand and
market acceptance for the Company's products is subject to a high level of
uncertainty. Achieving market acceptance for the Company's products will require
significant efforts and expenditures by the Company to create awareness and
demand. The Company's prospects will be significantly affected by its ability to
successfully build an effective sales organization and successfully implement
its business plan. The Company has limited marketing and technical experience
and limited financial, personnel and other resources to independently undertake
extensive marketing activities. The Company's strategy and preliminary and
future marketing plans may be subject to change as a result of a number of
factors, including progress or delays in the Company's marketing efforts and
21
<PAGE> 22
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
changes in market conditions. To the extent that the Company enters into
third-party marketing and distribution arrangements in the future, it will be
dependent on the marketing efforts of such third parties and in certain
instances on the popularity and sales of their products. There can be no
assurance that the Company's strategy will result in successful product
commercialization or that the Company's efforts will result in initial or
continued market acceptance for the Company's products. However, management
believes that projected 2000 revenues, when combined with planned cost savings
and existing financial resources will be sufficient to fund operations through
at least January 1, 2001.
c. Going Concern Matters
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the years ended December 31, 1998 and 1999, the Company
incurred losses of approximately $4,850,000 and $3,870,000, respectively, and at
December 31, 1999, its current liabilities exceed its current assets by
approximately $560,000, and its accumulated deficit is approximately
$24,175,000. These factors, among others, indicate that the Company may be
unable to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to (a) generate sufficient cash flow to
meet its obligations on a timely basis, (b) obtain additional financing as may
be required, and (c) ultimately attain profitability. The Company is attempting
to obtain additional bank or equity financing to alleviate its cash flow
constraints.
d. 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 did not
achieve compliance with Nasdaq's rules by June 1, 1999 and its Common Stock was
delisted. Exclusion of the Company's shares from Nasdaq has adversely affected
the market price and liquidity of the Company's equity securities.
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. 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, 1998 and 1999,
substantially all cash and cash equivalents are interest-bearing deposits.
c. Certificates of Deposit
Certificates of deposit represent short-term investments with maturities of
less than one year.
22
<PAGE> 23
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d. Inventories
The Company's inventories consist of videotapes, which are stated at the
lower of weighted average cost or market.
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. 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.
f. Prepaid Expenses-Advance Royalties
As described in Note 10(a), prior to December 31, 1998, the Company was
required to pay minimum guaranteed advances against a royalty of 8% of all
revenues. On December 31, 1998, an amendment to the royalty agreement was signed
which eliminated the post December 31, 1998 minimum guaranteed royalty payments
and increased the royalty to 13% of all revenues (8% to be paid
annually/quarterly/monthly in cash and 5% to be applied against past royalty
amounts). Once the Company's revenues exceed $24,172,000, the royalty is to be
reduced to 8%. The guaranteed minimum royalty payments were capitalized and
expensed as the related revenues were earned. Additionally, the Company
continually evaluates the expected realization of the carrying value of the
prepaid royalty and, if necessary, reduces the carrying value to reflect
management's best estimate of the amounts to be recovered in future periods.
Through December 31, 1998, payments in cash and shares of the Company's
common stock of $1,600,000 had been made under the agreement of which $450,000
and $936,095 was expensed as cost of sales in the accompanying statements of
operations during the years ended December 31, 1998 and 1999, respectively, and
$900,734 and $150,000 is included in prepaid expenses -- advance royalties in
the accompanying balance sheets as of December 31, 1998 and 1999, respectively.
g. Investments-Restricted
Investments-restricted represent certificates of deposit required as
collateral for the equipment loans (see Note 5(c)).
h. Revenue Recognition
Revenue from sale of event days or individual personalized videotapes is
recognized when the Company completes the event day or delivers the CD-ROMS or
videotapes to the individual customer. Deposits
23
<PAGE> 24
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
received in advance of CD-ROM or videotape delivery are recorded as customer
deposits which are included in other current liabilities in the accompanying
balance sheets.
i. 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.
j. Concentration of Credit Risk
The Company has no significant off-balance sheet concentrations of credit
risk.
k. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, certificates of deposit,
investments, accounts receivable and accounts payable 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.
l. Loss per Share
The Company follows SFAS No. 128, "Earnings Per Share." 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, 1998 and 1999, 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.
Dividends on preferred shares do not begin to accrue until January 1, 2000.
Accordingly, no provision for preferred stock dividends has been included in the
accompanying statement of operations for the year ended December 31, 1999.
m. 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 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 (see Note 9).
24
<PAGE> 25
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
n. Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, is effective for fiscal years beginning
after June 15, 2000. 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 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 No. 133.
3. FIXED ASSETS, NET
Fixed assets, including equipment and mobile production units acquired
under capital leases, consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
LIVES
1998 1999 (YEARS)
---------- ---------- -------
<S> <C> <C> <C>
Mobile videotape product units...................... $2,696,553 $2,623,886 5
Product development equipment....................... 523,224 549,877 3-5
Training and processing equipment................... 117,725 117,725 5
Office furniture and equipment...................... 392,759 409,770 5
Trade show exhibits................................. 146,657 147,157 5
---------- ----------
3,876,918 3,848,415
Less: accumulated depreciation...................... (1,628,404) (2,444,318)
---------- ----------
Fixed assets, net......................... $2,248,514 $1,404,097
========== ==========
</TABLE>
4. INTANGIBLE ASSETS, NET
Intangible assets consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Video and software production costs......................... $ 447,404 $ 447,404
Deferred organizational costs............................... 29,428 --
--------- ---------
476,832 447,404
Less: accumulated depreciation.............................. (309,055) (391,479)
--------- ---------
Intangible assets, net............................ $ 167,777 $ 55,925
========= =========
</TABLE>
5. FINANCINGS
a. 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
25
<PAGE> 26
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 or, in the event of default, in an amount based on a formula
using a percentage of the market price of the common stock. 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 1998, the Company issued an
aggregate of 80,989 shares (the "Interest Shares") for payment of interest due.
The Company made an interest payment of $30,938 for the first quarter of 1999
and has accrued but not paid interest of $92,812 as of December 31, 1999. The
Notes mature in June 2000 and are convertible into shares of common stock at a
price of $1.25 per share. The fair value of the Company's common stock at the
date of issuance was less than the conversion price.
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, inventories 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 fair value of the Company's common stock at the
date of issuance was less than the conversion price.
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.
26
<PAGE> 27
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 16, 1998, the Company sold an additional 1,550 shares of Preferred
Stock to the Funds in exchange for marketable securities with an aggregate value
of $1,550,000. In connection therewith, the Funds as the holders of the majority
of the outstanding shares of Preferred Stock, obtained the right to appoint one
director to the Company's Board of Directors, although they had not named such
director as of December 31, 1998.
As a condition to the consummation of the Marion Equity Financing (as
defined and described under "Marion Equity Financing" in Note 5(b)), 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
and $93,238 at December 31, 1998 and 1999, respectively.
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 therefore, issue to the New Funds
6,000 shares of a new class of Series A-2 Convertible Preferred Stock (the
"Series A-2 Preferred Stock"). The Series A-2 Preferred Stock is senior to the
common stock with respect to dividends, liquidation and dissolution. Prior to
January 1, 2000, no dividends shall accrue or be payable on the Series A-2
Preferred Stock. Beginning on January 1, 2000, each share of Series A-2
Preferred Stock shall entitle the holder to an annual dividend of 8.25%, payable
on a quarterly basis, which dividend shall increase to 18% in certain situations
as specified in the Certificate of Designation with respect to the Series A-2
Preferred Stock.
The Third Amendment also revised the conversion price at which the Notes
may be convertible into Common Stock and at which the Series A-2 Preferred Stock
may be convertible into common stock (the "Series A-2 Conversion Shares").
Unless an Event of Default exists, 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,
27
<PAGE> 28
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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,
unless an Event of Default exists, 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.
Because the Company's common stock has been delisted from the Nasdaq
SmallCap Market, an Event of Default exists under the Infinity Financing. As a
result, the New Funds may convert each share of Preferred Stock into a number of
shares of common stock based on a formula using a percentage of the market price
of common stock. The New Funds may also convert the Notes into common stock
based on the same formula used to convert the Preferred Stock into common stock.
On August 30, 1999, Infinity Investors Limited, one of the New Funds, delivered
a notice of conversion to the Company to convert 1,627 of its 4,400 shares of
Preferred Stock (see Note 10(d)).
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 Officers and the Vice
President of Operations and Technology be repriced to $1.00 per share and that
all such options shall be immediately vested. The Company also agreed to reprice
to $1.00 per share approximately 82,000 existing employee stock options, all
such options to be immediately vested. In addition, the New Funds agreed to
return to the Company the June Warrants and the New Warrants to purchase an
aggregate of 284,000 shares, and the Company repriced 16,000 of these warrants
to market value at $.781 per share that were exercised pursuant to the Third
Amendment. Additionally, options to purchase 200,000 shares of common stock were
granted to the President and Chief Operating Officer and options to purchase
100,000 shares of common stock were granted to the Vice President of Operations
and Technology, all such options to be immediately vested and to have an
exercise price of $1.00 per share. The unamortized portion amounting to $65,000
of the original issue discount associated with these warrants has been fully
amortized in 1998. Moreover, the Company granted 200,000 new stock options to
the President and Chief Operating Officer, all such options to be immediately
vested and to have an exercise price of $1.00 per share. At the date of these
transactions, the fair value of the Company's common stock was less than the
conversion price.
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 statement of operations.
Lastly, the New Funds agreed in the Third Amendment to exercise warrants to
purchase shares of common stock to result in a total exercise price of
approximately $12,500. Pursuant to this provision 16,000 shares were issued.
b. 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
28
<PAGE> 29
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 Chief
Executive Officer and President in 1999, 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 Note 5(a)).
c. Equipment Loans
In August 1997, the Company entered into an equipment financing facility
whereby the Company was provided with up to $2.5 million in financing. The
facility provided the Company with equipment financing of $100,000 per van for
25 vans, each of which was 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, 1998 and 1999 balance
sheets. In January 2000, the Company paid off the balance of this loan,
primarily with the certificate of deposit that was pledged to the lender.
The Company acquired certain fixed assets under capital leases totaling
$913,170. As a condition of the leases the Company was 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 $387,108 for the
year ended December 31, 1998, as security, which is included in
"Investments-Restricted" in the accompanying December 31, 1998 balance sheet. In
November 1999, the Company paid off the balance of this loan, primarily with the
proceeds from the collateral on the leases.
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
29
<PAGE> 30
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $99,460 and $39,820 at December 31,
1998 and 1999, respectively.
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, 1999, 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.
On August 13, 1999, Infinity Investors Limited ("Infinity") delivered a
notice of conversion to the Company to convert 1,627 of its 4,400 shares of our
Series A-2 Cumulative Convertible and Redeemable Preferred Stock into 9,594,857
shares of the Company's common stock. As of April 12, 2000, the Company has not
consummated this transaction (see Notes 10(d) and 12).
A summary of Common Stock reserved for potential future issuances as of
December 31, 1999 is as follows:
<TABLE>
<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 employee
consultants (Note 9)...................................... 1,649,039
Warrants issued in connection with 1997 March Bridge
Financing at $10.00 per share............................. 100,000
Equipment financing warrants at $10.00 per share (Note
5(c))..................................................... 75,000
Options granted to Greg Norman at $1.00 per share (Note
10(a)).................................................... 125,000
Options granted to consultants in accordance with the
Infinity Financing Third Amendment at $1.00 per share
(Note 5(a))............................................... 50,000
Options granted to consultants in accordance with the
Infinity Financing Third Amendment at $3.00 per share
(Note 5(a))............................................... 50,000
---------
3,804,039
=========
</TABLE>
7. ROYALTY INCOME
In the first quarter of 1999, the Company signed an agreement with Visual
Edge Systems Limited ("VESL") that launched the One-on-One concept in the United
Kingdom. The Company provided VESL with the sole and exclusive right to use,
sub-license, develop and distribute its concept and sell its products throughout
the United Kingdom in exchange for certain considerations, which included
minimum guaranteed fees of $150,000 through March 31, 2000. The Company has
earned $131,188 in royalty income under this agreement for the year ended
December 31, 1999.
8. INCOME TAXES
As of December 31, 1998 and 1999, the Company had approximately $6,893,000
and $8,218,000, 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, 1998 and 1999.
30
<PAGE> 31
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999 the Company's net operating loss carryforward is
approximately $20,462,000 and expires as follows:
<TABLE>
<S> <C>
2011................................................... $ 3,067,000
2012................................................... 10,557,000
2013................................................... 5,513,000
2014................................................... 1,325,000
-----------
$20,462,000
===========
</TABLE>
9. 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 year ended December 31, 1998 and 1999 would have increased to
$7,525,041 and $.91 and $4,037,858 and $.39, respectively.
Stock option activity during the periods is indicated as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1997.............................. 948,419 $5.46
Granted................................................. 1,321,500 1.00
Exercised............................................... -- --
Forfeited............................................... (395,880) 5.45
--------- -----
Balance at December 31, 1998.............................. 1,874,039 1.26
Granted................................................. -- --
Exercised............................................... -- --
Forfeited............................................... -- --
--------- -----
Balance at December 31, 1999.............................. 1,874,039 $1.26
========= =====
</TABLE>
31
<PAGE> 32
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1999, 1,780,633 and 1,761,965 options were
exercisable, respectively. At December 31, 1999, the weighted-average exercise
price and weighted-average remaining contractual life of outstanding options was
as follows:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------- EXERCISABLE
WEIGHTED -----------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICE SHARES PRICE LIFE SHARES PRICE
- -------------- --------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.00 1,734,889 $ 1.00 7.44 1,696,014 $ 1.00
3.00 50,000 3.00 .50 -- --
5.00-5.75 84,150 5.04 6.53 60,951 5.04
10.75 5,000 10.75 2.00 5,000 10.75
----------- --------- ------ ---- --------- ------
$1.00-10.75 1,874,039 $ 1.26 7.20 1,761,965 $ 1.17
=========== ========= ====== ==== ========= ======
</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 1998
and 1999: risk free interest rate of 4.8%; expected lives of 1.5 to 5 years; and
expected volatility of 70%.
10. COMMITMENTS AND CONTINGENCIES
a. License Agreement
In 1995, the Company entered into a license agreement (the "Norman
Agreement") with Greg Norman, a professional golfer, and Great White Shark
Enterprises, Inc. ("Great White Shark"), pursuant to which the Company was
granted a worldwide license to use Mr. Norman's name, likeness, endorsement and
certain trademarks in connection with the production and promotion of the
Company's products. Under the Norman Agreement, Mr. Norman received guaranteed
minimum payments against royalties of 8% of all net revenues, as defined,
derived from the sale of One-on-One videotapes.
In 1996, certain principal stockholders of the Company transferred an
aggregate of 300,000 shares of Common Stock owned by them to Mr. Norman pursuant
to an option held by Mr. Norman.
In 1997, the Norman Agreement was further amended to restructure the terms
of the guaranteed minimum payments due to Mr. Norman under the Norman Agreement.
The Company granted to Mr. Norman 25,000 options to purchase shares of the
Company's Common Stock at an exercise price of $10.00 per share and recorded
non-cash marketing expenses of $93,132 related to the options.
On December 31, 1998, the Norman Agreement was further amended to eliminate
the guaranteed minimum payments to Mr. Norman and 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
$900,734 and $150,000 at December 31, 1998 and 1999, respectively. The amount
that is expected to be amortized within twelve months has been classified as a
current asset on the accompanying 1999 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,
32
<PAGE> 33
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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. In 1998 and 1999, the Company expensed
$450,000 and $302,404, respectively of the advance royalty which is presented in
the statements of operations as a cost of sales.
On January 1, 2000, the Norman Agreement was further amended to allow the
Company to continue using the rights under the Greg Norman license. The Company
agreed to pay Mr. Norman $75,000 as a renewal fee, in addition to the 1999
royalties of $186,095 owed to Mr. Norman and included in accrued expenses in the
accompanying 1999 balance sheet. The Company will pay these amounts to Mr.
Norman in twelve equal monthly installments commencing on March 1, 2000.
b. Operating Leases
The Company has two noncancelable operating lease for corporate office
space that expires on July 5, 2005. Rental payments include minimum rentals plus
building expenses. Rental expense for these leases during 1998 and 1999 was
$108,374 and $97,161, respectively. Future minimum lease payments under these
leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000.................................................... $ 80,561
2001.................................................... 95,425
2002.................................................... 98,288
2003.................................................... 101,237
2004.................................................... 104,274
Thereafter.............................................. 53,425
--------
$533,210
========
</TABLE>
c. Significant and Continuing Losses
For the period from July 15, 1994 (inception) to December 31, 1999, the
Company has accumulated a deficit of $24,173,544. 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.
d. Legal Proceedings
PROCEEDINGS WITH GREG NORMAN AND HIS AFFILIATES
By letter dated July 30, 1999, Great White Shark Enterprises, Inc. placed
the Company on notice of certain alleged defaults with respect to the License
Agreement, dated March 1, 1995, as amended, by and among Great White Shark, Greg
Norman, and the Company, pursuant to which Great White Shark and Mr. Norman, as
licensors, has granted to the Company, among other things, the right to use the
name and likeness of Greg Norman in connection with the One-on-One product sold
by the Company. Mr. Norman alleged in that default notice that the Company had
failed to pay certain royalties and had failed to comply with certain other
covenants of the Greg Norman license. Pursuant to its terms, the Greg Norman
license terminates, upon the option of Norman, 90 days following notice thereof
if a monetary default is not cured within 10 days, or a non-monetary default is
not cured within 30 days, from the date of notice of default. Therefore, the
possibility exists that Norman will declare the Greg Norman license to be
terminated because of the Company's purported failure to timely cure the alleged
defaults within the applicable periods. In
33
<PAGE> 34
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, Mr. Norman may seek to recover damages and other relief against the
Company as a result of the alleged defaults and/or any alleged termination of
the License Agreement.
On August 11, 1999, the Company filed a Complaint and Demand for a Jury
Trial, with the United States District Court, Southern District, West Palm Beach
Division, against Greg Norman, Great White Shark Enterprises, Inc., Greg Norman
Interactive LLC, and LibertyOne Limited for breach of contract, unfair and
deceptive trade practices, unjust enrichment and trademark infringement. The
action claimed, among other things, that Mr. Norman violated his implied
covenant of good faith and fair dealing by purposefully attempting to obstruct
the Company's business, failed to use his best efforts to perform the personal
services required by him, failed to actively provide his endorsement of the
Company, and purposely violated the Company's trademarks by operating a
confusingly similar web site, shark.com.
In October 1999, the Company filed a Motion to Dismiss without Prejudice in
this action. On January 1, 2000, the Company amended the License Agreement with
Mr. Norman to allow it to continue using the rights under the Greg Norman
license (see Note 10(a)). The Company has no current plans to pursue this
lawsuit. Although management believes that the Company will be able to continue
the License Agreement with Mr. Norman on terms acceptable and beneficial to both
parties, there is no assurance that the Company will be able to do so.
PROCEEDINGS WITH PREFERRED STOCKHOLDERS
On August 2, 1999, Infinity filed suit in Delaware Chancery Court against
the Company and three of the Company's then current officers and directors, Earl
Takefman, Richard Parker, and Thomas Peters (Infinity Investors Limited v. Earl
T. Takefman, et al.; Civil Action No. 17347-NC, in the Court of Chancery of the
State of Delaware in and for New Castle County). In its original complaint in
that action, Infinity sought, among other things, injunctive relief to prevent
the defendants from interfering with Infinity's alleged rights to convert
Preferred Stock to common stock, as well as from interfering with the subsequent
removal of Takefman, Parker, and Peters as directors and officers of the
Company. The original complaint also disclosed Infinity's intention to convert
certain shares of the Company's convertible Preferred Stock into approximately
9,600,000 shares of our common stock. Infinity asserts that an event of default
under Infinity's securities purchase agreement with the Company occurred when
its common stock was delisted from the Nasdaq Small Cap Market and a listing on
a comparable market or exchange was not obtained within the applicable period.
Infinity further asserts that the occurrence of such an event provides it with
the aforementioned conversion rights.
On August 4, 1999, the parties in the Delaware action agreed to a
standstill stipulation approved by the Delaware Court. In the standstill
stipulation, the Company and the individual defendants agreed, pending final
resolution, to refrain from taking certain actions without court approval, or in
certain other cases, without prior notice to Infinity. By letter dated August
16, 1999, the Delaware Court ordered that current management may continue to
operate and manage the Company on a day-to-day basis so long as it does so
consistent with the terms of the standstill stipulation.
On August 13, 1999, Infinity delivered a notice of conversion to Visual
Edge, pursuant to which Infinity alleges that it converted 1,627 of its 4,400
shares of Series A-2 Convertible Preferred Stock into 9,594,857 shares of the
Company's common stock. As of April 12, 2000, the Company has not consummated
this transaction (see Note 12). Also on August 13, 1999, Infinity dismissed the
Company from the Delaware lawsuit.
On August 30, 1999, Infinity delivered a stockholders' consent to the
Company, pursuant to which Messrs. Parker, Peters, and Takefman were allegedly
removed from the Company's Board of Directors, and Stuart J. Chasanoff and J.
Keith Benedict, affiliates of Infinity, were appointed as directors. On the same
date, the purported newly-appointed Board of Directors caused a unanimous
written consent to be delivered to the
34
<PAGE> 35
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, pursuant to which, among other things, Mr. Takefman was removed from
his position as Chief Executive Officer, Mr. Parker was removed from his
position as President and Chief Operating officer, and Mr. Peters was removed
from his position as Vice President of Operations and Technology.
On September 13, 1999, the Series A-2 Convertible Preferred Stockholders of
the Company appointed John A. Wagner to the Board of Directors, exercising their
rights under the applicable Certificate of Designation to appoint a
representative to the Company's Board of Directors. To the extent that the
alleged unanimous board consent of August 30, 1999 did not terminate Takefman
and Parker from their offices, the Board of Directors held a meeting on
September 14, 1999 and removed Takefman and Parker from their positions with the
Company. By letters dated September 21, 1999, Takefman and Parker resigned from
the Board of Directors effective immediately.
On November 5, 1999, Takefman and Parker filed a motion to dismiss
Infinity's Delaware action. By Memorandum Opinion issued January 28, 2000, the
Delaware Chancery Court granted that motion in part and denied it in part,
holding that Infinity could continue to pursue its claims against those two
individuals for tortious interference and for breach of their fiduciary duties
of care and loyalty with respect to their alleged interference with Infinity's
stock conversion and their alleged failure to disclose their intent to take
control of the Company's Board of Directors. The Delaware Court also held that
Takefman and Parker necessarily conceded the validity of Infinity's conversion
and their subsequent removal from the Company's board of directors.
PROCEEDINGS WITH FORMER OFFICERS AND DIRECTORS
On September 23, 1999, Takefman and Parker filed suit in Florida state
court against the Company, Infinity, HW Partners, L.P., Clark Hunt, Barrett
Wissman, John Wagner, Stuart Chasanoff and Keith Benedict (Earl Takefman, et al.
v. Visual Edge System, Inc., et al., Case No. CL 99-9086 AG, in the Circuit
Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida).
Takefman and Parker allege that they are owed severance payments pursuant to
their respective employment agreements with the Company, and assert claims for
breach of contract, tortious interference with contract, and interference with
employment. The Company believes Takefman's and Parker's claims are without
merit and intends to vigorously defend itself against those claims.
On October 12, 1999, the Company filed suit in Delaware Chancery Court
against Takefman and Parker for, among other things, breach of fiduciary duty,
breach of employment agreements, and tortious interference with contract (Visual
Edge Systems Inc. v. Earl T. Takefman, et al.; Civil Action No. 17472-NC, in the
Court of Chancery of the State of Delaware in and for New Castle County). On
November 5, 1999, Takefman and Parker moved to dismiss the action or to stay the
action in favor of the Florida suit. On January 31, 2000, the Delaware Court
granted the motion to stay until further order of that Court. As a result,
Visual Edge intends to assert its claim against Takefman and Parker as
counterclaims in the prior-filed Florida action, which is described in the
immediately preceding paragraph.
11. SUPPLEMENTAL DISCLOSURE OF NON CASH RELATED ACTIVITIES
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 was
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.
35
<PAGE> 36
VISUAL EDGE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, the Company issued 302,755 shares of common stock for payment of
dividends totaling $487,268 on its preferred stock.
In 1999, the Company issued 20,000 shares of common stock for payment of
services.
12. SUBSEQUENT EVENT
As of April 12, 2000, pursuant to the unanimous written consent of the
Company's Board of Directors in lieu of a special meeting, the following
corporate actions were approved.
By Notice of Conversion of Series A-2 Cumulative Convertible Preferred
Stock, dated August 13, 1999, Infinity Investors Limited allegedly converted
1,627 shares of the Series A-2 Cumulative Convertible Redeemable Preferred Stock
of the Company into 9,594,857 shares of the Company's common stock (the
"Conversion"). The Board of Directors has established a new committee to be
designated the Conversion Committee, which is authorized to review the materials
related to the Conversion and to make a determination regarding the validity of
the Conversion and the issuance of the Company's common stock as a result of the
Conversion.
The Company has entered into an agreement with Jim McLean Golf Schools to
provide Internet-based CD-ROM golf instruction at KSL resorts nationwide (the
"KSL Agreement"). The Board of Directors ratified the KSL Agreement in all
respects.
The Board of Directors approved an amendment to the Company's Certificate
of Incorporation to increase the number of authorized shares of the Company's
Common Stock, $.01 par value per share, from 20,000,000 to 50,000,000 (the
"Amendment"). This Amendment will be submitted to the Company's stockholders
entitled to vote thereon for their approval and adoption.
The Board of Directors considers it to be in the best interest of the
Company to amend the Company's Amended and Restated 1996 Stock Option Plan (the
"Stock Option Plan"). This Amended Stock Option Plan, including any other
documents, instruments, or agreements contemplated by such amended plan, with
such further changes therein as shall be approved by the officers of the Company
will be submitted to a vote of the Company's stockholders for approval.
36
<PAGE> 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT AND FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS
Ronald F. Seale, age 52, has been Chairman of the Board of Visual Edge
Systems, Inc. ("Visual Edge" or the "Company") since May 1998. Mr. Seale has
served as the Company's Chief Executive Officer and President since November
1999. Mr. Seale also presently serves as a Senior Managing Director of Marion
Interglobal, Ltd., an investment group which is a stockholder of the Company, as
well as Senior Managing Director of Bayfront Holdings Inc., an investment group,
and Chairman of the Board of Aim Holdings, Inc., an investment group. From 1986
until 1998, Mr. Seale served as President of Tristar Acquisitions, an investment
group. From 1967 until 1984, Mr. Seale worked in the securities industry for
Merrill Lynch, PaineWebber, Inc., American Express and Prudential Bache
Securities.
Thomas Peters, age 55, has been a director of the Company since June 1999,
although he was allegedly removed in August 1999 and later re-elected to the
Board of Directors. Mr. Peters has served as the Company's Executive Vice
President and Chief Technology Officer since November 1999. Mr. Peters has also
served as the Company's Vice President of Operations and Technology from May
1996 to November 1999. Since July 1992, Mr. Peters has been the owner of 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 forming 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.
J. Keith Benedict, age 28, has been a director of the Company since August
1999. Mr. Benedict has been Vice President of HW Partners, L.P., the investment
manager for several affiliated investment funds which are stockholders of the
Company, since April 1999. From September 1996 to April 1999, Mr. Benedict
served as a corporate and securities associate at the law firm Bracewell &
Patterson LLP. Mr. Benedict received his law degree from Washington & Lee
University in May 1996.
John Wagner, age 44, has been a director of the Company since August 1999.
Mr. Wagner serves as President of the Hunt Sports Group, L.L.C., and has been an
officer of Hunt Sports Group, L.L.C. since January 1997. He is also the Chief
Operating Officer of Hunt Financial Group, L.L.C. Mr. Wagner is also a Vice
President of HW Partners, L.P., the investment manager for several affiliated
investment funds which are stockholders of the Company. Prior to January 1997,
Mr. Wagner was a CPA and served 12 years in the public accounting industry,
predominantly with Coopers and Lybrand, L.L.P. His area of expertise was federal
and state tax issues for entrepreneurial- and sports-related interests.
EXECUTIVE OFFICERS
The executive officers of the Company are appointed by the Board of
Directors of the Company and serve at the discretion of the Board of Directors.
The executive officers of the Company are Ronald F. Seale, Chairman of the
Board, Chief Executive Officer and President, and Thomas Peters, Executive Vice
President and Chief Technology Officer. Information relating to each of them is
set forth above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities and Exchange Act of 1934, the
Company's directors, executive officers and holders of more than 10% of the
common stock are required to report their initial ownership of the
37
<PAGE> 38
Company's equity securities and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established, and we are required to disclose any failure to file by these
dates with respect to 1999. Based on representations of our current directors
and executive officers and copies of reports filed with the Securities and
Exchange Commission, there were no late reports filed for 1999, except that Tom
Peters failed to file a Form 3 upon his election as a director of the Company in
June 1999. However, during 1999 Beryl Artz and Mark Hershhorn resigned as
directors of the Company and Earl Takefman and Richard Parker ceased serving as
directors and executive officers of the Company. These persons have not filed a
Form 5 for 1999 with respect to the Company, and the Company has not received a
written representation from them that these persons were not required to file a
Form 5 with respect to the Company for 1999.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated the compensation
earned by (a) each person that served as the Company's Chief Executive Officer
during the fiscal year ended December 31, 1999 (b) the other executive officer
whose salary and bonus for the fiscal year ended December 31, 1999 was in excess
of $100,000 for services rendered in all capacities to the Company for that year
and (c) the individual for whom disclosure would have been provided pursuant to
clause (b) but for the fact that the individual was not serving as an executive
officer of the Company on December 31, 1999 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
SALARY SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ($)(1) OPTIONS(#)(1)
- --------------------------- ---- ------- ---------------------
<S> <C> <C> <C>
Ronald F. Seale, Chairman of the Board, Chief Executive
Officer and President(2)................................ 1999 -- --
1998 -- --
1997 -- --
Earl Takefman(3)(4)....................................... 1999 157,050 --
1998 164,867 250,000(5)
1997 170,333 --
Thomas Peters, Executive Vice President and Chief
Technology Officer(4)................................... 1999 150,300 --
1998 125,283 200,000(5)
1997 115,366 20,000
Richard Parker(3)(4)...................................... 1999 157,050 --
1998 164,867 600,000(5)
1997 171,698 50,000
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers that
are available generally to all salaried employees of the Company, and
certain perquisites and other personal benefits received by the Named
Executive Officers that do not exceed the lesser of $50,000 or ten percent
(10%) of any such officer's salary disclosed in the table.
(2) Mr. Seale became Chief Executive Officer and President of the Company in
November 1999.
(3) Messrs. Takefman and Parker were removed from their positions with the
Company in August 1999.
(4) The salaries of Messrs. Takefman, Peters and Parker were paid in accordance
with the terms of their respective employment agreements.
(5) In December 1998, the Company entered into a Third Amendment to the Bridge
Securities Purchase Agreement with a group of investment funds, which is
further described below. See "Certain Relationships and Related
Transactions -- Infinity Financing." 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 Messrs. Takefman, Parker and Peters be repriced to
$1.00 per share and that all such options be immediately vested.
38
<PAGE> 39
STOCK OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to any of the Named Executive Officers during
the fiscal year ended December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
The following table shows, with respect to the Named Executive Officers,
information with respect to the unexercised options to purchase shares of the
common stock granted under the Amended and Restated 1996 Stock Option Plan and
held as of December 31, 1999. None of the Named Executive Officers exercised
options during the year ended December 31, 1999, and as of December 31, 1999, no
options granted to the Named Executive Officers were in-the-money, which means
that the exercise price of all such options exceeded the market price for the
underlying securities.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS HELD AT
DECEMBER 31, 1999
---------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
<S> <C> <C>
Ronald F. Seale............................................. -- --
Thomas Peters............................................... 240,411(1) --
Earl Takefman(2)............................................ 537,478(1) --
Richard Parker.............................................. 700,000(1) --
</TABLE>
- ---------------
(1) In December 1998, the Company entered into a Third Amendment to the Bridge
Securities Purchase Agreement with a group of investment funds, which is
further described below. See "Certain Relationships and Related
Transactions -- Infinity Financing." 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 Messrs. Takefman, Parker and Peters be repriced to
$1.00 per share and that all such options be immediately vested.
(2) Excludes (i) 10,000 warrants owned by Mr. Takefman to acquire shares of the
Common Stock, which were purchased by Mr. Takefman upon the same terms as
other unaffiliated investors in a Bridge Financing consummated by the
Company in March 1997, and (ii) 5,832 shares underlying options owned by Mr.
Takefman's spouse as to which shares Mr. Takefman disclaims beneficial
ownership.
COMPENSATION OF DIRECTORS
The Company reimburses directors for reasonable travel expenses incurred in
connection with their activities on behalf of the Company, but does not give its
directors additional compensation for serving as directors or for attending
Board of Directors meetings. Directors of the Company may in the future receive
option grants to purchase common stock of the Company under the Company's
Amended and Restated 1996 Stock Option Plan. Historically, each director who was
not an employee of the Company received an initial grant of non-qualified
options to purchase 5,000 shares of the Common Stock under the Company's Amended
and Restated 1996 Stock Option Plan and annual grants thereafter of
non-qualified options to purchase 2,500 shares of the Common Stock.
EMPLOYMENT AGREEMENT
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 Executive Vice President and Chief
Technology Officer. 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 under the agreement for 1998, subject to increase to $140,000 for 1999
and to $150,000 for 2000. Pursuant to the agreement, Mr. Peters will also be
eligible to receive a bonus based on the Company's performance, as
39
<PAGE> 40
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 as severance the amount of his base salary
for three months.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 10, 2000,
relating to the beneficial ownership of shares of the Company's Common Stock by:
(i) each person or entity who is known by the Company to own beneficially five
percent or more of its outstanding common stock; (ii) each of the Company's
Named Executive Officers and directors; and (iii) all directors and Named
Executive Officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIAL BENEFICIAL
OWNERSHIP OF OWNERSHIP OF
BENEFICIAL HOLDER COMMON STOCK(1) COMMON STOCK(1)
- ----------------- --------------- ---------------
<S> <C> <C>
Infinity Investors Limited(2)............................... 298,538 2.9%
Ronald F. Seale(3).......................................... 976,000 9.4%
Greg Norman(4).............................................. 727,000 6.9%
Thomas Peters(5)............................................ 258,566 2.4%
J. Keith Benedict(2)........................................ -- *
John Wagner(2).............................................. -- *
Earl Takefman(6)............................................ 1,696,960 15.5%
Richard Parker(6)........................................... 702,000 6.3%
All directors and executive officers as a group (six
persons)(2)(3)(5)(6)...................................... 3,633,526 30.6%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, Visual Edge believes that all persons named in
the table have sole voting and investment power with respect to all shares
of the Common Stock beneficially owned by them. Unless otherwise indicated a
person is deemed to be the beneficial owner of securities which may be
acquired by such person within 60 days from the date of this document upon
the exercise of options, warrants or convertible securities. Unless
otherwise indicated each beneficial owner's percentage ownership is
determined by assuming that (a) options that are held by such person (but
not those held by any other person) and which are exercisable within 60 days
of the date of this document have been exercised and (b) securities
convertible into shares of common stock that are held by such person (but
not those held by any other person) and which are convertible within 60 days
of the date of this document have been converted. As of April 10, 2000,
there were 10,398,440 shares of the Company's common stock outstanding.
(2) Includes for Infinity Investors Limited shares beneficially owned by IEO
Holdings Limited, Glacier Capital Limited and Summit Capital Limited, which
entities have affirmed the existence of a "group" as such term is used in
Rule 13d-5 promulgated under the Securities Exchange Act of 1934, as
amended. For all of such entities, excludes all shares underlying
Convertible Notes and Series A-2 Convertible Preferred Stock held by such
entities. Because Visual Edge's common stock has been delisted from the
Nasdaq SmallCap Market, an Event of Default exists under the Infinity
Financing. As a result, this group of investment funds may convert each
share of Series A-2 Convertible Preferred Stock into a number of shares of
common stock based on a formula using a percentage of the market price of
the common stock. Because of the existing Event of Default, the group of
investment funds may convert the Convertible Notes into common stock based
on the same formula used to convert the Series A-2 Convertible Preferred
Stock. On August 30, 1999, one of the investments funds delivered a notice
of conversion to Visual Edge, to convert 1,627 of its 4,400 shares of our
Series A-2 Convertible Preferred Stock into 9,594,857 shares of our common
stock. The conversion was disputed, and litigation ensued in the Delaware
Court of Chancery. In January 2000, the court dismissed the action, stating
that the claim
40
<PAGE> 41
relating to the conversion was moot because parties to the dispute had
resigned from their positions with Visual Edge. Currently, Visual Edge is in
discussions with Infinity regarding this conversion of Series A-2
Convertible Preferred Stock into common stock, which may effect the number
of shares that these funds hold. Additionally, any further conversions of
the Series A-2 Convertible Preferred Stock and the Convertible Notes into
common stock by this group of investment funds could result in further
substantial dilution to the other stockholders of the Company. See
"Description of Business -- Risk Factors -- The value of our shares could
decrease upon the issuance of additional securities by Visual Edge." The
conversion of the Series A-2 Convertible Preferred Stock and the Convertible
Notes at the formula based on the market price of the common stock may
enable this group of investment funds to effect a change in control of the
Company. J. Keith Benedict and John Wagner are representatives of the
investment manager (or its affiliates) of Infinity Investors Limited and
certain of the other funds in the group but do not have investment power or
any pecuniary interest in this stockholder's shares of common stock. The
address of each of the entities in this group is 1601 Elm Street, Suite
4000, Dallas, Texas 75201.
(3) Includes 976,000 shares owned by Marion Interglobal, Ltd., a British Virgin
Islands corporation of which Mr. Seale is Senior Managing Director. The
address of Marion Interglobal, Ltd. is 12803 Water Point Blvd., Windermere,
Florida 34786.
(4) Includes options to purchase 125,000 shares of the Company's common stock.
The address of Greg Norman is c/o Great White Shark Enterprises, Inc., 501
North AIA, Jupiter Florida 33477. No filings have been made by this
stockholder. Thus, the information presented is based on the records
maintained by the Company and its transfer agent, which may not include
shares held in street name by the stockholder.
(5) Includes exercisable options held by Mr. Peters to purchase 240,411 shares
of common stock and warrants to purchase 5,000 shares of common stock.
(6) Messrs. Takefman and Parker ceased serving as directors and executive
officers of Visual Edge in 1999. Litigation between the Company and Messrs.
Takefman and Parker has arisen out of the termination of their relationship
with the Company. As a result of this dispute, the Company has been unable
to obtain information from Messrs. Takefman and Parker regarding the number
of shares of common stock beneficially held by them. Consequently, this
table reflects the number of shares beneficially held by them as set forth
in the Companys definitive proxy statement filed with the Commission in
1999. For Mr. Takefman, the information includes (i) 1,159,482 shares owned
by Status-One Investments Inc., a Delaware corporation owned by Earl
Takefman and certain family members ("Status-One"), and (ii) presently
exercisable options to acquire 537,478 shares of Common Stock, but does not
include 2,136 shares of Common Stock owned by Mr. Takefman's spouse, as to
which shares Mr. Takefman disclaims beneficial ownership. For Mr. Parker,
the information includes presently exercisable options to acquire 700,000
shares of the Company's common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INFINITY FINANCING.
On June 13, 1997, Visual Edge arranged a three-year $7.5 million debt and
convertible equity facility (the "Infinity Financing") with a group of
investment funds, which resulted in net proceeds to Visual Edge of approximately
$7.2 million. Under the Securities Purchase Agreement dated June 13, 1997,
including the amendments that have since been made to this agreement, Visual
Edge issued to the investment funds 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 original principal amount
of $1.5 million. As of April 10, 2000, the investment funds hold of record
298,538 shares of our common stock subject to the recognition of the conversion
by Infinity of 1,627 shares of Series A-2 Convertible Preferred Stock, which is
described below. The investment funds may convert their Series A-2 Convertible
Preferred Stock and Convertible Notes into additional shares of our common
stock, subject to our right to prepay or redeem any of those convertible
instruments at any time. Because Visual Edge's common stock has been delisted
from the Nasdaq SmallCap Market, an Event of Default exists under the Infinity
Financing. As a result, the investment
41
<PAGE> 42
funds may convert each share of Series A-2 Convertible Preferred Stock into a
number of shares of common stock based on a formula using a percentage of the
market price of the common stock. On August 30, 1999, one of the investment
funds delivered a notice of conversion to Visual Edge, to convert 1,627 of its
4,400 shares of our Series A-2 Convertible Preferred Stock into 9,594,857 shares
of our common stock. The conversion was disputed, and litigation ensued in the
Delaware Court of Chancery. See "Item 3. -- Legal Proceedings." In January 2000,
the court dismissed the action, stating that the claim relating to the
conversion was moot because parties to the dispute had resigned from their
positions with Visual Edge. Currently, Visual Edge is in discussions with
Infinity regarding this conversion of series A-2 Convertible Preferred Stock
into common stock.
Because of the existing Event of Default under the Infinity Financing, the
investment funds may convert the Convertible Notes into common stock based on
the same formula used to convert the Series A-2 Convertible Preferred Stock into
shares of common stock during an Event of Default. As of the date of this
filing, the holders of the Convertible Notes have neither declared a default nor
given notice of acceleration of the amounts owed under the Convertible Notes.
Dividends on the Series A-2 Convertible Preferred Stock began accruing on
January 1, 2000 at the rate of 8.25% annually and are payable quarterly in cash
or in shares of common stock. To date, no dividends have been paid. The
investment funds are entitled to receive 495,000 shares of our common stock in
each of the year 2000 and 2001 as payment of dividends on the Series A-2
Convertible Preferred Stock.
The Convertible Notes mature in June 2000 and interest on the notes shall
be paid in cash. The notes are secured by all of our significant assets.
MARION EQUITY FINANCING.
In March 1998, Visual Edge entered into a Purchase Agreement with Marion
Interglobal, Ltd., an investment group owned by Ronald Seale, a director and
executive officer of Visual Edge, and its nominee. Under this agreement, Marion
agreed 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,
Visual Edge issued to Marion an aggregate of two million shares of common stock
for $5 million. Marion opted not to proceed with the third phase. Visual Edge
paid certain transaction fees to Marion totaling two million additional shares
of common stock upon the completion of the first two phases. As of December 31,
1999, Marion beneficially owns 976,000 shares of our common stock for its own
account.
RELATIONSHIP WITH GREG NORMAN
Under the terms of a license agreement among Visual Edge, Greg Norman and
Great White Shark Enterprises, Inc., Greg Norman granted to Visual Edge a
worldwide license to use his name, likeness and endorsement and certain
trademarks owned by him in connection with the production and promotion of our
products. 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 our concept or products and does not prohibit Visual Edge
from entering into similar endorsement agreements with other athletes or
instructors.
For the year ended December 31, 1998, Visual Edge paid approximately
$700,000 in connection with the Greg Norman license. The Greg Norman license,
originally required Visual Edge to make minimum guaranteed royalty payments to
Mr. Norman; however, as a result of an amendment to the agreement, guaranteed
payments are no longer required from Visual Edge. For the year ended December
31, 1999, a total of $186,095 of royalties owed by Visual Edge under the Greg
Norman license were accrued, although no payments were made. By letter dated
July 30, 1999, Greg Norman and Great White Shark notified Visual Edge of certain
alleged defaults by Visual Edge with respect to the Greg Norman license, and
subsequently terminated the Greg Norman license. Visual Edge, Greg Norman and
Great White Shark Enterprises, Inc. have entered into an amendment to the
license agreement to allow Visual Edge to continue using the rights under the
Greg Norman license. Under this amendment, payments on the accrued amounts as of
December 31, 1999 are to be paid on a schedule of twelve equal monthly payments
beginning in March 2000. The original term of the Greg Norman license expires on
December 31, 2001, subject to prior termination provided thereunder. Our
business and future prospects are dependent upon our continued association with
Greg Norman.
42
<PAGE> 43
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.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of Visual Edge, 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 Visual Edge (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)
3.3 -- Certificate of Designation for Series A-2 Convertible
Preferred Stock (Incorporated by reference to Exhibit A
to the Third Amendment to Bridge Securities Purchase
Agreement and Related Documents, dated as of December 29,
1998, among Visual Edge, 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.), which is filed as Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed January 8,
1999)
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 Visual Edge and Whale
Securities Co., L.P. (Incorporated by reference to
Exhibit 4.2 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, Visual Edge 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)
4.5 -- Form of Warrant Certificate issued to investors in the
March 1997 Bridge Financing (Incorporated by reference to
Exhibit 4.5 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-24675) filed April 7,
1997)
4.6 -- Form of Common Stock Purchase Warrant issued to investors
in the Infinity Bridge Financing (Incorporated by
reference to Exhibit 99.4 to the Registrant's Current
Report on Form 8-K filed June 23, 1997)
4.7 -- Form of Convertible Note issued to investors in the
Infinity Bridge Financing (Incorporated by reference to
Exhibit 99.5 to the Registrant's Current Report on Form
8-K filed June 23, 1997)
4.8 -- Form of Common Stock Purchase Warrant issued to Vision
Financial Group, Inc. (Incorporated by reference to
Exhibit 4.8 to the Registrant's Quarterly Report on Form
10-QSB filed November 14, 1997)
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)
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.1 -- License Agreement, dated March 1, 1995, between Great
White Shark Enterprises, Inc. and Visual Edge, 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 Visual Edge, 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 -- Amendment to License Agreement, dated as of January 1,
2000, by and among Visual Edge, Greg Norman and Great
White Shark Enterprises, Inc. (Previously filed on April
14, 2000 with Form 10-K for fiscal year ended December
31, 1999)
*10.4 -- Employment Agreement, dated as of May 1, 1996, between
Thomas S. Peters and Visual Edge, 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 our 1996 definitive Proxy Statement filed
on April 7, 1997)
10.6 -- Lease Agreement by and between Fairfax Boca 92, L.P., a
Georgia limited partnership, and Visual Edge Systems,
Inc. for offices located at 901 Yamato Road, Boca Raton,
Florida (Previously filed on April 14, 2000 with Form
10-K for fiscal year ended December 31, 1999)
10.7 -- Assignment, dated April 19, 1996 from Thomas S. Peters to
Visual Edge (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 Visual Edge and Status-One
Investments Inc. (Incorporated by reference to Exhibit
10.11 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-24675) filed April 7, 1997)
10.9 -- Bridge Securities Purchase Agreement, dated as of June
13, 1997, among Visual Edge 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 Visual Edge 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 Visual Edge, the Funds and American Stock Transfer
& Trust Company (Incorporated by reference to Exhibit
99.3 to our Report on Form 8-K filed June 23, 1997)
10.12 -- Purchase Agreement, dated as of March 27, 1998, among
Visual Edge 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 Visual Edge 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)
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.14 -- First Amendment to Bridge Securities Purchase Agreement
and Related Documents, dated as of December 31, 1997,
among Visual Edge 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
Visual Edge, 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 Visual Edge, 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 9, 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 9, 1998)
10.19 -- Amendment, dated as of December 31, 1998, to License
Agreement dated as of March 1, 1995, by and between Greg
Norman and Great White Shark Enterprises, Inc. and Visual
Edge, 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 for the
fiscal year ended December 31, 1998)
10.21 -- Sublease Agreement, dated as of September 29, 1999, by
and between Visual Edge and Sensormatic Electronics
Corporation (Previously filed on April 14, 2000 with Form
10-K for fiscal year ended December 31, 2000)
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 (Previously filed on April 14, 2000
with Form 10-K for fiscal year ended December 31, 2000)
27 -- Financial Data Schedule (Previously filed on April 14,
2000 with Form 10-K for fiscal year ended December 31,
2000)
</TABLE>
- ---------------
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
45
<PAGE> 46
SIGNATURES
In accordance with the Section 13 or 15(d) of the Securities Exchange Act,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VISUAL EDGE SYSTEMS INC.
/s/ RONALD SEALE
------------------------------------
Ronald Seale
Chief Executive Officer
May 1, 2000
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ RONALD SEALE Chief Executive Officer, President May 1, 2000
- ----------------------------------------------------- and Director (Principal
Ronald Seale Executive Officer and Principal
Financial and Accounting
Officer)
* Director May 1, 2000
- -----------------------------------------------------
J. Keith Benedict
* Director May 1, 2000
- -----------------------------------------------------
John Wagner
* Director May 1, 2000
- -----------------------------------------------------
Thomas Peters
* /s/ RONALD SEALE
- -----------------------------------------------------
Ronald Seale, Attorney-in-fact
</TABLE>
46
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of Visual Edge, 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 Visual Edge (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)
3.3 -- Certificate of Designation for Series A-2 Convertible
Preferred Stock (Incorporated by reference to Exhibit A
to the Third Amendment to Bridge Securities Purchase
Agreement and Related Documents, dated as of December 29,
1998, among Visual Edge, 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.), which is filed as Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed January 8,
1999)
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 Visual Edge and Whale
Securities Co., L.P. (Incorporated by reference to
Exhibit 4.2 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, Visual Edge 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)
4.5 -- Form of Warrant Certificate issued to investors in the
March 1997 Bridge Financing (Incorporated by reference to
Exhibit 4.5 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-24675) filed April 7,
1997)
4.6 -- Form of Common Stock Purchase Warrant issued to investors
in the Infinity Bridge Financing (Incorporated by
reference to Exhibit 99.4 to the Registrant's Current
Report on Form 8-K filed June 23, 1997)
4.7 -- Form of Convertible Note issued to investors in the
Infinity Bridge Financing (Incorporated by reference to
Exhibit 99.5 to the Registrant's Current Report on Form
8-K filed June 23, 1997)
4.8 -- Form of Common Stock Purchase Warrant issued to Vision
Financial Group, Inc. (Incorporated by reference to
Exhibit 4.8 to the Registrant's Quarterly Report on Form
10-QSB filed November 14, 1997)
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 Visual Edge, 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)
</TABLE>
<PAGE> 48
<TABLE>
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EXHIBIT NUMBER DESCRIPTION
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10.2 -- Amendment to License Agreement, dated as of June 3, 1997,
by and among Visual Edge, 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 -- Amendment to License Agreement, dated as of January 1,
2000, by and among Visual Edge, Greg Norman and Great
White Shark Enterprises, Inc. (Previously filed on April
14, 2000 with Form 10-K for fiscal year ended December
31, 1999)
*10.4 -- Employment Agreement, dated as of May 1, 1996, between
Thomas S. Peters and Visual Edge, 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 our 1996 definitive Proxy Statement filed
on April 7, 1997)
10.6 -- Lease Agreement by and between Fairfax Boca 92, L.P., a
Georgia limited partnership, and Visual Edge Systems,
Inc. for offices located at 901 Yamato Road, Boca Raton,
Florida (Previously filed on April 14, 2000 with Form
10-K for fiscal year ended December 31, 1999)
10.7 -- Assignment, dated April 19, 1996 from Thomas S. Peters to
Visual Edge (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 Visual Edge and Status-One
Investments Inc. (Incorporated by reference to Exhibit
10.11 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-24675) filed April 7, 1997)
10.9 -- Bridge Securities Purchase Agreement, dated as of June
13, 1997, among Visual Edge 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 Visual Edge 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 Visual Edge, the Funds and American Stock Transfer
& Trust Company (Incorporated by reference to Exhibit
99.3 to our Report on Form 8-K filed June 23, 1997)
10.12 -- Purchase Agreement, dated as of March 27, 1998, among
Visual Edge 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 Visual Edge 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 Visual Edge and the Funds (Incorporated by
reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K filed February 9, 1998)
</TABLE>
<PAGE> 49
<TABLE>
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10.15 -- Second Amendment to Bridge Securities Purchase Agreement
and Related Documents, dated as of March 27, 1998, among
Visual Edge, 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 Visual Edge, 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 9, 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 9, 1998)
10.19 -- Amendment, dated as of December 31, 1998, to License
Agreement dated as of March 1, 1995, by and between Greg
Norman and Great White Shark Enterprises, Inc. and Visual
Edge, 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 for the
fiscal year ended December 31, 1998)
10.21 -- Sublease Agreement, dated as of September 29, 1999, by
and between Visual Edge and Sensormatic Electronics
Corporation (Previously filed on April 14, 2000 with Form
10-K for fiscal year ended December 31, 2000)
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 (Previously filed on April 14, 2000
with Form 10-K for fiscal year ended December 31, 2000)
27 -- Financial Data Schedule (Previously filed on April 14,
2000 with Form 10-K for fiscal year ended December 31,
2000)
</TABLE>
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* Indicates management contract or compensatory plan or arrangement.
