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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
UNITED STATES
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 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)
DELAWARE 13-3778895
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
901 YAMATO ROAD, SUITE 175, BOCA RATON, FLORIDA 33431
(Address of principal executive offices) (Zip Code)
(561) 750-7559
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
REDEEMABLE WARRANTS, EACH TO PURCHASE ONE SHARE OF COMMON STOCK
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
The Registrant's revenue for its most recent fiscal year: $2,333,642
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.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Registrant's fiscal year ended December 31, 1999 are
incorporated by reference into Part III of this Form 10-KSB.
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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
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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.
MARKETING AND DISTRIBUTION
Our marketing strategy is to sell One-on-One video golf
lessons to:
o various organizers of amateur corporate,
charity and member golf tournaments (who
typically offer gifts to tournament
participants)
o golf professionals at private and daily fee
golf courses and driving ranges
o 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.
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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
o 100,000 shares of common stock and
o 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. 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.
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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
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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.
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
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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 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
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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.
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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-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
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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:
o the popularity, price and timing of
competitors' products being introduced and
distributed
o national, regional and local economic
conditions (particularly recessionary
conditions adversely affecting consumer
spending)
o changes in consumer demographics
o the availability and relative popularity of
other forms of sports and entertainment
o 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 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.
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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.
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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 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.
12
<PAGE> 13
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.
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."
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
<PAGE> 15
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
o 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
o 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.
15
<PAGE> 16
<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
FirstQuarter $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
IPO WARRANTS: HIGH LOW
------------ ---- ---
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.
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.
16
<PAGE> 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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
17
<PAGE> 18
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.
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
18
<PAGE> 19
$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.
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
19
<PAGE> 20
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.
20
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants..................... 22
Balance Sheets as of December 31, 1998 and December 31, 1999........... 23
Statements of Operations for the Years Ended December 31, 1998
and 1999.......................................................... 24
Statements of Changes in Stockholders' Equity (Deficit) for the
Years Ended December 31, 1998 and 1999............................ 25
Statements of Cash Flows for the Years Ended December 31, 1998
and 1999.......................................................... 26
Notes to Financial Statements.......................................... 27
</TABLE>
21
<PAGE> 22
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)
22
<PAGE> 23
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>
23
<PAGE> 24
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.
24
<PAGE> 25
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
Shares Amount Stock Capital
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 5,316,696 $ 53,167 $ -- $ 12,427,394
Preferred stock Series A convertible issued in connection with
the Infinity financing -- -- 6,000,000 (2,178,942)
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
Sale of preferred stock in connection with the Infinity
financing -- -- 1,550,000 --
Redemption of preferred stock in connection with the Infinity
financing -- -- (1,550,000) --
Issuance of common stock for payment of dividends on
preferred stock 302,755 3,028 -- 484,240
Issuance of common stock for payment of interest on
convertible debt 80,989 809 -- 123,972
Common stock and warrants issued in connection with the
Infinity financing amendments 350,000 3,500 -- 260,909
Common stock issued in connection with the Marion
equity financing 4,010,000 40,100 -- 4,678,678
Common stock and warrants issued in connection with the
Greg Norman agreement 272,000 2,720 -- 290,088
Issuance of common stock for payment of prepaid royalties 30,000 300 -- 299,700
Exercise of options 16,000 160 -- 12,340
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 10,378,440 103,784 6,000,000 17,748,379
Issuance of common stock for payment of services 20,000 200 -- 17,300
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 10,398,440 $ 103,984 $ 6,000,000 $ 17,765,679
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
Balance at December 31, 1997 $(13,618,223) $ (1,137,662)
Preferred stock Series A convertible issued in connection with
the Infinity financing -- 3,821,058
Cancellation of Preferred stock Series A convertible issued in
Connection with the Infinity financing -- --
Preferred stock Series A-2 convertible issued in connection
with the Infinity financing -- --
Preferred stock embedded dividend (1,350,000) --
Sale of preferred stock in connection with the Infinity
financing -- 1,550,000
Redemption of preferred stock in connection with the Infinity
financing -- (1,550,000)
Issuance of common stock for payment of dividends on
preferred stock (487,268) --
Issuance of common stock for payment of interest on
convertible debt -- 124,781
Common stock and warrants issued in connection with the
Infinity financing amendments -- 264,409
Common stock issued in connection with the Marion
equity financing -- 4,718,778
Common stock and warrants issued in connection with the
Greg Norman agreement -- 292,808
Issuance of common stock for payment of prepaid royalties -- 300,000
Exercise of options -- 12,500
Net loss (4,846,792) (4,846,792)
------------ ------------
Balance at December 31, 1998 (20,302,283) 3,549,880
Issuance of common stock for payment of services -- 17,500
Net loss (3,871,261) (3,871,261)
------------ ------------
Balance at December 31, 1999 $(24,173,544) $ (303,881)
============ ============
</TABLE>
25
<PAGE> 26
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>
26
<PAGE> 27
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
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
27
<PAGE> 28
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.
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
28
<PAGE> 29
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 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.
29
<PAGE> 30
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).
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>
30
<PAGE> 31
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
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
31
<PAGE> 32
"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.
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
32
<PAGE> 33
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, (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
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
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<PAGE> 34
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 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
34
<PAGE> 35
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 10a) 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.
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>
35
<PAGE> 36
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>
36
<PAGE> 37
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 Exercise Contractual 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.
37
<PAGE> 38
As consideration for entering into the December 1998 amendment, the Company paid
Mr. Norman a fee equal to (i) 272,000 shares of the Company's Common Stock, (ii)
an option to purchase 100,000 shares of the Company's Common Stock with an
exercise price of $1.00 per share, such options to be immediately vested, and
(iii) 25,000 options currently held by Mr. Norman, repriced to $1.00 per share.
The Company recorded a non-cash compensation expense of $292,808 related to the
December 1998 amendment. Through December 31, 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:
-------------------------------- ---------
Year Ending December 31,
-------------------------------- ---------
2000 $ 80,561
-------------------------------- ---------
2001 95,425
-------------------------------- ---------
2002 98,288
-------------------------------- ---------
2003 101,237
-------------------------------- ---------
2004 104,274
-------------------------------- ---------
Thereafter 53,425
-------------------------------- ---------
$ 533,210
=========
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 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.
38
<PAGE> 39
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 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.
39
<PAGE> 40
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 aginst 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.
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.
40
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WTH 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
Information called for by Item 9 is set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in our 2000
Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information called for by Item 10 is set forth under the caption
"Executive Compensation" in our 2000 Proxy Statement, which is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 11 is set forth under the caption
"Voting Securities and Beneficial Ownership" in our 2000 Proxy
Statement, which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 12 is set forth under the caption
"Certain Transactions" in our 2000 Proxy Statement, which is
incorporated herein by reference.
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.
41
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
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)
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C>
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)
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. (Filed herewith)
*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 (Filed herewith)
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
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
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)
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
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
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
(Filed herewith)
16 Letter, dated November 14, 1997, from KPMG Peat Marwick LLP to
the Securities and Exchange (Incorporated by reference to Exhibit
1 to the Registrant's Current Report on Form 8-K/A filed November
19, 1997)
24 Power of Attorney (included with the signature page hereof)
27 Financial Data Schedule (Filed herewith)
- --------------
*Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
</TABLE>
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
April 14, 2000 Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and constitutes
Ronald Seale, Thomas Peters and Keith Benedict, and each of them singly, his,
her or its true and lawful attorneys-in-fact with full power of substitution and
resubstitution, for him, her or its and in his, her or its name, place and
stead, in any and all capacities to sign and file any and all amendments to this
report with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and he, she or it hereby ratifies
and confirms all that said attorneys-in-fact or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
----------
<S> <C> <C>
/s/ Ronald Seale Chief Executive Officer, President April 14, 2000
- --------------------------- and Director (Principal Executive
Ronald Seale Officer and Principal Financial and
Accounting Officer)
/s/ J. Keith Benedict Director April 14, 2000
- ---------------------------
J. Keith Benedict
/s/ John Wagner Director April 14, 2000
- ---------------------------
John Wagner
/s/ Thomas Peters Director April 14, 2000
- ---------------------------
Thomas Peters
</TABLE>
46
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
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)
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
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)
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. (Filed herewith)
*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 (Filed herewith)
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)
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
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)
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
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
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
(Filed herewith)
16 Letter, dated November 14, 1997, from KPMG Peat Marwick LLP to
the Securities and Exchange (Incorporated by reference to Exhibit
1 to the Registrant's Current Report on Form 8-K/A filed November
19, 1997)
24 Power of Attorney (included with the signature page hereof)
27 Financial Data Schedule (Filed herewith)
- -------------
* Indicates management contract or compensatory plan or arrangement
</TABLE>
<PAGE> 1
EXHIBIT 10.3
AMENDMENT
This Amendment to License Agreement is dated as of January 1, 2000 by
and between Greg Norman and Great White Shark Enterprises, Inc., (collectively
"Norman"), and Visual Edge Systems, Inc. ("Licensee").
WHEREAS, Norman and Licensee entered into a License Agreement dated
April 11, 1995 and subsequently amended April 19, 1996; October 18, 1996; June
3, 1997; June 18, 1998 and December 31, 1998; and
WHEREAS, certain disputes arose between Norman and Licensee previously,
which the parties wish to resolve pursuant to this Amendment.
NOW THEREFORE in consideration of the foregoing, the parties agree as
follows:
1. In consideration of the execution of this Amendment and the renewal
of the Licensee relationship, Licensee agrees to pay Norman the sum of $75,000
as a renewal fee, which shall not be charged against any royalties due under
this Agreement.
2. The parties agree that the term of the royalty payment as stated in
Paragraph 5.2 of the Amendment dated December 31, 1998 shall remain in full
force and effect during the term of the Agreement. Parties further agree that
during the calendar year of 1999, no royalty payments were made by Licensee to
Norman and the amount which has accrued equals $441,163.00 of which $143,013.00
is applicable to previously prepaid guaranteed royalties and the balance of
$187,177.00 is due and owing to Norman. The License warrants that the attached
income statement for 1999 is true and correct.
3. Licensee agrees that this total sum of $262,177.00 (i.e., $75,000.00
and $187,177.00) shall be paid in twelve equal monthly installments to Norman in
the amount of $21,848.00 commencing March 1, 2000 and continuing through
February 1, 2001.
<PAGE> 2
4. The parties further agree that on or before the 1st day of each
month of this Agreement, commencing March 1, 2000, Licensee shall furnish to
Norman a financial report of Licensee's net revenue for the next preceding month
(i.e., January for the March 1st report) and at the same time shall pay Norman
royalty as called for the Paragraph 5.2 of the Agreement in addition to the
accrued royalties referred to in Paragraph 3 above.
5. The parties agree that Norman approves the 888 number used by
Licensee under the designation of 1-888-Norman1.
6. The parties agree that Licensee shall assign to Norman, or Norman's
designee, the URL of its website, "theshark.com", and shall change the URL on
its website to such name which is reflective of its corporate name or products.
7. All commercial and collateral activities of Licensee on the Internet
related to the Greg Norman One on One golf product shall be directed through
shark.com, which is the website of Greg Norman Interactive, LLC, ("GNI")
pursuant to the separate agreement of even date between Licensee and GNI.
IN WITNESS WHEREOF the parties have executed this Amendment as of
January 1, 2000.
VISUAL EDGE SYSTEMS, INC. GREAT WHITE SHARK ENTERPRISES, INC.
By: /s/ RONALD T. SEALE By:
------------------------------ -------------------------------
/s/ GREG NORMAN
-------------------------------
Greg Norman
2
<PAGE> 1
EXHIBIT 10.6
LEASE AGREEMENT
BOCA RATON, FLORIDA
THIS LEASE AGREEMENT (this "Lease") is made as of this ___ day of
October, 1999, by and between FAIRFAX BOCA 92, L.P., a Georgia limited
partnership ("Landlord"), and VISUAL EDGE SYSTEMS INC., a Florida corporation
("Tenant");
W I T N E S S E T H:
1. Premises. In consideration of the rents, terms and covenants of this
Lease, Landlord hereby leases, lets and demises to Tenant those certain premises
(the "Premises") containing approximately 2,407 rentable square feet situated on
the first (1st) floor of Pod D in Building 235, 901 Yamato Road, Boca Raton,
Florida 33431 (the "Building"), as shown outlined on EXHIBIT A, attached hereto
and made a part hereof. The land upon which the Building is located is more
particularly described on EXHIBIT B, attached hereto and made a part hereof (the
"Land"); the Building and the Land together with all improvements located
thereon are collectively referred to herein as the "Project"). All of the
windows and outside walls of the Premises, and any space in the Premises used
for shafts, pipes, conduits, ducts, telephone ducts and equipment, electric or
other utilities, or other Building facilities, and the use thereof and access
thereto through the Premises for the purposes of operation, maintenance,
inspection, display and repairs are hereby reserved to Landlord.
2. Terms. The Term (as hereinafter defined) of this Lease shall
commence on June 1, 2000 (the "Commencement Date") and ending at 12:00 midnight
on July 5, 2005 (the "Expiration Date") (such term, taking into account any
sooner termination or renewal or extension, is hereinafter referred to as the
"Term"). Tenant's occupancy of all or any portion of the Premises prior to the
Commencement Date shall be subject to and Tenant agrees to comply with (as
though the Term has commenced) all of the provisions of this Lease.
In the event the Premises are not ready for occupancy as a result of failure to
complete the Tenant Improvements, the Commencement Date shall be delayed until
substantial completion of the improvements for the Premises. If Tenant desires
occupancy of Premises earlier than June 1, 2000, then it shall notify Landlord
and Landlord will commence with design and construction. In the event of an
earlier completion of the Premises, then the Commencement Date will be adjusted.
Tenant must provide signed acceptance of design space plan by no later than
March 1, 2000 or Landlord will be provided a day for day extension of the
planned occupancy date of June 1, 2000.
3. Base Rent. (a) Tenant agrees to pay Base Rent in monthly
installments on the first day of each month, during the original Term of the
Lease in an amount equal to the product of the number of rentable square feet
contained in the Premises, multiplied by the annual rate per rentable square
foot set forth below:
The initial annual Base Rent shall be $12.05 per RSF and shall escalate by three
percent (3%) per annum beginning January 1, 2001.
-1-
<PAGE> 2
Each monthly installment of Base Rent shall be payable to Landlord at the
address set forth in Section 32 below on the first day of each calendar month,
in legal tender of the United States of America, without abatement, demand,
reduction or offset whatsoever, except as may be expressly provided in this
Lease. The monthly installment of Base Rent shall be due and payable on or
before the first day of each calendar month following the Commencement Date
during the Term; provided, that if the Commencement Date should be a date other
than the first day of a calendar month, the monthly Base Rent shall be prorated
to the end of that calendar month. Tenant shall pay, as Additional Rent, all
other sums due from Tenant under this Lease, including, but not limited to, any
rent tax or other tax imposed upon Landlord based upon rent payments to the
extent not included in Operating Expenses (as hereinafter defined) (the term
"Rent" means all Base Rent, Additional Rent and all other amounts payable
hereunder from Tenant to Landlord).
(b) In addition to the Base Rent payable pursuant to Section 3(a)
above, Tenant shall promptly pay to Landlord the cost of electric power consumed
in the Premises within any computer room, or for supplemental air conditioning
systems or any equipment installed which consumes electric current in excess of
the amounts specified in Section 9(c). Tenant shall, at Tenant's sole cost and
expense, install a submeter to measure all such electric power consumed in the
Premises by Tenant in such locations and Tenant shall pay the cost of such
electric power so consumed as determined by the submeter calculated at the rate
structure then existing of the utility company supplying electrical energy to
the Premises.
4. Operating Expenses. (a) Computation and Payment. Tenant agrees to
pay as Additional Rent, Tenant's pro rata share of such Operating Expenses (as
hereinafter defined) of the Project. The 1999 projected operating expenses are
$7.05 per SF. Landlord shall estimate the projected Operating Expenses for the
Project and Tenant's pro rata share of such projected Operating Expenses prior
to the commencement of each calendar year during the Term and shall notify
Tenant in writing of such estimate. The amount of Additional Rent specified in
such notification shall be paid by Tenant to Landlord in equal monthly
installments in advance on the first day of each month of such ensuing calendar
year, at the same time and in the same manner as Base Rent. Landlord shall,
within three (3) months following the close of each calendar year during the
Term, provide Tenant with a statement of the actual Operating Expenses for such
calendar year, in reasonable detail. If such statement shows an amount owing by
Tenant for the actual Operating Expenses during a calendar year that is less
than the sum of the monthly payments of Additional Rent made by Tenant for
projected Operating Expenses for such calendar year, the statement shall be
accompanied by a refund to Tenant of the overpayment. If such statement shows an
amount owing by Tenant for actual Operating Expenses during a calendar year
which is more than the sum of the monthly payments of Additional Rent made by
Tenant for projected Operating Expenses for such calendar year, Tenant shall pay
deficiency to Landlord within sixty (60) days after receipt of such statement.
If the Term shall begin on a day other than January 1 or shall end on a day
other than December 31, the amount of any Additional Rent for Operating Expenses
payable by Tenant applicable to the year in which the Term begins or ends,
respectively, shall be prorated on the ratio that the actual number of days of
the Term and such year bears to 365, Landlord may invoice Tenant for Tenant's
pro rata share of actual Operating Expenses for the calendar year to which the
Term ends (if such amount is more than the sum of the monthly payments of
Additional Rent for projected Operating Expenses made by Tenant in such calendar
year) within thirty (30) days prior to the end of the Term or at any time
thereafter. Notwithstanding any provision of this Lease to the contrary, if
occupancy of the
-2-
<PAGE> 3
Building at any time during the Term is less than one hundred percent (100%),
then actual variable Operating Expenses for the Building for such calendar year
shall be increased ("grossed up") to that amount of Operating Expenses that,
using reasonable estimates, would normally be expected to be incurred during
such calendar year if the Building was one hundred percent (100%) occupied
during such calendar year, as determined under generally accepted accounting
principles consistently applied. The term "grossed up" as used in this Section
shall mean and refer to the method of calculating such variable Operating
Expenses which is designed to reasonably estimate what would be the cost of
providing a variable Operating Expense service to the rentable areas of the
Building receiving such service. The gross-up treatment shall be applied only
with respect to the variable Operating Expenses, which are those component
expenses that are affected by variations in occupancy levels arising from
services provided to space in the Building being occupied by tenants, in order
to equitably allocate such variable Operating Expenses to the tenants receiving
the benefit thereof.
(b) Definition of "Operating Expenses". The term "Operating
Expenses" includes all costs and expenses incurred with respect to the
maintenance and operation of the Building or Project (determined in accordance
with generally accepted accounting principles consistently applied), such as,
but not limited to, Building services, maintenance and repair costs, electricity
(exclusive of any charges made pursuant to Section 3(b) above), fuel, water,
sewer, gas and other utility charges, security, window washing, janitorial
services, trash and snow removal, landscaping, pest control, management fees,
wages and fringe benefits payable to employees of Landlord or of any management
agent of Landlord whose duties are directly connected with the operation and
maintenance of the Building, all services, supplies, repairs, replacements or
other expenses for maintaining and operating the Building, including, but not
limited to lobby and other common use areas, vehicular and pedestrian traffic
areas and plaza areas; all real property taxes and installments of special
assessments, including special assessments due to recorded covenants or
restrictions, if any, which accrue against the Building during the Term, any and
all reasonable costs and expenses incurred by Landlord in seeking a reduction of
any such taxes or assessments, and all insurance premiums Landlord is required
to pay or deems necessary to pay, including public liability insurance, rent
loss insurance, and contractual liability insurance, with respect to the
Building; the costs, including interest, amortized over its useful life, of any
capital improvement made to the Building by or on behalf of Landlord after the
date of this Lease which is required under any governmental law or regulation
that was not applicable to the Building at the time of its construction, and of
the acquisition and installation of any device or equipment designed and
reasonably expected to reduce Operating Expenses or to improve the operating
efficiency of any system within the Building. The term "Operating Expenses" does
not include any depreciation allowance or expense, the cost of restoration
occasioned by casualty, income or franchise taxes of Landlord, expenses incurred
in leasing to or procuring of Tenants, leasing commissions or expenses for the
renovating of space for new Tenants.
(c) Tenant's Pro Rata Share. Tenant's pro rata share of Operating
Expenses shall mean the proportion that the rentable square footage in the
Premises hears to the total rentable square footage of the Building.
5. Late Payment Charge. Other remedies for nonpayment of Rent
notwithstanding, if any payment of Base Rent or Additional Rent is not received
by Landlord on or before the fifth
-3-
<PAGE> 4
(5th) day of the month for which such payment of Rent is due, or if any other
payment due Landlord by Tenant is not received by Landlord on or before the
tenth (10th) day of the month next following the month in which Tenant is
invoiced, a late payment charge of five percent (5%) of such amount for each and
every thirty (30) day period that said amount remains unpaid (but in no event
shall the amount of such late charge exceed an amount based upon the highest
legally permissible rate chargeable at any time by Landlord under the
circumstances) shall become due and payable in addition to such amounts owed
under this Lease. Should Tenant make a partial payment of past due amounts, the
amount of such partial payment shall be applied first to reduce all accrued and
unpaid late charges, in inverse order of their maturity, and then to reduce all
other past due amounts, in inverse order of their maturity.
6. Tenant Acceptance. Except as otherwise provided herein, Tenant has
accepted the Premises from Landlord pursuant to this Lease on an "as-is" basis,
and each party acknowledges that, except as specifically provided herein,
Landlord has made, makes and shall make no representations or warranties with
respect to the Premises, express or implied. Tenant acknowledges that Tenant has
had the full and complete opportunity to inspect the Premises (and to have the
engineering and other inspection reports prepared by professionals with respect
to the Premises). Without limiting the generality of the foregoing, Tenant
acknowledges and agrees that Landlord, except as specifically provided herein,
has made, makes and shall make (i) no representation or warranty of
tenantability or habitability with respect to the Premises, (ii) no
representation or warranty of fitness with respect to any personal property
contained therein, (iii) and no representation or warranty with respect to the
physical condition of the Premises or the operating order or condition of any
fixtures, equipment or systems of the Premises; and Tenant agrees that, except
for the representations specifically made herein, Tenant is not relying upon any
representations or warranties of Landlord with respect to the tenantability or
habitability, fitness, physical condition or operating order of the Premises or
any of the personal property or fixtures, equipment or systems contained
therein.
7. Security Deposits. Tenant shall pay to Landlord on or before March
1, 2000 a Security Deposit in the amount of $9,000.00. This Security Deposit
shall be returned to Tenant after termination of this Lease and delivery of
possession of the Premises in accordance with the terms of this Lease to the
Landlord. Such Security Deposit (or portion thereof) may be used by Landlord
toward payments due from Tenant. Tenant agrees to immediately restore the
Security Deposit so as to maintain a $9,000 balance throughout the term.
8. Usage. Tenant warrants and represents to Landlord that the Premises
shall be used and occupied only for the purpose of general offices (including
conference and computer facilities, employee kitchen and related facilities) and
for no other purpose.
9. Building Services. During the Term of this Lease, Landlord agrees to
operate and maintain the Building in a manner similar to and in accordance with
a standard of comparable buildings in the Boca Raton, Florida market area
("Comparable Buildings") and to provide to Tenant the following services, which
include, but are not limited to:
(a) General cleaning and janitorial service required as a result
of normal, prudent use of the Premises in accordance with EXHIBIT C attached
hereto and made a part hereof and only on Mondays through Fridays, inclusive,
with New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day (herein collectively called the "Holidays") excepted;
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(b) Heating, ventilating and air-conditioning service daily on
Mondays through Fridays, inclusive, with Holidays excepted, from 8:00 A.M. to
6:00 P.M. and on Saturdays, if not a Holiday, from 8:00 A.M. to 1:00 P.M. The
range of temperatures maintained in the Building shall be comparable to those
maintained in other like-kind office buildings in the City of Boca Raton,
Florida as the same may be regulated by governmental authority. Should Tenant
desire either heating or air conditioning at times when such services are not
furnished by Landlord under the terms of this Lease, such shall be provided upon
not less than twenty-four (24) hours prior notice to Landlord during Landlord's
normal business hours, and Tenant shall pay to Landlord $35.00 per hour. Tenant
may, in accordance with Section 12 hereof, install supplemental air conditioning
systems in the Premises at the sole cost and expense of Tenant, which systems
shall be separately metered (the installation cost of such meter to be Tenant's
expense) and all utility costs associated with such systems shall be Tenant's
responsibility.
(c) Electric current for lighting and reasonable facilities for
furnishing usual and normal electric power for office space. Tenant shall not,
without Landlord's prior written consent, use or install any equipment (i) which
consumes more than 30 Amps and 208 volts or (ii) uses electric current in excess
of the capacity of the feeders or lines to the Building or the risers or wiring
installation of the Building or the Premises;
(d) On-site property management services;
(e) Installation, as an Operating Expense subject to
reimbursement as provided in Section 4 hereof, of all replacement fluorescent
lamps, light bulbs and ballasts as needed in the Premises (including any
non-standard, special or upgraded lamps and ballasts within the Premises,
provided Tenant shall pay to Landlord upon demand as Additional Rent the
incremental difference in the cost of such non-standard lamps and ballasts over
the building standard lights and ballasts); and
(f) Passenger and freight elevators serving each of the floors of
the Premises in common with other tenants.
Failure by Landlord to any extent to furnish these defined services or
any other services not enumerated or any cessarion thereof, shall not render
Landlord liable in any respect for damages to either person or property, give
rise to any abatement of rent or relieve Tenant from fulfillment of any covenant
contained in this Lease. Should any of the equipment or machinery break down, or
for any cause cease to function properly, Landlord shall use reasonable
diligence to repair the same promptly, but Tenant shall have no claim for
abatement or rebate of rent on account of any interruption in service occasioned
from the repairs, except a specifically provided below.
10. INTENTIONALLY OMITTED.
11. Repairs and Maintenance. (a) Tenant's Repairs and Maintenance.
Tenant shall, at its own cost and expense, maintain the Premises in condition
existing on the date of this Lease, including all necessary repairs and
replacements. Tenant shall further, at its own cost and expense, repair or
restore any damage or injury to all or any part of the Building caused by Tenant
or Tenant's agents, employees, invitees, licensees, visitors or contractors,
including but not limited to any repairs or replacements necessitated by (i) the
construction or installation of
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improvements to the Premises by or on behalf of Tenant, (ii) the installation,
use or operation of Tenant's property, or (iii) the moving of any property into
or out of the Premises; provided, however, if Tenant fails to make the repairs
or replacements promptly, Landlord may, at its option upon ten (10) business
days written notice, make the repairs or replacements and the costs of such
repairs or replacements shall be charged to Tenant as Additional Rent and shall
become due and payable by Tenant with the monthly installment of Base Rent next
due hereunder.
(b) Condition at End of Term. On the Expiration Date, Tenant
shall surrender the Premises to Landlord in the condition in which Premises were
originally received from Landlord, except for ordinary wear and tear and damage
by casualty or taking not required to be repaired by Tenant hereunder. So long
as Tenant is not in default hereunder, Tenant may remove the Premises on or
prior to the Expiration Date all property situated therein which is not owned by
Landlord, and Tenant shall, on or prior to the Expiration Date, remove all of
Tenant's office equipment, trade fixtures and moveable furnishings from the
Premises. Property not so removed shall become the property of Landlord, and
Landlord may at Tenant's expense remove such property from the Premises and
dispose thereof without any liability of Landlord to Tenant.
(c) Landlord's Repairs and Maintenance. Landlord shall during the
Term maintain the Building in a manner comparable to other Comparable Buildings,
including, but not limited to, public areas of the Building, landscaped areas of
the Land and Building, elevators, stairs, common restrooms and main lobby area
for the Building, heating, ventilating and air conditioning systems (exclusive
of any Tenant supplemental air conditioning systems that Tenant shall install),
other mechanical systems, plumbing, life safety systems, electrical systems and
the structure.
12. Alterations and Improvements. (a) No alteration, addition,
improvement or installation (hereinafter collectively "Alterations" or
individually referred to as an "Alteration") to the Premises shall be made or
permitted to be made by Tenant, except as provided in Section 12(b) below,
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. As a condition of giving any consent under
this Section 12, Landlord may require, among other things, that Tenant (a)
deliver to Landlord and obtain Landlord's approval of final plans and
specifications for the Alterations, (b) obtain Landlord's approval of all
contractors and subcontractors performing Alterations, (c) obtain all permits,
approvals and certificates required by governmental or quasi-governmental
bodies, and upon completion, certificates of final approval and shall deliver
promptly duplicates required by governmental permits, approvals and certificates
to Landlord, (d) carry and cause all contractors and subcontractors to carry,
worker's compensation, general liability, personal and property damage
insurance, (e) if notice is given by Landlord to Tenant concurrently with the
delivery of Landlord's approval of any alteration that Landlord will require the
removal of an Alteration at the expiration or earlier termination of the term,
Landlord shall have the right to require Tenant, at its sole cost and expense,
to remove any "Non-Standard" (hereinafter defined) Alteration, at the expiration
or earlier termination of the Term and (f) provide security reasonably
satisfactory to Landlord in order to insure that the Premises and Building shall
be kept free from mechanics' or materialmens' liens and that all approved
Alterations will be fully paid for. For purposes of this Section 12(a), a
"Non-Standard" Alteration shall be any Alteration (y) that shall in Landlord's
reasonable opinion require demolition costs on a per square foot basis
materially greater than the costs on a per square foot basis to demolish the
tenant improvements initially
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installed in the Premises and approved by Landlord and (z) that is of a nature
nor generally found in comparable office space at the time of the request for
approval.
Notwithstanding the foregoing provisions of this Section 12(a), Tenant
shall have no right without Landlord's prior written consent, to make any
Alterations which would (i) adversely affect the load bearing structural
components and structural soundness of the Building, (ii) adversely affect the
central environmental systems (excluding ventilation duets, diffusers and
returns), (iii) adversely affect the electrical, plumbing or other utility
systems of the Building or (iv) adversely affect the roofing systems, window
glass, window gaskets or glazing.
Landlord agrees to provide a $15.00 per SF allowance to be used by
Tenant in the design and construction of the Premises. Such allowance shall be
below the finished ceiling.
(b) Notwithstanding the foregoing, Tenant may, without Landlord's
consent, make Alterations that are non-structural in nature and do not adversely
affect the Building mechanical, plumbing or electrical systems; provided (i)
tenant shall give Landlord fifteen (15) days advance notice of such Alterations
which notice shall include a description of such Alterations; (ii) all such
Alterations shall be installed or constructed in accordance with all laws; (iii)
Tenant shall obtain all necessary permits required by governmental or
quasi-governmental bodies; (iv) all contractors shall be approved by Landlord,
such approval not to be unreasonably withheld or delayed; (v) Tenant shall
deliver to landlord upon completion thereof as-built plans therefore; (vi) if
the Alteration is a Non-Standard Alteration and if notice is given by Landlord
to Tenant within said fifteen (15) day period that Landlord requires the removal
of such Non-Standard Alteration at the expiration or earlier termination of the
Term, then Tenant shall, at its sole costs and expense, remove any Non-Standard
Alteration at the expiration or earlier termination of the Term; and (vii)
Tenant shall carry and cause its contractors to carry worker's compensation,
general liability, personal and property damage insurance.
(c) Notwithstanding any provision in this Section 12 or otherwise
in this Lease to the contrary, Tenant shall not make any Alteration that shall
affect the facade or exterior face of the Building or otherwise affect the
appearance of the Building from the exterior of the Building in any respect.
Landlord reserve the right to unreasonably withhold its consent to any such
Alteration in Landlord's sole and absolute discretion.
(d) All Alterations which may be made to the Premises, shall
become the property of Landlord and remain and be surrendered with the Premises.
Tenant agrees to repair any damage to the Premises caused by or in connection
with the removal of any articles of personal property, business or trade
fixtures, including without limitation thereto, repairing the floor and patching
and painting the wall where damaged.
13. Standards for Work. (a) Whenever in this Lease Landlord or Tenant
is permitted or required to maintain and repair, or make additions, alterations,
substitutions or replacements, or reconstruct or restore the Building or the
Premises, such party shall cause such work (the "Work") to be done and completed
in a good, substantial and workmanlike manner, free from faults and defects, and
in compliance with all legal requirements, and shall utilize only new
first-class materials and supplies. The party performing such Work shall be
solely responsible for construction means, methods, techniques, sequences and
procedures, and for coordinating all activities related to the Work, and the
other party shall have no duty or obligation to inspect the
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<PAGE> 8
Work, but shall have the right to do so.
(b) Whenever Landlord or Tenant is required to perform any Work
upon the Building or the Premises, such party shall promptly commence the Work
and, once the Work is commenced, diligently and continually pursue the Work and
complete the Work within a reasonable time. The party performing such Work shall
supervise and direct the Work utilizing its best efforts and reasonable care,
and shall assign such qualified personnel to the Work as may be necessary to
cause the Work to be completed in an expeditious fashion.
(c) The party performing such Work shall (i) provide and pay for
all labor, material, goods, supplies, equipment, appliances, tools, construction
equipment and machinery and other facilities and services necessary for the
proper execution and completion of the Work; (ii) promptly pay when due all
costs and expenses incurred in connection with the Work; (iii) pay all sales,
consumer, use and similar taxes required by law in connection with the Work;
(iv) secure and pay for all permits, fees and licenses necessary for the
performance of the Work; and (v) at all times maintain the Premises and the
Project free and clear from any and all liens, claims, security interests and
encumbrances arising from or in connection with the Work, including, without
limitation, liens for materials delivered, supplied or furnished, or for
services or labor performed or rendered. All materials, supplies, goods,
appliances and equipment incorporated in the Work shall be free from any liens,
security interests or title retention arrangements, other than the lien or
security interest (if any) of the holder of any Mortgage placed upon the
Premises by Landlord. However, nothing contained in this Section is intended to
restrict or affect any right the party performing such Work may otherwise have
under this Lease for reimbursement of any costs or expenses incurred in
connection with such Work.
(d) The party performing such Work shall (i) be responsible for
the acts and omissions of all of it employees and all other persons performing
any of the Work; (ii) be responsible for initiating, maintaining and supervising
all necessary safety precautions and programs in connection with the Work; (iii)
take all reasonable precautions for the safety of, and provide all reasonable
protection to prevent damage, injury or loss to, the Work, all persons
performing the Work, all other persons who may be involved in or affected by the
Work, all materials and equipment to be incorporated in the Work and all other
property in the Building or on the land or adjacent thereto; (iv) purchase and
maintain in full force and effect, an cause its contractors and subcontractors
to purchase and maintain in full force and effect, such insurance (if any) in
addition to that otherwise required of such party under this Lease as may be
necessary to protect such party from claims under worker's compensation acts and
other employee benefit acts, from claims for damages because of bodily injury,
including death, and from claim for damage to property which arise out of
performance of the Work. Such additional insurance policies, if any, shall meet
the requirements set forth elsewhere herein with respect to the insurance
policies otherwise required to be obtained and maintained by such party under
this Lease. The party performing such Work shall pay and shall indemnify and
save the other party and its officers, employees and agents harmless from all
liabilities, damages, losses, costs, expenses, causes of action, suits, claims,
demands and judgments of any nature arising out of, by reason of or in
connection with the Work.
14. Compliance with Laws, Rules and Regulations. Tenant, at Tenant's
expense, shall comply with all laws, ordinances, orders, rules and regulations
of state, federal, county,
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municipal or other agencies or bodies having jurisdiction relating to the
Premises. Tenant will comply with the Rules and Regulations adopted by Landlord
which are set forth on EXHIBIT D, attached hereto and hereby made a part hereof.
Landlord shall have the right at all times to change the Rules and Regulations
in any reasonable manner as Landlord may deem necessary or advisable. All
changes and amendments in the Rules and Regulations will be sent by Landlord to
Tenant in writing and shall thereafter be carried out and observed by Tenant.
Landlord shall not enforce the Rules and Regulations in a discriminatory manner
against Tenant. landlord shall comply with all laws, ordinances, orders, rules
and regulation of state, federal, county, municipal or other agencies or bodies
having jurisdiction relating to the Building other than the Premises and
portions of the Project leased to other tenants.
15. Condemnation. (a) Substantial Taking. If, during the Term, all or a
substantial part of the Premises is permanently taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain or by purchase or exchange in lieu thereof, and the
taking would prevent or materially interfere with the use of the Premises for
the purpose for which they are then being used, the Term shall terminate and the
Rent shall be abated during the otherwise unexpired portion of the Term
effective on the date physical possession of the condemned property it taken by
the condemning authority. The determination of whether such taking would prevent
or materially interfere with the use of the Premises shall be made by Landlord,
however Landlord shall act reasonably in making such determination.
(b) Less Than Substantial Taking. In the event a portion of the
Premises shall be taken for any public or quasi-public use under any
governmental law, ordinance or regulation, or by right of eminent domain or by
purchase or exchange in lieu thereof, and the Term is not terminated as provided
in subsection (a) above, Landlord may, at Landlord's option and at Landlord's
expense, restore and reconstruct the Building and other improvements of which
the Premises are a part to the extent necessary to make them reasonably
tenantable, and the Rent for the remainder of the Term shall be abated to such
extent as may be fair and reasonable considering all the circumstances.
16. Fire and Casualty. (a) Substantial Damage. If the Premises should
be totally destroyed by fire or other casualty, or if the Premises should be so
damaged such that the rebuilding cannot reasonably be completed within two
hundred forty five (245) days after the date of written notification by Tenant
to Landlord of the destruction, either Landlord or Tenant may terminate this
Lease and the Rent shall be abated for the otherwise unexpired portion of the
Term, effective as of the date of such casualty. The determination of whether
such rebuilding can reasonably be completed within such period shall be made by
Landlord, however, Landlord shall act reasonably in making such determination.
(b) Less Than Substantial Damage. If the Premises should be
partially damaged by fire or other casualty, and the rebuilding or repairs can
reasonably be completed within two hundred forty five (245) days after written
notification by Tenant to Landlord of the damage, or if Landlord or Tenant does
not elect to terminate the Lease as set forth in Section 16(a) above, Landlord
may at its option, either terminate this Lease or proceed with reasonable
diligence to rebuild or repair the Building or other improvements of which the
Premises are a part to substantially the same condition as existed prior to the
damage. If the Premises are to be so rebuilt or repaired and are untenantable in
whole or in part following the damage, and the
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damage was not caused or contributed to by the willful misconduct of Tenant, its
agents, employees, invitees, visitors, contractors, or those for whom Tenant is
responsible, the Rent payable hereunder during the period for which the Premises
are untenantable shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. In the event that Landlord fails to complete
the necessary repairs or rebuilding within two hundred forty five (245) days
from the date of written notification by Tenant to Landlord of the damage, with
due allowance for any force majeure, Tenant may at its option terminate this
Lease effective as of the end of such period for repair or rebuilding, by
delivering written notice of such termination to Landlord.
17. Insurance. (a) Landlord's Insurance. Landlord agrees to maintain
during the Term the following insurance (the cost of which is to be included as
an Operating Expense): (i) "all risk" coverage insurance on the Building and the
other improvements on the Property, exclusive of any improvements constructed
within the Premises by or on behalf of Tenant, in an amount equal to the full
replacement cost thereof; and (b) a policy or policies of worker's compensation
and comprehensive general liability insurance, including personal injury and
property damage in the amount of One Million and No/100 Dollars ($1,000,000.00)
for property damage and One Million and No/100 Dollars ($1,000,000.00) per
occurrence for personal injuries or deaths of persons occurring in or about the
Property. Tenant shall not permit the Premises to be used in any way which
would, in the opinion of Landlord, be extra hazardous on account of fire or
other hazard or casualty or which would otherwise and in other ways increase the
premiums for or render void any insurance relating to the Building or the
contents thereof or any liability of Landlord. If Tenant's specific use and
occupancy of the Premises causes any increase in any insurance premiums paid by
Landlord with respect to the Building, or if Tenant abandons the Premises and
thereby causes an increase in such premiums, then Tenant shall pay the Landlord
upon demand as Additional Rent the amount of such increase. Landlord shall not
be obligated in any way or manner to insure any personal property (including but
not limited to any furniture, machinery, equipment, goods or supplies) of Tenant
or which Tenant may have upon or within the Premises or any fixtures installed
by or paid for by Tenant upon or within the Premises or any additional
improvements which Tenant may construct on the Premises.
(b) Tenant's Insurance. Tenant shall, at its sole expense, at all
times during the Term of this Lease maintain in effect a policy or policies of
insurance (i) covering its personal property located in the Premises and tenant
improvements to the Premises paid for and installed by Tenant and Landlord other
than as set forth in (a) above, providing protection against any period included
under insurance practices within the classification "all risk" and to the full
insurable value of such personal property and tenant improvements and (ii)
comprehensive public liability insurance with respect to the Premises and the
conduct or operation of Tenant's business therein, with limits of not less than
One Million and No/100 Dollars ($1,000,000.00) for death or bodily injury to any
one or more persons in a single occurrence and One Million and No/100 Dollars
($1,000,000.00) for property damage. Tenant hereby waives any and all rights of
recovery against Landlord for any insured loss or liability occurring to
Tenant's personal property and tenant improvements and the aforesaid policy or
policies shall contain appropriate provisions recognizing this release by Tenant
and waiving all rights of subrogation by the insurance carrier. Except for
Landlord's negligence or willful misconduct, Tenant hereby indemnifies and holds
Landlord harmless from all claims, demands, actions, damages, loss, liabilities,
judgments, costs and expenses, including, without limitation, attorneys' fees
and costs which are suffered by, recovered from or asserted against Landlord and
arise from or in
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connection with the use or occupancy of the Premises and/or any accident, injury
or damage occurring in the Premises. Tenant shall maintain a policy or policies
of insurance with the premiums paid in advance issued by and binding upon a
solvent insurance company, authorized to transact business in Florida, insuring
all personal property of Tenant upon or within the Premises in an amount equal
to the full replacement cost of such property. Tenant shall deliver certificates
of such insurance to Landlord on or before the Commencement Date, and thereafter
from time to time upon request.
18. Waiver of Subrogation. Landlord and Tenant, to the fullest extent
permitted by law, each hereby waive all claims, causes of action and rights of
recovery against the other for and hereby release the other from liability for,
loss or damage to the extent such loss or damage is insured by valid and
collectible insurance in effect at the time of such loss or damage.
19. Liability and Indemnification. Landlord shall not be liable to
Tenant's employees, agents, invitees, licensees, contractors or visitors, or to
any other person, for any injury to person or damage to property on or about the
Premises caused by the negligence or misconduct of Tenant, its agents, servants,
or employees or of any other person entering upon the Premises under express or
implied invitation by Tenant. Except for Landlord's negligence or willful
misconduct, Tenant agrees to indemnify and hold harmless Landlord of and from
any loss, attorneys' fees, expenses or claims arising out of (i) any such damage
or injury, (ii) any and all defaults by Tenant hereunder, or otherwise by reason
of or resulting from the use or occupancy of the Premises.
Except for Tenant's negligence or willful misconduct, Landlord
agrees to indemnify and hold harmless Tenant from any loss, attorneys' fees,
expenses or claims arising out of Landlord's negligence or willful misconduct.
20. Quiet Enjoyment. Landlord warrants that it has full right to
execute and to perform this Lease and that Tenant, upon payment in full of the
required Rent and full performance of the terms, conditions, covenants and
agreements contained in this Lease, shall peaceably and quietly have, hold and
enjoy the Premises during the Term, subject only to the matters set forth in
Section 21 below. Landlord shall not be responsible for the acts or omissions of
any other Tenant, lessee or third party that may interfere with Tenant's use and
employment of the Premises.
21. Landlord's Right Of Entry. With reasonable notice (except in the
case of an emergency), Landlord or its authorized agent shall at any and all
reasonable times have the right to enter the Premises to inspect the same, to
supply janitorial service or any other service to be provided by Landlord, to
show the Premises to perspective purchasers or tenants (only during the last
twelve (12) months of the Term with respect to prospective tenants), and to
alter, improve or repair the Premises or any other portion of the Building.
Tenant shall make available a representative of Tenant during all periods
(except in an emergency) during which Landlord shall at all times have and
retain a key with which to unlock all of the doors in, upon and about the
Premises. Tenant shall not change Landlord's lock system or in any other manner
prohibit Landlord from entering the Premises. Landlord shall have the right to
use any and all means which Landlord may deem proper to open any door in an
emergency without liability therefore.
22. Assignment of Sublet. (a) Tenant shall not assign, in whole or in
part, this Lease, or allow it to e assigned, in whole or in part, by operation
of law or otherwise(including without
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limitation by transfer of a majority interest in a partnership or a majority
interest of stock, merger or dissolution, which transfer of majority interest,
merger or dissolution shall be deemed an assignment) or mortgage or pledge the
same, or sublet the Premises in whole or in part, without the prior written
consent of Landlord (which consent shall not be unreasonably withheld or
delayed) and in no event shall any such assignment or sublease release Tenant or
any guarantor from any obligation or liability hereunder. The foregoing
provision of this Section 22 shall not apply to restrict any transfer of stock
whenever Tenant is a corporation the outstanding stock of which is listed on a
recognized national stock exchange or the National Association of Securities
Dealers National Market System or in connection with an initial public offering
or a private placement of stock pursuant to Section 3(a)(11), (4)(2) or
regulations D and S of the Securities Act of 1933, as amended. No assignee or
sublessee of the Premises or any portion thereof may assign or sublet the
Premises or any portion thereof.
(b) Any assignment or sublease made by Tenant without Landlord's
consent when Landlord's consent is required pursuant to the terms of this Lease
shall be void, and, at Landlord's option, constitute a default under the terms
and conditions of this Lease.
(c) Consent by Landlord to any assignment, transfer or subletting
to any party, shall not be construed as a waiver or a release of Tenant from the
terms of any covenant or obligation under this Lease, nor shall its consent to
one assignment, transfer or subletting to another person, partnership, firm or
corporation.
(d) In the case of an approved subletting, Landlord shall have
the right to any and all sums or economic consideration in excess of the Base
Rent and Additional Rent payable hereunder from such subletting reasonably
attributable to the sublet portion of the Premises, as and when received. In the
case of an assignment of this Lease, Landlord shall have the right to any and
all sums or other economic consideration in excess of the Base Rent and
Additional Rent reasonably attributable to such assignment of this Lease, as and
when received.
(e) Notwithstanding the above provisions of this Section 22,
Tenant shall have the right to sublet or assign all or part of the Premises
without the prior consent of Landlord to: (i) any person, corporation,
partnership or other entity which shall control, be under the control of, or be
under common control with, Tenant and/or (ii) any corporation, partnership or
other business entity resulting from the merger, consolidation or other business
combination with Tenant to any person or entity that acquires all or
substantially all of Tenant's assets as a going concern of the business that is
being conducted in the Premises, as long as the assignee or sublessee assumes in
full the obligations of Tenant under this Lease, provided, however, that (1)
such assignee or subtenant must be a bona fide entity, (2) such assignee's or
subtenant's proposed use of the Premises must be consistent with the uses
permitted under this Lease, (3) the character, reputation, and business of the
proposed assignee or sublessee is consistent with the tenants then in the
Building, including Tenant and (4) Tenant shall nonetheless be required to
provide the following information, documentation and notice: (aa) the identity
of such sublessee or assignee, (bb) the planned use of the Premises and the
business to be conducted therefrom, and (cc) reasonable documentation to
evidence that the proposed sublessee or assignee shall in fact be an affiliate
meeting the qualifications of this Section 22(e). Further, if requested by
Landlord, Tenant shall provide to Landlord such other information as may be
reasonably requested by Landlord during such fifteen (15) business day period to
substantiate Tenant's right
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to consummate said subleases or assignments as contemplated by this Section
22(e). For purposes of this Section 22, the term "control" shall mean
possession, direct or indirect, of the power to direct, or cause the direction
of, the management and policies of any person or entity, if through the
ownership of at least twenty percent (20%) of the voting securities, partnership
interests or similar ownership rights. Landlord acknowledges that such
information is confidential information and may not be used, disclosed or acted
upon for the purpose of insider trading or otherwise in contravention of the
Securities Act of 1933, as amended, or the Exchange Act of 1934.
23. Events of Default. Each of the following shall be deemed to be an
Event of Default by Tenant under this Lease: (a) Tenant shall fail to pay any
installment of Base Rent and Additional Rent when due or any other amount
required pursuant to this Lease within five (5) days after written notice by
Landlord to Tenant that such sum is due and unpaid; provided, however, that
notwithstanding the foregoing, Landlord shall have no obligation to notify
Tenant of the failure to pay any sum due from Tenant under this Lease on more
than two (2) occasions during any twelve (12) month period; (b) Tenant shall
fail to comply with any term, provision or covenant of this Lease, other than
payment of Base Rent, Additional Rent, or any other required amount, and the
failure is not cured within thirty (30) days after written notice to Tenant (or
if such failure to comply on the part of Tenant would reasonably require more
than thirty (30) days to rectify, unless Tenant commences rectification within
the thirty (30) day notice period and thereafter promptly, effectively an
continuously proceeds with the rectification of the failure to comply on the
part of Tenant and, in all events, cures such failure to comply on the part of
Tenant no later than sixty (60) after such notice); (c) Tenant shall file a
petition for relief or be adjudged bankrupt or insolvent under the Federal
Bankruptcy Act, as amended, U.S.C.A. Title 11 (entitled "Bankruptcy") Section
101 et seq., as amended, or any similar law or statute of the United States or
any state; or a receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant; or Tenant shall make a transfer in fraud of
creditors or shall make an assignment for the benefit of creditors and fails to
have such receiver or trustee dismissed within ninety (90) days from the date of
such appointment; or (d) Tenant shall do or permit to be done any act which
results in a lien being filed against the Premises or the Building and fails to
remove such lien by payment, bond or otherwise within twenty (20) business days
from receipt of Landlord's notice to remove.
24. Remedies For Tenant's Default. Upon the occurrence of any event of
Default, Landlord may at its option pursue any one or more of the following
remedies, and any and all other rights or remedies accruing to Landlord by law
or otherwise, without any notice or demand: (a) commence dispossessory
proceedings with or without the termination of this Lease; (b) declare the
entire amount of Rent calculated on the current rate being paid by Tenant, and
other sums which in Landlord's reasonable determination would become due and
payable during the remainder of the Term (including, but not limited to,
increases in Rent pursuant to the terms hereof), discounted to present value by
using a reasonable discount rate selected by Landlord, to be due and payable
immediately. Upon such acceleration of such amounts, Tenant agrees to pay the
same at once, together with all Rent and other amounts theretofore due, at
Landlord's address as provided herein, provided however, that such payment shall
not constitute a penalty or forfeiture but shall constitute liquidated damages
for Tenant's failure to comply with the terms and provisions of this Lease
(Landlord and Tenant agreeing that Landlord's actual damages in such an event
are impossible to ascertain and that the amount set forth above is a reasonable
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<PAGE> 14
estimate thereof). Upon making such payment, Tenant shall receive from Landlord
all rents received by Landlord from other tenants renting the Premises during
the Term, provided that the monies to which Tenant shall so become entitled
shall in no event exceed the entire amount actually paid by Tenant to Landlord
pursuant to the preceding sentence, less all of Landlord's costs and expenses
(including, without limitation, brokerage and attorneys' fees and expenses)
incurred in connection with or in any way related to the reletting of the
Premises. The acceptance of such payment by Landlord shall not constitute a
waiver of rights or remedies to Landlord for any failure of Tenant thereafter
occurring to comply with any term, provision, condition or covenant of this
Lease; (c) commence proceedings against Tenant for all amount owed by Tenant to
Landlord whether a Base Rent, Additional Rent, damages or otherwise; (d)
terminate the Term, in which event Tenant shall immediately surrender the
Premises to Landlord and Tenant agrees to pay on demand the amount of all loss
and damage which Landlord may suffer by reason of the termination of the Term
under this subsection or otherwise; (e) with or without terminating this Lease,
relet the Premises on behalf of Tenant an receive directly the rent by reason of
the reletting in which event Tenant agrees to pay landlord on demand any
deficiency that may arise by reason of any reletting of the Premises and to
reimburse Landlord upon demand for any expenditures made by it for remodeling or
repairing in order to relet the Premises and for all other expenses incurred in
connection with such reletting; Landlord shall not be liable for any failure to
relet the Premises, in whole or in part, nor for any failure to collect any rent
due from any such reletting; rather, Tenant shall remain liable for all Rent and
for all such expenses; (f) enter upon and take possession of the Premises,
without being liable for prosecution of any claim for damages or for trespass or
other tort; (g) do or caused to be done whatever Tenant is obligated to do under
the terms of this Lease, in which case Tenant agrees to reimburse Landlord on
demand for any and all costs or expenses which Landlord may thereby incur and
Tenant agrees that Landlord shall not be liable for any damages resulting to
tenant from effecting compliance with Tenant's obligations under this
subsection, whether caused by the negligence of Landlord or otherwise; or (h)
enforce the performance of Tenant's obligations hereunder by injunction or other
equitable relief (which remedy may be exercised upon any breach or default or
any threatened breach or default of Tenant's obligations hereunder).
25. Waiver Of Default Or Remedy. Tenant understands and acknowledges
that no assent, express or implied, by Landlord to any breach of any one or more
of the terms, covenants or conditions hereof shall be deemed or taken to be a
waiver of any succeeding or other breach, whether of the same or any other term,
covenant or condition hereof.
26. Force Majeure. Landlord and Tenant (except with respect to the
payment of Base Rent, Additional Rent or any other monetary obligation under
this Lease) shall be excused for the period of any delay and shall not be deemed
in default with respect to the performance of any of the terms, covenants and
conditions of this Lease when prevented from so doing by a cause or causes
beyond the Landlord's or Tenant's (as the case may be) control, which shall
include, without limitation, all labor disputes, governmental regulations or
controls, fire or other casualty, inability to obtain any material or services,
acts of God, or any other cause not within the reasonable control of Landlord or
Tenant (as the case may be).
27. Attorney's Fees. In the event of any lawsuit or court action
between Landlord and Tenant arising out of or under this Lease or the terms and
conditions stated herein, the prevailing party in such lawsuit or court action
shall be entitled to and shall collect from the non-prevailing party the
reasonable attorney's fees and court costs actually incurred by the prevailing
party with
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<PAGE> 15
respect to said lawsuit or court action. The prevailing party shall be deemed to
be that party who obtains substantially the same relief sought whether by
compromise, settlement or judgment.
28. Holding Over. Tenant will, at the termination of this Lease by
lapse of time or otherwise, yield up immediate possession of the Premises to
Landlord. If Tenant retains possession of the Premises or any part thereof after
such termination, then such holding over shall create a tenancy at sufferance
upon the terms and conditions set forth in this Lease; provided, however, that
the Base Rent shall, in addition to all other sums which are to be paid by
Tenant hereunder, whether or not as Additional Rent, be equal to one hundred
fifty percent (150%) of the Base Rent being paid to Landlord under this Lease
immediately prior to such termination (prorated for each day Tenant remains in
possession); provided, however, that in the event Landlord has provided Tenant
notice of termination and Tenant retains possession the Base Rent shall be two
hundred percent (200%) of the Base Rent being paid to Landlord under this Lease
immediately prior to such termination (prorated for each day Tenant remains in
possession); and there shall be no renewal of this Lease by operation of law.
The provisions of this Section 28 shall not constitute a waiver of any right of
re-entry as herein set forth or as provided by law; nor shall receipt of any
rent or other act in apparent affirmance of the tenancy operate as a waiver of
the right to terminate this Lease for a breach of any of the terms, covenants or
obligations herein on Tenant's part to be performed.
29. Rights Of Mortgagees And Others. Tenant accepts this Lease subject
and subordinate to the lien or security title of any recorded mortgage, deed of
trust or deed to secure debt presently existing or hereafter created upon the
Premises and to all existing recorded restrictions, covenants, easements and
agreements with respect to the Building or any part thereof, and all amendments,
modifications and restatements thereof and all replacements and substitutions
therefor. Any provisions of this Lease requiring the approval or consent of
Landlord shall not be deemed to have been unreasonably withheld if any mortgagee
(which shall include the holder of any mortgage, deed of trust or deed to secure
debt) of the Premises or Building or any portion thereof shall refuse or
withhold its approval or consent thereto. Any requirement of Landlord pursuant
to this Lease which is imposed pursuant to the direction of any such mortgagee
shall be deemed to have been reasonably imposed by Landlord if made in good
faith. Landlord agrees to obtain from the holder of any current or future
indebtedness secured by a deed of trust, deed to secure debt or mortgage
encumbering the Building such holder's agreement substantially in the form
attached hereto as EXHIBIT E and incorporated herein by this reference stating
that in the event of foreclosure under such deed of trust, deed to secure debt
or mortgage (or deed in lieu thereof), the purchaser or new owner of Building
will not disturb Tenant's occupancy or any other rights under the terms of this
Lease, and will honor and recognize this Lease, so long as Tenant is not in
default under the terms and provisions of this Lease subject to terms and
conditions typically contained in such instruments.
30. Estoppel Certificates. Within ten (10) business days following any
written request which a party may make from time to time (but not more often
than four (4) times in any calendar year), the other party shall execute,
acknowledge and deliver to the requesting party a certificate stating that this
Lease is unmodified and in full effect (or, if there have been modifications,
that this Lease is in full effect as modified, and setting forth such
modifications); the amounts and dates to which Base Rent, Additional Rent and
other sums payable hereunder have been paid; such other reasonable information
pertaining to the Lease as may be requested by Landlord or Tenant, as the case
may be; and either that to the knowledge of the signer of such
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<PAGE> 16
certificate no default exists hereunder or specifying each such default of which
the signer has knowledge. Landlord and Tenant intend that any statement
delivered pursuant to this Section 30 may be relied upon by the requesting party
and any individual or entity named by the requesting party in the request
therefor.
31. Successors And Assigns. This Lease shall be binding upon and inure
to the benefit of Landlord and Tenant and their respective heirs,
representatives and assigns, subject, however, to the provisions of Section 23
above. It is hereby covenanted and agreed that should Landlord's interest in the
Premises cease to exist for any reason during the Term, then notwithstanding the
happening of such event this Lease nevertheless shall remain unimpaired and in
full force and effect and Tenant hereby agrees to be bound and obligated
hereunder to the then owner of the Premises as landlord provided the new owner
accepts the obligations of landlord hereunder.
32. Notice. (a) Except for legal process, which may also be served as
by law provided or as provided below, all notices required or desired so be
given with respect to this Lease shall be in writing and shall be deemed to be
given to and received by the party intended to receive such notice when
delivered by overnight courier, hand delivered or three (3) days after such
notice shall have been deposited, postage prepaid, in the United States mail,
certified, return receipt requested, properly addressed to the addresses
specified below. In the event of a change of address by either party, such party
shall give written notice thereof in accordance with the foregoing.
<TABLE>
<CAPTION>
Landlord's Address for Notices: Tenant's Address for Notices:
------------------------------- ----------------------------
<S> <C>
Fairfax Boca 92, L.P. Visual Edge Systems Inc.
c/o Flagship Group, Inc. 901 Yamato Road, Suite 175
2300 Windy Ridge Parkway, Suite 50 Boca Raton, Florida 33431
Atlanta, GA 30339-5671 Attention: Tom Peters
Attention: T. Gordy Germany
</TABLE>
33. Brokerage Claims. Tenant and Landlord hereby warrant and represent
to the other that Tenant or Landlord, as the case may be, has not dealt with any
broker, agent or finder in connection with this Agreement other than Cushman &
Wakefield of Florida, Inc. Both Landlord and Tenant covenant and agree to hold
each other harmless from and against any and all loss, liability, damage, claim,
judgment, cost or expense (including but not limited to attorneys' fees and
expenses and court costs) that may be incurred or suffered by the other party
because of any claim for any fee, commission or similar compensation with
respect to this Agreement, made by any other broker, agent or finder claiming to
have dealt with such party, whether or not such claim is meritorious. Landlord
agrees to pay Cushman & Wakefield of Florida, Inc. pursuant to a separate
agreement.
34. Signs. Tenant shall not install, paint, display, inscribe, place or
affix any sign, picture, advertisement, notice, lettering, or direction
(hereinafter collectively called "Signs") on the exterior of the Premises, the
common areas of the Building, the interior surface of glass or any other
location which could be visible from outside of the Premises without first
securing written consent from Landlord therefore. Any Sign permitted by Landlord
shall at all times conform with all municipal ordinances or other laws,
regulations, deed restrictions and protective covenants applicable thereto.
Tenant shall remove all Signs at the expiration or other
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<PAGE> 17
termination of this Lease, at Tenant's sole risk and expense, and shall in a
good and workmanlike manner properly repair any damage caused by the
installation, existence, or removal of Tenant's Signs.
35. Entire Agreement, Amendment and Limitation of Warranties. IT IS
EXPRESSLY AGREED BY TENANT, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF
THIS LEASE, THAT THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC
DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES; THAT THERE ARE, AND WERE NO
VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR
PROMISES PERTAINING TO THIS LEASE OR THE EXPRESSLY MENTIONED EXTRINSIC DOCUMENTS
NOT INCORPORATED IN WRITING IN THIS LEASE. LANDLORD AND TENANT EXPRESSLY AGREE
THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY,
HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR USE OR OF ANY OTHER KIND
ARISING OUT OF THIS LEASE AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE
EXPRESSLY SET FORTH IN THIS LEASE. IT IS LIKEWISE AGREED THAT THIS LEASE MAY NOT
BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING
SIGNED BY BOTH LANDLORD AND TENANT.
36. Limitation Of Liability. Landlord's obligations and liability with
respect to this Lease shall be limited solely to Landlord's interest in the
Building, as such interest is constituted from time to time, and neither
Landlord nor any officer, director, shareholder or partner or Landlord, or of
any partner of Landlord, shall have any personal liability whatsoever with
respect to this Lease.
37. Submission of Agreement. Submission of this Lease to Tenant for
signature does not constitute a reservation of space or an option to acquire a
right of entry This Lease is not binding or effective until execution by and
delivery to both Landlord and Tenant.
38. Corporate Authority. (a) If Tenant executes this Lease as a
corporation, each of the persons executing this Lease on behalf of Tenant does
hereby represent and warrant that Tenant is a duly organized an validly existing
corporation, that Tenant is qualified to do business in the State in which the
Building is located, that Tenant has full right, power, and authority to enter
into this Lease, and that each person signing on behalf of Tenant is authorized
to do so and Tenant shall provide Landlord evidence reasonably acceptable to
Landlord of such authority. Upon Landlord's request, Tenant shall provide
Landlord with evidence reasonably satisfactory to Tenant confirming the
foregoing representations and warranties.
39. Miscellaneous. The captions appearing in this Lease are inserted
only as a matter of convenience and in no way define, limit, construe or
describe the scope or intent of any provision hereof. If any provision of this
Lease shall ever be held to be invalid or unenforceable in any circumstance or
as to any person, such invalidity or unenforceability shall not effect such
provision in any other circumstance or as to any other person or any other
provision of this Lease. This Lease, or any portion hereof, shall not be
recorded unless both parties hereto agreed to the recording.
40. Governing Law. This Lease shall be governed and construed in
accordance with the laws of the State in which the Building is located.
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<PAGE> 18
41. Counterparts. This Lease may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute one
agreement, and the signatures of any party to any counterpart shall be deemed to
be a signature to, and may be appended to, any other counterpart.
42. Radon Disclosure. Radon is a naturally occurring radioactive gas
that, when it has accumulated in a building in sufficient quantities, may
present health risks to persons who are exposed to it over a time. Levels of
radon that exceed federal and state guidelines have been found in buildings in
Florida. Additional information regarding radon and radon testing may be
obtained from the County Public Health Unit.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Lease under seal as of the day and year first above written.
LANDLORD:
FAIRFAX BOCA 92, L.P.,
a Georgia limited partnership
By: Fairfax Properties, Inc
Its duly authorized general partner
Witness: /s/ Illegible By: /s/ Illegible
------------------ ---------------------------------
Its: Illegible
--------------------------------
TENANT:
VISUAL EDGE SYSTEMS INC.
Witness: /s/ Tom Peters By: /s/ Illegible
------------------ ---------------------------------
Its: CEO
--------------------------------
[CORPORATE SEAL]
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<PAGE> 19
EXHIBIT "A"
(diagram provided)
-19-
<PAGE> 20
EXHIBIT "B"
[LEGAL DESCRIPTION OF LAND]
_______________ IN FLOOD PLAN A6, ELEV. 11 (2/1/79),
_________ FLOOD INSURANCE MAP, PALM BEACH COUNTY, FLORIDA,
___________ PANEL NUMBER 1,20192 0220 B, MAP REVISED OCTOBER 15, 1962
DESCRIPTION: Parcel "B" of North Forty
A parcel of land lying and being in Sections 1 and 12, Township 47 South; Range
42 East and Sections 6 and 7, Township 47 South, Range 43 East, Palm Beach
County, Florida, described as follows:
Commence at the Northeast corner of said Section 12; thence South
00(degree)29'15" West, along the East line of said Section 12, a distance of
80.01 feet to the North right-of-way line of N.W. 51st Street and the Point of
Beginning of this description; thence North 86(degree)35'00" West, along a line
80.00 feet South of, and parallel with, as measured at right angles to the North
line of said Section 12, a distance of 453.93 feet; thence North
00(degree)24'40" East, a distance of 149.73 feet; thence North 89(degree)35'20"
West, a distance of 4.27 feet;; thence North 00(degree)24'40" East, a distance
of 69.93 feet; thence North 89(degree)35'20" West, a distance of 2.46 feet;
thence North 00(degree)24'40" East, a distance of 578.59 feet; thence South
89(degree)35'20" East, a distance of 14.51 feet; thence North 00(degree)24'40"
West, a distance of 13.99 feet; thence South 88(degree)35'00" East, a distance
of 504.73 feet to the East line said Section 1, thence continue South
88(degree)35'00" East, a distance of 57.50 feet; thence South 00(degree)29'15"
West, parallel with the East line of said Section 1, a distance of 250.00 feet;
thence South 88(degree)35'00" East, a distance of 20.00 feet; thence South
00(degree)29'15" West, a distance of 436.82 feet to a line 45.00 feet North of
and parallel with the South line of said Section 6; thence South
89(degree)42'30" East, along said parallel line, a distance of 40.00 feet;
thence South 00(degree)29'15" West, a distance 45.00 feet to the South line of
said Section 6; thence continue South 00(degree)29'15" West, a distance of 80.00
feet to a line 80.00 feet South of and parallel with the South line of said
Section 6, said point being further described as being the North right-of-way
line of N.W. 51st Street; thence North 89(degree)42'30" West, along said
parallel line, a distance of 117.50 feet to the said Point of Beginning of this
description.
said lands situate, lying and being in Palm Beach County, Florida.
Containing 10.03 acres, more or less.
S=SET R/W=RIGHT-OF-WAY M=MEASURED
R=RADIUS (F)=FOUND P = PLAT
C=CALCULATED PP=POWER POLE
N/T=NAIL & TAB UE=UTILITY EASEMENT
O/S=OFFSET LME=LAKE MAINTENANCE EASEMENT
A/C=AIR CONDITIONING PAD TOB-TOP OF BANK
FT=FEET DEFAULT=DRAINAGE EASEMENT
C&G=CURB & GUTTER CL=CENTERLINE
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<PAGE> 21
EXHIBIT "C"
Cleaning service for the North 40 includes:
Daily Operations
Lobby:-
1. Dust mop floors. Damp mop hard surface floors.
2. Spot clean interior glass partitions, doors, frames, light switches,
baseboards, et. Wash entrance glass on both sides.
3. Dust all partitions, doors, door frame surfaces and all horizontal
surfaces.
4. Wash exterior surfaces of all trash containers.
5. Empty and damp wipe ashtrays.
Corridors, Elevators and Stairwells -
1. Empty and damp wipe ashtrays.
2. Dust to hand height all horizontal surfaces of ledges, sills,
ventilating louvers, frames, etc.
3. Clean and sanitize all drinking fountains.
4. Empty waste containers.
5. Vacuum all carpeted areas.
6. Spot wash wall an exterior surfaces of elevator doors.
7. Sweep and remove leaves from atrium floors.
8. Dust grab rails.
9. Sweep and wash steps and landings, as necessary.
General Office Area:
1. Empty all waste baskets in offices and replace basket liners as
required.
2. Dust and spot clean all countertops.
3. Dust all horizontal surfaces of desks, chairs, tables and office
equipment.
4. Dust all exposed filing cabinets, bookcases and shelves.
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<PAGE> 22
Cleaning Service for The North 40
General Office Area: - (continued)
5. Dust to hand height all horizontal surfaces of equipment, ledges,
sills, shelves, frames partitions, etc.
6. Dust all telephones.
7. Vacuum clean all exposed carpeting.
8. Dust mop or sweep all non-carpeted floors.
9. Spot wash walls, glass surfaces, doors, frames, light switches,
baseboards, desk tops, and countertops.
Rest Rooms: -
1. Clean and disinfect all fixtures, toilets, urinals and partitions. Mop
floors and clean mirrors. Stock all dispensers.
2. Empty and damp wipe ashtrays.
Work Hours: -
All cleaning shall be performed on a five (5) day week, Monday through Friday,
between 6:30 P.M. and 11:00 P.M.
Additional Work Requested by Tenant: -
Any additional work requested by tenants can be per an agreed additional charge
and can be paid for by management or the requesting tenant.
Insurance: -
Any company performing janitorial services in The North 40 will maintain
worker's compensation and contractor's liability insurance.
Quarterly or as required: -
o Wash windows interior and exterior
o Clean all mechanical, equipment rooms, plumbing pipes in stairwells
o Dust blinds and clean any finger prints
o Clean all light fixtures, fire equipment boxes and exit lights
o Spot clean all carpet, including traffic areas
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<PAGE> 23
EXHIBIT "D"
[RULES AND REGULATIONS]
To ensure minimizing of inconvenience to tenants and to maintain the interior
space in a condition comparable to other first class space in the Boca Raton,
Florida market area, the following Building regulations are provided and are
applicable to Tenant except as otherwise specifically addressed in the Lease:
1. The sidewalks, entry passages, corridors, halls, elevators and
stairways shall not be obstructed by Tenant, or used by Tenant for any purpose
other than chose in ingress and egress. The floors, skylights and windows that
reflect or admit light into any place in said Building, shall not be covered or
obstructed by Tenant subject to Tenant's right to install window coverings such
as blinds. The water closets and other water apparatus, shall not be used for
any other purpose than those for which they were constructed, and no sweepings,
rubbish, or other obstructing substances shall be thrown therein.
2. No advertisement, sign, or other notice, shall be inscribed, painted
or affixed on any part of the outside or inside of said Building, except upon
the interior doors and windows permitted by Landlord, which signs, etc., shall
be of such order, size an style and at such places as shall be designated by
Landlord. Exterior signs on doors will be provided for Tenant by Landlord, the
cost of such signage to be charged to and paid for by Tenant.
3. Nothing shall be thrown by Tenant, its clerks, or servants out of
the windows or doors or down the passages or skylights of the Building. No rooms
shall be occupied or used as sleeping or lodging apartments at anytime.
4. Tenant shall not employ any persons other than the janitors of
Landlord or others reasonably approved by Landlord (who will be provided with
pass-keys into the offices) for the purposes of cleaning or taking charge of
said Premises. It is understood and agreed that the Landlord shall not be
responsible to Tenant for any loss of property from the Premises, however
occurring or for any damage done to the furniture or other effects of Tenant by
the janitor or any of its employees, provided, however, that the Landlord shall
use its good faith reasonable efforts to employ service companies for providing
such janitorial services which maintain quality controls for personnel employed.
5. No animals (except service animals), birds, bicycles or other
vehicles shall be allowed in the offices, halls, corridors, elevators or
elsewhere in the Building.
6. No painting shall be done, nor shall any alteration be made to any
part of the Building by putting up or changing any partitions, doors or windows,
nor shall there be any nailing, boring or screwing into the woodwork or
plastering, nor shall nay connection be made to the electric wires or electric
fixtures, without the consent in writing on each occasion of Landlord or its
Agent. All glass, locks and trimmings in or upon the doors and windows of the
building shall be kept whole and, when any part thereof shall be broken, the
same shall be immediately replaced or repaired and put in order under the
direction and to the satisfaction of Landlord, or its Agent, and shall be left
whole and in good repair. Tenant shall not injure, overload or deface the
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<PAGE> 24
Building, the woodwork or the walls of the Premises, nor carry on upon the
Premises any noisome, noxious, noisy, of offensive business.
7. Tenant shall not (without Landlords' prior written consent) put up
or operate any steam engine, boiler, machinery or stove upon the Premises, or
carry on any mechanical business thereon, or do any cooking thereon, or use or
allow to be used upon the Premises oil, burning fluids, carophene, gasoline or
kerosene for heating, warming or lighting. No article deemed extra hazardous on
account of fire and no explosives shall be brought into the Premises. No
offensive gases or liquids will be permitted.
8. Landlord will post on the directory of its Building, if any, at no
charge to Tenant, names of the executives of Tenant, such executives to be
designated by Tenant. All additional names which Tenant shall desire put upon
said directory must be first consented to by Landlord, and if so approved, a
charge will be made for such additional listing ad prescribed by Landlord to be
paid to Landlord by Tenant.
9. The Landlord, and its agents, shall have the right to enter the
Premises at al reasonable hours for the purpose of making any repairs,
alterations, or additions which is shall deem necessary for the safety,
preservation, or improvement of said Building, and the Landlord shall be allowed
to take all material into and upon such Premises that may be required to make
such repairs, improvements, and additions, or any alteration for the benefit of
the Tenant without in any way being deemed or held guilty of an eviction of
Tenant; and the rent reserved shall in no wise abate while said repairs,
alterations or additions are being made; and Tenant shall not be entitled to
maintain a set-off or counterclaim for damage against Landlord by reason of loss
or interruption to the business of Tenant because of the prosecution of any such
work. All such repairs, decorations, additions and improvements shall be done
during ordinary business hours or, if any such work is not the request of the
Tenant to be done during any other hours, Tenant shall pay for all overtime
costs.
10. Tenant shall instruct its mover to contact the Building manager two
(2) working days prior to truck arrival for coordination of move in and/or large
furniture/equipment deliveries. Such moves will normally be made after 6:00 p.m.
Friday and prior to 8:00 a.m. Monday. Tenant shall be responsible for any damage
to Building interior including, but not limited to floors and carpet. A Landlord
representatives will be present for all such moves.
11. Landlord reserves the right to make such other and reasonable rules
and regulations as in its judgment may from time to time be needed for the
safety, care and cleanliness of the Premises, and for the preservation of good
order therein.
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<PAGE> 1
EXHIBIT 10.21
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT made as of this 29th day of September, 1999, is
entered into by and between SENSORMATIC ELECTRONICS CORPORATION (hereinafter
referred to as Sublessor), and VISUAL EDGE SYSTEMS INC. (hereinafter referred to
as Sublessee).
WITNESSETH
WHEREAS, Sublessor has leased 3.150 SF on the first floor of the office
building located at 901 Yamato Road pursuant to the Lease dated July 7, 1995, as
amended, between Sublessor, as Lessee and Fairfax Boca '92. L.P. as Lessor (the
"Lease"), a copy of which is attached hereto and made a part hereof; and
WHEREAS, Sublessee desires to sublease from Sublessor the above space
(hereinafter referred to as "Subleased Premises"); and
WHEREAS, Sublessor desires to sublease said space to Sublessee.
NOW, THEREFORE, Sublessor and Sublessee hereby agree, on behalf of
themselves, their successors and assigns, as follows:
1. Sublease Premises
Sublessor, subject to written consent of Lessor, hereby leases (the "Sublease")
to Sublessee and Sublessee hereby leases from Sublessor subject to the terms,
provisions, and conditions contained in both this Sublease Agreement and the
Lease, the Subleased Premises containing the western 3.150 RSF on the first
floor of Pod D, 901 Yamato Road, as indicated on the attached Exhibit A.
2. Sublease Term
The Sublease term ("Sublease Term") begins on October 1, 1999 and ends on July
5, 2005.
3. Base Rent
Sublessee agrees to pay Sublessor as Base Rent hereunder, the sum of Thirty
Seven Thousand Nine Hundred Fifty Seven Dollars and 50/100 ($37,957.50 per year)
for the Sublease Term, payable in equal monthly installments of Three Thousand
One Hundred Sixty Three Dollars and 13/100 ($3,163.13/month) in advance on the
first day of each calendar month during the Sublease Term. All payments shall be
due without billing or demand and without deduction, setoff or counter claim.
Payments received after the 5th of the month will be considered past due and
subject to a late fee subject to Paragraph 10 of this Sublease Agreement. All
payments shall be made at Sublessor's office at 951 Yamato Road, Boca Raton, FL.
33431 to the attention of Finance Department.
<PAGE> 2
4. Rent Adjustment
Base Rent will increase annually by three percent (3%) beginning on the first
anniversary of the Sublease (October 1, 2000).
5. Operating Expenses and Real Estate Taxes
Sublessee will also pay in addition to Base Rent its pro rata. share of the
operating expenses along with the Base Rent. For 1999, the operating expenses
are estimated to be $7.05 per SF, or based upon the subleased premises of 3,150
SF, $22,207.50 or $1,850.63 per month. Sublessee will be responsible for any
increases in the operating expenses over the 1999 base year operating expenses
during the term of the Sublease. Overtime air-conditioning is available upon
request. The cost is $35.00 per hour.
5.5 Security Deposit
Sublessee will pay to Sublessor a security deposit in the amount of $12,000.00.
This security deposit shall be returned to Sublessee after termination of this
Sublease and delivery of possession of the Premises in accordance with the terms
of this Sublease to the Sublessor. Such security deposit (or portion thereof)
may be used by Sublessor toward payments due from Sublessee. Sublessee agrees to
immediately restore the security deposit so as to maintain a $12,000.00 balance
throughout the term.
6. Delivery of the Subleased Premises
The Subleased Premises shall be delivered by Sublessor to Sublessee in "as-is"
condition. Sublessee has inspected the Subleased Premises and found them
acceptable for their intended use.
7. Condition of the Subleased Premises
Upon the expiration or termination of the term of this Sublease Agreement,
Sublessee shall deliver the possession of the Subleased Premises to Sublessor in
the same general condition as at the commencement of the Sublease subject to
ordinary wear and tear.
8. Quiet Enjoyment
Sublessor covenants that so long as Sublessee is not in default of the Sublease,
Sublessee may freely, peaceably and quietly occupy and enjoy full possession of
the Subleased Premises without molestation or hindrance by Sublessor or any
party claiming through or under Sublessor. Sublessor covenants and agrees to
comply with its obligations under the Lease which are not assumed by Sublessee.
9. Covenants of Sublessor and Sublessee
The parties hereto agree that the Lease is incorporated herein by reference.
Except as provided herein, Sublessee agrees that it shall, at all times, keep,
observe, and perform the obligations to
<PAGE> 3
be performed by Sublessor as Lessee under the said provisions of the Lease with
respect to the Sublease Premises.
In cases where Sublessee must obtain consent from Sublessor, Sublessor will not
unreasonably condition, withhold, or delay such consent provided the consent of
Lessor is not required under the Lease; in no case must Sublessor give its
consent if Lessor has not given its consent. In cases where Sublessor must
request consent from Lessor, Sublessor will not unreasonably delay requesting
such consent. Lessor will not unreasonably delay its consent.
10. Default of Sublessee
If Sublessee shall fail to pay any installment of rent when due hereunder or
shall default in the observance or performance of any conditions or covenants to
be kept, observed or performed by Sublessee hereunder, or shall default under
any of the terms of the Lease incorporated herein, then Sublessor shall have and
may exercise all rights and remedies against Sublessee as provided to Lessor in
the event of default by Sublessor as set forth in the Lease. Any overdue payment
shall bear interest at the rate of 18% per annum accruing from the date such
installment or payment becomes due to the date payment is made by Sublessee.
11. Assignment and Subletting
Sublessee will not assign this Sublease Agreement nor sublet the Subleased
Premises or any portion thereof without prior written consent of Sublessor and
Lessor.
12. Payment of Attorney's Fees
In the event of the employment of an attorney by Sublessor because of the
violation by the other party of any term or provisions of this Sublease
Agreement, including non-payment of rent as due, the Sublessee shall pay, and
agrees to pay, reasonable attorney's fees, and all other reasonable costs
incurred by the Sublessor as a result of such violation.
13. Indemnification and Liability
Sublessee shall defend, indemnity and hold Sublessor harmless from any and all
damages, losses, claims and costs (including attorney's fees) arising out of or
relating to Sublessee's use or occupancy of the Subleased Premises. Sublessor
shall not be liable to Sublessee for any loss of property relating to
Sublessee's use or occupancy of the Subleased Premises, unless such loss was the
sole and direct result of Sublessor's gross negligence or willful misconduct.
14. Use of Demised Premises
Sublessee shall use and occupy the Subleased Premises solely for general office
purposes.
15. Sublease Subordinate to Lease
This Sublease shall be subject to and subordinate to the provisions of the
Lease. In the event any act or omission by Sublessee pursuant to the terms of
this Sublease would constitute an event of
<PAGE> 4
default under the Lease if committed by Sublessor, such act or omission shall be
deemed to be a default by Sublessee hereunder.
16. Sublessor Not Liable for Lessor's Obligations or Defaults
(a) Notwithstanding anything to the contrary contained in this Sublease
or in the Lease, Sublessor shall not be required to (i) provide any of the
services or construction that Lessor has agreed to provide pursuant to the Lease
(or as are required by law), (ii) provide any utilities (including electricity)
to the Subleased Premises that Lessor has agreed to furnish pursuant to the
Lease (or as are required by law), (iii) make any of the repairs that Lessor has
agreed to make pursuant to the Lease (or as are required by law), (iv) comply
with any laws or requirements of any governmental authorities regarding the
maintenance or operation of the Subleased Premises, (v) take any other action
that Lessor has agreed to provide, furnish, make, comply with, or take, or cause
to be provided, furnished, made, complied with or taken under the Lease, or (vi)
provide Sublessee with any rebate, credit, allowance or other concession
required of Lessor pursuant to the Lease. Further, Sublessor makes no covenant
or representation made by Lessor under the Lease.
(b) Sublessor agrees to use reasonable efforts, at Sublessee's sole
cost and expense, to cause Lessor to provide, furnish, or comply with the
foregoing provisions pursuant to the Lease (provided, however, that Sublessor
shall not be obligated to use such efforts to take any action which might give
rise to a default under the Lease). If Lessor shall default in the performance
of any of its obligations under the Lease, Sublessor shall, upon request and at
the expense of Sublessee, cooperate with the Sublessee in the prosecution of any
action or proceeding which Sublessee, in its reasonable judgment, deems
meritorious, in order to have Lessor make such repairs, furnish such
electricity, provide such services or comply with any other obligation of Lessor
under the Lease or as required by law.
(c) Subject to the other terms and conditions hereof, Sublessee shall
defend, indemnify and hold harmless Sublessor from and against (i) any and all
of the aforementioned claims arising from or in connection with such request,
action or proceeding, and (ii) any dispute, claim, or cost (including attorney's
fees) arising from any conflict whatsoever concerning the Lease regarding
actions or omissions of Sublessee (other than Sublessee's execution of this
Sublease). This indemnity and hold harmless agreement shall include indemnity
from and against any and all liability, fines, suits, demands, costs and
expenses of any kind or nature, including, without limitation, reasonable
attorney's fees and disbursements, incurred in connection with any such claim,
action or proceeding brought thereon.
(d) Sublessee shall not make any claim against Sublessor for any damage
which may arise by reason of (i) the failure of Lessor to keep, observe or
perform any of its obligations pursuant to the Lease, useless such failure is
due to Sublessor's gross negligence, willful misconduct, or failure to comply
with the provisions of this Sublease or the Lease; or (ii) the acts or omissions
of Lessor or Sublessee or their respective agents, contractors, servants,
employees, invitees or licensees.
<PAGE> 5
17. Alterations
Sublessee shall not make any alteration, improvement, decoration, or
installation (hereinafter called "Alterations") in or to the Subleased Premises,
without in each instance obtaining the prior written consent of Lessor and
Sublessor. Such consent not to be unreasonably withheld, conditioned or delayed.
17.5 Rent Tax
Sublessee is responsible for paying in addition to Base Rent and Operating
Expenses a six percent (6%) Florida rent tax. This amount will be included on
each invoice.
18. Lessor's Consent
(a) This Sublease shall be effective upon obtaining the written consent
of Lessor, and it is hereby acknowledged by Sublessor and Sublessee that
Lessor's consent to this Sublease shall not create any contractual liability or
duty on the part of Lessor or its agent to the Sublessee, and shall not in any
manner increase, decrease or otherwise affect the rights and obligations of
Lessor and Sublessor, as the Lessee under the Lease, with respect to the
Subleased Premises.
(b) Sublessor and Sublessee shall not amend this Sublease without
Lessor's prior written consent, and any such amendment made or entered into
without Lessor's consent shall be null and void.
19. General Provisions
(a) During the term of this Sublease Agreement, Sublessee shall
maintain liability and personal property insurance covering the Subleased
Premises and Sublessee's property therein in such amounts no less than required
under the Lease.
(b) The waiver by either party of a breach of covenant, obligation, or
condition set forth herein shall not be deemed to be a waiver of any subsequent
breach of the same or of any other covenant, obligation, or condition of this
Sublease Agreement.
(c) This Sublease Agreement shall be governed by and construed in
accordance with the Laws of Florida. Venue for any litigation shall be in Palm
Beach County, Florida.
(d) Sublessor and Lessor shall have the right to inspect the Subleased
Premises during business hours upon reasonable notice.
(e) This Sublease Agreement constitutes the entire agreement between
the parties hereto and may not be modified except by a written instrument
executed by both parties hereto.
(f) If any provision of this Sublease is declared invalid or
unenforceable, the remainder of this Sublease Agreement shall continue in full
force and effect.
(g) Paragraph headings are used herein solely for convenience of
part reference and are not to be construed as of this Sublease Agreement.
<PAGE> 6
20. Notices
All notices, demands, or requests between Sublessor and Sublessee shall be
delivered in person, by certified mail, return receipt requested, or by
registered mail and shall be effective on receipt or refusal thereof:
If to Sublessor: If to Sublessee:
Sensormatic Electronics Corporation Visual Edge Systems Inc.
951 Yamato Road 901 Yamato Rd., Suite 175
Boca Raton, FL 33431 Boca Raton, FL 33431
Attn: Brian Twist Attn: Tom Peters
WITNESS: SUBLESSOR: Sensormatic Electronics
Corporation
/s/ WAYNE GREEN By: /s/ GARRETT PRICE
- ---------------------------------- ---------------------------------
WITNESS: SUBLESSEE: Visual Edge Systems, Inc.
/s/ TOM PETERS, VP By: /s/ RONALD T. SEALE, CEO
- ---------------------------------- ---------------------------------
The Lessor hereby consents to the foregoing Sublease Agreement.
WITNESS: LESSOR: FAIRFAX BOCA '92, L.P.
/s/ SUE WHITTINGTON /s/ GORDY GERMAN
- ---------------------------------- ------------------------------------
By: Fairfax Properties, Inc.
T. Gordy German, Its President
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