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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11770
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VISUAL EDGE SYSTEMS INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 13-377-8895
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
2424 North Federal Hwy., Suite 100, Boca Raton, Florida 33431
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(Address of principal executive offices) (zip code)
(561) 750-7559
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Redeemable Warrants, each to purchase one share of Common Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB/A or any
amendment to this Form 10-KSB/A. [X]
The Registrant did not generate any revenues in the fiscal year ended
December 31, 1996.
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 31, 1997 was $15,592,500,
based on the last sale price $10.50 of the Registrant's Common Stock, $.01
par value per share, reported on the Nasdaq SmallCap Market on March 31, 1997.
As of March 31, 1997, 4,715,000 shares of the Registrant's Common
Stock were outstanding and 1,495,000 of the Registrant's Warrants were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 1997 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,
1996 are incorporated by reference into Part III of this Form 10-KSB/A.
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VISUAL EDGE SYSTEMS INC.
1996 FORM 10-KSB/A ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . 11
Item 6. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . 12
Item 7. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART III
Item 9. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 28
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . 28
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 28
PART IV
Item 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K . . . . . . . . . . . . . 29
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PART I
ITEM 1. BUSINESS
The Company was incorporated in July 1994 and commenced
operations in January 1995. Since the Company's inception, it has been
primarily engaged in the development and marketing of videotape golf
lessons featuring personalized One-on-One instruction by leading professional
golfer Greg Norman. The Company sells its products under the name One-on-One
with Greg Norman.(TM)
INDUSTRY OVERVIEW
Golf has become an increasingly popular form of sport in
recent years. According to the National Golf Foundation, consumer spending on
golf-related activities, including green fees, golf equipment and related
merchandise, increased from approximately $12.7 billion in 1989 to
approximately $15.1 billion in 1994. The Company believes that this trend is
due largely to the aging of the general population as well as baby boomers,
whose income and leisure time spent on recreational activities have been
increasing. According to the National Golf Foundation, golfers are generally
well-educated, high income, young to middle-aged adult males, a target market
with attractive demographics and significant spending power. Also, it is
estimated that there are more female golfers enjoying the sport than ever
before.
The number of golfers, 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.
According to the National Golf Foundation, there are approximately 15,000
public and private courses and, according to the Golf Range and Recreational
Association, 1,900 to 2,300 stand-alone driving ranges in the United States
today. In addition, the National Golf Foundation has estimated that there are
currently 1,850 golf courses under construction in the United States. It is
also estimated that golfers spend approximately $440 million annually on golf
lessons. The Company believes that golfers are motivated to continually
improve their play and that video is an effective method of delivering
instruction. The Company believes that the capabilities of its software,
including its ability to produce instructional commentary by Greg Norman and
synchronized, "split-screen" comparisons with Greg Norman's swing, coupled with
consumer recognition and appeal of Greg Norman, differentiate the Company's
products from competing products and position the Company to capitalize on the
growing popularity of golf.
PRODUCTS
The Company's One-on-One personalized videotape golf lesson
analyzes a golfer's swing by comparing it to Greg Norman's swing at several
different club positions from two camera angles using Greg Norman's
pre-recorded instructional commentary and analysis and computer graphics to
highlight important golf fundamentals intended to improve a golfer's
performance. The Company's products, through the use of synchronized
"split-screen" comparisons to Greg Norman's swing, are designed to enable
golfers to make meaningful self-observations to improve their play. In each of
the Company's video golf lessons, Greg Norman emphasizes the importance of the
relevant golf fundamental, comments on the golfer's execution of the
fundamental and summarizes the key fundamentals to remember. The Company's
products include the following right and left-handed, full swing personalized
One-on-One golf lessons with Greg Norman:
- The Basic Fundamentals: The Company's basic
fundamental golf lesson is designed for golfers of
all skill levels and is approximately 45 minutes.
The Company has developed three versions of this
lesson, each focusing on a different body and swing
type.
- The Basic Fundamentals for Senior Golfers: The
Company's senior lesson is intended for male and
female senior golfers who typically have more limited
range of motion. It is approximately 45 minutes.
- The Basic Fundamentals of Female Golfers: The
Company's female lesson is designed for a female
golfer and includes a professional female golfer to
provide additional comparisons. It is approximately
45 minutes.
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- The Swing Plane: The Company's advanced golf lesson
is designed primarily for golfers who have taken the
standard lesson and for lower handicap golfers and is
approximately 30 minutes.
- The Follow-Up: This self-comparison video lesson is
designed to permit golfers to compare two swings
taken at different times to Greg Norman's swing to
measure improvement or deterioration through the use
of triple "split-screen" video. Golfers are able to
store several swings on a computer diskette which may
be incorporated into a self-comparison One-on-One
video at any time.
The Company's products sell for $19.95 to $49.95 and are
available on VHS videotape format. The Company also expects to make
personalized video golf lessons available on CD-ROM in the future. In
addition, the Company plans to develop additional One-on-One video golf
lessons, including short game lessons designed to focus on short iron play,
chipping and pitching, sand play lessons and putting lessons. In the event the
Company is able to meet its business objective, the Company believes that
potential opportunities exist for the application of its One-on-One concept to
the sports of bowling, tennis and baseball. There can be no assurance that the
Company will be able to successfully develop any of these proposed additional
sports.
RELATIONSHIP WITH GREG NORMAN
Greg Norman, currently the number one player in the world
according to the SONY golfer ranking system, is a two-time British Open winner,
was awarded the Varden Trophy for the lowest average score on the PGA Tour in
1989, 1990 and 1994 and was named the 1995 PGA Player of the Year. The
Company's business and prospects are dependent upon the Company's continued
association with Greg Norman.
Pursuant to a license agreement dated March 1, 1995, by and
among the Company, Greg Norman and Great White Shark Enterprises, Inc. (the
"Greg Norman License"), Greg Norman agreed to grant to the Company a worldwide
license to use his name, likeness and endorsement in connection with the
production and promotion of the Company's products. Greg Norman also agreed to
grant to the Company the right to use any trademarks owned by him (except for
the "Shark" logo). The agreement provides that the continued use of the
license by the Company is conditioned upon guaranteed payments aggregating $3.3
million during the three-year period commencing July 1, 1996 (the "Initial
Term") to be applied against a royalty equal to 8% of the Company's net
revenues from product sales. "Net revenues" is defined as revenues less costs
associated with discounts, allowances, payments to golf clubs, driving ranges
or golf professionals, sales tax and returns, not to exceed 20% of product
sales.
Under the agreement, the Company is required to make payments
aggregating $600,000, $1,000,000 and $1,700,000, respectively, during each of
the years commencing July 1, 1996, 1997 and 1998, whether or not the Company
derives any revenues from product sales. Such annual payments are payable on a
quarterly basis. The Company has the option to renew the agreement for two
additional five-year periods. In the event of renewal, the Company is
obligated to make guaranteed payments of $1,300,000 during the first year of
any renewal term, increasing by $100,000 for each successive year. In
connection with the agreement, in April 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.
The Company has the right to require Greg Norman to be
available, subject to his commitments to the PGA Tour and other golf tours and
contractual commitments, to produce the Company's products and make promotional
appearances to market such products and to play with individuals who achieve a
hole-in-one in a tournament who has purchased the Company's Ultimate
Hole-in-One prize. Greg Norman is required to be available to the Company on
three days, one day and two days during the first, second and third year,
respectively, of the Initial Term, and two days during each year of any renewal
term. In order to assist the Company in developing its products and if a
tournament participant achieves a hole-in-one, Greg Norman has agreed to make
himself available, at a cost of $50,000 per day or $50,000 per hole-in-one and
subject to his schedule and convenience, for additional days in 1997 for the
purpose of filming personalized One-on-One golf video lessons. Greg Norman has
the right to approve prototypes and finished products and related advertising
and promotional materials and may withhold his consent under certain
circumstances. The agreement also requires Greg Norman to make himself
available for medical exams for the purpose of assisting the Company in
obtaining up to $10 million in "key-man" insurance on his life, which policy
is now in effect. The Company has agreed to indemnify Greg Norman against any
liability arising out of the Greg Norman License.
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The Greg Norman License prohibits Greg Norman from granting
similar rights to any person with respect to any concept which is the same as
or confusingly similar to the Company's concept or products. "Products" means
a videotape or CD-ROM or printed versions or other similar medium that is given
or sold to a consumer upon use of the concept in which Greg Norman's golf swing
or any other golf professional's golf swing is compared to the user's golf
swing using audio and video analysis of both swings. For purposes of the
agreement, however, the self-instructional golf video product Better Golf
featuring Greg Norman or any other form of golf instructional video or
multi-media presentation for teaching golf techniques are not deemed to be the
same as or confusingly similar to the Company's concept or products.
Greg Norman may terminate the agreement in the event the
Company fails to make any payment, breaches the agreement, is declared bankrupt
or becomes insolvent, assigns its assets for the benefit of creditors, consents
to the appointment of a receiver or trustee or winds up or ceases to carry on
its business. The Company may terminate the agreement in the event Greg Norman
dies, voluntarily enters a substance abuse program, commits an act that results
in a criminal conviction damaging to his reputation or good will or breaches
any material term of the agreement.
The Company may assign the agreement to an affiliated entity
and enter into distribution agreements with third parties with respect to
product sales. The Company has no right to sublicense its rights under the
agreement to a third party without the prior consent of Greg Norman.
MARKETING AND DISTRIBUTION
Marketing Strategy
The Company's primary marketing strategy is to sell One-on-One
videotapes on a prearranged basis 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 event planners who arrange indoor corporate events such as
new store openings, convention and trade shows, in-store retail promotions and
sales meetings.
Target Markets
The Company believes that its primary target markets will
include:
Amateur Golf Tournaments. The Company believes that private
and public golf courses present a significant opportunity to sell personalized
One-on-One videotape golf lessons. The Company has targeted private and public
golf courses which host corporate, charity and member tournaments and whose
sponsors typically offer gifts such as golf umbrellas, golf bag towels, golf
balls or golf shirts to tournament participants. The Company believes there is
a significant opportunity for product and promotional "tie-ins" with these
potential corporate and charity sponsors.
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Golf Courses and Golf Professionals. The Company has focused
its marketing efforts on golf professionals at private and public golf courses.
The Company believes that golf professionals will be willing to use the
Company's products as instructional tools to enhance the marketing and quality
of golf lessons given to their students and as a participant gift in
member-guest tournaments.
Driving Ranges. The Company has identified driving ranges as
a potentially significant market for the Company's One-on-One videotapes.
Driving ranges generally conduct a substantial portion of their business during
the evenings and on weekends. The Company intends to market its products at
driving ranges during evening hours to complement its marketing efforts to
private and public golf courses during the daytime.
Other Potential Markets. The Company also believes that
travel agents who plan golf trips, golf specialty shops and sporting goods
retailers and professional golf tournaments are also potential markets for the
Company's products, as well as event planners who arrange indoor and outdoor
events such as conventions and trade shows, new store openings, sales meetings
and seminars and in-store retail promotions.
Distribution Strategy
The Company's has developed mobile One-on-One vans equipped
with video and personal computer equipment to market, promote and produce the
Company's products. The Company has positioned and will position such vans in
selected geographic areas that will serve golf courses and driving ranges
throughout the United States. The Company has placed its first seven vans in
Florida (3), Georgia, Texas, Arizona and Southern California.
Strategic Relationships
The Company may also seek to enter into strategic
relationships with third parties relating to product marketing and
distribution. Potential marketing partners may include golf industry
participants, such as organizers of golf tournaments and companies that offer
hole-in-one insurance.
In November 1995, the Company entered into a distribution
agreement with Visual Edge Systems Australia Pty. Ltd. ("Vesa"), an
unaffiliated third party, pursuant to which the Company granted to Vesa the
exclusive right to distribute One-on-One products in Australia, New Zealand and
Indonesia. In connection with the agreement and upon delivery of the Company's
initial version of its product, the Company received a non-refundable payment
of $125,000 to be applied against future royalties, and is entitled to receive
a royalty of $5.00 for each videotape sold. During the second and third years
of the agreement, the Company is entitled to receive aggregate guaranteed
royalties of $700,000. In addition, the agreement provides for certain profit
sharing arrangements.
The Company has recently commenced its marketing activities
and has limited marketing and technical experience and limited financial,
personnel and other resources to independently undertake extensive marketing
activities. The Company's strategy and preliminary and future marketing plans
may be subject to change as a result of a number of factors, including progress
or delays in the Company's marketing efforts, changes in market conditions
(including the emergence of potentially significant related market segments),
the nature of possible license and distribution arrangements which may become
available to it in the future and competitive factors. There can be no
assurance that the Company's strategy will result in successful product
commercialization or that the Company's efforts will result in initial or
continued market acceptance for the Company's products.
PRODUCTION
The Company's One-on-One products are made possible by
relatively recent advancements in the capabilities of affordable desktop
personal computers to process, manipulate and edit digital video information.
Creation of a One-on-One videotape involves videotaping a golfers' swing,
editing and production of a videotape. Videotaping involves the operation of
video equipment, including three cameras, a small television monitor, a video
cassette recorder and power supply. Editing involves the use of a computer and
monitor, a scan converter and video cassette recorder and
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consists of editing the video footage of a golfer, synchronizing and sizing the
golfer's swing to Greg Norman's swing and identifying key clubhead and body
positions. In the final videotape production stage, the Company's software
scans the videotape to locate the first blank segment where it records a
"split-screen' image of Greg Norman and the golfer at similar club positions.
Using pre-recorded film and audio footage stored in the computer's memory, the
software creates computer graphics designed to illustrate comparisons to Greg
Norman's swing and chooses appropriate verbal instructions and analytical
comments from Greg Norman. The Company anticipates that a Company employee
will operate videotaping equipment at the first tee, driving range or other
suitable location to videotape a golfer's swing which would be edited inside
the One-on-One van to create a personalized video golf lesson in approximately
20 minutes.
COMPETITION
The Company faces intense competition for a finite amount
of consumer discretionary spending from numerous other businesses in the golf
industry and related market segments. The Company will compete with numerous
other products and services which provide golf instruction, including
instructional golf videotapes, golf software used to analyze golf swings and
golf courses, golf schools and professionals who offer video golf lessons,
which may be less expensive or provide other advantages to consumers.
Various instructional golf videotapes currently being marketed
by leading golf professionals and instructors such as Jack Nicklaus, Tom Kite,
Nick Faldo, David Leadbetter, Jim McLean and Greg Norman, including Better Golf
and Shark Attack, among others, featuring Greg Norman, have achieved
significant national, regional and local consumer recognition. These products
are marketed by companies with substantially greater financial, marketing,
distribution, personnel and other resources than the Company, permitting such
companies to implement extensive advertising and promotional campaigns, both
generally and in response to efforts by additional competitors to enter into
new markets.
In addition, certain companies offer both hardware and
software to golf professionals for use in connection with golf lessons. Such
companies include Astar, Inc., Vivid Visions, Inc. and Golf Training Systems,
Inc. The Company believes that such companies offer hardware and software at
prices ranging from $4,500 to $20,000. Certain companies also offer computer
software to permit a golfer to analyze a golf swing, such as David Leadbetter's
Computer Coach, which sells at a price of $59.95.
The instructional golf video segment of the industry has no
substantial barriers to entry and, consequently, the Company expects that other
companies which have developed software technologies may seek to enter into the
Company's target markets and compete directly against the Company. There can
be no assurance that other companies are not developing or will not seek to
develop similar products.
The Greg Norman License prohibits Greg Norman from granting
similar rights to any person with respect to any concept which is the same as
or confusingly similar to the Company's concept or products. Notwithstanding
this prohibition, the self-instructional golf video product known as Better
Golf featuring Greg Norman or any other form of golf instructional video or
multi-media presentation for teaching golf techniques are not deemed the same
as or confusingly similar to the Company's concept or products. There can be
no assurance that the Company will be able to compete successfully.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company has filed a patent application with the United
States Patent and Trademark Office covering certain aspects of its digital
video editing and production process. There can be no assurance, however, as
to the breadth or degree of protection which patents may afford the Company,
that any patent applications will result in issued patents or that patents will
not be circumvented or invalidated. Rapid technological developments in the
computer software industry results in extensive patent filings and a rapid rate
of issuance of new patents. Although the Company believes that its products do
not and will not infringe patents or violate proprietary rights of others, the
Company has not conducted any investigation to determine whether its products
infringe patents or violate proprietary rights of others, and it is possible
that infringement of existing or future patents or proprietary rights of others
have occurred or may occur. In the event the Company's products infringe
patents or proprietary rights of others, the Company may be required to modify
the design of
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its products or obtain a license. There can be no assurance that the Company
will be able to do so in a timely manner, upon acceptable terms and conditions
or at all. The failure to do any of the foregoing could have a material
adverse effect upon the Company. In addition, there can be no assurance that
the Company will have the financial or other resources necessary to enforce or
defend a patent infringement action and the Company could, under certain
circumstances, become liable for damages, which also could have a material
adverse effect on the Company.
The Company relies on proprietary processes and to employ
various methods to protect the concepts, ideas and documentation of its
products. However, such methods may not afford complete protection and there
can be no assurance that others will not independently develop such processes
or obtain access to the Company's proprietary processes, ideas and
documentation. Furthermore, although the Company intends to enter into
confidentiality agreements with its employees, there can be no assurance that
such arrangements will adequately protect the Company.
The Company has filed a trademark application with the United
States Patent and Trademark Office, on behalf of Greg Norman, for the mark
One-on-One with Greg Norman(TM) and may use this mark, as well as all other
trademarks owned by Greg Norman (except the "Shark" logo) in connection with
the marketing of its products. The Company's rights in these marks may be a
significant part of the Company's business. The Company is not aware of any
claims or infringement or other challenges to the Company's rights to use these
marks.
EMPLOYEES
As at December 31, 1996 the Company employed (directly or
indirectly) seven executive employees and 15 employees involved in the
operation of its office and vans.
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers and key employees of the
Company:
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Earl T. Takefman . . . . . . . . . . . 47 Chief Executive Officer and Director
Alan L. Lubell . . . . . . . . . . . . 58 Chairman of the Board and Vice
President - Product Development
Richard Parker . . . . . . . . . . . . 35 President and Chief Operating Officer
Edward Smith . . . . . . . . . . . . . 45 Chief Financial Officer
Thomas Peters . . . . . . . . . . . . . 51 Director of Software Development
Peter Gorski . . . . . . . . . . . . . 41 Vice President of Operations
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Earl T. Takefman, a co-founder of the Company, has been Chief
Executive Officer of the Company since March 1995. Prior to founding the
Company, Mr. Takefman was Co-Chief Executive Officer of SLM International, Inc.
("SLM"), a publicly traded toy and sporting goods company, from December 1989
to August 1994. SLM filed for protection under Chapter 11 of the U.S.
Bankruptcy Code in October 1995. From 1980 to 1989, prior to joining SLM, Mr.
Takefman was Chief Operating Officer of Charan Industries ("Charan"), a
publicly traded Canadian toy and sporting goods company. Mr. Takefman
received a Bachelor of Architecture degree in 1971 and a Masters of Business
Administration degree from McGill University in Montreal, Canada in 1973.
Alan L. Lubell, a co-founder of the Company, has been Chairman of the
Board of the Company since July 1994 and Vice President - Product Development
since May 1996. Prior to founding the Company, Mr. Lubell had been an
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entrepreneur in the area of sports television. From 1977 to July 1994, Mr.
Lubell served as President of Marathon Entertainment, a sports television
company which he founded that created many events and programs that were sold
to television stations and networks and national advertisers. Among the events
developed, packaged and produced by Marathon Entertainment was the New York
City Marathon. Mr. Lubell received a Bachelor of Science degree in marketing
from New York University in 1960.
Richard Parker has been the Company's President and Chief Operating
Officer since July 1996. From February 1990 until his appointment as Chief
Operating Officer of the Company, Mr. Parker was the founder, owner and
president of Diomo Marketing Inc. and Devrew Merchandising Inc., companies
engaged in marketing and selling consumer products in Canada. From August 1984
to February 1990, Mr. Parker held various positions, including Vice President,
at Charan. Mr. Parker graduated from Vanier College in Montreal in 1980.
Edward Smith became the Company's Chief Financial Officer in March
1997. From January 1996 until February 1997, Mr. Smith was the Vice President
of Finance for Enterprise Development Corporation, a Florida corporation that
provides consulting services to developing and early stage companies. From
January 1995 until January 1996, Mr. Smith was the Chief Financial Officer for
Kirker Enterprises, Inc., a Delaware corporation specializing in the
manufacturing of bulk cosmetics. From September 1985 until January 1995, Mr.
Smith was the Chief Financial Officer of the Calabrian Corporation, a Delaware
corporation which manufactures specialized chemicals. From February 1981 to
September 1985, Mr. Smith was a Manager at KPMG Peat Marwick LLP in the
consulting area. Mr. Smith received a B.B.A. in accounting from Pace University
in 1975 and an M.B.A. from Pace University in 1978.
Thomas Peters has been Director of Software Development of the Company
since May 1996. Since July 1992, Mr. Peters has been the owner of Smart View
("Smart View"), a company he founded to design and develop computer golf
software to be used by golf professionals when giving video golf lessons.
Since March 1995, Smart View has been engaged as an independent consultant to
the Company and is principally responsible for the development of the software
used in the Company's products. Smart View also has developed operating
systems used by the Golf Academy at PGA National and at the Doral Golf Learning
Center, each in Florida. Prior to founding Smart View, Mr. Peters, for 26
years, held various positions at International Business Machines Corporation,
including Manager of Application Development from July 1989 to July 1992 and
Personal Computer Product Planning Manager from 1984 to 1989. Mr. Peters
graduated from Harper College at University of New York in 1967, with a B.A. in
mathematics.
Peter Gorski has been the Company's Vice President of Operations since
August 1996. From March 1996 until his appointment as Vice President of
Operations, Mr. Gorski was founder and owner and President of GHD Systems,
Inc., a company providing courier services in five states. From February 1979
to March 1996, Mr. Gorski held various positions with the Federal Express
Corporation, including Managing Director of District Operations, South Florida
District. Mr. Gorski graduated from University of Wisconsin - Whitewater in
1976.
RISK FACTORS
Readers of this annual report should carefully consider the following
risk factors, in addition to the other information contained herein. This
annual report contains certain statements of a forward-looking nature relating
to future events or the future financial performance of the Company. 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.
No Significant Operating Revenues. The Company has generated minimal
operating revenues, and may not generate any meaningful revenues until after
the Company operates several One-on-One vans. There can be no assurance that
the Company will ever generate meaningful revenues.
Significant and Continuing Losses; Going Concern. For the period from
July 15, 1994 (inception) to December 31, 1996, the Company incurred a
cumulative net loss of $2,862,653. Since December 31, 1996, the Company has
continued to incur significant losses and anticipates that it will incur
continuing losses until, at the earliest, the Company
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generates sufficient revenues to offset the substantial up-front capital
expenditures and operating costs (including significantly increased salaries of
executives officers) associated with enhancing and commercializing its products.
The Company incurred a non-recurring charge of $600,000 relating to the
transfer of Common Stock to Greg Norman prior to the consummation of the
Company's initial public offering (the "IPO"). In addition, the Company
incurred costs of $1,615,000 relating to the IPO which was a reduction to its
equity. The Company's independent auditors have included an explanatory
paragraph in their report on the Company's financial statements stating that the
Company's recurring losses through 1996 and contractual commitments under a
licensing agreement raise substantial doubt about its ability to continue as a
going concern unless the Company receives additional equity or other financing.
There can be no assurance that the Company will ever achieve profitable
operations.
Uncertainty of Plan of Operation. The Company's plan of operation and
prospects will be largely dependent upon the Company's ability to successfully
hire and retain skilled technical, marketing and other personnel; establish and
maintain satisfactory relationships with those who arrange golf events;
successfully develop, equip and operate One-on-One vans on a timely and cost
effective basis; and achieve significant market acceptance for its products.
The Company has limited experience in developing and commercializing new
products based on innovative technology and there is limited information
available concerning the potential performance of the Company's video editing
and production process or market acceptance of the Company's products. There
can be no assurance that the Company will be able to successfully implement its
business plan or that unanticipated expenses, problems or technical difficulties
will not occur which would result in material delays in its implementation.
Need for Additional Financing. The continued implementation of the
Company's business plan or the development of additional products will require
capital resources greater than the proceeds of the IPO or other funds currently
available to the Company. There can be no assurance that any additional
financing, particularly the significant amounts of financing that would be
required if the Company is unable to secure satisfactory equipment leasing or
financing arrangements, will be available to the Company on commercially
reasonable terms, or at all.
Dependence on Greg Norman License. Pursuant to the Greg Norman
License, Greg Norman agreed to grant to the Company a worldwide license to use
his name, likeness and endorsement in connection with the production and
promotion of the Company's products. The license agreement provides that the
continued use of the license by the Company is conditioned upon guaranteed
payments aggregating $3,300,000 during the three-year period commencing July 1,
1996 to be applied against a royalty equal to 8% of the Company's net revenues
from product sales. The Company is required to make payments aggregating
$600,000, $1,000,000 and $1,700,000, respectively, during each of the years
commencing July 1, 1996, 1997 and 1998, whether or not the Company derives any
revenues from product sales. Failure to make any required payment under the
Greg Norman License would result in termination of the agreement, which would
have a material adverse effect on the Company. Greg Norman's death, disability
or retirement from tournament play or any significant decline in the level of
his tournament play would, under certain circumstances, have a material adverse
effect on the Company. In addition, the commission by Greg Norman of any
serious crime or any act which adversely affects his reputation could also have
an adverse affect on the Company. The Company has obtained "key-man" insurance
on the life of Greg Norman in the amount of $10,000,000.
Uncertainty of Market Acceptance and Commercialization Strategy. The
Company's One-on-One personalized videotape golf lesson is a new business
concept and, accordingly, demand and market acceptance for the Company's
products is subject to a high level of uncertainty. Achieving market
acceptance for the Company's products will require significant efforts and
expenditures by the Company to create awareness and demand by golf
professionals at golf courses and driving ranges and consumers. The Company's
prospects will be significantly affected by its ability to successfully build
an effective sales organization and develop a significant number of One-on-One
vans. The Company has only recently commenced marketing activities and has
limited marketing and technical experience and limited financial, personnel and
other resources to independently undertake extensive marketing activities. The
Company's strategy and preliminary and future marketing plans may be subject to
change as a result of a number of factors, including progress or delays in the
Company's marketing efforts, changes in market conditions (including the
emergence of potentially significant related market segments), the nature of
possible license and distribution arrangements which may become available to it
in the future and competitive factors. 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
-8-
<PAGE> 11
of their products. Additionally, to the extent that the Company seeks to
market its products in foreign markets, the Company may be subject to various
risks associated with foreign trade, including customs duties, quotas and other
trade restrictions, shipping delays, currency fluctuations and international
political and economic developments. There can be no assurance that the
Company's strategy will result in successful product commercialization or that
the Company's efforts will result in initial or continued market acceptance for
the Company's products.
Potential Product Obsolescence. The markets for the Company's
products may be characterized by rapidly changing technology which could result
in product obsolescence or short product life cycles. Accordingly, the ability
of the Company to compete may be dependent upon the Company's ability to
complete development and commercialization of the Company's products in a
timely manner and to continually enhance and improve its software. There can
be no assurance that competitors will not develop technologies or products that
render the Company's products obsolete or less marketable.
Dependence on Limited Product Line. The Company's principal efforts
to date have been devoted to securing rights to and engaging in the development
of its instructional golf videotapes. The Company will be entirely dependent
on the commencement of sales of a limited product line to generate revenues and
on the commercial success of its products. There can be no assurance that the
Company's products will prove to be commercially viable. Failure to achieve
commercial viability would have a material adverse effect on the Company.
Industry Factors. Sales of the Company's instructional golf videotapes
will be dependent on discretionary spending by consumers, which may be adversely
affected by unfavorable general economic conditions, as well as a decline in the
popularity of golf. Any decrease in the level of consumer spending on golf
instruction could adversely affect the Company's business and prospects. The
Company's future operating results will depend on numerous factors beyond its
control, including the popularity, price and timing of other instructional golf
videos and related products being introduced and distributed, national, regional
and local economic conditions (particularly recessionary conditions adversely
affecting consumer spending), changes in consumer demographics, the availability
and relative popularity of other forms of sports and entertainment, and public
tastes and preferences, which may change rapidly and cannot be predicted. The
Company's ability to plan for product development and promotional activities may
be affected by the Company's ability to anticipate and respond to relatively
rapid changes in consumer tastes and preferences. To the extent that the
Company targets consumers with limited disposable income, the Company may find
it more difficult to price its products at levels which result in profitable
operations. In addition, seasonal weather conditions limiting the playing
seasons in certain geographic areas may result in fluctuations in the Company's
future operating results.
Dependence on Key Personnel; Need for Qualified Personnel. The success
of the Company will be dependent on the personal efforts of Earl T. Takefman,
its Chief Executive Officer, and other key personnel. The loss of the services
of Mr. Takefman could have a material adverse effect on the Company's business
and prospects. The Company has entered into employment agreements with Mr.
Takefman and other key personnel and has obtained "key-man" insurance on the
life of Mr. Takefman in the amount of $5,000,000. The success of the Company is
also dependent upon its ability to hire and retain additional qualified
marketing, technical, financial and other personnel. Competition for qualified
personnel is intense and there can be no assurance that the Company will be able
to hire or retain additional qualified personnel. Any inability to attract and
retain qualified personnel would have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company's executive offices are located in approximately 4400
square feet of office space in Boca Raton, Florida. This office space is
leased and is principally used for operations and general administrative
functions. See Note 4 of Notes to the Company's Financial Statements for
further information relating to this lease.
In order to secure its obligations under its financing arrangement
with Barnett Bank, the Company granted to Barnett Bank, a lien on substantially
all of the Company's liquid assets.
-9-
<PAGE> 12
The Company believes that its property is generally well maintained,
in good condition and adequate for its present needs. Furthermore, the Company
believes that suitable additional or replacement space will be available when
required.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1996, no
matters were submitted to a vote of the security holders.
-10-
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock and Warrants are traded on the Nasdaq
SmallCap Market under the symbols "EDGE" and "EDGEW," respectively. The
Company completed its initial public offering in July 1996 at an offering price
of $5.00 per share for its Common Stock and $.10 per Warrant. The following
tables set forth, for the Company's fiscal periods indicated, the range of high
and low last reported sale prices for the Common Stock and the Warrants.
<TABLE>
<CAPTION>
COMMON STOCK: HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1996
Third Quarter (from July 24, 1996) $ 8.00 $4.375
Fourth Quarter 7.625 5.625
FISCAL YEAR 1997
First Quarter (through March 27, 1997) 12.25 5.75
<CAPTION>
WARRANTS: HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1996
Third Quarter (from July 24, 1996) $ 4.125 $1.00
Fourth Quarter 3.156 1.875
FISCAL YEAR 1997
First Quarter (through March 27, 1997) 7.25 1.875
</TABLE>
HOLDERS
On March 27, 1997, the last reported sale price of the Common Stock
on the Nasdaq SmallCap Market was $11.125 per share and the last reported sale
price of the Warrants on the Nasdaq SmallCap Market was $6.125 per Warrant. At
February 25, 1997, there were 83 holders of record of the Company's Common
Stock and 2 holders of record of the Company's Warrants, although the Company
believes that there are approximately 425 beneficial holders of the Common
Stock.
DIVIDENDS
The Company does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future and intends to retain its earnings, if
any, to finance the expansion of its business and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions and other factors that the Company's Board of
Directors deems relevant.
-11-
<PAGE> 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
Assuming the Company is successful in completing its financing,
management intends to launch 15 to 25 "One-on-One with Greg Norman" vans by the
end of the year which will serve California, Arizona, Texas, Nevada, Florida,
Georgia, Illinois, Michigan and all of northeastern United States. Management
also intends to build the infrastructure required to support these vans from an
operations and sales perspective. Management also intends on negotiating
international distribution rights with third parties during the year.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 ("Fiscal 1996") compared to Year Ended December
31, 1995 ("Fiscal 1995")
The Company is a development stage company and generated no revenues
during Fiscal 1996. The Company's revenues of $132,267 in Fiscal 1995 were
primarily attributable to the licensing of its technology and product to an
Australian company. In Fiscal 1996, the Company commenced its introduction and
marketing of computerized videotape golf lessons, featuring One-on-One
instruction by leading professional golfer Greg Norman. In 1997, the Company
intends to introduce its product to the golf tournament market throughout the
United States.
In Fiscal 1996, the Company continued to focus its efforts on
upgrading its proprietary hardware and software technology, video products and
mobile video capturing and processing production units. In Fiscal 1996, the
Company completed its first five mobile production units as well as the
Company's training facility.
Costs during Fiscal 1996 consisted primarily of start-up product
development, payroll, marketing and other administrative expenses. A
significant portion of the Company's disbursements during Fiscal 1996
represents the Company's investment in mobile production units, training
facilities, product development equipment and other fixed assets aggregating
$1,365,365 compared with similar expenditures which aggregated $395,369 in
Fiscal 1995. Investment in video and marketing production costs during fiscal
1996 totaled $398,558 compared with $275,808 in Fiscal 1995.
In addition, the Company incurred a one-time non-cash stock
compensation expense totaling $600,000 in conjunction with the transfer of
300,000 shares of Common Stock from the founding shareholders to Greg Norman.
See Note 9 of Notes to the Company's Financial Statements.
Liquidity and Capital Resources
In July 1996, the Company consummated an initial public offering (the
"IPO") of its Common Stock and Warrants. Net proceeds from the IPO (including
in-house placement related expenses) aggregated $5,511,849. Of the proceeds
from the IPO, $515,000 was utilized to repay bank debt and $1,100,000 was used
to repay bridge loans provided to the Company prior to the IPO. In addition,
a portion of the proceeds of the IPO was used to develop and deploy seven
mobile operating units, to purchase other operating assets and to establish
the Company's marketing, operating and administrative infrastructure.
See Note 5 of Notes to the Company's Financial Statements.
In November 1996, the Company entered into a $4,000,000 revolving line
of credit arrangement with a financial institution. At December 31, 1996 the
outstanding balance under this line was $500,000. See Note 6 of Notes to the
Company's Financial Statements.
On December 31, 1996, the Company executed an agreement with a
financial institution to finance the first seven mobile production units
whereby the Company can borrow up to $840,000 during 1997. No amounts were
drawn against this lease at December 31, 1996. See Note 4 of Notes
to the Company's Financial Statements.
The Company is required to make payments to Greg Norman under a
license agreement aggregating $600,000, $1,000,000 and $1,700,000,
respectively, during each of the years commencing July 1, 1996, 1997 and 1998,
whether or not the Company derives any revenues from product sales.
The Company is currently negotiating arrangements to obtain additional
financing in an amount of up to $3,500,000. Such additional funds, if obtained
by the Company, will enable the Company to deploy additional mobile production
units in several markets throughout the United States and Canada and provide
working capital during the product launch period. See Note 1 of Notes to the
Company's Financial Statements.
The Company believes that its current cash position combined with its
available credit lines, as well as the pending incremental financing agreements
which the Company hopes to consummate in 1997, will be adequate to satisfy its
capital and operating cash requirements in 1997. No assurances can be made,
however, that the Company will be able to enter into any additional financing
arrangement.
-12-
<PAGE> 15
Business
The nature of the Company's products, industry overview, competition
and marketing and distribution strategies are discussed in Part I of this
Annual Report.
Third Party Reports
The Company does not make financial forecasts or projections or
endorse the financial forecasts or projections of third parties nor does it
comment on the accuracy of third party reports. The Company does not
participate in the preparation of the reports or the estimates given by
analysts. Analysts who issue financial reports are not privy to non-public
financial information. Any purchase of the Company's securities based on
financial estimates provided by analysts or other third parties is done
entirely at the risk of the purchaser.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
VISUAL EDGE SYSTEMS INC.
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . 14
Report of Independent Public Accountants . . . . . . . . . . . . . 15
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Statements of Operations . . . . . . . . . . . . . . . . . . . . . 17
Statements of Stockholders' Equity (Deficit) . . . . . . . . . . . 18
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . 19
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 20
</TABLE>
-13-
<PAGE> 16
VISUAL EDGE SYSTEMS INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 15
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1996 and 1995 16
Statements of Operations for the years ended December 31,
1996 and 1995 and from the period of inception (July 15,
1994) to December 31, 1996 17
Statements of Stockholders' Equity (Deficit) from the period
of inception (July 15, 1994) to December 31, 1994 and for
the years ended December 31, 1995 and 1996 18
Statements of Cash Flows for the years ended December 31,
1996 and 1995 and from the period of inception (July 15,
1994) to December 31, 1996 19
Notes to Financial Statements 20 - 27
</TABLE>
-14-
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Visual Edge Systems Inc.:
We have audited the accompanying balance sheets of Visual Edge Systems Inc. (a
development stage company) as of December 31, 1996 and 1995 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended and for the period from inception (July 15, 1994) to December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
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, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended and for the period from inception (July 15, 1994) to
December 31, 1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1(a) to the
financial statements, the Company is in its development stage and its recurring
losses through 1996 and contractual commitments under a license agreement raise
substantial doubt about its ability to continue as a going concern unless
additional financing or equity is obtained. Management's plans in regard to
these matters are also described in Note 1(a). The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
January 24, 1997 except as to
note 9(b), which is as of
April 3, 1997
-15-
<PAGE> 18
VISUAL EDGE SYSTEMS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- ---------
<S> <C> <C>
Current assets:
Cash $ 233,117 $ 558
Short-term investments 1,869,052 --
Advance royalties (note 9a) 300,000 --
Other current assets 117,503 --
----------- ---------
Total current assets 2,519,672 558
Fixed assets, net (note 2) 1,624,826 330,626
Intangible assets, net (note 3) 616,470 302,293
Other assets 23,202 --
----------- ---------
Total assets $ 4,784,170 $ 633,477
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current Liabilities:
Bank borrowings (note 6) $ 500,000 $ 400,000
Accounts payable 333,114 269,262
Accrued expenses 284,900 13,718
Other current liabilities 1,500 --
----------- ---------
Total current liabilities 1,119,514 682,980
----------- ---------
Commitments and contingencies (notes 1(a), 8 and 9)
Stockholders' equity (deficit) (Notes 5, 8 and 9):
Preferred Stock, 5,000,000 shares authorized, none
issued -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,615,000 shares issued and outstanding at
December 31, 1996 and 3,000,000 shares issued and
outstanding at December 31, 1995 46,150 30,000
Additional paid-in capital 6,481,159 385,460
Deficit accumulated during the development stage (2,862,653) (464,963)
----------- ---------
Total stockholders' equity (deficit) 3,664,656 (49,503)
----------- ---------
Total liabilities and stockholders'
equity (deficit) $ 4,784,170 $ 633,477
=========== =========
</TABLE>
See accompanying notes to financial statements.
-16-
<PAGE> 19
VISUAL EDGE SYSTEMS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
inception
(July 15,
For the years ended 1994) to
December 31, December 31,
1996 1995 1996
------------ ----------- ------------
<S> <C> <C> <C>
Product sales $ -- $ 7,267 $ 7,267
License fees -- 125,000 125,000
------------ ----------- ------------
-- 132,267 132,267
------------ ----------- ------------
Cost of sales -- 44,167 44,167
General and administrative expenses 1,552,062 520,224 2,072,286
Selling and marketing 264,772 15,240 280,012
One-time stock compensation expense
(note 9(a)) 600,000 11,760 611,760
------------ ----------- ------------
2,416,834 591,391 3,008,225
------------ ----------- ------------
Operating loss (2,416,834) (459,124) (2,875,958)
Other:
Interest expense (50,854) (5,118) (55,972)
Interest income 69,998 -- 69,998
------------ ----------- ------------
Total other 19,144 (5,118) 14,026
------------ ----------- ------------
Loss before income taxes (2,397,690) (464,242) (2,861,932)
Provision for income taxes (note 7) -- (721) (721)
------------ ----------- ------------
Net loss $ (2,397,690) $ (464,963) $ (2,862,653)
============ =========== ============
Net loss per share $ (.63) $ (.14) $ (.82)
------------ ----------- ------------
Weighted average common shares
outstanding (note 1e) 3,801,250 3,220,000 3,510,625
============ =========== ============
</TABLE>
See accompanying notes to financial statements.
-17-
<PAGE> 20
VISUAL EDGE SYSTEMS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION (JULY 15, 1994) TO
DECEMBER 31, 1994 AND FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
------------ PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at inception (July 15,
1994) to December 31, 1994 -- $ -- $ -- $ -- $ --
Issuance of common stock 2,929,608 29,296 374,404 -- 403,700
Common stock issued for services 70,392 704 11,056 -- 11,760
Net loss -- -- -- (464,963) (464,963)
--------- ------- ---------- ------------ -----------
Balance at December 31, 1995 3,000,000 30,000 385,460 (464,963) (49,503)
Issuance of common stock 1,615,000 16,150 5,495,699 -- 5,511,849
Common stock issued by shareholders
for services -- -- 600,000 -- 600,000
Net loss -- -- -- (2,397,690) (2,397,690)
--------- ------- ---------- ------------ -----------
Balance at December 31, 1996 4,615,000 $46,150 $6,481,159 $ (2,862,653) $ 3,664,656
========= ======= ========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
-18-
<PAGE> 21
VISUAL EDGE SYSTEMS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
from inception
For the years ended (July 15, 1994)
December 31, to December 31,
1996 1995 1996
------------ ---------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (2,397,690) $ (464,963) $ (2,862,653)
Adjustments to reconcile net loss to
net cash used in operating activities:
One-time stock compensation expense 600,000 11,760 611,760
Depreciation and amortization 155,546 67,686 223,232
Changes in assets and liabilities:
Increase in other current assets (117,503) -- (117,503)
Increase in advanced royalties (300,000) -- (300,000)
Increase in other assets (23,202) -- (23,202)
Increase in accounts payable 63,852 269,262 333,114
Increase in accrued expenses 271,182 13,718 284,900
Increase in other current liabilities 1,500 -- 1,500
------------ ---------- ------------
Net cash used in operating activities (1,746,315) (102,537) (1,848,852)
------------ ---------- ------------
Investing activities:
Purchases of short-term investments (3,508,015) -- (3,508,015)
Proceeds from the sale of short-term
investments 1,638,963 -- 1,638,963
Deferred organization costs -- (29,428) (29,428)
Increase in intangible assets (398,558) (275,808) (674,366)
Capital expenditures (1,365,365) (395,369) (1,760,734)
------------ ---------- ------------
Net cash used in investing activities (3,632,975) (700,605) (4,333,580)
------------ ---------- ------------
Financing activities:
Proceeds from borrowings 1,715,000 400,000 2,115,000
Repayment of borrowings (1,615,000) -- (1,615,000)
Proceeds from issuance of common stock 5,511,849 403,700 5,915,549
------------ ---------- ------------
Net cash provided by financing
activities 5,611,849 803,700 6,415,549
------------ ---------- ------------
Net increase in cash 232,559 558 233,117
Cash at beginning of period 558 -- --
------------ ---------- ------------
Cash at end of period $ 233,117 $ 558 $ 233,117
============ ========== ============
Supplemental information:
Cash paid for interest $ 50,854 $ 5,118 $ 55,972
============ ========== ============
Cash paid for income taxes $ -- $ 721 $ 721
============ ========== ============
</TABLE>
See accompanying notes to financial statements.
-19-
<PAGE> 22
VISUAL EDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
Visual Edge Systems Inc. (the "Company") was organized to
develop and market personalized videotape golf lessons
featuring One-on-One instruction by leading professional
golfer Greg Norman. To date, the Company has focused its
efforts on developing video production technology which
digitally combines actual video footage of a golfer's swing
with a synchronized "split-screen" comparison to Greg Norman's
golf swing to produce a 45-minute One-on-One videotape golf
lesson. The Company's One-on-One personalized videotape golf
lesson analyzes a golfer's swing by comparing it to Greg
Norman's swing at several different club positions from two
camera angles using Greg Norman's pre-recorded instructional
commentary and analysis and computer graphics to highlight
important golf fundamentals intended to improve a golfer's
performance. The Company sells its products under the name
"One-on-One with Greg Norman."
The Company was incorporated in July 1994 and commenced
operations in January 1995. Since the Company's inception, it
has been primarily engaged in product development, market
development, testing technology, recruitment of key personnel,
raising capital and preparing the software, hardware and
videotape coaching instructions used in the production of its
products. As a consequence, the Company has not generated any
significant revenue and operated as a development stage
company through December 31, 1996. Subsequent to year-end, the
Company commenced generating revenue from its primary business
activities.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
a development stage company, the Company has not generated any
significant revenues. Its recurring losses through 1996, and
contractual commitments under a license agreement raise
substantial doubt about the Company's ability to continue as a
going concern unless additional financing or equity is
obtained. The financial statements do not include any
adjustments that might arise from the outcome of this
uncertainty.
In March 1997, the Company obtained some additional financing
(see Note 10). Currently, the Company is in negotiation with
several parties to obtain additional financing. There is no
assurance the Company will be able to successfully obtain
financing.
(b) Revenue Recognition
Revenue from product sales is recognized as videotape products
are delivered to the customer and in accordance with
individual contracted terms. Royalties and license fees are
recorded as revenue when earned.
(c) Fixed and Intangible Assets
Fixed assets are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of
the assets (4 years).
-20-
<PAGE> 23
Intangible assets consist principally of video production
costs. The costs of video production are amortized over the
estimated useful lives of the respective assets (4 years).
The Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," on January 1, 1996. This
Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed
fair value.
(d) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(e) Loss Per Share
The Company has presented loss per share information giving
effect to the recapitalization discussed in note 5. Pursuant
to the Securities and Exchange Commission Staff Accounting
Bulletin Topic 4:D, stock issued and stock options granted
during the 12-month period preceding the date of the Company's
July 1996 initial public offering (the IPO) have been included
in the calculation of weighted average common shares
outstanding for the period prior to the IPO, even when the
impact of such incremental shares is antidilutive. The
computation of weighted average common shares and equivalents
outstanding for the year ended December 31, 1995 and December
31, 1996 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Weighted average common shares outstanding,
exclusive of issuances within twelve months
prior to the IPO 3,000,000 3,000,000
Shares issued within 12 months prior to the IPO
assumed to be outstanding for the entire
period 220,000 220,000
Weighted average common shares outstanding, for
shares issued after IPO 581,250 --
--------- ---------
Weighted average common shares outstanding at
end of year 3,801,250 3,220,000
========= =========
</TABLE>
(f) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial
instruments. Cash, short term investments, advance royalties
and other current assets as well as accounts payable, accrued
expenses and other current liabilities as reflected in the
financial statements approximate fair value because of the
short-term maturity of these instruments. The carrying value
of the note payable to bank at
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<PAGE> 24
December 31, 1995 and the borrowings against the line of
credit at December 31, 1996 approximated fair value as the
variable rates offered are comparable to rates currently
available to the Company.
(g) Stock Option Plan
As permitted by Statement No. 123, "Accounting for Stock Based
Compensation," the Company accounts for its stock option plan
in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation
expense would generally be recorded only if the current market
price of the underlying stock exceeded the exercise price on
the date of grant. Consistent with Statement No. 123, the
Company discloses pro forma net loss and pro forma net loss
per share for employee stock option grants made in 1995 and
future years as if the fair-value-based method described in
Statement No. 123 had been applied.
(h) Short-Term Investments
Short-term investments consist of discount notes and Treasury
bills and are available for sale. The difference between the
carrying value and fair value is immaterial at December 31,
1996.
(i) Use of 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 disclosures 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.
(j) Reclassification
Certain accounts in the 1995 financial statements were
reclassified in order to conform to the 1996 financial
statement presentation.
(2) FIXED ASSETS
Fixed assets consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Mobile video production units $ 951,653 $ --
Product development equipment 407,184 220,915
Training and processing equipment 112,302 --
Office furniture and equipment 144,808 31,930
Show and exhibit displays 144,787 142,524
---------- --------
1,760,734 395,369
Less accumulated depreciation (135,908) (64,743)
---------- --------
$1,624,826 $330,626
========== ========
</TABLE>
-22-
<PAGE> 25
(3) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Video and marketing production costs $674,366 $275,808
Deferred organization costs 29,428 29,428
-------- --------
703,794 305,236
Less: accumulated amortization (87,324) (2,943)
-------- --------
$616,470 $302,293
======== ========
</TABLE>
(4) LEASES
The Company has a noncancelable lease for office space that expires in
1999. Rental payments include minimum rentals plus building expenses.
Rental expense for this lease during 1996 was $16,984. Through October
1996, the Company utilized minimal office space provided by an officer
of the Company.
Future minimum lease payments under this lease as of December 31, 1996
are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 102,452
1998 105,751
1999 90,512
---------
$ 298,715
=========
</TABLE>
The Company entered into a capitalized master lease agreement with a
financial institution which permits the Company to finance its mobile
video productions units of up to $840,000 through May 2000 at an
interest rate of approximately 10%. At December 31, 1996, no amounts
were drawn against this master capital lease. In January 1997, the
Company financed one mobile video production unit for $130,284 under
this lease. Future payments under this capital lease for each of the
following three years is $49,210. Also, the Company anticipates
financing six additional mobile video production units in 1997 for
approximately the same amount.
(5) COMMON STOCK
During 1995, the Company's founding shareholders made capital
contributions or loaned funds to the Company which were subsequently
contributed to the Company as capital, totaling $403,700, in exchange
for 5,000,000 Class A non-voting shares and 100 Class B voting shares.
In March 1995, the Company issued 144,167 shares of Class A non-voting
shares to employees and consultants for services. The estimated market
value of such shares of $11,760 was recorded as compensation expense.
On March 11, 1996, the Company's Board of Directors eliminated the
Class A and B designation of its common stock and declared a
recapitalization effective May 2, 1996, whereby .488268 of a share and
4882.68 shares of common stock with a par value of $.01 per share was
issued for each Class A and Class B share, respectively, of common
stock outstanding on that date. In addition, options to purchase Class
A common stock were converted into the right to purchase .5831847
shares of common stock. All share and per share information related to
shares issued prior to the recapitalization have been restated to
reflect the recapitalization.
-23-
<PAGE> 26
In April 1996, three shareholders transferred 300,000 shares of Common
Stock to Greg Norman, upon his exercise of an option granted to him
pursuant to the terms of the Shareholders Agreement and Greg Norman
License (see note 9(a)).
To generate funds to continue the development of the Company's
products and commence its planned primary business activities, the
Company on May 31, 1996, raised $965,000 net of expenses, from sale of
22 units in a private placement for $50,000 per unit, each unit
consisting of an 8% unsecured promissory note in the principal amount
of $50,000 and 10,000 shares of the Company's common stock. The
promissory notes ($1,100,000) were repaid upon consummation of the
initial public offering (IPO) on July 24, 1996.
In the July 1996 IPO, including the over-allotment option granted to
the underwriters in connection therewith, the Company sold 1,395,000
shares of Common Stock and 1,495,000 Redeemable Warrants to the public.
Each Redeemable Warrant gives the registered holder thereof, during the
period from July 24, 1997 until July 24, 2000, the right to purchase
one share of Common Stock at an exercise price of $5.00. The
Redeemable Warrants are redeemable by the Company, upon the consent of
Whale Securities Co., L.P. (Whale) at any time after July 24, 1997,
upon notice of not less than 30 days, at a price of $.10 per Redeemable
Warrant, provided that the closing bid price of the Common Stock is at
least $7.50 per share for thirty trading days ending on the third day
prior to the date on which the Company gives notice of the redemption
of the Redeemable Warrants, subject to adjustment in certain
circumstances. Net proceeds from the IPO were $5,511,849. At December
31, 1996, 1,495,000 shares of common stock are reserved for issuance
upon exercise of the Redeemable Warrants and an additional 260,000
shares of Common Stock are reserved for issuance upon exercise of an
aggregate of 260,000 warrants held by Whale, which warrants were
received in connection with Whale's role as underwriter in the IPO.
(6) BANK BORROWINGS
In October 1995, the Company borrowed $400,000 from a bank which was
due on demand. This note bore interest at the bank's reference rate
(8.25% at December 31, 1995). The note was secured by all of the
Company's assets and certain personal assets of certain of the
Company's shareholders and was personally guaranteed by such
shareholders. In January and April 1996, the Company borrowed an
additional $115,000 and the total outstanding balance of $515,000 was
converted to a promissory note. This note was paid off in July 1996
using the proceeds obtained from the IPO.
In November 1996, the Company entered into a revolving line of credit
arrangement with a financial institution for $4,000,000. Through
December 20, 1996, the line of credit bore an interest rate of 6.625%.
Subsequent to December 20, 1996, the interest rate is 1.25% plus LIBOR
(5.50% at December 31, 1996). All investments held with the financial
institution are pledged as collateral for the line of credit. At
December 31, 1996, the outstanding balance under this line was
$500,000.
-24-
<PAGE> 27
(7) INCOME TAXES
Income tax expense in 1995 represented current state and local taxes.
Net operating losses which are not currently usable are the principal
difference between the expected amounts of tax benefits computed by
applying the statutory federal income tax rate to the Company's loss
before income taxes for the years ended December 31, 1996 and 1995.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Deferred tax assets:
Deferred start-up costs $ 75,550 $ 97,500
Net operating loss carryforward 1,095,160 54,300
Accrued expenses 22,212 --
Amortization 5,439 --
Fixed asset depreciation -- 6,000
------------ ---------
Total gross deferred tax assets 1,198,361 157,800
Less valuation allowance (1,075,644) (157,800)
------------ ---------
Net deferred tax assets 122,717 --
------------ ---------
Deferred tax liabilities:
Fixed asset depreciation (9,827) --
Advanced royalties (112,890) --
------------ ---------
Total gross deferred tax liabilities (122,717) --
------------ ---------
Net deferred tax asset $ -- $ --
============ =========
</TABLE>
As of December 31, 1996, the Company has a tax net operating loss
carryforward of approximately $1,160,000 expiring in 2010. The Company
has provided a valuation allowance of $1,075,644 and $157,800 at
December 31, 1996 and 1995 against its net deferred tax assets since
it is more likely than not that the Company will not realize such
assets given the Company's development stage and the losses incurred
since inception. The change in valuation allowance in 1996 was
$917,844.
(8) STOCK OPTION PLAN
In April 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"), which provided for the granting to directors, officers, key
employees and consultants of the greater of 900,000 shares of common
stock 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. However, with respect to incentive stock
options, the option exercise price may not be less than 100% of the
market value at the time of grant (110% if the incentive stock option
is granted to a 10% or more stockholder) and the term of any option
may not exceed ten years (unless granted as an incentive stock option
to a 10% or more stockholder, which term may not exceed five years.)
The Company has not granted any incentive stock options. On
January 1, 1997, the Plan was amended by the Board of Directors to
increase the maximum number of shares of Common Stock that may be
subject to outstanding options, determined immediately after the grant
of any option. The Plan currently provides that such maximum number
of shares of Common Stock is equal to the greater of 1,200,000 shares
or 12% of the aggregate number of shares of the Company's Common Stock
outstanding, provided, however, that options to purchase no more than
300,000 shares of Common Stock may be granted as ISOs.
-25-
<PAGE> 28
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 at the
time of grant. Such options vest one-third on the date of grant and
one third on the first two anniversary dates and have a term of five
years.
At the time of the IPO (July 1996), 787,871 nonqualified options were
granted to purchase common stock at an exercise price equal to the IPO
price of the common stock ($5.00).
In March 1995, the Company granted 177,871 nonqualified options to
purchase common stock at an exercise price equal to the IPO price of
the common stock ($5.00). Such options have been canceled.
The Company applies APB Opinion No. 25 in accounting for its Plan,
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on fair value at the grant date for its stock
options under Statement No. 123, the Company's net loss and net loss
per share for the year ended December 31, 1996 would have increased to
$3,579,469 and $.94, respectively, and, for the year ended December
31, 1995, the Company's net loss and net loss per share would have
increased to $719,904 and $.23, respectively.
In calculating the Company's net loss had the compensation cost been
determined under Statement No. 123, it was assumed that Earl Takefman's
options would vest in the year granted, others would vest over a four
year period, 5% of the options would be forfeited, no dividends,
volatility percent of 10% and an interest rate of 6.3%.
Stock option activity during the periods is indicated as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ------
<S> <C> <C>
Balance at January 1, 1995
Granted 177,871 $ 5.00
Exercised -- --
Forfeited -- --
Expired -- --
-------- ------
Balance at December 31, 1995 177,871 $ 5.00
Granted 787,871 $ 5.00
Exercised -- --
Forfeited -- --
Canceled (177,871) $ 5.00
-------- ------
Balance at December 31, 1996 787,871 $ 5.00
======== ======
</TABLE>
At December 31, 1996, 4,998 options are exercisable. In addition, on February
7, 1997, an additional 300,000 options became exercisable. See Note 9(b).
At December 31, 1996, the exercise price and weighted-average remaining
contractual life of outstanding options was $5.00 and 10 years, respectively.
(9) COMMITMENTS AND CONTINGENCIES
(A) LICENSE AGREEMENT
-26-
<PAGE> 29
Effective March 1, 1995 the Company entered into a license
agreement with Greg Norman (Norman), a professional golfer,
and his corporation, Great White Shark Enterprises, Inc.
(Great White Shark), pursuant to which the Company was granted
a worldwide license to use his name, likeness and endorsement
in connection with the production and promotion of the
Company's products. Norman will receive royalties of 8% of all
net revenues, as defined, derived from the sale of One-on-One
videotapes. The Company extended the agreement in 1996 and
used a portion of the proceeds from its private placement to
pay the initial $150,000 required to extend the agreement. The
extension of the agreement, which is for three additional
years, requires the Company to pay certain guaranteed fees,
amounting to $3,300,000, to be paid in quarterly installments
to Great White Shark and total $600,000 (including the
$150,000 payment referred to above) in the year ending June
30, 1997, $1 million in the year ending June 1998 and $1.7
million in the year ending June 30, 1999. Such guaranteed
payments will be credited against future 8% royalties due on
the Company's net revenues from the sale of the One-on-One
video. Through December 31, 1996, the Company made payments to
Norman amounting to $300,000. These payments are presented as
advance royalties on the balance sheet at December 31, 1996.
As the Company generates revenue, the advance royalties will
be recorded as expense.
The Company has the right to renew the license agreement for
two additional periods of five years each. In the event of
renewal, the Company is obligated to make guaranteed payments
of $1,300,000 during the first year of the renewal term,
increasing by $100,000 per year thereafter.
Also in March 1995, the Company's three founding shareholders
entered into an Agreement which gave Norman an option to
receive 10% of the outstanding shares of the Company from
them. The option was conditioned upon the Company delivering a
notice to Norman that was intended to extend the License
Agreement for three years. In April 1996, Norman exercised the
option and those shareholders transferred 300,000 shares of
their common stock to Norman. The market value of such shares
was $600,000. In accordance with Accounting Principles Board
Opinion ("APB") No. 25, the non-cash transaction was recorded
as a charge to the statement of operation and an increase in
additional paid-in capital, in April 1996, with no net impact
on the Company's equity.
(B) EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with seven
executive employees expiring through December 1998 which
provide for aggregate minimum annual compensation of
approximately $763,000 in 1997 and $888,000 in 1998. The
agreements are automatically renewed for additional one-year
periods unless the Company or the employees provide timely
notice of termination. Two of the employment agreements provide
for an increase in compensation commencing in July 1997, if the
Company achieves prescribed pre-tax earnings thresholds. The
agreements also provide for bonuses and severance payments
ranging from three to twelve months. In addition, two of the
employment agreements provide for options for each employee to
purchase an aggregate of up to 250,000 shares of common stock,
at an exercise price per share equal to the IPO price of $5 per
share, which was the per share price at the date of grant (see
note 8). Such options had a vesting term of five years,
subject to acceleration if the trading price of the Common
Stock reached certain thresholds. Specifically, the vesting of
300,000 of such options would accelerate to the date that the
market price of the Common Stock equaled or exceeded $10.00 per
share for at least five consecutive trading days prior to
January 24, 1998, if such threshold is reached. This threshold
was achieved on February 7, 1997, at which time such 300,000
options became exercisable. The vesting of the remaining
200,000 options will be accelerated to the date that the
trading price of the Common Stock equals or exceeds $15.00 per
share for at least five consecutive trading days on or before
January 24, 1999 if such threshold is reached. This threshold
has not yet been reached. The original option agreement
contained an error in that it did not include a provision for
the options to vest in five years. Such error was corrected by
revisions to the option agreements dated April 3, 1997.
(10) SUBSEQUENT EVENT (UNAUDITED)
In March 1997, the Company consummated a bridge financing (the
"Bridge Financing") pursuant to which it issued to 13
investors, including Status-One Investments Inc., a company
controlled by Earl T. Takefman, the Chief Executive Officer of
the Company, an aggregate of (i) 100,000 shares of Common Stock
and (ii) 100,000 warrants to purchase 100,000 shares of Common
Stock at a price of $10.00 per share, subject to adjustment in
certain circumstances. As consideration for such securities,
the investors in the Bridge Financing pledged an aggregate of
$3,500,000 in cash and other marketable securities as cash
collateral (the "Cash Collateral") to Republic Bank of New York
(Canada) Ltd. ("Republic"), which in turn issued a stand-by
letter of credit (the "Letter of Credit") to the Company in an
amount up to $3,500,000, which expires on December 31, 1997.
The Company has used the Letter of Credit to secure a
$3,500,000 line of credit (the "Line of Credit") from Barnett
Bank. In the event that the Company draws upon the Line of
Credit and is subsequently unable to repay amounts owed to
Barnett Bank under the Line of Credit prior to December 31,
1997, Barnett Bank will present the Letter of Credit to
Republic, who will pay Barnett Bank amounts owed to it using
the Cash Collateral. In such instance, the investors in the
Bridge Financing will be issued additional shares of Common
Stock by the Company according to a predetermined formula to a
maximum of 467,000 shares provided that the average of the
closing bid prices of the Common Stock on the Nasdaq SmallCap
Market on each of the twenty consecutive trading days
immediately prior to December 31, 1997 is greater than $11.00.
Alternatively, if the average of the closing bid prices of the
Common Stock on the Nasdaq SmallCap Market on each of the
twenty consecutive days immediately prior to December 31,
1997 is less than $11.00, the Company is obligated to issue
to each investor in the Bridge Financing a number of shares
of Common Stock equal to (x) the amount of such investor's
unreturned Cash Collateral divided by (y) one-half of the
average of the closing bid prices of the Common Stock on the
Nasdaq SmallCap Market on each of the twenty consecutive
trading days prior to December 31, 1997.
-27-
<PAGE> 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 9 is set forth under the
caption "Election of Directors" in the Company's 1997 Proxy Statement,
which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information called for by Item 10 is set forth under the
caption "Executive Compensation" in the Company's 1997 Proxy
Statement, which is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 11 is set forth under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's 1997 Proxy Statement, which is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 12 is set forth under the
caption "Certain Relationships and Related Transactions" in the
Company's 1997 Proxy Statement, which is incorporated herein by
reference.
-28-
<PAGE> 31
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report as
required by Item 601 of Regulation S-B. The Exhibits
designated by an asterisk are management contracts and
compensatory plans and arrangements required to be filed as
Exhibits to this Report.
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to Amendment No. 2
to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
4.1 Form of Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.2 Form of Specimen Redeemable Warrant Certificate (Incorporated
by reference to Exhibit 4.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.3 Form of Warrant Agreement between the Company and Whale
Securities Co., L.P. (Incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.4 Form of Warrant among American Stock Transfer & Trust Company,
the Company and Whale Securities Co., L.P. (Incorporated by
reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.1 License Agreement, dated March 1, 1995, between Great White
Shark Enterprises, Inc. and the Company, as supplemented
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.2 Promissory Note, dated April 15, 1996, payable to the Republic
National Bank of New York (Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5193) effective July 24, 1996)
10.3* Employment Agreement, dated as of January 1, 1996, between
Earl Takefman and the Company (Incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5193) effective July 24, 1996)
10.4* Employment Agreement, dated as of January 1, 1996, between
Alan Lubell and the Company (Incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5193) effective July 24, 1996)
-29-
<PAGE> 32
Exhibit
Number Description
- ------- -----------
10.5* Employment Agreement, dated as of May 1, 1996, between Thomas
S. Peters and the Company (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)
10.6 License Agreement, dated as of November 1, 1996, between the
Company and Visual Edge Systems (Australia) Pty. Ltd.
(Incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.7 Form of Consulting Agreement between the Company and Whale
Securities Co., L.P. (Incorporated by reference to Exhibit
10.7 to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
10.8* 1996 Stock Option Plan (Incorporated by reference to Exhibit
10.8 to Amendment No. 2 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.9* Employment Agreement, dated as of June 1, 1996, between the
Company and Richard Parker (Incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.10* Employment Agreement, dated as of June 1, 1996, between the
Company and Ami Trauber (Incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.11 Assignment, dated April 19, 1996 from Thomas S. Peters to the
Company (Incorporated by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
11 Computation of Per Share Loss
24 Power of Attorney (included with the signature page hereof)
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during
the last quarter of the fiscal year ended December 31,
1996.
-30-
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VISUAL EDGE SYSTEMS INC.
By: /s/ Earl Takefman
----------------------------------------
Earl Takefman
Chief Executive Officer
Date: April 3, 1997
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and
constitutes Earl Takefman and Alan Lubell, and each of them singly, his true
and lawful attorneys-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign and file any and all amendments to this report with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and he hereby ratifies and confirms all
that said attorneys-in-fact or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
<S> <C> <C>
/s/ Earl Takefman Director, Chief Executive Officer April 3, 1997
- ---------------------------- (Principal Executive Officer and
Earl Takefman Principal Financial and Accounting
Officer)
* Chairman of the Board April 3, 1997
- ----------------------------
Alan Lubell
* Director April 3, 1997
- ----------------------------
Eddie Einhorn
* Director April 3, 1997
- ----------------------------
Mark Hershhorn
Director April _, 1997
- ----------------------------
Beryl Artz
*By: /s/ Earl Takefman
----------------------------------------
Earl Takefman
Attorney-in-Fact
</TABLE>
-31-
<PAGE> 34
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to Amendment No. 2
to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
4.1 Form of Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.2 Form of Specimen Redeemable Warrant Certificate (Incorporated
by reference to Exhibit 4.2 to Amendment No. 1 to the
Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.3 Form of Warrant Agreement between the Company and Whale
Securities Co., L.P. (Incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.4 Form of Warrant among American Stock Transfer & Trust Company,
the Company and Whale Securities Co., L.P. (Incorporated by
reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.1 License Agreement, dated March 1, 1995, between Great White
Shark Enterprises, Inc. and the Company, as supplemented
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.2 Promissory Note, dated April 15, 1996, payable to the Republic
National Bank of New York (Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5193) effective July 24, 1996)
10.3* Employment Agreement, dated as of January 1, 1996, between
Earl Takefman and the Company (Incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5193) effective July 24, 1996)
10.4* Employment Agreement, dated as of January 1, 1996, between
Alan Lubell and the Company (Incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5193) effective July 24, 1996)
10.5* Employment Agreement, dated as of May 1, 1996, between Thomas
S. Peters and the Company (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)
-32-
<PAGE> 35
10.6 License Agreement, dated as of November 1, 1996, between the
Company and Visual Edge Systems (Australia) Pty. Ltd.
(Incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.7 Form of Consulting Agreement between the Company and Whale
Securities Co., L.P. (Incorporated by reference to Exhibit
10.7 to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
10.8* 1996 Stock Option Plan (Incorporated by reference to Exhibit
10.8 to Amendment No. 2 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.9* Employment Agreement, dated as of June 1, 1996, between the
Company and Richard Parker (Incorporated by reference to
Exhibit 10.9 to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2 (Registration No.
333-5193) effective July 24, 1996)
10.10* Employment Agreement, dated as of June 1, 1996, between the
Company and Ami Trauber (Incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective
July 24, 1996)
10.11 Assignment, dated April 19, 1996 from Thomas S. Peters to the
Company (Incorporated by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
11 Computation of Per Share Loss
24 Power of Attorney (included with the signature page hereof)
27 Financial Data Schedule
-33-
<PAGE> 1
Exhibit 11
Visual Edge Systems Inc.
Computation of Per Share Loss
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
Primary 1996 1995
---- ----
<S> <C> <C>
Weighted average common shares outstanding, exclusive 3,000,000 3,000,000
of issuances within twelve months prior to the IPO
Shares issued within 12 months prior to the IPO 220,000 220,000
assumed to be outstanding for the entire period
Weighted average common shares outstanding, for 581,250 --
shares issued after IPO ----------- ----------
Weighted average common shares outstanding at end of year 3,801,250 3,220,000
=========== ==========
Net loss $(2,397,690) $ (464,963)
=========== ==========
Net loss per share $ (.63) $ (.14)
=========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CERTIFIED
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 233,117
<SECURITIES> 1,869,052
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 447,503
<PP&E> 1,760,734
<DEPRECIATION> 135,908
<TOTAL-ASSETS> 4,784,170
<CURRENT-LIABILITIES> 1,119,514
<BONDS> 0
0
0
<COMMON> 46,150
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,664,656
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,416,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,854
<INCOME-PRETAX> (2,397,690)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,397,690)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
