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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
UNITED STATES
Form 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-20995
For the transition period from _________________ to ______________________
VISUAL EDGE SYSTEMS INC.
Delaware 13-3778895
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2424 North Federal Highway, Suite 100, Boca Raton, Florida 33431
(Address of principal executive offices)
(561) 750-7559
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1997, the registrant had 4,847,728 shares of common stock
and 1,495,000 redeemable warrants outstanding.
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VISUAL EDGE SYSTEMS INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets 3
June 30, 1997 and December 31, 1996
Condensed Statements of Operations 4
Three Months Ended June 30, 1997 and 1996 and Six Months
ended June 30, 1997 and 1996
Condensed Statements of Cash Flows 5
Six Months Ended June 30, 1997 Year ended December 31,
1996
Notes to Condensed Financial Statements 6-10
Item 2 Management's Discussion and Analysis or Plan of Operation 11-14
PART II OTHER INFORMATION 15-20
Signatures 21
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VISUAL EDGE SYSTEMS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
---------------
JUNE 30, 1997 DECEMBER 31, 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 676,867 $ 233,117
Short Term Investments 4,280,210 1,869,052
Accounts Receivable 85,206 0
Inventory 133,944 36,747
Advanced Royalties 128,000 300,000
Other Current Assets 147,475 80,756
-------------- -------------
TOTAL CURRENT ASSETS 5,451,701 2,519,672
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PROPERTY, PLANT & EQUIPMENT
Mobile Production Units 2,224,887 951,653
Training and Processing 112,882 112,301
Product Development 474,957 407,184
Office Furniture & Equipment 380,787 144,808
Show and Exhibit 144,787 144,787
Depreciation (310,568) (135,908)
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TOTAL FIXED ASSETS, NET 3,027,730 1,624,826
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DEFERRED COSTS:
Video Production 447,405 447,404
Organizational 29,428 29,428
Financing 2,029,436 -
Marketing Development (see Note 3) 601,222 226,962
Amortization (239,503) (87,324)
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TOTAL DEFERRED ASSETS, NET 2,867,989 616,470
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Other Assets 23,314 23,202
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TOTAL ASSETS $ 11,370,734 $ 4,784,170
-------------- -------------
-------------- -------------
LIABILITIES & EQUITY
CURRENT LIABILITIES
Bank Advances $ - $ 500,000
Accounts Payable 200,949 333,114
Accrued Expenses 123,138 284,900
Other Current Liabilities 29,051 1,500
Current Maturities - Note Payable 305,279 -
-------------- -------------
TOTAL CURRENT LIABILITIES 658,417 1,119,514
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LONG-TERM LIABILITIES
Note Payable 499,526 -
Convertible Debt (see Note 7b) 7,500,000 -
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TOTAL LONG-TERM LIABILITIES 7,999,526 -
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TOTAL LIABILITIES 8,657,943 1,119,514
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STOCKHOLDERS' EQUITY
Preferred Stock, 5,000,000 shares authorized, none issued
Common stock, $.01 par value, 20,000,000 shares authorized,
4,847,728 shares issued and outstanding 48,477 46,150
Additional Paid in Capital 9,226,235 6,481,159
Accumulated Deficit (6,561,921) (2,862,653)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,712,791 3,664,656
-------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $11,370,734 $ 4,784,170
-------------- -------------
-------------- -------------
</TABLE>
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VISUAL EDGE SYSTEMS INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
------------------------------ -------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1997 1996 1997 1996
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE $ 397,015 $ - $ 596,751 $ -
---------- ------------- ------------- --------------
COST OF SALES 223,743 - 452,860 -
---------- ------------- ------------- --------------
GROSS PROFIT 173,272 - 143,891 -
---------- ------------- ------------- --------------
General and administrative expenses 1,361,707 35,883 1,921,048 153,911
Selling and marketing 706,607 - 896,670 459
One-time non-cash stock severance expense - - 150,125 -
One-time non-cash marketing expense (see Note 5) 53,132 - 53,132 -
---------- ------------- ------------- --------------
2,121,446 35,883 3,020,975 154,370
---------- ------------- ------------- --------------
OPERATING LOSS (1,948,175) (35,883) (2,877,085) (154,370)
---------- ------------- ------------- --------------
OTHER:
Interest income 3,458 - 35,634 -
Interest expense (105,560) (17,934) (109,265) (30,746)
Financing costs: (see Notes 7a & 7b)
Financing fees (123,571) - (148,571) -
---------- ------------- ------------- --------------
Non-cash financing fees (499,981) - (599,981) -
---------- ------------- ------------- --------------
NET LOSS BEFORE INCOME TAXES (2,673,829) (53,817) (3,699,268) (185,116)
Provision for Income Taxes - - - -
NET LOSS $ (2,673,829) $ (53,817) $ (3,633,268) $ (185,116)
---------- ------------- ------------- --------------
LOSS PER SHARE $ (0.56) $ (0.02) $ (0.79) $ (0.06)
---------- ------------- ------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING 1,767,575 3,000,00 4,707,953 3,000,000
---------- ------------- ------------- --------------
---------- ------------- ------------- --------------
</TABLE>
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VISUAL EDGE SYSTEMS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31, 1996
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1997 1996
---------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (3,699,268) $ (2,397,690)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
One-time stock compensation expense
One-time non-cash marketing expense - 600,000
Loan financing expenses 53,132 -
Severance pay expense 748,552 -
Depreciation and amortization 150,125 -
Changes in assets and liabilities:
Increase in accounts receivable (85,206) -
Increase in other current assets (163,916) (117,503)
Increase in other assets (112) (23,202)
Increase in bank advances (500,000) -
Increase (decrease) in accounts payable (132,165) 63,852
Increase in accrued expenses (161,762) 271,182
Increase in advanced royalties (202,260) (300,000)
Increase in other current liabilities 27,551 1,500
---------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (3,638,490) (1,746,315)
---------------- --------------
INVESTING ACTIVITIES:
Capital expenditures (1,577,564) (1,365,365)
Proceeds from the sale of short term investments (1,577,564) (1,638,963)
Increase in intangible assets - (398,558)
Deferred financing costs (2,029,436) -
Purchases of short term investments (3,300,000) (3,508,015)
---------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (752,092) (3,632,975)
---------------- --------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 128,000 5,511,849
Repayment of borrowings (3,015,000) (1,615,000)
Proceeds from borrowings 7,721,332 1,715,000
---------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,834,332 5,611,849
---------------- --------------
NET INCREASE IN CASH 443,750 232,559
CASH AT BEGINNING OF PERIOD 233,117 558
---------------- --------------
CASH AT END OF PERIOD $ 676,867 $ 233,117
---------------- --------------
---------------- --------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 80,046 $ 50,854
---------------- --------------
---------------- --------------
Cash paid for income taxes $ - $ -
---------------- --------------
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</TABLE>
5
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VISUAL EDGE SYSTEMS INC
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. As such, they should be
read in conjunction with the Company's audited financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the interim periods are
not necessarily indicative of the results that might be expected for
the future interim periods or for the full year ending December 31,
1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) 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).
(c) 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, inventory, accounts receivable, 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.
(D) 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 June 30, 1997.
(E) 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
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of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(3) ADVANCED ROYALTIES
Advanced royalties at June 30, 1997 amounted to $502, 259. Based on a
comparison of advanced royalties to projections it was determined that
an additional $128,000 would be expensed by December 31, 1997.
Therefore $374, 259 was reclassed from a current asset to a
non-current asset (marketing development) and will be amortized as it
is earned.
(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 for the six months ending June 30, 1997
was $51,228.
Future minimum lease payments under this lease as of December 31, 1996
are:
Year Ending December 31,
1997 $102,452
1998 105,751
1999 90,512
--------
$298,715
--------
--------
The Company entered into a capitalized master lease and equipment
financing agreement with a financial institution which permits the
Company to finance its mobile video production 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. For the six months ended June 30, 1997, the Company financed
seven mobile video production units for $761,905 under this lease.
Future payments under this capital lease for each of the following
three years is $344,470.
(5) COMMITMENTS AND CONTINGENCIES
Effective March 1, 1995 the Company entered into a license agreement
(the "Agreement") with Greg Norman ("Norman"), a professional golfer,
and Great White Shark Enterprises, Inc. ("Great White Shark"), pursuant
to which the Company was granted a worldwide license to use Norman's
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.
As of June 3, 1997, the Company, Norman and Great White Shark executed
an amendment (the "Amendment") to the Agreement. Norman and the Company
have agreed to restructure the terms of the payments due to Norman
under the Agreement by: (i) altering the payments such
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that Norman will receive $1,020,000 of his royalties in shares of the
Company's common stock, rather than cash as was originally contemplated
by the Agreement: (ii) changing the schedule of the payments such that
they will be paid to Norman over a period of time from January 1998
through April 2000; and (iii) granting to Norman 25,000 options to
purchase shares of the Company's common stock. Such options are
exercisable at a price of $10.00 per share, vest immediately and are
exercisable at Norman's discretion at any time prior to their
expiration on June 30, 2000. Accordingly, in compliance with FASB #123
the Company recorded a one time non-cash marketing expense of $53,132.
The Amendment restructures the payments to Norman as follows: 1997 - as
of June 30, 1997 $300,000 was paid with no further payments due for the
remainder of the year; 1998 - $700,000 to be paid in addition to 30,000
shares of common stock to be issued during the year; 1999 - $1,200,000
to be paid in addition to 48,000 shares of common stock to be issued
during the year; and 2000 - $480,000 to be paid in addition to 24,000
shares of common stock to be issued during the first three months of
the year.
For the purpose of calculating the royalties payable to Norman, the
common stock issued to Norman by the Company will be valued at $10.00
per share regardless of the actual market price of the common stock at
the time of payment. Any royalties earned by Norman pursuant to the
Amendment that are in excess of the $1,020,000 paid in shares of common
stock are to be paid in cash.
After the initial term, which ends on June 30, 2000, the Company has
the option to renew the Agreement for two additional five-year periods
(each five-year period, a "Renewal Term"). The guaranteed fee to
Norman in the first year of the first Renewal Term will be $1,300,000,
increasing by $100,000 each successive year thereafter; all such fees
will be payable in cash in equal quarterly installments.
(6) 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 (5) 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 $5.00 per share, which was the per share price at the date of
grant. 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 was reached.
This threshold was achieved on February 7, 1997, at which time
such 300,000 options became exerciseable. 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
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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.
(7a) MARCH FINANCING
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), as a financing fee 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"), and Bank Hapoalim
(Switzerland) Ltd. ("Bank Hapoalim"), which in turn issued stand-by
letters of credit (the "Letters of Credit") to the Company in the
aggregate amount of up to $3,500,000. The Company has used the Letters
of Credit to secure a $3,500,000 line of credit (the "Line of Credit")
from Barnett Bank. In June 1997, the Company used a portion of the
proceeds from the issuance and sale of certain equity securities,
outlined hereafter in note (7b), to repay the remaining outstanding
balance due and owing on the Line of Credit and returned the Letters
of Credit to Republic and Bank Hapoalim, which in turn returned all
of the Cash Collateral to the Bridge Investors.
(7b) JUNE FINANCING
On June 13, 1997, the Company arranged a three-year $7,500,000 debt and
convertible equity facility with a group of investment funds advised by
an affiliate of Hunt Sports Group, a sports and entertainment
management company controlled by the Lamar Hunt family of Dallas,
Texas. The Company issued and sold to Infinity Investors Limited,
Infinity Emerging Opportunities Limited, Sandera Partners, L.P. and
Lion Capital Partners, L.P. (collectively, the "Funds") the following
securities pursuant to the Bridge Securities Purchase Agreement, dated
as of June 13, 1997 (the "Bridge Agreement"), between the Company and
the Funds: (i) 8.25% unsecured convertible bridge notes (the "Bridge
Notes") in the aggregate principal amount of $7,500,000 with a maturity
date of three years from the date of issuance (subject to the mandatory
automatic exchange for the Company's preferred stock, par value $.01
per share (the "Preferred Stock"), as discussed below), which Bridge
Notes are convertible into shares of common stock at any time and from
time to time commencing January 1, 1998 at the option of the holder
thereof subject to certain limitations on conversion set forth in the
Bridge Agreement; (ii) 93,677 shares of common stock, (the "Grant
Shares"); and (iii) five-year warrants (the "Bridge Warrants") to
purchase 100,000 shares of common stock at an exercise price equal to
$10.675. On June 13, 1997 (the "Closing Date"), 30% of the Bridge
Warrants were assigned, with the Company's consent, to Alpine Capital
Partners, Inc. The Bridge Warrants are redeemable commencing
October 1, 1998 at a redemption price equal to $.10 per share, subject
to adjustment based on a 20-day minimum closing bid price of the
Company's common stock. The net proceeds to the Company from the sale
of the Bridge Notes, Grant Shares and Bridge Warrants was $7,236,938.
In addition, the Company issued 14,502 shares of common stock to Whale
Securities Co., L.P.
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("Whale"), the underwriter in the Company's initial public offering
(the "IPO"), as a fee for services rendered in connection with the
transactions contemplated by the Bridge Agreement.
Pursuant to the Bridge Agreement, the Company will issue additional
Grant Shares (the "Additional Grant Shares") to the Funds in the event
that the closing bid price of the Company's common stock for each
trading day during any consecutive 10 trading days from the Closing
Date through December 31, 1997 does not equal at least $10.00 per
share. In the event that any Additional Grant Shares are issued, the
exercise price of the Bridge Warrants will be adjusted so that the
value of the Bridge Warrants (using a Black-Scholes or similar model)
equals the value of the Bridge Warrants as of the Closing Date.
Interest payments on the Bridge Notes will, at the option of the
Company, be payable in cash or in shares of common stock. Effective
January 1, 1998, the aggregate outstanding principal amount of Bridge
Notes exceeding $2,500,000 will be automatically exchanged for a number
of shares of Preferred Stock with an aggregate liquidation preference
equal to the principal amount of Bridge Notes so exchanged and with
terms substantially identical to the Bridge Notes, which Preferred
Stock is convertible into shares of common stock (the "Stock Conversion
Shares"). In addition, if the Company elects to redeem the warrants
issued in the Company's IPO (the "Redeemable Warrants"), the Company
must redeem at least $5,000,000 principal amount of the Bridge Notes
with the net proceeds of such redemption.
The Company may redeem the Redeemable Warrants, with the consent of
Whale and upon notice to the holders thereof of not less than 30 days,
at a price of $.10 per warrant, provided that the closing bid price of
the common stock on all 30 of the trading days ending on the third day
prior to the day on which the Company gives notice has been at least
150% (currently $7.50, subject to adjustment) of the then effective
exercise price of the Redeemable Warrants.
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VISUAL EDGE SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
Visual Edge Systems Inc. (the "Company") was organized to develop and
market personalized videotape golf lessons featuring One-on-One
instruction by leading professional golfer Greg Norman. Through
December 31,1996, the Company 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 developmental
operations in January 1995. From the Company's inception through the
end of its last fiscal year, it was primarily engaged in product
development, market development, testing technology, recruitment of
key personnel, raising capital and preparing the software, hardware
and videotape coaching instructions used in the production of its
products. As a consequence, the Company did not generate any
significant revenue and operated as a development stage company
through December 31, 1996. The Company commenced generating revenue
from its primary business activities during the first quarter of this
year.
The Company's primary marketing strategy is to sell "One-on-One with
Greg Norman." 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 indoor event planners
who organize trade shows, conventions, sales meetings, retail store
openings and promotions and automobile dealer showroom promotions. To
implement its marketing and business strategy, the Company has already
developed 15 mobile One-on-One vans equipped with video and personal
computer equipment to market, promote and produce the Company's
products. The Company intends to position its One-on-One vans in
selected geographic areas that will service golf courses and driving
ranges throughout the United States, and has initially placed its
first 15 vans in Arizona, California, Florida, Georgia, Illinois,
Maryland, Massachusetts, Michigan, New Jersey, New York, South
Carolina and Texas. The Company anticipates that, at the discretion
of management, additional vans will be developed and situated based on
the demand for the Company's products.
On May 9, 1997, the Company entered into an agreement in principle
with Cadillac Motor Car Division of General Motors ("Cadillac").
Subsequently, on August 5, 1997 the Company signed a formal agreement
with Cadillac. The agreement grants Cadillac the exclusive U.S.
dealer showroom rights to the Company's One-on-One with Greg Norman
concept, allowing
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Cadillac to exclusively offer its customers a free video golf lesson
personally analyzed by Greg Norman if they test drive a Cadillac. The
Company is to provide each participating Cadillac dealership with all
marketing materials related to this promotion, including creative for
print and radio advertisements, banners, posters, and direct mail
invitations. The contract runs until December 31, 2000 and provides
the Company with up to approximately 6,500 event days or approximately
$34,750,000 over the term of the agreement if the Company has an
adequate number of available vans to serve all participating Cadillac
dealers. The agreement is terminable by Cadillac under certain
circumstances without penalty.
RESULTS OF OPERATIONS
The Company was a development stage company in 1996 and had no revenue
for the fiscal year ended December 31, 1996. The Company commenced
its introduction and marketing of personalized videotape golf lessons,
featuring One-on-One instruction by leading professional golfer Greg
Norman, during the fourth quarter of 1996. The Company completed and
launched its first seven mobile production units ("vans") during the
fist three months of 1997 and an additional eight vans were launched
by the end of May 1997. As of June 30, 1997, the Company had 15 vans
in operation.
During the first quarter of 1997 the Company began to generate revenue
from the sales of its videotape golf lessons. For the three months
ending June 30, 1997, the Company had sales of approximately $397,015
and a gross profit of $173,272, or a gross profit margin of 44%. For
the six months ending June 30, 1997, the Company generated revenue of
$596,751 and a gross profit of $143,891, or a gross profit margin of
24%.
Selling and administrative expenses for the three month and six month
period ending June 30, 1997 were $2,068,314 and $2,817,718,
respectively. These expenses include non-cash depreciation expense,
which totaled $47,490 and $190,940 for the three and six months ending
June 30, 1997, and amortization expense, which totaled $19,959 and
$135,899 for the three and six months ending June 30, 1997.
Additionally, a significant portion of the expenses were start-up
expenses related to the launching of the 15 vans and consisted of
payroll, marketing, training, travel and other administrative
expenses.
A significant portion of the Company's disbursements during the six
months ending June 30, 1997 represented investment in fixed assets of
$1,577,564. At June 30, 1997, the Company's cumulative investment in
fixed assets was $3,338,298.
The Company earned $35,634 in interest income for the six month period
ending June 30, 1997. Further, in connection with its bridge
financings, the Company incurred financing fees of $1,250,000 in
connection with the March financing and $1,739,866 in connection with
the June financing, or a total of $2,989,866, of which $1,000,000 and
$1,399,866, respectively, were non-cash expenses. The financing fees
are amortized over a ten month period and a seven month period,
respectively, ending December 31, 1997. Additionally, in compliance
with FASB #123 the Company recorded a one time non-cash marketing
expense of $53,132, and during the first quarter, the Company incurred
a one time non-cash stock severance expense of $150,125.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 the Company had cash of $676,867 and cash equivalents
(consisting of short- term investments) of $4,280,210 and working
capital of $4,793,284. Net cash used in operating activities for the
six months ending June 30, 1997 was $3,638,490, primarily representing
cash used for start-up expenses related to the launching of the 15
vans. Net cash provided by financing activities was $4,834,332 and
$752,092 was used in investing activities for a total increase in cash
of $443,750 and cash equivalents of $2,411,158.
In March 1997, the Company completed a $3,500,000 bridge financing
facility pursuant to which it issued to 13 investors, as a financing
fee, an aggregate of 100,000 shares of common stock and 100,000
warrants (exercisable through March 26, 2002) to purchase 100,000
shares of common stock at a price of $10.00 per share. The investors
pledged an aggregate of $3,500,000 in collateral, which resulted in
the issuance of two letters of credit in the aggregate amount of
$3,500,000. Such letters of credit were used by the Company to secure
a line of credit of $3,500,000. In June 1997, the Company used a
portion of the proceeds from the issuance and sale of certain equity
securities, as described below, to repay the remaining outstanding
balance due and owing on the line of credit. As a result, the letters
of credit were returned to the issuing banks and the cash collateral
was returned to the investors in the bridge financing.
On June 13, 1997, the Company arranged a three-year $7,500,000 debt
and convertible equity facility with a group of investment funds
advised by an affiliate of Hunt Sports Group, a sports and
entertainment management company controlled by the Lamar Hunt family
of Dallas, Texas. The Company issued and sold to Infinity Investors
Limited, Infinity Emerging Opportunities Limited, Sandera Partners,
L.P. and Lion Capital Partners, L. P. (collectively, the "Funds") the
following securities pursuant to the Bridge Securities Purchase
Agreement, dated as of June 13, 1997 (the "Bridge Agreement"), between
the Company and the Funds: (i) 8.25% unsecured convertible bridge
notes (the "Bridge Notes") in the aggregate principal amount of
$7,500,000 with a maturity date of three years from the date of
issuance (subject to the mandatory automatic exchange for the
Company's preferred stock, par value $.01 per share (the "Preferred
Stock"), as discussed below), which Bridge Notes are convertible into
shares of common stock at any time and from time to time commencing
January 1, 1998 at the option of the holder thereof, subject to
certain limitations on conversion set forth in the Bridge Agreement;
(ii) 93,677 shares of common stock (the "Grant Shares"); and (iii)
five-year warrants (the "Bridge Warrants") to purchase 100,000 shares
of common stock at an exercise price equal to $10.675. On June 13,
1997 (the "Closing Date"), 30% of the Bridge Warrants were assigned,
with the Company's consent, to Alpine Capital Partners, Inc. The
Bridge Warrants are redeemable commencing October 1, 1998 at a
redemption price equal to $.10 per share, subject to adjustment based
on a 20-day minimum closing bid price of the Company's common stock.
The net proceeds to the Company from the sale of the Bridge Notes,
Grant Shares and Bridge Warrants was $7,236,938. In addition, the
Company issued 14,502 shares of common stock to Whale Securities Co.,
L.P. ("Whale"), the underwriter in the Company's initial public
offering (the "IPO"), as a fee for services rendered in connection
with the transactions contemplated by the Bridge Agreement. (see Note
7b).
The Company anticipates that its available cash will be sufficient to
fund its operations through the end of this year.
13
<PAGE>
SUBSEQUENT EVENTS
In July 1997, the Company signed a letter of intent with Vision
Financial Group, which would provide $2.5 million in equipment
financing to the Company. The proceeds will fund 25 vans at a cost of
$100,000 per van or $2.5 million.
The letter of intent provides that the financing is to be made in
three tranches. The first tranche of $800,000 for the eight vans
that were purchased during the second quarter of 1997 will be made
upon closing of the financing agreement. The second tranche provides
$1 million during the fourth quarter of 1997, to purchase ten
additional vans. The third tranche provides $700,000 during the second
quarter of 1998, to purchase an additional seven vans.
THIRD PARTY REPORTS
The Company does not make financial forecasts or projections nor
endorse the financial forecasts or projections of third parties nor
does it comment on the accuracy of third party reports. The Company
does not participate in the preparation of the reports or the
estimates given by the analysts. Analysts who issue financial reports
are not privy to non-public financial information. Any purchase of
the Company's securities based on financial estimates provided by
analysts or third parties is done entirely at the risk of the
purchaser.
14
<PAGE>
VISUAL EDGE SYSTEMS INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently a party to any litigation.
ITEM 2. CHANGES IN SECURITIES
The following is a description of all sales of unregistered securities
by the Company during the quarterly period ended June 30, 1997. All
of such sales were private placements made in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933, as
amended, and no underwriters were involved in such placements.
On March 26, 1997, Visual Edge Systems Inc. (the "Company")
consummated a bridge financing (the "Bridge Financing") pursuant to
which it issued to 13 investors (the "Bridge 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 (the "Shares") of common stock, par value $.01 per
share (the "Common Stock"), and (ii) 100,000 warrants (the "Warrants")
to purchase 100,000 share of Common Stock at a price of $10.00 per
share, subject to adjustments in certain circumstances, at any time
before March 26, 2002.
As consideration for the Shares and Warrants, 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") and Bank Hapoalim
(Switzerland) Ltd. ("Bank Hapoalim"). Republic and Bank Hapoalim have
each issued a stand-by letter of credit (the "Letters of Credit") in
favor of Barnett Bank, N.A. ("Barnett"), in the amount of $3,250,000
and $250,000, respectively, which the Company used to secure a line of
credit from Barnett Bank. The Company has repaid all amounts owing
and outstanding under such line of credit and, as a result, the
Letters of Credit have been returned to Republic and Bank Hapoalim and
the Cash Collateral has been returned to the Bridge Investors.
On June 13, 1997, the Company arranged a three-year $7,500,000 debt
and convertible equity facility with a group of investment funds
advised by an affiliate of Hunt Sports Group, a sports and
entertainment management company controlled by the Lamar Hunt family
of Dallas, Texas. The Company issued and sold to Infinity Investors
Limited, Infinity Emerging Opportunities Limited, Sandera Partners,
L.P. and Lion Capital Partners, L. P. (collectively, the "Funds") the
following securities pursuant to the Bridge Securities Purchase
Agreement, dated as of June 13, 1997 (the "Bridge Agreement"), between
the Company and the Funds: (i) 8.25% unsecured convertible bridge
notes (the "Bridge Notes") in the aggregate principal amount of
$7,500,000 with a maturity date of three years from the date of
issuance (subject to the mandatory automatic exchange for the
Company's preferred stock, par value $.01 per share (the "Preferred
Stock"), as discussed below), which Bridge Notes are convertible into
shares of common stock at any time and from time to time commencing
January 1, 1998 at the option of the holder thereof subject to certain
limitations on conversion set forth in the Bridge
15
<PAGE>
Agreement; (ii) 93,677 shares of common stock, (the "Grant Shares");
and (iii) five-year warrants (the "Bridge Warrants") to purchase
100,000 shares of common stock at an exercise price equal to $10.675.
On June 13, 1997 (the "Closing Date"), 30% of the Bridge Warrants were
assigned, with the Company's consent, to Alpine Capital Partners, Inc.
The Bridge Warrants are redeemable commencing October 1, 1998 at a
redemption price equal to $.10 per share, subject to adjustment based
on a 20-day minimum closing bid price of the Company's common stock.
The net proceeds to the Company from the sale of the Bridge Notes,
Grant Shares and Bridge Warrants was $7,236,938. In addition, the
Company issued 14,502 shares of common stock to Whale Securities Co.,
L.P. ("Whale"), the underwriter in the Company's initial public
offering (the "IPO"), as a fee for services rendered in connection
with the transactions contemplated by the Bridge Agreement.
Pursuant to the Bridge Agreement, the Company will issue additional
Grant Shares (the "Additional Grant Shares") to the Funds in the event
that the closing bid price of the Company's common stock for each
trading day during any consecutive 10 trading days from the Closing
Date through December 31, 1997 does not equal at least $10.00 per
share. In the event that any Additional Grant Shares are issued, the
exercise price of the Bridge Warrants will be adjusted so that the
value of the Bridge Warrants (using a Black-Scholes or similar model)
equals the value of the Bridge Warrants as of the Closing Date.
Interest payments on the Bridge Notes will, at the option of the
Company, be payable in cash or in shares of common stock. Effective
January 1, 1998, the aggregate outstanding principal amount of Bridge
Notes exceeding $2,500,000 will be automatically exchanged for a
number of shares of Preferred Stock with an aggregate liquidation
preference equal to the principal amount of Bridge Notes so exchanged
and with terms substantially identical to the Bridge Notes, which
Preferred Stock is convertible into shares of common stock (the "Stock
Conversion Shares"). In addition, if the Company elects to redeem the
warrants issued in the Company's IPO (the "Redeemable Warrants"), the
Company must redeem at least $5,000,000 principal amount of the Bridge
Notes with the net proceeds of such redemption.
The Company may redeem the Redeemable Warrants, with the consent of
Whale and upon notice to the holders thereof of not less than 30 days,
at a price of $.10 per warrant, provided that the closing bid price of
the common stock on all 30 of the trading days ending on the third day
prior to the day on which the Company gives notice has been at least
150% (currently $7.50, subject to adjustment) of the then effective
exercise price of the Redeemable Warrants. The Company's Board of
Directors has authorized the Company to purchase the Company's common
stock, from time to time, at its discretion, in order to ensure that
the market price of the common stock remains at a level where the
Company is permitted to redeem the Redeemable Warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
<PAGE>
Item 5. Other Information
None
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3.1 Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
3.2 Amended and Restated By-Laws of the Company (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2 (Registration No. 333-5193)
effective July 24, 1996)
4.1 Form of Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2 (Registration No. 333-5193)
effective July 24, 1996)
4.2 Form of Specimen Redeemable Warrant Certificate (Incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2 (Registration No. 333-5193)
effective July 24, 1996)
4.3 Form of Warrant Agreement between the Company and Whale
Securities Co., L.P. (Incorporated by reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form SB-2
(Registration No. 333-5193) effective July 24, 1996)
4.4 Form of Warrant among American Stock Transfer & Trust Company,
the Company and Whale Securities Co., L.P. (Incorporated by
reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective July
24, 1996)
4.5 Form of Warrant Certificate issued to investors in the Bridge
Financing (Incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-24675) filed April 7, 1997)
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)
18
<PAGE>
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 Amended and Restated 1996 Stock Option Plan (Incorporated by
reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-23519) filed April
7, 1997)
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 Assignment, dated April 19, 1996, from Thomas S. Peters to
the Company (Incorporated by reference to Exhibit 10.11 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
10.11 Share and Warrant Purchase Agreement, dated as of February
27, 1997, between the Company and Status-One Investments Inc.
(Incorporated by reference to Exhibit 10.11 to the Registrant's
Registration Statement on Form SB-2 (Registration No. 333-24675)
filed April 7, 1997)
10.12 Form of Share and Warrant Purchase Agreement, dated as of
February 27, 1997, between the Company and each unaffiliated
investor in the Bridge Financing (Incorporated by reference to
Exhibit 10.12 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 333-24675) filed April 7, 1997)
10.13 Guarantee and Agreement, dated as of August 5, 1997,
between the Company and Cadillac Motor Car Division of General
Motors Corporation (Incorporated by reference to Exhibit 10.1 to
amendment No. 1 to the Registrants Registration Statement on Form
S-3 (Registration No. 333-32247) filed August 12, 1997).
27 Financial Data Schedule *
* Filed herewith
19
<PAGE>
(b) Reports on Form 8-K
The Company filed reports with the Securities and Exchange
Commission on Form 8-K on April 14, 1997, June 23, 1997 and
June 25, 1997 (as amended on June 28, 1997).
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VISUAL EDGE SYSTEMS INC.
/s/ Earl T. Takefman
---------------------------------
Earl T. Takefman
August 13, 1997 Chief Executive Officer
/s/ Edward R. Smith
---------------------------------
Edward R. Smith
August 13, 1997 Chief Financial Officer
21
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