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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 September 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 November 12, 1997, the registrant had 4,853,190 shares of common
stock and 2,037,026 redeemable warrants outstanding.
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VISUAL EDGE SYSTEMS INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets
September 30, 1997 and December 31, 1996................... 3
Statements of Operations
Three Months Ended September 30, 1997 and 1996 and Nine
Months Ended September 30, 1997 and 1996................... 4
Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996.............. 5
Notes to Financial Statements.............................. 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 11-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 16
Item 2. Changes in Securities...................................... 16-17
Item 3. Defaults Upon Senior Securities............................ 17
Item 4. Submission to Matters to a Vote of Security Holders........ 17
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 18-20
Signatures................................................. 21
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VISUAL EDGE SYSTEMS INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash..................................... $ 305,555 $ 233,117
Short Term Investments................... 3,739,673 1,869,052
Accounts Receivable...................... 55,083 --
Inventory................................ 79,850 36,747
Prepaid Expense--Royalties............... 350,000 300,000
Other Current Assets..................... 191,882 80,756
----------------- -----------------
Total Current Assets................. 4,722,043 2,519,672
----------------- -----------------
Property, Plant & Equipment:
Mobile Production Units.................. 2,318,925 951,653
Training and Processing.................. 112,882 112,301
Product Development Equipment............ 487,676 407,184
Office Furniture & Equipment............. 382,399 144,808
Show and Exhibit......................... 146,657 144,787
Accumulated Depreciation................. (766,125) (135,908)
----------------- -----------------
Total Fixed Assets, Net.............. 2,682,414 1,624,826
----------------- -----------------
Deferred Assets:
Video Production......................... 447,406 447,406
Organizational........................... 29,428 29,428
Marketing Development.................... 226,962 226,962
Deferred Financing Fees.................. 490,000 --
Accumulated Amortization................. (433,947) (87,324)
----------------- -----------------
Total Deferred Assets, Net........... 759,849 616,470
----------------- -----------------
Other Assets............................. 23,331 23,202
----------------- -----------------
Total Assets............................. $8,187,636 $ 4,784,170
================= =================
Liabilities & Stockholders' Equity
(Deficit)
Current Liabilities
Bank Advances............................ $ -- $ 500,000
Accounts Payable......................... 499,249 333,114
Accrued Expenses......................... 267,471 284,900
Other Current Liabilities................ 33,508 1,500
Current Installments of Equipment
Loans.................................... 305,279 --
----------------- -----------------
Total Current Liabilities............ 1,105,508 1,119,514
----------------- -----------------
Long-Term Liabilities
Equipment Loans, less current
installments........................... 1,006,998 --
Convertible Debt (see Notes 2b & 6)...... 6,772,565 --
----------------- -----------------
Total Long-Term Liabilities.............. 7,779,563 --
----------------- -----------------
Total Liabilites.................... 8,885,070 1,119,514
================= =================
Stockholders' Equity (Deficit)
Preferred Stock.......................... -- --
Common Stock............................. 48,532 46,150
Additional Paid In Capital............... 9,438,140 6,481,159
Accumulated Deficit...................... (10,184,106) (2,862,653)
----------------- -----------------
Total Stockholders' Equity (Deficit)
(see Note 6)........................ (697,434) 3,664,656
----------------- -----------------
Total Liabilities & Stockholders'
Equity (Deficit).................... $8,187,636 $ 4,784,170
================= =================
</TABLE>
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VISUAL EDGE SYSTEMS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- ----------------------------
1997 1996 1997 1996
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue............................................... $ 518,365 $ -- $ 1,115,116 $ --
Cost of Sales......................................... 465,456 -- 918,316 --
-------------- -------------- ------------- ------------
Gross Profit.......................................... 52,909 -- 196,800 --
-------------- -------------- ------------- ------------
General and administrative expenses................... 1,685,966 500,113 3,607,014 654,483
Selling and marketing................................. 772,420 -- 1,669,091 --
Non-cash stock compensation expense................... -- 600,000 -- 600,000
Non-cash stock severance expense...................... -- -- 150,125 --
Non-cash marketing expense............................ -- -- 53,132 --
-------------- -------------- ------------ ------------
2,458,386 1,100,113 5,479,362 1,254,483
-------------- -------------- ------------ ------------
Operating Loss........................................ (2,405,477) (1,100,113) (5,282,562) (1,254,483)
-------------- -------------- ------------ ------------
Other (Income)/Expense:
Interest income..................................... (11,744) (7,010) (47,378) (25,580)
Interest expense.................................... 204,573 12,482 313,838 50,854
Amortization on original issue discount on
financing fees.................................... 273,879 -- 1,022,431 --
-------------- -------------- ------------ ------------
466,708 5,472 1,288,891 25,274
-------------- -------------- ------------ ------------
Loss Before Income Taxes & Extraordinary Item......... (2,872,185) (1,094,641) (6,571,453) (1,279,757)
Extraordinary expense -- financing fees............. -- -- 750,000 --
-------------- -------------- ------------ ------------
Net Loss.............................................. $(2,872,185) $(1,094,641) $(7,321,453) $(1,279,757)
-------------- -------------- ------------ ------------
-------------- -------------- ------------ ------------
Loss Per Share:
Before extraordinary expense........................ $ (0.59) $ (0.24) $ (1.38) $ (0.28)
Extraordinary expense............................... -- -- (0.16) --
-------------- -------------- ------------ ------------
Net Loss Per Share.................................... $ (0.59) $ (0.24) $ (1.54) $ (0.28)
-------------- -------------- ------------ -------------
-------------- -------------- ------------ -------------
Weighted Average Shares Outstanding................... 4,848,227 4,615,000 4,755,400 4,615,000
-------------- -------------- ------------ -------------
-------------- -------------- ------------ -------------
</TABLE>
4
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VISUAL EDGE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------------ ------------------
<S> <C> <C>
Operating Activities:
Net Loss............................................................... $ (7,321,453) $ (1,279,757)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash stock compensation expense.................................... -- 600,000
Non-cash marketing expense............................................. 53,132 --
Non-cash severance pay expense......................................... 150,125 --
Loan financing expenses-extraordinary loss............................. 750,000 --
Loan financing expenses-amortization................................... 1,022,431 --
Depreciation and amortization.......................................... 989,521 156,287
Changes in assets and liabilities:
Increase in accounts receivable...................................... (55,083) --
Increase in other current assets..................................... (44,407) (26,100)
Increase in deferred organizational costs............................ -- (73,999)
Increase in prepaid expense--royalties............................... (50,000) (300,000)
Increase in other assets............................................. (129) (28,338)
Decrease in accounts payable......................................... 166,135 128,888
Increase in accrued expenses......................................... (17,429) --
Increase in other current liabilities................................ 32,008 --
------------------ ------------------
Net Cash Used in Operating Activities................................ (4,325,149) (823,019)
------------------ ------------------
Investing Activities:
Capital expenditures................................................... (1,689,634) (158,668)
Increase in intagible assets........................................... -- (527,594)
------------------ ------------------
Net Cash Used in Investing Activities................................ (1,689,634) (686,262)
------------------ ------------------
Financing Activities:
Increase in bank advances.............................................. (500,000) --
Proceeds from issuance of common stock................................. 128,000 5,509,974
Procceds from the sale of short term investments....................... 6,154,908 --
Deferred Financing Costs............................................... (490,000) --
Repurchase common stock................................................ (128,945) --
Purchases of short term investments.................................... (3,500,000) --
Repayment of borrowings................................................ (3,131,340) (2,015,000)
Proceeds from borrowings............................................... 7,554,598 1,615,000
------------------ ------------------
Net Cash Provided by Financing Activities............................ 6,087,221 5,109,974
------------------ ------------------
------------------ ------------------
Net Increase in Cash................................................. 72,438 3,600,693
Cash at Beginning of Period.......................................... 233,117 558
------------------ ------------------
Cash at End of Period................................................ $ 305,555 $ 3,601,251
------------------ ------------------
------------------ ------------------
Supplemental information:
Cash paid for interest................................................. $ 129,932 $ 50,854
------------------ ------------------
------------------ ------------------
</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.
See note 2(a).
(2) Financings
(a) 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 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 (2b), 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.
In connection with the Bridge Financing, the Company recorded $1,250,000 in
deferred financing fees which were to be amortized over the life of the
financing at a rate of $125,000 a month. In October 1997, management
determined that $750,000 of unamortized deferred financing costs at June
30, 1997 related to the Bridge Financing should be expensed since amounts
borrowed under such financing were repaid. If the Company had expensed the
remaining balance at June 30, 1997, deferred financing fees and total
Stockholders' Equity would have decreased by $750,000, and both
extraordinary expense-financing fees and the net loss would have increased
by $750,000
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(net loss per share of $.79 would have increased to a net loss
per share of $.95, with the additional $.16 representing an extraordinary
item).
(b) 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., 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 $10.675 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. On September 30, 1997,
the first interest payment was made in shares of the Company's common
stock. The Company issued an aggregate of 22,462 shares for payment of
interest due. 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. In addition,
if the Company elects to redeem the warrants issued in the Company's IPO
(the "Redeemable Warrants"), the Company must
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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.
In connection with the June financing, the value of the Grant Shares and
Bridge Warrants credited to equity ($1,249,866) represents additional
interest on the note in the form of an original issue discount (OID). The
OID will be amortized using a method which approximates the interest method
over the term of the Bridge Notes. The other debt issuance costs of
$490,000 are recorded as deferred financing fees and are being amortized
over the term of the Bridge Notes.
(c) Equipment Financing
On August 20, 1997, the Company entered into an equipment financing
agreement (the "Equipment Financing") with Vision Financial Group of
Pittsburgh ("Vision"), whereby Vision has agreed to provide the Company
with up to $2.5 million in financing by September 1998. Such arrangement
provides the Company with equipment financing of $100,000 for each of its
next 25 vans, each of which is anticipated to cost approximately $150,000.
The Company has drawn on $800,000 of the facility to finance eight vans
purchased in May 1997. The outstanding balance bears interest at the rate
of 11.62% and is payable in 36 consecutive monthly payments of $25,328
which commenced in August 1997, followed by one balloon payment of $47,040.
Further, the Company has agreed to pledge as collateral a certificate of
deposit in the amount of $25,000 per van to Vision. Such collateral is to
be returned to the Company within 5 days after the Company notifies Vision
that (a) the Company has earned $1,000,000 or more on a pre-tax basis for
fiscal 1998 or 1999, or (b) the Company's stock has traded at $20.00 per
share for at least 5 consecutive trading days. The Company has pledged to
Vision a certificate of deposit in the aggregate amount of $200,000 in
connection with the financing of the first eight vans.
In connection with the Equipment Financing, the Company issued warrants to
Vision (the "Vision Warrants") to purchase 75,000 shares of the Company's
common stock at a price per share of $10.00 (subject to adjustment in
certain circumstances) at any time prior to August 20, 2000. The Company
has the right to redeem the Vision Warrants as follows: in the event that
the closing bid price of the common stock equals or exceeds $15.00 for 20
consecutive trading days ended three days prior to the notice of
redemption, the Company may, upon 10 days' notice to Vision, redeem up to
50% of the Vision Warrants at a price equal to $.01 per share of common
stock issuable upon the exercise of the Vision Warrants; and 100% of the
Vision Warrants are redeemable by the Company if the closing bid price of
the Company's common stock equals or exceeds $20.00 for the 20 trading days
ended three days prior to the notice of redemption.
The value of the Vision Warrants ($178,980) is included in additional paid
in capital, with the resulting original issue discount (OID) on the loan
being amortized using a method which approximates the interest method over
the term of the equipment financing.
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(3) Lease
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 nine months ended
September 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.
(4) Employment Agreements
The Company entered into employment agreements with five executive
employees expiring through December 1998 which provide for aggregate
minimum annual compensation of approximately $555,000 in 1997, and $560,000
in 1998. The agreements are automatically renewed for additional one-year
periods unless the Company or the employees provide timely notice of
termination. 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 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.
(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
agreed to restructure the terms of the payments due to Norman under the
Agreement by: (i) altering the payments such that
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Norman will receive
$1,020,000 of his royalties in shares of the Company's common stock, at $10
per share, 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. The Company recorded
a non-cash marketing expense of $53,132 related to the options.
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.
Including the $300,000 cash payment made in 1996, it is a total commitment
of $4 million.
For the purpose of calculating the royalties payable to Norman, the
amendment stipulates that the common stock issued to Norman 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) Stockholders' Equity (Deficit)
At September 30, 1997, the Company had a deficit of $697,434 in
Stockholders' Equity. However, on January 1, 1998, when the convertible
debt is converted to equity there will no longer be a deficit in
Stockholders' Equity (see Note 2b). If the convertible debt had been
converted at September 30, 1997, the Stockholders' Equity would have been
approximately $4,300,000.
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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
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, Nevada, New Jersey, New York and
Texas. The Company anticipates that additional vans will be developed
and situated based on the demand for the Company's products.
The Company entered into an agreement with Cadillac Motor Car Division
of General Motors ("Cadillac") on August 5, 1997. The agreement
grants Cadillac the exclusive U.S. dealer showroom rights to the
Company's One-on-One with Greg Norman concept, allowing Cadillac
11
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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 the
marketing materials related to this promotion, including creative
print and radio advertisements, banners, posters, and direct mail
invitations.
The contract includes a test phase that runs through December 31, 1997
with a test phase termination clause ending January 31, 1998, at
Cadillac's sole option, and then guarantees the Company a total of
$7,500,000 in revenue for 1998 if the agreement is not terminated. The
contract runs until December 31, 2000 and provides the Company with up
to approximately $34,750,000 in revenue over the term of the agreement
if the Company has an adequate number of available vans to serve all
participating Cadillac dealers. Cadillac may terminate the agreement
as of December 31, 1998, as long as notice is given to the Company on
or before June 30, 1998 and will be responsible for the guaranteed
payment for the year 1998.
Results of Operations
The Company was a development stage company in 1996 and had no
significant 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 first three months of 1997 and an additional
eight vans were launched by the end of May 1997. As of September 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 September 30, 1997, the Company had sales of $518,365 and a
gross profit of $52,909, or a gross profit margin of approximately
10%. For the nine months ending September 30, 1997, the Company
generated revenue of $1,115,116 and a gross profit of $196,800, or a
gross profit margin of approximately 18%. The Company anticipates
that its gross margins will be higher in the future; its gross margins
were significantly lower during the three and nine months ending
September 30, 1997 due to significant training costs of van operators
and low initial sales during its start-up phase.
Operating expenses for the three month and nine month periods ending
September 30, 1997 were $2,458,386 and $5,479,362, respectively, as
compared to $1,100,113 and $1,254,483 for the three month and nine
month periods ending September 30, 1996. The increase in operating
expenses for the three month and nine month periods ending September
30, 1997, as compared to the three month and nine month periods ending
September 30, 1996, is attributable to start-up expenses related to
the launching of the Company's 15 vans and consisted of payroll,
marketing, training, travel and other administrative expenses. These
expenses also include non-cash depreciation expense, which totaled
$455,557 and $646,498 for the three and nine months ending September
30, 1997, as compared to $57,238 for the nine months ending September
30, 1996, and amortization expense, which totaled $207,124 and
$343,023 for the three and nine months ending September 30, 1997, as
compared to $5,288 for the nine months ending September 30, 1996.
Additionally, in the second quarter of 1997, in compliance with FASB
#123, the Company recorded a non-cash marketing expense of $53,132
related to the 25,000 options granted to Greg Norman, and during the
first quarter of 1997, the Company incurred a non-cash stock
severance expense of $150,125.
12
<PAGE>
The Company earned $47,378 in interest income for the nine month
period ending September 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. In connection with the Equipment Financing, the Company
incurred a non-cash expense of $178,980. The March financing
fees have been fully expensed via amortization of $500,000 and
the balance of $750,000 as an extraordinary item (see Note 2a).
The June financing fees of $1,249,866 and the Equipment Financing
costs of $178,980 are recorded as an original issue discount
(OID) on the Bridge Notes and are being amortized using a method
which approximates the interest method over the term of the note
and equipment financing. The other debt issuance costs of
$490,000 incurred with the June financing are recorded as
deferred financing fees and are being amortized over the life of
the Bridge Notes.
Liquidity and Capital Resources
At September 30, 1997 the Company had cash of $305,555 and cash
equivalents (consisting of short- term investments) of $3,739,673 and
working capital of $3,616,535. Net cash used in operating activities
for the nine months ending September 30, 1997 was $4,325,149,
primarily representing cash used for start-up expenses related to the
launching of the Company's 15 vans. Net cash provided by financing
was $6,087,221 and $1,689,634 was used in investing activities for a
total increase in cash of $72,438 and cash equivalents of $1,870,621.
A significant portion of the Company's disbursements during the nine
months ending September 30, 1997 represented investment in fixed
assets of $1,689,634. At September 30, 1997, the Company's cumulative
investment in fixed assets was $3,448,539.
At September 30, 1997 the Company had Stockholders' deficit of
$697,434. On January 1, 1998 when the convertible debt is converted to
equity pursuant to the terms of the Bridge Agreement there will no
longer be a deficit in Stockholders' Equity. If the convertible debt
had been converted at September 30, 1997 the Stockholders' Equity
would have been approximately, $4,300,000.
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
13
<PAGE>
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
2b).
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 $10.675 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.
On August 20, 1997, the Company entered into an equipment financing
agreement (the "Equipment Financing") with Vision Financial Group of
Pittsburgh ("Vision"), whereby Vision has agreed to provide the
Company with up to $2.5 million in financing by September 1998. Such
arrangement provides the Company with equipment financing of $100,000
for each of its next 25 vans, each of which is anticipated to cost
approximately $150,000. The Company has drawn on $800,000 of the
facility to finance eight vans purchased in May 1997. The outstanding
balance bears interest at the rate of 11.62% and is payable in 36
consecutive monthly payments of $25,328 which commenced in August
1997, followed by one balloon payment of $47,040. Further, the
Company has agreed to pledge as collateral a certificate of deposit in
the amount of $25,000 per van to Vision. Such collateral is returned
to the Company within 5 days after the Company notifies Vision that
(a) the Company has earned $1,000,000 or more on a pre-tax basis for
fiscal 1998 or 1999, or (b) the Company's stock has traded at $20.00
per share for at least 5 consecutive trading days. The Company has
pledged to Vision a certificate of deposit in the aggregate amount of
$200,000 in connection with the financing of the first eight vans.
The Company anticipates that its available cash will be sufficient to
fund its operations through the end of this year.
14
<PAGE>
Subsequent Events
On November 7, 1997, the Company's former accountants, KPMG Peat
Marwick LLP, were dismissed and Arthur Andersen LLP were engaged to
audit the Company's financial statements. Such actions were approved
by the Company's Board of Directors on November 12, 1997.
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.
15
<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 September 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 August 20, 1997, the Company entered into an equipment
financing agreement (the "Equipment Financing") with Vision
Financial Group of Pittsburgh ("Vision"), whereby Vision has
agreed to provide the Company with up to $2.5 million in
financing by September 1998. Such arrangement provides the
Company with equipment financing of $100,000 for each of its next
25 vans, each of which is anticipated to cost approximately
$150,000. The Company has drawn on $800,000 of the facility to
finance eight vans purchased in May 1997. The outstanding balance
bears interest at the rate of 11.62% and is payable in 36
consecutive monthly payments of $25,328 which commenced in August
1997, followed by one balloon payment of $47,040. Further, the
Company has agreed to pledge as collateral a certificate of
deposit in the amount of $25,000 per van to Vision. Such
collateral is to be returned to the Company within 5 days after
the Company notifies Vision that (a) the Company has earned
$1,000,000 or more on a pre-tax basis for fiscal 1998 or 1999, or
(b) the Company's stock has traded at $20.00 per share for at
least 5 consecutive trading days. The Company has pledged to
Vision a certificate of deposit in the aggregate amount of
$200,000 in connection with the financing of the first eight vans.
In connection with the Equipment Financing, the Company issued to
Vision warrants (the "Vision Warrants") to purchase 75,000 shares
of the Company's common stock at a price per share of $10.00
(subject to adjustment in certain circumstances) at any time
prior to August 20, 2000. The Company has the right to redeem
the Vision Warrants as follows: in the event that the closing bid
price of the common stock equals or exceeds $15.00 for 20
consecutive trading days ended three days prior to the notice of
redemption, the Company may, upon 10 days' notice to Vision,
redeem up to 50% of the Vision Warrants at a price equal to $.01
per share of common stock issuable upon the exercise of the
Vision Warrants; and 100% of the Vision Warrants are redeemable
by the Company if the closing bid price of the Company's common
stock equals or exceeds $20.00 for the 20 trading days ended
three days prior to the notice of redemption.
16
<PAGE>
On September 30, 1997, the first interest payment on the Bridge Notes
was made in shares of the Company's common stock. The Company issued
an aggregate of 22,462 shares for payment of interest due.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) 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 March 1997
Bridge Financing (Incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 333-24675) filed April 7, 1997)
4.6 Form of Common Stock Purchase Warrant issued to investors in the
June 1997 Bridge Financing (Incorporated by reference to Exhibit
99.4 to the Registrant's Current Report on Form 8-K filed June
23,1997)
4.7 Form of Convertible Note issued to investors in the June 1997
Bridge Financing (Incorporated by reference to Exhibit 99.5 to
the Registrant's Current Report on Form 8-K filed June 23,1997)
4.8 Form of Common Stock Purchase Warrant issued to Vision Financial
Group, Inc.*
10.1 License Agreement, dated March 1, 1995, between Great White Shark
Enterprises, Inc. and the Company, as supplemented (Incorporated
by reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 333-5193) effective July
24, 1996)
10.2 Amendment to License Agreement, dated as of June 3, 1997, by and
among, the Company, Greg Norman and Great White Shark
Enterprises, Inc. (Incorporated by reference to Exhibit 99.1 to
the Registrant's Current Report on Form 8-K/A filed June 27,
1997)
18
<PAGE>
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)
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 Bridge Securities Purchase Agreement, dated as of June 13,
1997, among the Company and Infinity Investors Limited,
Infinity Emerging Opportunities Limited, Sandera Partners,
L.P. and Lion Capital Partners, L.P. (collectively, the
"Funds") (Incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K filed June 23, 1997)
19
<PAGE>
10.13 Registration Rights Agreement, dated as of June 13, 1997,
between the Company and the Funds (Incorporated by reference
to Exhibit 99.2 to the Company's Current Report on Form 8-K
filed June 23, 1997)
10.14 Transfer Agent Agreement, dated as of June 13, 1997, among
the Company, the Funds and American Stock Transfer & Trust
Company (Incorporated by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K filed June 23, 1997)
10.15 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)
11 Computation of Per Share Loss *
27 Financial Data Schedule *
* Filed herewith
(b) Reports on Form 8-K
None filed during quarter ended September 30, 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
November 12, 1997 Chief Executive Officer/Chief Financial
Officer
/s/ Richard Parker
----------------------------------------
Richard Parker
November 12, 1997 President
21
<PAGE>
Exhibit 4.8
THIS COMMON STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"); OR UNDER ANY APPLICABLE LAW OR
REGULATION OF ANY STATE. THIS COMMON STOCK WARRANT MAY NOT BE SOLD, OFFERED,
ASSIGNED OR TRANSFERRED UNLESS THE WARRANT IS REGISTERED UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES, ASSIGNMENTS AND
TRANSFERS ARE MADE PURSUANT TO THE AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
VISUAL EDGE SYSTEMS INC.
COMMON STOCK PURCHASE WARRANT
DATED: August 20, 1997
- -------------------------------------------------------------------------------
No.1
Number of Common Shares: 75,000 Holder: Vision Financial Group, Inc.
Purchase Price: $10.00 1100 Liberty Avenue
Expiration Date: August 20, 2000 Pittsburgh, PA 15222
For identification only.
The governing terms of this Warrant are set forth below.
- -------------------------------------------------------------------------------
Visual Edge Systems Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Vision Financial Group, Inc. or assigns
(each a "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time after the date hereof
and prior to August 20, 2000 (the "Exercise Period"), at the Purchase price
hereinafter set forth, seventy-five thousand (75,000) fully paid and
nonassessable shares of Common Stock (as hereinafter defined) of the Company.
The number and character of such shares of Common Stock and the Purchase Price
are subject to adjustment as provided herein.
This Warrant (this "Warrant"; such term to include any warrants issued in
substitution therefor) is issued in connection with that certain Letter (the
"Letter"), dated of even date herewith between the initial Holder hereof and the
Company.
The purchase price per share of Common Stock issuable upon exercise of this
Warrant (the "Purchase Price") shall initially be $10.00; provided, however,
that the Purchase Price shall be adjusted from time to time as provided herein.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
<PAGE>
(a) The term "Company" shall include Visual Edge Systems Inc. and any
entity that shall succeed or assume the obligations of such corporation
hereunder.
(b) The term "Common Stock" includes (a) the Company's common stock,
$.01 par value per share, (b) any other capital stock of any class or
classes (however designated) of the Company, authorized on or after such
date, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on
any shares entitled to preference, and the holders of which shall
ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even though the right
so to vote has been suspended by the happening of such a contingency) and
(c) any other securities into which or for which any of the securities
described in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than
Common Stock) and other securities of the Company or any other person
(corporate or otherwise) that the holder of this Warrant at any time shall
be entitled to receive, or shall have received, on the exercise of this
Warrant, in lieu of or in addition to Common Stock, or that at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 4 or
otherwise.
1. Exercise of Warrant.
1.1. Method of Exercise. This Warrant may be exercised in whole or in part
(but not as to a fractional share of Common Stock), at any time and from time to
time during the Exercise Period, by the Holder hereof by delivery of a notice of
exercise (a "Notice of Exercise") substantially in the form attached hereto as
Exhibit A via facsimile to the Company. Promptly thereafter the Holder shall
surrender this Warrant to the Company at its principal office, accompanied by
payment of the Purchase Price multiplied by the number of shares of Common Stock
for which this Warrant is being exercised (the "Exercise Price"). Payment of
the Exercise Price shall be made by check or bank draft payable to the order of
the Company or by wire transfer to the account of the Company. If the amount of
the payment received by the Company is less than the Exercise Price, the Holder
will be notified of the deficiency and shall make payment in that amount within
five (5) business days. In the event the payment exceeds the Exercise Price,
the Company will promptly refund the excess to the Holder. Upon exercise, the
Holder shall be entitled to receive, promptly after payment in full, one or more
certificates, issued in the Holder's name or in such name or names as the Holder
may direct, subject to the limitations on transfer contained herein, for the
number of shares of Common Stock so purchased. The shares so purchased shall be
deemed to be issued as of the close of business on the date on which the Company
shall have received from the Holder payment of the Exercise Price (the "Exercise
Date").
-2-
<PAGE>
1.2. Regulation D Restrictions. The Holder hereof represents
and warrants to the Company that it has acquired this Warrant and
anticipates acquiring the shares of Common Stock issuable upon
exercise of the Warrant solely for its own account for investment
purposes and not with a view to or for distributing such securities
unless such distribution has been registered with the Securities
and Exchange Commission or an applicable exemption is available
therefor. At the time this Warrant is exercised, the Company may
require the Holder to state in the Notice of Exercise such
representations concerning the Holder as are necessary or
appropriate to assure compliance by the Holder with the Securities
Act.
1.3. Company Acknowledgment. The Company will, at the time of
the exercise of this Warrant, upon the request of the Holder
hereof, acknowledge in writing its continuing obligation to afford
to the Holder any rights to which the Holder shall continue to be
entitled after such exercise in accordance with the provisions of
this Warrant. If the Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the
Company to afford to the Holder any such rights.
1.4.Limitation on Exercise. Notwithstanding the rights of the
Holder to exercise all or a portion of this Warrant as described
herein, such exercise rights shall be limited solely in the manner
set forth in the Purchase Agreement as if such provisions were
specifically set forth herein.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant, the Company at its expense
(including the payment by it of any applicable issue, stamp or transfer taxes
upon issuance to the Holder) will cause to be issued in the name of and
delivered to the Holder to hereof, or, to the extent permissible hereunder,
to such other person as the Holder may direct, a certificate or certificates
for the number of full paid and nonassessable shares of Common Stock (or
Other Securities) to which the Holder shall be entitled on such exercise,
plus, in lieu of any fractional share to which the Holder would otherwise be
entitled, cash equal to the such fraction multiplied by the then applicable
Purchase Price, together with any other stock or other securities and
property (including cash, where applicable ) to which the Holder is entitled
upon such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Dividends in Other Stock Property, etc.,
Reclassification, etc. In case at any time or from time to time the holders
of Common Stock (or Other Securities) shall have received, or (on or after
the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash)
by way of dividend or any cash (excluding cash dividends payable solely out
of earnings or earned surplus of the Company), or other or additional stock
or other securities or property (including cash) by way or spin-off,
split-up, reclassification, recapitalization, combination of shares or
similar corporate rearrangement other than additional shares of Common Stock
(or Other Securities) issued as a stock dividend or in a stock split
(adjustments in respect of which are provided for in Section 5), then and in
each such event, the
-3-
<PAGE>
Holder of this Warrant, on the exercise hereof as provided in Section 1 shall
be entitled to receive the amount of stock and other securities and property
(including cash in the cases referred to in subdivisions (b) and (c) of this
Section 3) that the Holder would have been entitled to receive on the
effective date of such event if the Holder had so exercised this Warrant
immediately prior thereto, giving effect to all adjustments called for during
such period by Sections 4 and 5.
4. Adjustment for Reorganization, Consolidation, Merger, etc.
4.1. Reorganization, etc. In case at any time or from time to
time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person or (c) transfer all
or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution
of the Company, then, in each such case, the Holder of this
Warrant, nor the exercise hereof as provided in Section 1 at any
time after the consummation of such reorganization, consolidation
or merger or the effective date of such dissolution, as the case
may be, shall receive, in lieu of the Common Stock (or Other
Securities) issuable on such exercise prior to such consummation o
such effective date, the stock and other securities and property
(including cash) to which the Holder would have been entitled upon
such consummation or in connection with such dissolution, as the
case may be, if the Holder had so exercised this Warrant,
immediately prior thereto, all subject to further adjustment
thereafter as provided herein.
4.2. Dissolution. In the event of any dissolution of the
Company following the transfer of all or substantially all of its
properties or assets, the Company, prior to such dissolution, shall
at its expense deliver or cause to be delivered the stock and other
securities and property (including cash, where applicable)
receivable by the Holder of this Warrant after the effective date
of such dissolution pursuant to this Section 4 to a bank or trust
company, as trustee for the Holder or Holders of this Warrant.
4.3. Continuation of Terms. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following
any transfer) referred to in this Section 4, this Warrant shall
continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property
receivable on the exercise of this Warrant after the consummation
of such reorganization, consolidation or merger to the effective
date of dissolution following any such transfer, as the case may
be, and shall be binding upon the issuer of any such stock or other
securities, including, in the case of any such transfer, the person
acquiring all or substantially all of the properties or assets of
the Company, whether or not such person shall have expressly
assumed the terms of this Warrant as provided in Section 7.
5. Adjustment for Extraordinary Events. The Purchase Price to be paid
by the Holder upon exercise of this Warrant shall be adjusted in case at any
time or from time to time the Company should (i) subdivide the outstanding
shares of Common Stock into a greater number of shares, (ii) consolidate the
outstanding shares of Common Stock into a smaller number of shares, (iii)
issue
-4-
<PAGE>
shares of Common Stock or securities convertible into or exchangeable for
shares of Common Stock as a dividend to all or substantially all holders of
shares of Common Stock or (iv) issue by reclassification of shares of Common
Stock or any shares of capital stock of the Company.
6. Redemption.
6.1. Voluntary Redemption. The Company may at any time, at its
option and following at least ten (10) days prior written notice to
the Holder, redeem (each, a "Redemption") for cash from funds
legally available therefor, up to 50% of the Warrants for a
redemption price per share (the "Redemption Price") equal to $.01
per share of Common Stock (or Other Securities) issuable upon
exercise of this Warrant (the "Warrant Shares") on the Redemption
Date (as hereinafter defined) if the Stock Price (as hereinafter
defined) is equal to or in excess of $15.00, provided, that if the
Stock Price is equal to or in excess of $20.00, then the Company
may redeem up to 100% of the total number of Warrant Shares
underlying this Warrant.
As used herein, "Stock Price" shall mean the closing bid price
for the Common Stock (as specified by Bloomberg, L.P.) during the
20 trading days ending three days prior to the date on which the
Company delivers the Redemption Notice.
6.2. Notice of Redemption. If the Company elects to redeem any
or all of this Warrant pursuant to the terms hereof, the Company
shall give not less than ten (10) days prior written notice of such
Redemption (the "Redemption Notice") to the Holder (together with
each of the other holders of the warrants of the same class hereof)
at such Holder's address as it appears on the books and records of
the Company by facsimile transmission (if such Holder shall have
provided a facsimile number), and the Warrant Shares then subject
to Redemption and not otherwise converted prior to the Redemption
Date shall, on the date which is ten (10) days after the deposit of
Redemption Notice (the "Redemption Date"), cease to be outstanding
and the rights of the Holders and owners thereof shall be limited
to payment of the Redemption Price thereof. The Company shall
deliver the Redemption Price to the Holders in cash or by wire
transfer as indicated by the Holder within two (2) business days of
the Redemption Date. The Redemption Price shall (in the reasonable
discretion of the Board of Directors of the Company) be adjusted to
take into account any stock split or other similar event.
6.3. Selection of Warrant Shares. The Company shall select the
Warrants to be redeemed in a Redemption in which not all Warrants
of this class are to be redeemed so that the Warrant Shares of each
Holder selected for Redemption shall bear the same proportion to
the total Warrant Shares owned by that Holder that the proportion
of all Warrant Shares selected for Redemption bears to the total
number of Warrant Shares. Should any Warrant Shares required to be
redeemed under the terms hereof not be redeemed solely by reason of
limitations imposed by law, the applicable Warrant Shares shall be
redeemed on the earliest possible date that the applicable Warrant
Shares may be redeemed to the maximum extent
-5-
<PAGE>
permitted by law. Except as set forth above, the Board of Directors
shall prescribe the manner in which any Redemption shall be effected.
7. No Impairment. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all of such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the Holder
of this Warrant against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any shares of
stock receivable on the exercise of this Warrant above the amount payable
therefor on such exercise, (b) will take all such action as may be necessary
or appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of stock on the exercise of this Warrant and
(c) will not transfer all or substantially all of its properties and assets
to any other person (corporate or otherwise), or consolidate with or merge
into any other persons or permit any such person to consolidate with or merge
into the Company (if the Company is not the surviving person), unless such
other person shall expressly assume in writing and will be bound by all the
terms of this Warrant.
8. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders
of any class or securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other
distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all the assets of
the Company to, or consolidation or merger of the Company with or
into, any other person, or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
then, in each such event, the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other Securities) for securities or other property
deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger
-6-
<PAGE>
dissolution, liquidation or winding-up. Such notice shall be mailed at least
20 days prior to the date specified in such notice on which any action is to
be taken.
9. Reservation of Stock, etc. Issuable on Exercise of Warrant. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of this Warrant, all shares of Common Stock (or
Other Securities) from time to time issuable on the exercise of this Warrant.
10. Exchange of Warrant. On surrender for exchange of this Warrant,
properly endorsed, to the Company, the Company at is expense will issue and
deliver to or on the order of the holder thereof of a new Warrant of like
tenor, in the name of such Holder or as such Holder (on payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate
on the face or faces thereof for the number of shares of Common Stock called
for on the face of the Warrant so surrendered.
11. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation or surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
12. Remedies. The Company stipulates that the remedies at law of the
Holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not
and will not be adequate, and that such terms may be specifically enforced by
a decree for the specific performance of any agreement contained herein or by
an injunction against a violation of any of the terms hereof or otherwise.
13. Negotiability, etc. This Warrant is issued upon the following terms,
to all of which each Holder or owner hereof by the taking hereof consents and
agrees:
(a) title to this Warrant may be transferred by
endorsement (by the Holder hereof executing the form of assignment
at the end hereof) and delivery in the same manner as in the case
of a negotiable instrument transferable by endorsement and delivery;
(b) any person in possession of this Warrant properly
endorsed is authorized to represent himself as absolute owner
hereof and is empowered to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser hereof for
value; each prior taker or owner waives and renounces all of his
equities or rights in this Warrant in favor of each such bona fide
purchaser, and each such bona fide purchaser shall acquire absolute
title hereto and to all rights represented hereby;
-7-
<PAGE>
(c) until this Warrant is transferred on the books of the
Company, the Company may treat the registered Holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice
to the contrary; and
(d) notwithstanding the foregoing, this Warrant may not
be sold, transferred or assigned except pursuant to an effective
registration statement under the Securities Act or, pursuant to an
applicable exemption therefrom (including in accordance with
Regulation D promulgated under the Securities Act).
14. Notices, etc. All notices and other communications from the Company
to the Holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished
to the Company in writing by the Holder or, until any the Holder furnishes to
the Company an address, then to, and at the address of, the last Holder of
this Warrant who has so furnished an address to the Company.
15. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws of the State of New York,
except where the Delaware General Corporation Law applies. The headings in
this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof. This Warrant is being executed as
an instrument under seal. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
[SIGNATURE PAGE FOLLOWS]
-8-
<PAGE>
DATED as of August __, 1997.
VISUAL EDGE SYSTEMS INC.
By:______________________________
Name:____________________________
Title:___________________________
-9-
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
(To be executed only upon exercise or conversion
of the Warrant in whole or in part)
To Visual Edge Systems Inc.
The undersigned registered holder of the accompanying Warrant hereby
exercises such Warrant or portion thereof for, and purchases thereunder,
__________(1) shares of Common Stock (as defined in such Warrant) and herewith
makes payment therefor of $___________. The undersigned requests that the
certificates for such shares of Common Stock be issued in the name of, and
delivered to, __________________________ whose address is _____________________
_______________________________________________________.
Dated:________________________
---------------------------------------
(Name must conform to name of holder
as specified on the face of the Warrant)
By:____________________________________
Name:_______________________________
Title:______________________________
Address of holder:
_______________________________________
_______________________________________
_______________________________________
- ----------------------------
(1) Insert the number of shares of Common Stock as to which the accompanying
Warrant is being exercised. In the case of a partial exercise, a new Warrant
or Warrants will be issued and delivered, representing the unexercised
portion of the accompanying warrant, to the holder surrendering the same.
-10-
<PAGE>
Visual Edge Systems Inc.
Computation of Per Share Loss
Exhibit 11
Nine Months Ending
September 30,
---------------------------
1997 1996
------------ ------------
Weighted average common shares outstanding.... 4,755,400 4,615,000
Net Loss...................................... $(7,321,453) $(1,279,757)
Net Loss Per Share before Extraordinary item.. $ (1.38) $ (0.28)
Extraordianry expense......................... (0.16) --
------------ ------------
Net Loss Per Share............................ $ (1.54) $ (0.28)
------------ ------------
------------ ------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 305,555
<SECURITIES> 3,739,673
<RECEIVABLES> 55,083
<ALLOWANCES> 0
<INVENTORY> 79,850
<CURRENT-ASSETS> 4,722,043
<PP&E> 3,448,539
<DEPRECIATION> 766,125
<TOTAL-ASSETS> 8,187,636
<CURRENT-LIABILITIES> 1,105,508
<BONDS> 0
0
0
<COMMON> 48,532
<OTHER-SE> (745,966)
<TOTAL-LIABILITY-AND-EQUITY> 8,187,636
<SALES> 1,115,116
<TOTAL-REVENUES> 1,115,116
<CGS> 918,316
<TOTAL-COSTS> 5,479,362
<OTHER-EXPENSES> 1,022,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313,838
<INCOME-PRETAX> 6,571,453
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,571,453
<DISCONTINUED> 0
<EXTRAORDINARY> 750,000
<CHANGES> 0
<NET-INCOME> 7,321,453
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.54
</TABLE>
