<PAGE>
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 March 31, 1998
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 May 11, 1998, the registrant had 7,979,648 shares of common stock and
2,230,000 redeemable warrants outstanding, of which 1,495,000 are publicly
traded.
<PAGE>
VISUAL EDGE SYSTEMS INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets 3
March 31, 1998 and December 31, 1997
Statements of Operations 4
Three Months Ended March 31, 1998 and 1997
Statements of Cash Flows 5
Three Months Ended March 31, 1998 and 1997
Statements of Changes in Stockholders' Equity for the Quarter Ended
March 31, 1998 and the Year Ended December 31, 1997 6
Notes to Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition and 13-15
Results of Operation
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 18-21
Signatures 22
</TABLE>
2
<PAGE>
VISUAL EDGE SYSTEMS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998
December 31, 1997 (unaudited)
----------------- ---------------
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 224,429 $ 318,171
Short-Term Investments 1,080,000 30,000
Accounts Receivable 23,917 61,228
Inventory 72,771 94,627
Prepaid Expenses - Advance Royalties 350,000 451,600
Subscription Receivable (Note 3(b)) -- 3,000,000
Other Current Assets 217,225 125,872
-------------- -------------
Total Current Assets 1,968,342 4,081,498
Fixed Assets, net 2,632,826 2,540,201
Non-marketable Securites (Note 3(a)) -- 1,550,000
Intangible Assets, net 286,986 255,344
Other Assets 449 519
Investments-Restricted (Note 3(c)) 812,719 820,307
-------------- -------------
Total Assets $ 5,701,322 $ 9,247,869
-------------- -------------
-------------- -------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts Payable $ 344,884 $ 392,678
Accrued Expenses 173,605 436,493
Other Current Liabilities 121,266 391,069
Current Maturities of Equipment Loans 540,264 540,264
-------------- -------------
Total Current Liabilities 1,180,019 1,760,504
Equipment Loans 661,939 563,067
Convertible Debt 4,997,026 1,200,056
-------------- -------------
Total Liabilities 6,838,984 3,523,627
-------------- -------------
Commitments and Contingencies (Notes 4 and 5)
Preferred Stock Pending Redemption 1,550 shares
issued and outstanding at March 31, 1998 (Note 3(a)) - 1,550,000
-------------- -------------
Stockholders' Equity (Deficit):
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1997 and 6,000 shares issued and
outstanding at March 31, 1998 $ - $ 4,895,000
Common Stock, $.01 par value, 20,000,000 shares
authorized, 5,316,696 shares issued and outstanding
at December 31, 1997 and 7,865,792 issued and
outstanding at March 31, 1998 53,167 78,658
Additional Paid in Capital 12,427,394 14,379,015
Accumulated Deficit (13,618,223) (15,178,431)
-------------- -------------
Total Stockholders' Equity (Deficit) (1,137,662) 4,174,242
-------------- -------------
Total Liabilities & Stockholders' Equity (Deficit) $ 5,701,322 $ 9,247,869
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
VISUAL EDGE SYSTEMS
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1998
------------ -------------
<S> <C> <C>
Sales $ 199,736 $ 234,006
Cost of Sales 229,117 416,575
------------ -------------
Gross Loss (29,381) (182,569)
------------ -------------
Operating Expenses:
General and Administrative 559,341 742,585
Selling and Marketing 190,063 292,920
Financing Fees 125,000 55,117
Non-cash Stock Compensation Expense 150,125 --
------------ ------------
Total Operating Expenses 1,024,529 1,090,622
------------ -------------
Operating Loss (1,053,910) (1,273,191)
------------ -------------
Other (Income) Expenses:
Interest Income (32,176) (46,385)
Interest Expense 3,705 64,314
Amortization of Deferred Financing Fees -- 24,088
------------ -------------
Total Other (Income) Expenses (28,471) 42,017
------------ -------------
Net Loss (1,025,439) (1,315,208)
Preferred Stock embedded dividend -- (245,000)
------------ -------------
Net Loss available to common shareholders $ (1,025,439) $ (1,560,208)
------------ -------------
------------ -------------
Net Loss per Share, basic and diluted: $ (0.25) $ (0.29)
------------ -------------
------------ -------------
Weighted average common shares outstanding 4,158,333 5,427,807
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
Operating activities:
Net loss $(1,025,438) $(1,315,208)
Adjustments to reconcile net loss to net cash used in operating acitivities:
Extraordinary Item
Non-cash stock compensation expense 150,125 --
Non-cash financing expenses 125,000 25,117
Non-cash interest expenses -- 30,937
Depreciation and amortization 48,615 219,732
Amortization of deferred financing expenses -- 24,088
Changes in assets and liabilities:
Increase in accounts receivable (79,653) (37,311)
Increase in other current assets (14,760) 91,353
Increase in prepaid expense - advance royalties (150,000) (101,600)
Increase in inventory (200) (21,856)
Increase in other assets -- (7,658)
Increase (decrease) in accounts payable (255,138) 47,794
Increase (decrease) in accrued expenses 199,217 12,888
Increase in other current liabilities 9,098 269,803
----------- ------------
Net cash used in operating activities (993,134) (761,921)
----------- ------------
Investing activities:
Capital expenditures (674,783) (95,465)
Purchases of short-term investments (350,000) --
Proceeds from the sale of short-term investments 1,268,844 1,050,000
----------- ------------
Net cash used in investing activities 244,061 954,535
----------- ------------
Financing activities:
Repayment of borrowings (617,126) (98,872)
Payments of financing costs (1,250,000) --
Proceeds from borrowings 3,346,125 --
----------- ------------
Net cash provided by financing activities 1,478,998 (98,872)
----------- ------------
Net increase in cash and cash equivalents 729,925 93,742
Cash and cash equivalents at beginning of period 233,117 224,429
----------- ------------
Cash and cash equivalents at end of period $ 963,042 $ 318,171
----------- ------------
----------- ------------
Supplemental schedule of cash related activities:
Cash paid for interest $ 3,705 $ 26,933
----------- ------------
----------- ------------
</TABLE>
Supplemental disclosure of non-cash related activities:
- - In the first quarter of 1998, the Company, in connection with the Marion
Equity Financing, issued shares of common stock and received payment of
$3,000,000 after March 31, 1998, which payment was recorded as a subscription
receivable on March 31, 1998.
- - In the first quarter of 1998, $6,000,000 in principal amount of the Company's
convertible debt was converted to preferred stock net of finance costs of
$2,178,942.
- - In the first quarter of 1998, the Company sold 1,550 shares of redeemable
preferred stock in exchange for non-marketable securities valued at $1,550,000.
- - In the first quarter of 1998, the Company issued 39,666 shares of common stock
for payment of dividends on its preferred stock.
- - In the first quarter of 1998, the Company issued 100,000 shares of common
stock in connection with the Marion Equity Financing to the holder of the
preferred stock.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Year Ended December 31, 1997 and the Quarter Ended March 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Preferred Paid-in Accumulated
Shares Amount Stock Capital Deficit Total
--------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $4,615,000 $46,150 $ -- $ 6,481,159 $ (2,862,653) $ 3,664,656
Common stock issued in connection
with the March bridge financing 100,000 1,000 -- 999,000 -- 1,000,000
Warrants issued in connection
with the March bridge financing -- -- -- 665,000 -- 665,000
Common stock issued in connection
with the June convertible financing 288,025 2,880 -- 1,755,619 -- 1,758,499
Warrants issued in connection
with the June convertible financing -- -- -- 962,012 -- 962,012
Common stock issued by shareholders
for services 270,000 2,700 -- 997,300 -- 1,000,000
Options and warrants issued by shareholders
for services -- -- -- 458,237 -- 458,237
Exercise of options 25,000 250 -- 127,750 -- 128,000
Issuance of common stock for payment
of interest on convertible debt 65,671 657 -- 333,101 -- 333,758
Repurchase and cancellation of common stock (47,000) (470) -- (351,784) -- (352,254)
Net loss -- -- -- -- (10,755,570) (10,755,570)
---------- ------- ----------- ----------- ------------ ------------
Balance at December 31,1997 5,316,696 53,167 - 12,427,394 (13,618,223) (1,137,662)
Preferred stock issued in connection
with the June financing conversion -- 6,000,000 (2,178,942) -- 3,821,058
Intrinsic value of conversion feature -- -- (1,350,000) 1,350,000 -- --
Preferred stock embedded dividend -- -- 245,000 -- (245,000) --
Common stock issued in connection
with the Marion equity financing 2,400,000 24,000 -- 2,726,000 -- 2,750,000
Common stock issued in connection with
the June convertible financing amendment 100,000 1,000 -- (1,000) -- --
Issuance of common stock for payment
of interest on preferred stock 39,666 397 -- (397) -- (0)
Issuance of common stock for payment
of interest on convertible debt 9,430 94 -- 30,843 -- 30,937
Warrants issued in connection with
the June convertible financing amendment -- -- -- 25,117 -- 25,117
Net loss 1st Qtr 1998 -- -- -- -- (1,315,208) (1,315,208)
---------- ------- ----------- ----------- ------------ ------------
Balance at March 31,1998 7,865,792 $78,658 $ 4,895,000 $14,379,015 $(15,178,431) $ 4,174,242
---------- ------- ----------- ----------- ------------ ------------
---------- ------- ----------- ----------- ------------ ------------
</TABLE>
6
<PAGE>
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 on form
10-KSB for the year ended December 31, 1997. 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, 1998.
Revenue Recognition
Revenue from sale of personalized videotapes is recognized when the Company
delivers the videotapes to the customer. Non-refundable deposits from
customers received in advance of videotape delivery are recorded as customer
deposits and are included in other current liabilities in the balance sheet.
During the first three quarters of 1997, the Company recorded non-refundable
deposits from customers as revenue. During the fourth quarter of 1997, the
Company changed its method of accounting for non-refundable deposits from
customers and deferred the revenue until the event occurred. The impact of
this change in accounting principle was not material to the Company's
financial position or results of operations.
(2) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which is required to be adopted in fiscal years beginning after December 15,
1997. This statement requires the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income is defined as the change in equity during
the financial reporting period of a business enterprise resulting from
non-owner sources. The Company adopted SFAS No. 130 on January 1, 1998. The
adoption of SFAS No. 130 did not have a material impact on the Company's
financial position or results of operations as comprehensive income is equal
to net income for all periods presented.
The Company adopted SFAS No. 128 "Earnings Per Share" during 1997. SFAS No.
128 establishes standards for computing and presenting basic and diluted
earnings per share. Basic earnings per share is calculated by dividing
income(loss) available to Common Stockholders by the weighted average number
of shares of Common Stock outstanding during each period. Diluted earnings
per share includes the potential impact of dilutive common share equivalents
using the treasury stock method. Convertible securities and common share
equivalents have not been included in the computation of diluted loss per
share in the accompanying statements of
7
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VISUAL EDGE SYSTEMS INC.
Notes to Financial Statements
Unaudited
(Continued)
operations as their impact is antidilutive. As of March 31, 1998, the
Company had 948,419 options and 2,230,000 warrants outstanding.
(3) Financings
(a) June Financing
On June 13, 1997, the Company arranged a three-year $7.5 million debt and
convertible equity facility (the "June Financing") with a group of
investment funds (the "Funds"). The Company issued and sold to the Funds
certain securities, including convertible notes (the "Notes) which are
convertible into the Company's preferred stock (the "Preferred Stock"),
pursuant to the Securities Purchase Agreement, dated as of June 13, 1997
(the "Agreement"), among the Company and the Funds.
Interest payments on the Notes are, at the option of the Company, payable in
cash or in shares of common stock. During the first quarter of 1998 the
Company issued an aggregate of 9,430 shares of the Company's common stock
for payment of interest due of $30,937.
On February 6, 1998, $6 million principal amount of outstanding Notes was
converted into 6,000 shares of the Company's preferred stock (the "First
Amendment"). The Preferred Stock has a liquidation preference of $1,000 per
share and is senior to the Company's common stock (the "Common Stock") with
respect to dividends, liquidation and dissolution. Each share of Preferred
Stock entitles the holder to an annual dividend of 8.25%, payable on a
quarterly basis, which dividend increases to 18% in certain situations as
specified in the Amended Certificate of Designation with respect to the
Preferred Stock. During the first quarter of 1998 the Company issued an
aggregate of 37,717 shares of the Common Stock for payment of dividends due
on the Preferred Stock of $123,750. Holders of the shares of Preferred Stock
do not have voting rights, except upon the occurrence of certain events that
would affect the preferences and rights of the Preferred Stock. Each share
of Preferred Stock is convertible into Common Stock at the lesser of: (i)
$6.00 per share of Common Stock or (ii) a discount ranging from 15% to 22.5%
of the market price of the Common Stock at the time of conversion; in
certain circumstances, the conversion price may be as low as 50% of the
market price of the Common Stock at the time of conversion. The Preferred
Stock is redeemable by the Company at any time at its option. The
intrinsic value of the above described beneficial conversion feature
($1,350,000) has been recognized as an increase in additional
paid-in-capital and a decrease in Preferred Stock. This beneficial
conversion feature is being amortized as an embedded Preferred Stock
dividend through December 31, 1998 (the date the conversion feature
resumes).
The Board of Directors is authorized, without further approval of the
stockholders, to fix the dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges and restrictions applicable to each
new series of Preferred Stock.
The remaining $1.5 million of outstanding Notes held by the Funds have
become secured debt pursuant to a Security Agreement, dated as of February
6, 1998 (the "Security Agreement"), between the Company and H.W. Partners,
L.P., as agent for and representative of the Funds. With respect to such
$1.5 million in outstanding Notes, the Funds have been granted a security
interest in the collateral described in the Security Agreement, which
includes all of the Company's unrestricted cash deposit accounts, accounts
receivable, inventory and equipment and fixtures excluding the vans.
8
<PAGE>
VISUAL EDGE SYSTEMS INC.
Notes to Financial Statements
Unaudited
(Continued)
On March 16, 1998, the Company sold an additional 1,550 shares of Preferred
Stock to the Funds in exchange for non-marketable securities with an
aggregate fair value of $1,550,000. The securities consist of warrants to
acquire common shares of various publicly traded companies and the fair
value has been determined using the Black Scholes model. During the first
quarter of 1998 the Company issued an aggregate of 1,949 shares of Common
Stock for payment of dividends due of $6,394. On April 20, 1998, the Company
redeemed the 1,550 shares of Preferred Stock from the Funds in exchange for
the non-marketable securities mentioned above. The redeemed Preferred Stock
is included on the March 31, 1998 balance sheet as Preferred Stock pending
redemption.
As a condition to the consummation of the Marion Equity Financing (see Note
3(c)), the Company entered into the Agreement and Second Amendment to Bridge
Securities Purchase Agreement and Related Documents dated March 27, 1998
(the "Second Amendment"), among the Company and the Funds. Pursuant to the
Second Amendment, the Funds agreed that they would not convert, prior to
December 31, 1998, any shares of Preferred Stock or any principal amount of
the Notes into shares of Common Stock, unless a "Material Transaction"
(defined as a change of control of the Company, a transfer of all or
substantially all of the Company's assets or a merger of the Company into
another entity) has occurred. Further, the Funds agreed that they would not,
prior to March 31, 1999, publicly sell any shares of Common Stock owned or
acquired by the Funds, unless a Material Transaction has occurred; the Funds
are permitted, after June 30, 1998 and subject to the Company's right of
first refusal, to privately sell any shares of Common Stock that they own or
acquire, provided the purchaser agrees in writing to be bound by the same
resale restrictions.
The Funds have granted to the Company an option to redeem the Preferred
Stock and the Notes owned by the Funds as follows: (i) up to $2,500,000
principal amount may be redeemed on or before April 30, 1998; (ii) an
additional $2,500,000 principal amount may be redeemed on or before May 31,
1998; and (iii) an additional $2,500,000 principal amount may be redeemed
from and after June 1, 1998. If the date that the Company redeems such
Preferred Stock and Notes is on or before June 30, 1998, the redemption
price will be 80% of the principal amount outstanding of the Notes being
redeemed or 80% of the liquidation preference of the Preferred Stock being
redeemed, plus accrued interest and dividends in the event that all of the
Preferred Stock and Notes owned by the Funds are not redeemed by June 30,
1998. If the redemption of the Notes and Preferred Stock is after June 30,
1998 but on or before December 31, 1998, the 80% referred to in the
preceding sentence shall increase by 2% per month, up to 90% in December
1998. If the redemption of the Notes and Preferred Stock occurs after
December 31, 1998, the redemption price shall be as provided in the
Agreement between the Company and the Funds. The Company is required to
redeem all of the Preferred Stock outstanding prior to redemption of any of
the Notes. In addition, the Funds have granted to the Company and to Marion
(see Note 3(b)) an option to acquire, on or before March 31, 1999, all of
the shares of Common Stock owned by the Funds.
In connection with the Second Amendment, the Funds received 100,000 shares
of Common Stock, as well as the right to receive 200,000 additional shares
of Common Stock in the event that all of the Preferred Stock and Notes owned
by the Funds have not been redeemed by the Company by June 30, 1998.
Further, the exercise price of the warrants issued in June 1997 with the
Agreement has been reduced from $10.675 per share to $3.25 per share and the
exercise price of the warrants issued in December 1997 has been reduced from
$4.00 per share to $3.25 per share. The Company recorded a non-cash
financing fee of $25,117 in connection
9
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VISUAL EDGE SYSTEMS INC.
Notes to Financial Statements
Unaudited
(Continued)
with the repricing of the warrants issued in December 1997. The Company has
registered all of such shares of Common Stock (including the shares
underlying warrants) under the Securities Act of 1933, as amended effective
April 15, 1998.
(b) Marion Equity Financing
In March 1998, the Company entered into a Purchase Agreement (the "Marion
Agreement") with Marion Interglobal, Ltd., an investment group ("Marion").
The Marion Agreement calls for the Company to receive up to $11,000,000 from
Marion in exchange for shares of Common Stock as explained herein. Pursuant
to the Marion Agreement, the purchase of Common Stock is to occur in three
tranches as follows: (i) on March 27, 1998 the Company sold to Marion
1,200,000 shares of Common Stock for an aggregate consideration of
$3,000,000 which was received on April 16, 1998 and is recorded as a
subscription receivable in the accompanying March 31, 1998 balance sheet;
(ii) on or prior to June 14, 1998, the Company will sell to Marion 800,000
shares of Common Stock for an aggregate consideration of $2,000,000; and
(iii) on or prior to September 30, 1998 the Company shall sell a number of
shares of Common Stock (to be determined by when the closing occurs, which
would range from 2,666,667 shares to 3,200,000 shares) for an aggregate
consideration of $6,000,000. The third tranche is contingent on Marion's
satisfaction that the Company has met or exceeded the financial targets
expected by Marion, in its sole discretion. The Company has agreed to use
the $6,000,000 in proceeds from the third tranche to redeem the Notes and
Preferred Stock issued in the June Financing. The Company will pay
transaction fees to Marion upon completion of each tranche as follows: (i)
1,200,000 shares of Common Stock for the first $3,000,000 tranche; (ii)
800,000 shares of Common Stock for the second $2,000,000 tranche; and (iii)
no additional fee for the completion of the third tranche. The issuance and
sale of 1,400,000 shares of Common Stock in the first tranche and all of the
shares to be issued in the second tranche to Marion, is subject to approval
by the Company's stockholders.
Further, upon the consummation of the second tranche of the Marion
Agreement, Mr. Alan Lubell, Chairman of the Board of the Company, has agreed
to transfer to Marion 250,000 shares of Common Stock, which shares were
registered under the Securities Act of 1933, as amended effective April 15,
1998.
In addition, if the third tranche of the aforementioned financing is
completed, then until March 30, 2001, the Company is required to obtain the
prior written consent of Marion before the consummation of any additional
financing transaction except for any credit facilities or lines of credit
with lenders or equipment financing arrangements. Further, the Company may
not redeem the warrants issued in the initial public offering (the "IPO
Warrants") without the prior written consent of Marion.
As a condition to the consummation of this equity financing, the Company
renegotiated the terms of its outstanding Notes and Preferred Stock with the
Funds (see Note 3(a) for details).
(c) Equipment Financing
In August 1997, the Company entered into an equipment financing facility
whereby the Company will be provided with up to $2.5 million in financing by
September 1998. The facility provides the Company with equipment financing
of $100,000 for 25 vans, each of
10
<PAGE>
VISUAL EDGE SYSTEMS INC.
Notes to Financial Statements
Unaudited
(Continued)
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. The Company has pledged to the
lender a certificate of deposit in the aggregate amount of $200,000 in
connection with the financing of the first eight vans which is included in
"Investments-Restricted" in the accompanying March 31, 1998 balance sheet.
The Company acquired certain fixed assets under leases totaling $913,170,
which are accounted for as capital leases. As a condition of the leases the
Company is required, throughout the term of the leases, to post letters of
credit in the aggregate amount of $538,902 for collateral on the leases. The
letters of credit were issued from the Company's bank and the Company
pledged one of its investment funds with a balance of $620,307 as security,
which is included in "Investments-Restricted" in the accompanying March 31,
1998 balance sheet.
(4) Employment Agreements
The Company currently has employment agreements with three executive
employees which expire on December 31, 2000 which provide for aggregate
minimum annual compensation of approximately $463,750 in 1998, $540,000 in
1999, and $600,000 in 2000. The agreements are automatically renewed
thereafter for additional one-year periods unless the Company or the
employees provide timely notice of termination. The agreements also provide
for potential performance bonuses and severance payments ranging from three
to twelve months.
(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, Great White Shark and
the Company agreed to restructure the terms of the payments due to Norman
under the Agreement by: (i) altering the payments such that Norman will
receive 102,000 in shares of the Company's common stock; (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
options to purchase 25,000 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 Amendment restructures the payments to Norman as follows: 1997 - as of
June 30, 1997 $300,000 was paid; 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.
11
<PAGE>
VISUAL EDGE SYSTEMS INC.
Notes to Financial Statements
Unaudited
(Continued)
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) Stock Option Plan
The Company applies APB Opinion No. 25 in accounting for its 1996 Stock
Option Plan. Had the Company determined compensation cost based on fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss and net loss per share for the three months ended March
31, 1997 and 1998 would have increased to $1,480,463 and $.36 and $1,366,696
and $.25, respectively.
12
<PAGE>
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. The Company has developed video
production technology which digitally combines actual video footage of a
golfer's swing with a synchronized "split-screen" comparison to Greg
Norman's golf swing to produce a 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
1996, 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.
The Company's primary focus is concentrated on marketing and sales efforts.
The Company's marketing strategy is to sell One-on-One videotapes on a
prearranged basis to various organizers of amateur corporate, charity and
member golf tournaments (who typically offer gifts to tournament
participants), golf professionals at private and daily fee golf courses and
driving ranges and 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, Nevada, New Jersey, New York, Ohio,
Pennsylvania and Texas, and is in the process of developing additional vans.
In addition, to further implement its marketing and sales efforts, the
Company has enlisted independent sales representatives who cater to the
premium and incentive industries across the country to present the Company's
products to their clients who seek incentives and premiums. These premium
sales representatives will be positioning the Company's products as premiums
or incentives similar to the Cadillac Agreement, which is described below.
The Company entered into an agreement with Cadillac Motor Car Division of
General Motors on August 5, 1997 (the "Cadillac Agreement"). The Cadillac
Agreement granted Cadillac the exclusive U.S. dealership showroom rights to
the Company's One-on-One with Greg Norman concept and allowed Cadillac to
exclusively offer its customers a free video golf lesson personally analyzed
by Greg Norman if they test drive a Cadillac. Pursuant to the Cadillac
13
<PAGE>
Agreement the Company provides each participating Cadillac dealership with
all marketing materials related to this promotion, including creative pieces
for print and radio advertisements, banners, posters and direct mail
invitations. In December 1997, the Company and Cadillac amended the Cadillac
Agreement and extended the dealership showroom rights granted exclusively to
Cadillac to other dealers of General Motors.
Results of Operations For the three months ended March 31, 1998 ("Q1-98") as
compared to the three months ended March 31, 1997 ("Q1-97").
Sales for Q1-98 increased 17% to $234,006, as compared to $199,736 for
Q1-97. During the quarter ended December 31, 1997, the Company changed its
method of accounting for non-refundable deposits from customers. For
quarters prior to the fourth quarter of 1997, the Company recorded advance
deposits from customers as revenue. Beginning in the fourth quarter of 1997,
advance deposits from customers were deferred until the event occurred. The
impact of this change in accounting principle was not material to the
Company's financial position or results of operations. The Company, in Q1-97
recorded non-refundable deposits from customers as sales. In Q1-98 the
Company recorded only revenue that was earned, with non-refundable deposits
from customers reflected on the balance sheet as current liabilities. Under
the new policy, sales in Q1-98 are $234,006, as compared to $90,237 in
Q1-97, a 159% increase.
For Q1-98 the Company had a gross loss of $182,569, as compared to a gross
loss of $29,381 for Q1-97. The increase in the Company's gross loss is
attributable to the increased number of vans. The Company had 15 vans in
service in the first quarter of 1998, as compared to 7 for a portion of the
first quarter of 1997. In Q1-98 cost of sales include a depreciation expense
for the vans of $120,533. There was no van depreciation recorded in Q1-97.
In addition, the Company incurred significant training costs in Q1-98
associated with the hiring of additional personnel for the anticipated
increase in sales in the second and third quarter of 1998. Under the new
sales policy regarding non-refundable deposits from customers, gross loss in
Q1-97 would have been $138,880, as compared to $182,569, in Q1-98.
Operating expenses for Q1-98 increased 6% to $1,090,622, as compared to
$1,024,529 for Q1-97. The increase in operating expenses for Q1-98, as
compared to Q1-97, is attributable to depreciation expense, which totaled
$67,557 for Q1-98, as compared to $30,615 for Q1-97, and amortization
expense of $46,551 for Q1-98, as compared to $18,000 for Q1-97.
Additionally, in Q1-98, in compliance with SFAS 123 "Accounting for
Stock-Based Compensation," the Company recorded a non-cash financing fee
expense of $25,117 related to the repricing of the warrants issued to the
Preferred Stockholder in December 1997.
The Company earned $46,385 in interest income for the three month period
ending March 31, 1998, as compared to $32,176 for the three month period
ending March 31, 1997. Interest expense for the three month period ending
March 31, 1998 was $64,314, as compared to $3,705 for the three month period
ending March 31, 1997. The increase in interest expense is primarily due to
the equipment financings.
Liquidity and Capital Resources
On March 31, 1998, the Company had cash and cash equivalents of $318,171,
unrestricted short-term investments of $30,000 and working capital of
$2,320,994, as compared to cash and
14
<PAGE>
cash equivalents of $224.429, unrestricted short-term investments of
$1,080,000 and working capital of $788,323 at December 31, 1997. Net cash
used in operating activities for Q1-98 was $761,921, which was used to fund
the Company's losses. Net cash provided by investing activities was $954,535
and $98,872 was used in financing activities for a total increase in cash
and cash equivalents of $93,742. Net cash used in operating activities for
Q1-97 was $993,134. Net cash provided by investing and financing activities
in Q1-97 was $244,061 and $1,478,998, respectively, for a total increase in
cash and cash equivalents in Q1-97 of $729,925.
On March 31, 1998, the Company had stockholders' equity of $4,174,242, as
compared to a stockholders' deficit of $1,137,662 at December 31, 1997. If
the second and third tranches of the Marion Equity Financing had occurred
prior to March 31, 1998, the Company's stockholders' equity, on a pro forma
basis, would have increased by approximately $2,239,955 for a total
stockholders' equity of $6,414,197.
Based on the recently completed securities purchase agreement for additional
financing as detailed more fully in Note 3(b), the Company anticipates that
its current capital resources, when combined with anticipated cash flows
from operations, will be sufficient to satisfy the Company's contemplated
working capital requirements until the end of the fiscal year.
Seasonality
The Company considers its business to be seasonal and expects sales to be
generally higher in the second and third quarters of each fiscal year.
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 material 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 March 31, 1998. 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 June 13, 1997, the Company arranged a three-year $7.5 million debt and
convertible equity facility (the "June Financing") with a group of
investment funds (the "Funds"). The Company issued and sold to the Funds the
following securities pursuant to the Securities Purchase Agreement, dated as
of June 13, 1997 (the "Agreement"), among the Company and the Funds: (i)
8.25% unsecured convertible notes (the "Notes") in the aggregate principal
amount of $7,500,000 with a maturity date of three years from the date of
issuance, subject to the mandatory automatic exchange of $5 million of the
Notes for Preferred Stock, par value $.01 per share, which Notes 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 Agreement; (ii) 93,677
shares of Common Stock subject to adjustment; and (iii) five-year warrants
(the "June Warrants") to purchase 100,000 shares of Common Stock at an
exercise price equal to $10.675.
Interest payments on the Notes are, at the option of the Company, payable in
cash or in shares of Common Stock. On March 31, 1998, 9,430 additional
shares became issuable as interest for the quarter then ended.
Dividends on the Preferred Stock are, at the option of the Company payable
in cash or shares of the Company's Common Stock. On March 31, 1998, 37,717
additional shares became issuable as dividends for the quarter then ended.
The Company has issued to the Funds an aggregate of 200,000 warrants (the
"New Warrants"), each to purchase one share of Common Stock at an exercise
price equal to $4.00 per share. The New Warrants are exercisable through
December 2002 and are redeemable at the option of the Company, commencing
January 1, 2000, based on a 20-day minimum closing bid price of Common
Stock, at a redemption price equal to $.10 per share.
On March 16, 1998, the Company sold an additional 1,550 shares of Preferred
Stock to the Funds in exchange for non-marketable securities with an
aggregate fair value of $1,550,000. In connection therewith, the Funds as
the holders of the majority of the outstanding Preferred Stock obtained the
16
<PAGE>
right to appoint one director to the Company's Board of Directors, through
they had not named such director as of April 8, 1998.
In connection with the Second Amendment, the Funds received 100,000 shares
of Common Stock, as well as the right to receive 200,000 additional shares
of Common Stock (collectively, the "New Shares") in the event that all of
the Preferred Stock and Notes owned by the Funds have not been redeemed by
the Company by June 30, 1998. Further, the exercise price of the June
Warrants has been reduced from $10.675 per share to $3.25 per share and the
exercise price of the New Warrants has been reduced from $4.00 per share to
$3.25 per share.
In March 1998, the Company entered into a Purchase Agreement (the "Marion
Agreement") with Marion Interglobal, Ltd., an investment group ("Marion").
The Marion Agreement calls for the Company to receive up to $11,000,000 from
Marion in exchange for shares of Common Stock as explained herein. Pursuant
to the Marion Agreement, the purchase of Common Stock is to occur in three
tranches as follows: (i) on March 27, 1998 the Company sold to Marion
1,200,000 shares of Common Stock for an aggregate consideration of
$3,000,000; (ii) on or prior to June 14, 1998, the Company will sell to
Marion 800,000 shares of Common Stock for an aggregate consideration of
$2,000,000; and (iii) on or prior to September 30, 1998 the Company shall
sell a number of shares of Common Stock (to be determined by when the
closing occurs, which would range from 2,666,667 shares to 3,200,000 shares)
for an aggregate consideration of $6,000,000. The third tranche is
contingent on Marion's satisfaction that the Company has met or exceeded the
financial targets expected by Marion, in its sole discretion. The Company
has agreed to use the $6,000,000 in proceeds from the third tranche to
redeem the Notes and Preferred Stock issued in the June Financing. The
Company will pay transaction fees to Marion upon completion of each tranche
as follows: (i) 1,200,000 shares of Common Stock for the first $3,000,000
tranche; (ii) 800,000 shares of Common Stock for the second $2,000,000
tranche; and (iii) no additional fee for the completion of the third
tranche. The issuance and sale of 1,400,000 shares of Common Stock in the
first tranche and all of the shares to be issued in the second tranche to
Marion, is subject to approval by the Company's stockholders.
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>
Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(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. (Incorporated by reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB filed November 14, 1997)
4.9 Form of Common Stock Purchase Warrant issued to investors in the June
1997 Bridge Financing in connection with the amendment to such
financing (Incorporated by reference to Exhibit 99.3 to the
Registrant's Current Report on Form 8-K filed February 9, 1998)
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
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)
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)
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
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)
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 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
Registrant's Registration Statement on Form S-3 (Registration No.
333-32247) filed August 12, 1997)
10.16 Purchase Agreement, dated as of March 27, 1998, among the Company and
Marion Interglobal, Ltd. (Incorporated by reference to Exhibit 10.16 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.17 Registration Rights Agreement, dated as of March 27, 1998, among the
Company and Marion Interglobal, Ltd. (Incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
10.18 Second Agreement to Bridge Securities Purchase Agreement and Related
Documents, dated as of March 27, 1998, among the Company, Infinity
Investors Limited, Infinity Emerging Opportunities Limited, Summit
Capital Limited (as the transferee of Sandera Partners, L.P.) and
Glacier Capital Limited (as the transferee of Lion Capital Partners,
L.P.) (Incorporated by reference to Exhibit 10.18 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.19 First Amendment to Bridge Securities Purchase Agreement and Related
Documents, dated as of December 31, 1997, among the Company, Infinity
Investors Limited, Infinity Emerging Opportunities Limited, Summit
Capital Limited (as the transferee of Sandera Partners, L.P.) and
Glacier Capital Limited (as the transferee of Lion Capital Partners,
L.P.). (Incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed February 6, 1998).
20
<PAGE>
<S> <C>
10.20 Security Agreement, dated February 6, 1998, between the Company and HW
Partners, L.P., as agent for and representative of the Funds.
(Incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K filed February 6, 1998).
10.21 Form of Warrant Certificate. (Incorporated by reference to Exhibit
99.3 to the Registrant's Current Report on Form 8-K filed February 6,
1998).
27 Financial Data Schedule *
* Filed herewith
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 9, 1998 under Item 5.
21
<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
May 12, 1997 Chief Executive Officer
/s/ Melissa Forzly
-----------------------
Melissa Forzly
May 12, 1997 Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 318,171
<SECURITIES> 30,000
<RECEIVABLES> 61,228
<ALLOWANCES> 0
<INVENTORY> 94,627
<CURRENT-ASSETS> 4,081,498
<PP&E> 3,624,645
<DEPRECIATION> 1,084,444
<TOTAL-ASSETS> 9,247,869
<CURRENT-LIABILITIES> 1,760,504
<BONDS> 0
0
7,550,000
<COMMON> 78,658
<OTHER-SE> (1,904,416)
<TOTAL-LIABILITY-AND-EQUITY> 9,247,869
<SALES> 234,006
<TOTAL-REVENUES> 234,006
<CGS> 416,575
<TOTAL-COSTS> 1,090,622
<OTHER-EXPENSES> 24,088
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,314
<INCOME-PRETAX> 1,315,208
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,315,208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,315,208
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
