<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
UNITED STATES
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 August 11, 1999, the registrant had 10,398,440 shares of common
stock and 1,930,000 redeemable warrants outstanding, of which 1,495,000 are
publicly traded.
<PAGE> 2
VISUAL EDGE SYSTEMS INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Balance Sheets 3
June 30, 1999 (unaudited) and December 31, 1998
Statements of Operations 4
Three and Six Months Ended June 30, 1999 and 1998 (unaudited)
Statements of Cash Flows 5
Six Months Ended June 30, 1999 and 1998 (unaudited)
Statements of Stockholders' Equity for the Six Months 6
Ended June 30, 1999 (unaudited) and the Year Ended December 31, 1998
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and 9-13
Results of Operations
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 4. Submission to Matters to a Vote of Security Holders 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 15-17
Signatures 18
</TABLE>
2
<PAGE> 3
VISUAL EDGE SYSTEMS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 244,346 $ 20,890
Certificates of Deposit 1,750,000 825,000
Investments-Restricted -- 396,431
Accounts Receivable 26,893 66,381
Inventory 103,142 108,433
Prepaid Expenses - Advance Royalties 220,577 224,142
Other Current Assets 107,345 125,976
------------ ------------
Total Current Assets 2,452,303 1,767,253
Fixed Assets, net 2,248,514 1,828,508
Intangible Assets, net 167,777 111,851
Investments-Restricted 587,108 39,540
Prepaid Expenses - Advance Royalties 680,157 621,407
------------ ------------
Total Assets $ 6,135,859 $ 4,368,559
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 201,617 $ 122,696
Accrued Expenses 167,795 99,121
Other Current Liabilities 218,259 308,339
Current Maturities of Equipment Loans 595,084 485,651
------------ ------------
Total Current Liabilities 1,182,755 1,015,807
Equipment Loans 149,951 --
Convertible Debt 1,253,273 1,329,322
------------ ------------
Total Liabilities 2,585,979 2,345,129
------------ ------------
Commitments and Contingencies (Note 3)
Stockholders' Equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized: Series A-2
convertible, 6,000 shares issued and outstanding at December 31, 1998
and June 30, 1999 6,000,000 6,000,000
Common Stock, $.01 par value, 20,000,000 shares authorized, 10,378,440 shares
issued and outstanding at December 31, 1998 and 10,398,440 issued and
outstanding at June 30, 1999 (unaudited) 103,784 103,984
Additional Paid in Capital 17,748,379 17,765,679
Accumulated Deficit (20,302,283) (21,846,233)
------------ ------------
Total Stockholders' Equity 3,549,880 2,023,430
------------ ------------
Total Liabilities & Stockholders' Equity $ 6,135,859 $ 4,368,559
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
Visual Edge Systems Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sales $ 1,047,145 $ 916,904 $ 1,281,150 $ 1,237,301
Cost of Sales 615,435 612,420 1,032,009 1,091,797
----------- ------------ ----------- ------------
Gross Profit 431,710 304,484 249,141 145,504
----------- ------------ ----------- ------------
Operating Expenses:
General and Administrative 729,773 638,541 1,527,475 1,250,016
Selling and Marketing 287,166 94,288 580,087 274,739
----------- ------------ ----------- ------------
Total Operating Expenses 1,016,939 732,829 2,107,562 1,524,755
----------- ------------ ----------- ------------
Operating Loss (585,229) (428,345) (1,858,421) (1,379,251)
----------- ------------ ----------- ------------
Other Income (Expenses):
Interest Income 11,561 6,945 57,946 42,394
Interest Expense (71,275) (48,585) (135,588) (101,224)
Amortization of Deferred Financing Fees (25,638) (53,630) (49,726) (105,869)
----------- ------------ ----------- ------------
Total Other Income (Expenses) (85,352) (95,270) (127,368) (164,699)
----------- ------------ ----------- ------------
Net Loss (670,581) (523,615) (1,985,789) (1,543,950)
Preferred Stock dividend (623,957) -- (875,351) --
----------- ------------ ----------- ------------
Net Loss to common stockholders $(1,294,538) $ (523,615) $(2,861,140) $ (1,543,950)
=========== ============ =========== ============
Net Loss per Share, basic and diluted: $ (0.16) $ (0.05) $ (0.43) $ (0.15)
=========== ============ =========== ============
Weighted average common shares outstanding 7,881,229 10,398,440 6,661,296 10,396,893
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(1,985,789) $(1,543,950)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash stock compensation expense -- 17,500
Non-cash stock financing fees 25,117 --
Non-cash interest expenses 62,219 --
Depreciation and amortization 477,112 445,192
Amortization of deferred financing expenses 49,726 105,869
Changes in assets and liabilities:
Increase in accounts receivable (169,877) (39,488)
(Increase) decrease in other current assets 19,310 (18,631)
(Increase) decrease in prepaid expense - advance royalties (176,600) 55,185
Increase in inventory (70,853) (5,291)
(Increase) decrease in restricted investments (10,439) 151,137
Decrease in accounts payable (107,074) (78,921)
Decrease in accrued expenses (138,222) (68,674)
Increase in other current liabilities 365,209 90,080
----------- -----------
Net cash used in operating activities (1,660,161) (889,992)
----------- -----------
Investing activities:
Capital expenditures (243,942) (20,405)
Purchases of short-term investments (1,750,000) --
Proceeds from the sale of assets -- 51,145
Proceeds from the sale of short-term investments 1,080,000 925,000
----------- -----------
Net cash provided by (used in) investing activities (913,942) 955,740
----------- -----------
Financing activities:
Proceeds from the issuance of common stock 4,750,000 --
Repayment of borrowings (254,145) (289,204)
Payments of financing costs (31,221) --
----------- -----------
Net cash provided by (used in) in financing activities 4,464,634 (289,204)
----------- -----------
Net change in cash and cash equivalents 1,890,531 (223,456)
Cash and cash equivalents at beginning of period 224,429 244,346
----------- -----------
Cash and cash equivalents at end of period $ 2,114,960 $ 20,890
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 73,369 $ 48,585
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
VISUAL EDGE SYSTEMS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1998 and the
Three Months Ended March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Preferred Paid-in
Shares Amount Stock Capital
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 5,316,696 $ 53,167 $ -- $ 12,427,394
Preferred stock Series A convertible issued in
connection with the Infinity financing -- -- 6,000,000 (2,178,942)
Cancellation of Series A convertible Preferred stock issued in
connection with the Infinity financing -- -- (6,000,000) 6,000,000
Series A-2 convertible Preferred stock issued in connection
with the Infinity financing -- -- 6,000,000 (6,000,000)
Preferred stock embedded dividend -- -- -- 1,350,000
Sale of preferred stock in connection with
the Infinity financing -- -- 1,550,000 --
Redemption of preferred stock in connection with the
Infinity financing -- -- (1,550,000) --
Issuance of common stock for payment of dividends on
preferred stock 302,755 3,028 -- 484,240
Issuance of common stock for payment of interest
on convertible debt 80,989 809 -- 123,972
Common stock and warrants issued in connection with the
Infinity financing amendments 350,000 3,500 -- 260,909
Common stock issued in connection with the Marion
equity financing 4,010,000 40,100 -- 4,678,678
Common stock and warrants issued in connection with the
Greg Norman agreement 272,000 2,720 -- 290,088
Issuance of common stock for payment of prepaid royalties 30,000 300 -- 299,700
Exercise of options 16,000 160 -- 12,340
Net loss -- -- -- --
----------- -------- ----------- ------------
Balance at December 31, 1998 10,378,440 103,784 6,000,000 17,748,379
Common stock issued for services 20,000 200 -- 17,300
Net loss for through June 30, 1999
----------- -------- ----------- ------------
Balance at June 30, 1999 10,398,440 $103,984 $ 6,000,000 $ 17,765,679
=========== ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------ -----------
<S> <C> <C>
Balance at December 31, 1997 $(13,618,223) $(1,137,662)
Preferred stock Series A convertible issued in
connection with the Infinity financing -- 3,821,058
Cancellation of Series A convertible Preferred stock issued in
connection with the Infinity financing -- --
Series A-2 convertible Preferred stock issued in connection
with the Infinity financing -- --
Preferred stock embedded dividend (1,350,000) --
Sale of preferred stock in connection with
the Infinity financing -- 1,550,000
Redemption of preferred stock in connection with the
Infinity financing -- (1,550,000)
Issuance of common stock for payment of dividends on
preferred stock (487,268) --
Issuance of common stock for payment of interest
on convertible debt -- 124,781
Common stock and warrants issued in connection with the
Infinity financing amendments -- 264,409
Common stock issued in connection with the Marion
equity financing -- 4,718,778
Common stock and warrants issued in connection with the
Greg Norman agreement -- 292,808
Issuance of common stock for payment of prepaid royalties -- 300,000
Exercise of options -- 12,500
Net loss (4,846,792) (4,846,792)
------------ -----------
Balance at December 31, 1998 (20,302,283) 3,549,880
Common stock issued for services -- 17,500
Net loss for through June 30, 1999 (1,543,950) (1,543,950)
------------ -----------
Balance at June 30, 1999 $(21,846,233) $ 2,023,430
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
VISUAL EDGE SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
(1) BASIS OF PRESENTATION
The financial statements included herein have been prepared by
Visual Edge Systems Inc. (the "Company") without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying
unaudited financial statements include all necessary
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position, results of
operations and cash flows of the Company. The results of
operations and cash flows for the three and six month periods
ended June 30, 1999, are not necessarily indicative of the
results of operations or cash flows that may be reported for
the year ended December 31, 1999. The unaudited financial
statements included herein should be read in conjunction with
the audited financial statements and the notes thereto
included in the Company's Form 10-KSB/A for the year ended
December 31, 1998.
(2) RECLASSIFICATIONS
Certain 1998 balances have been reclassified to conform to the
1999 presentation.
(3) COMMITMENTS AND CONTINGENCIES
(a) NASDAQ DELISTING
On March 1, 1999, the minimum bid price of the Company's
shares had been less than $1.00 per share for thirty
consecutive business days and in accordance with Nasdaq's
listing requirements, the Company received notice from Nasdaq
regarding the minimum bid price of the Company's shares. The
Company did not achieve compliance with Nasdaq's rules and was
delisted on July 16, 1999.
(b) NEED FOR ADDITIONAL FINANCING
As a result of the Company's continuing losses, the low market
price of its Common Stock, and its recent delisting, the
Company believes that it will be very difficult, if not
impossible, for it to raise additional capital in the future.
As of July 23, 1999, the Company had a total of cash and cash
equivalents and certificates of deposit of approximately
$911,000. Management believes that projected 1999 revenues,
when combined with planned cost savings and existing financial
resources should be sufficient to fund operations through the
end of 1999. If the Company is unable to become profitable in
the near future or raise new funds, it will exhaust its cash
resources and will be unable to continue in business.
7
<PAGE> 8
(c) SUBSEQUENT EVENTS
DISPUTE WITH PREFERRED SHAREHOLDERS
On August 2, 1999, the Company's Preferred Shareholders
commenced an action against the Company and three of its
officers and directors. The action sought a temporary
restraining order and a permanent injunction in order to
prevent the three officers and directors from taking certain
actions that the Preferred Shareholders believed would be
damaging to the Company. On August 4, 1999, the parties
entered into a stipulation and agreement pursuant to which the
Company agreed not to take certain actions without obtaining
either court approval or, in certain cases, giving prior
notice to the Preferred Shareholders. Based on the Preferred
Shareholders' complaint, the Company understands that the
Preferred Shareholders believe that an Event of Default has
occurred under their securities purchase agreement with the
Company and that they intend to convert their outstanding
shares of Preferred Stock and convertible notes into shares of
the Company's Common stock, and following such conversion,
obtain control of the Board of Directors and management of the
Company. The Company does not believe that the Event of
Default is valid and intends to vigorously oppose the
conversion of the Preferred Shareholders' shares into Common
stock. If the Event of Default is valid, it would
significantly affect the conversion price at which the
Preferred Shareholders would be able to convert their stock
into Common stock and could result in the issuance of
approximately 37 million additional Common shares.
LITIGATION AGAINST GREG NORMAN
On August 11, 1999, the Company filed a Complaint and Demand
for a Jury Trial with the United States District Court,
Southern District, West Palm Beach Division, against Greg
Norman, Great White Shark Enterprises Inc., Greg Norman
Interactive LLC, and LibertyOne Limited for breach of
contract, unfair and deceptive trade practices, unjust
enrichment and trademark infringement. The action claims,
amongst other claims, that (a) Norman violated his implied
covenant of good faith and fair dealing by purposefully
attempting to obstruct the Company's business, (b) failed to
use his best efforts to perform the personal services required
by him, (c) failed to actively provide his endorsement of the
Company, and (d) purposely violated the Company's trademarks
by launching a confusingly similar Web site, SHARK.COM. Since
1996, the Company has paid Norman $1.3 million plus an equity
interest of approximately 6% of the Company's outstanding
Common stock. The Company's management believes that the
Company has suffered damages in excess of $10 million as a
result of the multiple breaches by Norman. As a result of the
breaches, the Company has not recently paid any new royalties
to Norman and as such has received a Notice of Default from
Great White Shark Enterprises Inc., which could result in
termination of the licensing agreement, if not cured within
the delays specified in the agreement with Greg Norman. The
Company is also seeking a temporary restraining order and
injunction preventing Norman from using the SHARK.COM Web site
domain name.
8
<PAGE> 9
VISUAL EDGE SYSTEMS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
"forward-looking statements" with respect to Visual Edge Systems Inc. (the
"Company") which represents the Company's expectations or beliefs, including,
but not limited to, statements concerning industry performance, the Company's
operations, performance, financial condition, growth strategies, margins, and
growth in sales of the Company's products. For this purpose, any statements
contained in this report that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors. Such
factors include, but are not limited to, the Company's limited availability of
cash and working capital; operating losses and accumulated deficit; limited
operating history; risks related to operations; competition; risk related to
trademarks and proprietary rights; dependence on management; and other factors
discussed in the Company's filings with the Securities and Exchange Commission.
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's marketing strategy is to sell ONE-ON-ONE
videotapes 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 built 17 mobile ONE-ON-ONE production facilities ("vans")
equipped with video and personal computer equipment to market,
promote and produce the Company's products. The Company
locates its ONE-ON-ONE vans in selected geographic areas that
service golf courses and driving ranges throughout the United
States. The vans travel to golf courses and corporate events
to film participants and produce the ONE-ON-ONE lessons
on-site. Additionally, in the first quarter of 1999, the
Company signed an agreement and launched the ONE-ON-ONE
concept in the United Kingdom,
9
<PAGE> 10
which guarantees the Company royalty income over the next
three years. In the first six months of 1999, approximately
89% of the Company's revenue was derived from van service, 10%
was related to the United Kingdom and Canadian royalties, and
1% was related to the videotaping centers. An infomercial was
completed and tested in several markets where it was
unsuccessful.
OPERATING MARGINS AND OVERHEAD STRUCTURE
Approximately 25% of the cost of sales are variable costs
related to making the sale. These costs include the cost of
the videotapes, royalties to Greg Norman and salesmen's
commissions. The remaining 75% of each sales dollar is
contributed to the Company's fixed operating costs which
includes operator salaries, vehicle storage and van
depreciation and the Company's fixed overhead expenses. As
soon as the Company achieves sales levels sufficient to offset
its fixed operating costs, the Company believes that 75% of
each sales dollar will result in income before taxes. The
Company believes that sales of $6,500,000 to $7,000,000 are
needed before it may be able to generate profits. Management
believes that the Company will not achieve these sales levels
in 1999 and no assurance can be given that the Company will
ever achieve such sales levels or that the variable costs will
remain constant as a percent of sales or that the Company will
not incur additional fixed costs.
RESULTS OF OPERATIONS
For the three months ended June 30, 1999 ("Q2-99") as compared to the
three months ended June 30, 1998 ("Q2-98") and for the six months ended
June 30, 1999 ("Y2-99") as compared to the six months ended June 30,
1998 ("Y2-98").
Sales for Q2-99 decreased 12% to $916,904, as compared to
$1,047,145 for Q2-98 and sales for Y2-99 decreased 3% to
$1,237,301, as compared to $1,281,150 for Y2-98. The decrease
in sales in 1999, as compared to 1998 is primarily due to a
shift in the seasonality of the Company's sales, in the past,
the second quarter sales were the highest of all quarters but
in 1999, the Company's bookings for sales appear to be higher
for the third quarter. The cost of sales for Q2-99 as compared
to Q2-98 was unchanged and the cost of sales for Y2-99 as
compared to Y2-98 increased 6%. The increase in the cost of
sales is primarily attributable to the increase in
commissions. In accordance with the Company's cost reduction
strategy, the Company's sales force in Q2-99 was paid a higher
commission in lieu of salary, while in Q2-98 the commission
rates were lower but accompanied by a salary. In addition,
there was an increase in the royalties to Greg Norman as a
result of the new agreement. The increases in the expenses are
all directly related to sales. These increases were partially
offset by a reduction in operator salaries related to
videotape production.
The Company's gross profit decreased 29% to $304,484 for
Q2-99, as compared to $431,710 for Q2-98 and decreased 42% to
$145,504 for Y2-99, as compared to $249,141 for Y2-99. The
decrease in gross profit in 1999 as compared to 1998 is due to
the decrease in sales and the increase in cost of sales.
Operating expenses for Q2-99 decreased 28% to $732,829, as
compared to $1,016,939 for Q2-98 and operating expenses for
Y2-99 decreased 28% to $1,524,755, as compared to $2,107,562
for Y2-98. The decrease in operating expenses reflects
reductions in corporate overhead that were initiated in the
last quarter of 1998. The decrease in operating expenses is
attributable to a
10
<PAGE> 11
decrease in General & Administrative salaries, Sales &
Marketing salaries, training and recruitment, advertising and
financing fees.
Operating loss for Q2-99 decreased 27% to $428,345, as
compared to $585,229 for Q2-98 and operating loss for Y2-99
decreased 26% to $1,379,251, as compared to $1,858,421 for
Y2-98.
The Company earned $6,945 in interest income for Q2-99, as
compared to $11,561 for Q2-98 and earned $42,394 in interest
income for Y2-99, as compared to $57,946 for Y2-98. Interest
expense for Q2-99 was $48,585, as compared to $71,275 for
Q2-98 and interest expense for Y2-99 was $101,224, as compared
to $135,588 for Y2-98. The decrease in interest expense is
primarily due to the conversion of financing notes to
Preferred Stock.
Net loss for Q2-99 decreased 22% to $523,615, as compared to
$670,581 for Q2-98 and net loss for Y2-99 decreased 22% to
$1,543,950, as compared to $1,985,789 for Y2-98. Net loss per
share for Q2-99 decreased 69% to $.05, as compared to $.16 for
Q2-98 and net loss per share for Y2-99 decreased 65% to $.15,
as compared to $.43 for Y2-98. The decreases in operating and
net loss in Q2-99 as compared to Q2-98 and in Y2-99 as
compared to Y2-98 resulted from decreased operating expenses
in Q2-99 and Y2-99 resulting from the cost reduction strategy
implemented in the fourth quarter of 1998. The decrease in net
loss per share in Q2-99 as compared to Q2-98 and in Y2-99 as
compared to Y2-98 are attributable to both a decrease in net
loss and an increase in the number of shares outstanding which
is partially offset by Preferred Stock dividends recorded in
Q2-98 and Y2-98.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1999, the Company had cash and cash equivalents of
$20,890, unrestricted short-term investments (certificates of
deposit) of $825,000 and working capital of $751,446, as
compared to cash and cash equivalents of $244,346,
unrestricted short-term investments (certificates of deposit)
of $1,750,000 and working capital of $1,269,548 at December
31, 1998. Net cash used in operating activities for Y2-99 was
$889,992, which was used to fund the Company's losses. Net
cash provided by investing activities was $955,740 and
$289,204 was used in financing activities for a total decrease
in cash and cash equivalents of $223,456. Net cash used in
operating activities for Y2-98 was $1,660,161. Net cash used
in investing activities in Y2-98 was $913,942 and $4,464,634
was provided by financing activities, for a total increase in
cash and cash equivalents in Y2-98 of $1,890,531.
On June 30, 1999, the Company had stockholders' equity of
$2,023,430, as compared to stockholders' equity of $3,549,880
at December 31, 1998.
The Company anticipates that its current capital resources,
when combined with anticipated cash flows from operations
should be sufficient to satisfy the Company's contemplated
working capital requirements for the year ending December 31,
1999. However, there can be no guarantee that the Company's
anticipated cash flow from operations and sales will be
realized. If the Company is unable to realize the anticipated
cash flows, or raise additional equity, it may exhaust its
cash resources by the year-end and may be forced to curtail or
cease its operations.
11
<PAGE> 12
SEASONALITY
The Company's business is seasonal with higher sales 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.
The Company periodically issues press releases to update
shareholders on new developments. These releases may contain
certain statements of a forward-looking nature relating to
future events or the future financial performance of the
Company within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and which are intended to be
covered by the safe harbors created thereby. Readers are
cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating
such statements, readers should specifically consider the
various risk factors identified which could cause actual
results to differ materially from those indicated by such
forward-looking statements.
YEAR 2000 COMPUTER ISSUE
The Company has completed its assessment of the impact of Year
2000 on its business including its readiness of internal
accounting and operating systems and communicated with key
suppliers regarding their exposure to Year 2000 issues. The
Company anticipates that its business operations will
electronically interact with third parties very minimally, if
at all. The Company's Year 2000 risks from third parties are
insignificant. Management believes that the Company's worst
case scenario would involve delays in receiving videotapes
from its supplier. The Company will stockpile videotapes used
in production before the 1999 year-end, so as not to run short
if its vendor cannot supply the Company. The majority of the
Company's systems consist of packaged software purchased from
vendors which are already Year 2000 compliant, based on
representations from the vendors. The Company has addressed
both Information Technology and Non-Information Technology
concerns; for instance, the network file servers have been
designed to handle Year 2000 issues, and the recently
installed telephone system is designed to handle Year 2000
issues. The Company is not presently aware of any significant
expenditures which will be necessitated in order to be ready
for the Year 2000, although there can be no assurances that
significant expenditures may not be required in the future.
The Company presently believes that the Year 2000 issue will
not have a material impact on the Company's business or
operations; however, there can be no guarantee that the
Company will be unaffected or in the level of timely
compliance by key suppliers or vendors which could impact the
Company's operations including, but not limited to,
disruptions to the Company's business.
12
<PAGE> 13
SUBSEQUENT EVENTS
CHANGE IN BOARD OF DIRECTORS
In July 1999, two members of the Company's Board of Directors
resigned. The Company filled one of the vacated seats with
Thomas Peters, an officer of the Company and the developer of
the patented software used in the Company's products.
DISPUTE WITH PREFERRED SHAREHOLDERS
On August 2, 1999, the Company's Preferred Shareholders
commenced an action against the Company and three of its
officers and directors. The action sought a temporary
restraining order and a permanent injunction in order to
prevent the three officers and directors from taking certain
actions that the Preferred Shareholders believed would be
damaging to the Company. On August 4, 1999, the parties
entered into a stipulation and agreement pursuant to which the
Company agreed not to take certain actions without obtaining
either court approval or, in certain cases, giving prior
notice to the Preferred Shareholders. Based on the Preferred
Shareholders' complaint, the Company understands that the
Preferred Shareholders believe that an Event of Default has
occurred under their securities purchase agreement with the
Company and that they intend to convert their outstanding
shares of Preferred Stock and convertible notes into shares of
the Company's Common stock, and following such conversion,
obtain control of the Board of Directors and management of the
Company. The Company does not believe that the Event of
Default is valid and intends to vigorously oppose the
conversion of the Preferred Shareholders' shares into Common
stock. If the Event of Default is valid, it would
significantly affect the conversion price at which the
Preferred Shareholders would be able to convert their stock
into Common stock and could result in the issuance of
approximately 37 million additional Common shares.
LITIGATION AGAINST GREG NORMAN
On August 11, 1999, the Company filed a Complaint and Demand
for a Jury Trial with the United States District Court,
Southern District, West Palm Beach Division, against Greg
Norman, Great White Shark Enterprises Inc., Greg Norman
Interactive LLC, and LibertyOne Limited for breach of
contract, unfair and deceptive trade practices, unjust
enrichment and trademark infringement. The action claims,
amongst other claims, that (a) Norman violated his implied
covenant of good faith and fair dealing by purposefully
attempting to obstruct the Company's business, (b) failed to
use his best efforts to perform the personal services required
by him, (c) failed to actively provide his endorsement of the
Company, and (d) purposely violated the Company's trademarks
by launching a confusingly similar Web site, SHARK.COM. Since
1996, the Company has paid Norman $1.3 million plus an equity
interest of approximately 6% of the Company's outstanding
Common stock. The Company's management believes that the
Company has suffered damages in excess of $10 million as a
result of the multiple breaches by Norman. As a result of the
breaches, the Company has not recently paid any new royalties
to Norman and as such has received a Notice of Default from
Great White Shark Enterprises Inc., which could result in
termination of the licensing agreement, if not cured within
the delays specified in the agreement with Greg Norman. The
Company is also seeking a temporary restraining order and
injunction preventing Norman from using the SHARK.COM Web site
domain name.
13
<PAGE> 14
VISUAL EDGE SYSTEMS INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference to the information contained under the
subheadings "Subsequent Events; Dispute with Preferred Shareholders"
and "Subsequent Events; Litigation Against Greg Norman" in Part I,
Item 2 hereof.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Incorporated by reference to the information contained under the
subheadings "Subsequent Events; Dispute with Preferred Shareholders"
in Part I, Item 2 hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
14
<PAGE> 15
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 the Registrant's
Registration Statement on Form SB-2 (Registration No. 333-24675) filed
April 7, 1997)
4.6 Form of Common Stock Purchase Warrant issued to investors in the
Infinity Bridge Financing (Incorporated by reference to Exhibit 99.4 to
the Registrant's Current Report on Form 8-K filed June 23, 1997)
4.7 Form of Convertible Note issued to investors in the Infinity Bridge
Financing (Incorporated by reference to Exhibit 99.5 to the
Registrant's Current Report on Form 8-K filed June 23, 1997)
4.8 Form of Common Stock Purchase Warrant issued to Vision Financial Group,
Inc. (Incorporated by reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB filed November 14, 1997)
4.9 Form of Common Stock Purchase Warrant issued to investors in the
Infinity Bridge Financing in connection with the amendment to such
financing (Incorporated by reference to Exhibit 99.3 to the
Registrant's Current Report on Form 8-K filed February 9, 1998)
10.1 License Agreement, dated March 1, 1995, between Great White Shark
Enterprises, Inc. and 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)
15
<PAGE> 16
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, as amended (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 May 1, 1996, between Thomas S. Peters
and the Company, as amended (Incorporated by reference to Exhibit 10.5
to the Registrant's Registration Statement on Form SB-2 (Registration
No. 333-5193) effective July 24, 1996)
10.5 Amended and Restated 1996 Stock Option Plan (Incorporated by reference
to the Company's 1996 definitive Proxy Statement)
10.6 Employment Agreement, dated as of June 1, 1996, between Richard Parker
and the Company, as amended (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)
10.7 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)
10.8 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)
10.9 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 with their transferees, the "Funds")
(Incorporated by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K filed June 23, 1997)
10.10 Registration Rights Agreement, dated as of June 13, 1997, among the
Company and the Funds (Incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K filed June 23, 1997)
10.11 Transfer Agent Agreement, dated as of June 13, 1997, among 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).
10.12 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).
10.13 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).
16
<PAGE> 17
10.14 First Amendment to Bridge Securities Purchase Agreement and Related
Documents, dated as of December 31, 1997, among the Company and the
Funds (Incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed February 9, 1998)
10.15 Second Amendment to Bridge Securities Purchase Agreement and Related
Documents, dated as of March 27, 1998, among 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).
10.16 Third Amendment to Bridge Securities Purchase Agreement and Related
Documents, dated as of December 29, 1998, among the Company, Infinity
Investors Limited, IEO Holdings Limited (as the transferee from
Infinity Emerging Opportunities Limited), Summit Capital Limited (as
the transferee of Sandera Partners, L.P.) and Glacier Capital Limited
(as the transferee of Lion Capital Partners, L.P.) (Incorporated by
reference to Exhibit 99.1 to the Registrant's Current Report on Form
8-K filed January 8, 1999).
10.17 Security Agreement, dated February 6, 1998, between the Company and HW
Partners, L.P., as agent for and representative of the Funds.
(Incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K filed February 6, 1998).
10.18 Form of Warrant Certificate. (Incorporated by reference to Exhibit 99.3
to the Registrant's Current Report on Form 8-K filed February 6, 1998).
10.19 Amendment, dated as of December 31, 1998, to License Agreement dated as
of March 1, 1995, by and between Greg Norman and Great White Shark
Enterprises, Inc. and the Company, as amended on April 19, 1996,
October 18, 1996 and June 3, 1997 (Incorporated by reference to Exhibit
10.19 to the Registrant's Annual Report on Form 10-KSB filed March 31,
1999).
16 Letter, dated November 14, 1997, from KPMG Peat Marwick LLP to the
Securities and Exchange (Incorporated by reference to Exhibit 1 to the
Registrant's Current Report on Form 8-K/A filed November 19, 1997)
27* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VISUAL EDGE SYSTEMS INC.
/s/ Earl T. Takefman
--------------------------
Earl T. Takefman
August 11, 1999 Chief Executive Officer
/s/ Melissa Forzly Adler
--------------------------
Melissa Forzly Adler
August 11, 1999 Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,890
<SECURITIES> 825,000
<RECEIVABLES> 66,381
<ALLOWANCES> 0
<INVENTORY> 108,433
<CURRENT-ASSETS> 1,767,253
<PP&E> 3,845,860
<DEPRECIATION> 1,828,508
<TOTAL-ASSETS> 4,368,559
<CURRENT-LIABILITIES> 1,015,807
<BONDS> 0
0
6,000,000
<COMMON> 103,984
<OTHER-SE> (4,080,554)
<TOTAL-LIABILITY-AND-EQUITY> 4,368,559
<SALES> 1,237,301
<TOTAL-REVENUES> 1,237,301
<CGS> 1,091,797
<TOTAL-COSTS> 1,524,755
<OTHER-EXPENSES> 105,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,224
<INCOME-PRETAX> 1,543,950
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,543,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,543,950
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
