-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UgyqO/dzT5baGmiuWL7C0h5aPnOgFgCb812WaYB8BvQJ8UlQzW2lO7Fskus1cLZ6 H/514NRie2q9ebdYv4nvbQ== 0001047469-97-004817.txt : 19971117 0001047469-97-004817.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004817 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISUAL EDGE SYSTEMS INC CENTRAL INDEX KEY: 0001015172 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 133778895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-20995 FILM NUMBER: 97719649 BUSINESS ADDRESS: STREET 1: 2424 NORTH FEDERAL HIGHWAY STREET 2: SUITE 100 CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 5617507559 MAIL ADDRESS: STREET 1: 2424 NORTH FEDERAL HIGHWAY STREET 2: SUITE 100 CITY: BOCA RATON STATE: FL ZIP: 33431 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 UNITED STATES Form 10-QSB /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-20995 For the transition period from _________________ to ______________________ VISUAL EDGE SYSTEMS INC. Delaware 13-3778895 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2424 North Federal Highway, Suite 100, Boca Raton, Florida 33431 (Address of principal executive offices) (561) 750-7559 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 12, 1997, the registrant had 4,853,190 shares of common stock and 2,037,026 redeemable warrants outstanding. VISUAL EDGE SYSTEMS INC. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets September 30, 1997 and December 31, 1996................... 3 Statements of Operations Three Months Ended September 30, 1997 and 1996 and Nine Months Ended September 30, 1997 and 1996................... 4 Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996.............. 5 Notes to Financial Statements.............................. 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.................................. 11-15 PART II OTHER INFORMATION Item 1. Legal Proceedings.......................................... 16 Item 2. Changes in Securities...................................... 16-17 Item 3. Defaults Upon Senior Securities............................ 17 Item 4. Submission to Matters to a Vote of Security Holders........ 17 Item 5. Other Information.......................................... 17 Item 6. Exhibits and Reports on Form 8-K........................... 18-20 Signatures................................................. 21 2 VISUAL EDGE SYSTEMS INC. BALANCE SHEETS (Unaudited)
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------- ----------------- Assets Current Assets: Cash..................................... $ 305,555 $ 233,117 Short Term Investments................... 3,739,673 1,869,052 Accounts Receivable...................... 55,083 -- Inventory................................ 79,850 36,747 Prepaid Expense--Royalties............... 350,000 300,000 Other Current Assets..................... 191,882 80,756 ----------------- ----------------- Total Current Assets................. 4,722,043 2,519,672 ----------------- ----------------- Property, Plant & Equipment: Mobile Production Units.................. 2,318,925 951,653 Training and Processing.................. 112,882 112,301 Product Development Equipment............ 487,676 407,184 Office Furniture & Equipment............. 382,399 144,808 Show and Exhibit......................... 146,657 144,787 Accumulated Depreciation................. (766,125) (135,908) ----------------- ----------------- Total Fixed Assets, Net.............. 2,682,414 1,624,826 ----------------- ----------------- Deferred Assets: Video Production......................... 447,406 447,406 Organizational........................... 29,428 29,428 Marketing Development.................... 226,962 226,962 Deferred Financing Fees.................. 490,000 -- Accumulated Amortization................. (433,947) (87,324) ----------------- ----------------- Total Deferred Assets, Net........... 759,849 616,470 ----------------- ----------------- Other Assets............................. 23,331 23,202 ----------------- ----------------- Total Assets............................. $8,187,636 $ 4,784,170 ================= ================= Liabilities & Stockholders' Equity (Deficit) Current Liabilities Bank Advances............................ $ -- $ 500,000 Accounts Payable......................... 499,249 333,114 Accrued Expenses......................... 267,471 284,900 Other Current Liabilities................ 33,508 1,500 Current Installments of Equipment Loans.................................... 305,279 -- ----------------- ----------------- Total Current Liabilities............ 1,105,508 1,119,514 ----------------- ----------------- Long-Term Liabilities Equipment Loans, less current installments........................... 1,006,998 -- Convertible Debt (see Notes 2b & 6)...... 6,772,565 -- ----------------- ----------------- Total Long-Term Liabilities.............. 7,779,563 -- ----------------- ----------------- Total Liabilites.................... 8,885,070 1,119,514 ================= ================= Stockholders' Equity (Deficit) Preferred Stock.......................... -- -- Common Stock............................. 48,532 46,150 Additional Paid In Capital............... 9,438,140 6,481,159 Accumulated Deficit...................... (10,184,106) (2,862,653) ----------------- ----------------- Total Stockholders' Equity (Deficit) (see Note 6)........................ (697,434) 3,664,656 ----------------- ----------------- Total Liabilities & Stockholders' Equity (Deficit).................... $8,187,636 $ 4,784,170 ================= =================
3 VISUAL EDGE SYSTEMS INC. STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ------------------------------- ---------------------------- 1997 1996 1997 1996 -------------- -------------- -------------- ----------- Revenue............................................... $ 518,365 $ -- $ 1,115,116 $ -- Cost of Sales......................................... 465,456 -- 918,316 -- -------------- -------------- ------------- ------------ Gross Profit.......................................... 52,909 -- 196,800 -- -------------- -------------- ------------- ------------ General and administrative expenses................... 1,685,966 500,113 3,607,014 654,483 Selling and marketing................................. 772,420 -- 1,669,091 -- Non-cash stock compensation expense................... -- 600,000 -- 600,000 Non-cash stock severance expense...................... -- -- 150,125 -- Non-cash marketing expense............................ -- -- 53,132 -- -------------- -------------- ------------ ------------ 2,458,386 1,100,113 5,479,362 1,254,483 -------------- -------------- ------------ ------------ Operating Loss........................................ (2,405,477) (1,100,113) (5,282,562) (1,254,483) -------------- -------------- ------------ ------------ Other (Income)/Expense: Interest income..................................... (11,744) (7,010) (47,378) (25,580) Interest expense.................................... 204,573 12,482 313,838 50,854 Amortization on original issue discount on financing fees.................................... 273,879 -- 1,022,431 -- -------------- -------------- ------------ ------------ 466,708 5,472 1,288,891 25,274 -------------- -------------- ------------ ------------ Loss Before Income Taxes & Extraordinary Item......... (2,872,185) (1,094,641) (6,571,453) (1,279,757) Extraordinary expense -- financing fees............. -- -- 750,000 -- -------------- -------------- ------------ ------------ Net Loss.............................................. $(2,872,185) $(1,094,641) $(7,321,453) $(1,279,757) -------------- -------------- ------------ ------------ -------------- -------------- ------------ ------------ Loss Per Share: Before extraordinary expense........................ $ (0.59) $ (0.24) $ (1.38) $ (0.28) Extraordinary expense............................... -- -- (0.16) -- -------------- -------------- ------------ ------------ Net Loss Per Share.................................... $ (0.59) $ (0.24) $ (1.54) $ (0.28) -------------- -------------- ------------ ------------- -------------- -------------- ------------ ------------- Weighted Average Shares Outstanding................... 4,848,227 4,615,000 4,755,400 4,615,000 -------------- -------------- ------------ ------------- -------------- -------------- ------------ -------------
4 VISUAL EDGE SYSTEMS INC. STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------------ ------------------ Operating Activities: Net Loss............................................................... $ (7,321,453) $ (1,279,757) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash stock compensation expense.................................... -- 600,000 Non-cash marketing expense............................................. 53,132 -- Non-cash severance pay expense......................................... 150,125 -- Loan financing expenses-extraordinary loss............................. 750,000 -- Loan financing expenses-amortization................................... 1,022,431 -- Depreciation and amortization.......................................... 989,521 156,287 Changes in assets and liabilities: Increase in accounts receivable...................................... (55,083) -- Increase in other current assets..................................... (44,407) (26,100) Increase in deferred organizational costs............................ -- (73,999) Increase in prepaid expense--royalties............................... (50,000) (300,000) Increase in other assets............................................. (129) (28,338) Decrease in accounts payable......................................... 166,135 128,888 Increase in accrued expenses......................................... (17,429) -- Increase in other current liabilities................................ 32,008 -- ------------------ ------------------ Net Cash Used in Operating Activities................................ (4,325,149) (823,019) ------------------ ------------------ Investing Activities: Capital expenditures................................................... (1,689,634) (158,668) Increase in intagible assets........................................... -- (527,594) ------------------ ------------------ Net Cash Used in Investing Activities................................ (1,689,634) (686,262) ------------------ ------------------ Financing Activities: Increase in bank advances.............................................. (500,000) -- Proceeds from issuance of common stock................................. 128,000 5,509,974 Procceds from the sale of short term investments....................... 6,154,908 -- Deferred Financing Costs............................................... (490,000) -- Repurchase common stock................................................ (128,945) -- Purchases of short term investments.................................... (3,500,000) -- Repayment of borrowings................................................ (3,131,340) (2,015,000) Proceeds from borrowings............................................... 7,554,598 1,615,000 ------------------ ------------------ Net Cash Provided by Financing Activities............................ 6,087,221 5,109,974 ------------------ ------------------ ------------------ ------------------ Net Increase in Cash................................................. 72,438 3,600,693 Cash at Beginning of Period.......................................... 233,117 558 ------------------ ------------------ Cash at End of Period................................................ $ 305,555 $ 3,601,251 ------------------ ------------------ ------------------ ------------------ Supplemental information: Cash paid for interest................................................. $ 129,932 $ 50,854 ------------------ ------------------ ------------------ ------------------
5 VISUAL EDGE SYSTEMS INC. Notes to Financial Statements Unaudited (1) Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. As such, they should be read in conjunction with the Company's audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for the future interim periods or for the full year ending December 31, 1997. See note 2(a). (2) Financings (a) March Financing In March 1997, the Company consummated a bridge financing (the "Bridge Financing") pursuant to which it issued to 13 investors (including Status-One Investments Inc., a company controlled by Earl T. Takefman, the Chief Executive Officer of the Company), as a financing fee an aggregate of (i) 100,000 shares of common stock and (ii) 100,000 warrants to purchase 100,000 shares of common stock at a price of $10.00 per share, subject to adjustment in certain circumstances. As consideration for such securities, the investors in the Bridge Financing pledged an aggregate of $3,500,000 in cash and other marketable securities as cash collateral (the "Cash Collateral") to Republic Bank of New York (Canada) Ltd. ("Republic"), and Bank Hapoalim (Switzerland) Ltd. ("Bank Hapoalim"), which in turn issued stand-by letters of credit (the "Letters of Credit") to the Company in the aggregate amount of up to $3,500,000. The Company used the Letters of Credit to secure a $3,500,000 line of credit (the "Line of Credit") from Barnett Bank. In June 1997, the Company used a portion of the proceeds from the issuance and sale of certain equity securities, outlined hereafter in note (2b), to repay the remaining outstanding balance due and owing on the Line of Credit and returned the Letters of Credit to Republic and Bank Hapoalim, which in turn returned all of the Cash Collateral to the Bridge Investors. In connection with the Bridge Financing, the Company recorded $1,250,000 in deferred financing fees which were to be amortized over the life of the financing at a rate of $125,000 a month. In October 1997, management determined that $750,000 of unamortized deferred financing costs at June 30, 1997 related to the Bridge Financing should be expensed since amounts borrowed under such financing were repaid. If the Company had expensed the remaining balance at June 30, 1997, deferred financing fees and total Stockholders' Equity would have decreased by $750,000, and both extraordinary expense-financing fees and the net loss would have increased by $750,000 6 (net loss per share of $.79 would have increased to a net loss per share of $.95, with the additional $.16 representing an extraordinary item). (b) June Financing On June 13, 1997, the Company arranged a three-year $7,500,000 debt and convertible equity facility with a group of investment funds advised by an affiliate of Hunt Sports Group, a sports and entertainment management company controlled by the Lamar Hunt family of Dallas, Texas. The Company issued and sold to Infinity Investors Limited, Infinity Emerging Opportunities Limited, Sandera Partners, L.P. and Lion Capital Partners, L. P. (collectively, the "Funds") the following securities pursuant to the Bridge Securities Purchase Agreement, dated as of June 13, 1997 (the "Bridge Agreement"), between the Company and the Funds: (i) 8.25% unsecured convertible bridge notes (the "Bridge Notes") in the aggregate principal amount of $7,500,000 with a maturity date of three years from the date of issuance (subject to the mandatory automatic exchange for the Company's preferred stock, par value $.01 per share (the "Preferred Stock"), as discussed below), which Bridge Notes are convertible into shares of common stock at any time and from time to time commencing January 1, 1998 at the option of the holder thereof subject to certain limitations on conversion set forth in the Bridge Agreement; (ii) 93,677 shares of common stock (the "Grant Shares"); and (iii) five-year warrants (the "Bridge Warrants") to purchase 100,000 shares of common stock at an exercise price equal to $10.675. On June 13, 1997 (the "Closing Date"), 30% of the Bridge Warrants were assigned, with the Company's consent, to Alpine Capital Partners, Inc. The Bridge Warrants are redeemable commencing October 1, 1998 at a redemption price equal to $.10 per share, subject to adjustment based on a 20-day minimum closing bid price of the Company's common stock. The net proceeds to the Company from the sale of the Bridge Notes, Grant Shares and Bridge Warrants was $7,236,938. In addition, the Company issued 14,502 shares of common stock to Whale Securities Co., L.P., the underwriter in the Company's initial public offering (the "IPO"), as a fee for services rendered in connection with the transactions contemplated by the Bridge Agreement. Pursuant to the Bridge Agreement, the Company will issue additional Grant Shares (the "Additional Grant Shares") to the Funds in the event that the closing bid price of the Company's common stock for each trading day during any consecutive 10 trading days from the Closing Date through December 31, 1997 does not equal at least $10.675 per share. In the event that any Additional Grant Shares are issued, the exercise price of the Bridge Warrants will be adjusted so that the value of the Bridge Warrants (using a Black-Scholes or similar model) equals the value of the Bridge Warrants as of the Closing Date. Interest payments on the Bridge Notes will, at the option of the Company, be payable in cash or in shares of common stock. On September 30, 1997, the first interest payment was made in shares of the Company's common stock. The Company issued an aggregate of 22,462 shares for payment of interest due. Effective January 1, 1998, the aggregate outstanding principal amount of Bridge Notes exceeding $2,500,000 will be automatically exchanged for a number of shares of Preferred Stock with an aggregate liquidation preference equal to the principal amount of Bridge Notes so exchanged and with terms substantially identical to the Bridge Notes, which Preferred Stock is convertible into shares of common stock. In addition, if the Company elects to redeem the warrants issued in the Company's IPO (the "Redeemable Warrants"), the Company must 7 redeem at least $5,000,000 principal amount of the Bridge Notes with the net proceeds of such redemption. The Company may redeem the Redeemable Warrants, with the consent of Whale and upon notice to the holders thereof of not less than 30 days, at a price of $.10 per warrant, provided that the closing bid price of the common stock on all 30 of the trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $7.50, subject to adjustment) of the then effective exercise price of the Redeemable Warrants. In connection with the June financing, the value of the Grant Shares and Bridge Warrants credited to equity ($1,249,866) represents additional interest on the note in the form of an original issue discount (OID). The OID will be amortized using a method which approximates the interest method over the term of the Bridge Notes. The other debt issuance costs of $490,000 are recorded as deferred financing fees and are being amortized over the term of the Bridge Notes. (c) Equipment Financing On August 20, 1997, the Company entered into an equipment financing agreement (the "Equipment Financing") with Vision Financial Group of Pittsburgh ("Vision"), whereby Vision has agreed to provide the Company with up to $2.5 million in financing by September 1998. Such arrangement provides the Company with equipment financing of $100,000 for each of its next 25 vans, each of which is anticipated to cost approximately $150,000. The Company has drawn on $800,000 of the facility to finance eight vans purchased in May 1997. The outstanding balance bears interest at the rate of 11.62% and is payable in 36 consecutive monthly payments of $25,328 which commenced in August 1997, followed by one balloon payment of $47,040. Further, the Company has agreed to pledge as collateral a certificate of deposit in the amount of $25,000 per van to Vision. Such collateral is to be returned to the Company within 5 days after the Company notifies Vision that (a) the Company has earned $1,000,000 or more on a pre-tax basis for fiscal 1998 or 1999, or (b) the Company's stock has traded at $20.00 per share for at least 5 consecutive trading days. The Company has pledged to Vision a certificate of deposit in the aggregate amount of $200,000 in connection with the financing of the first eight vans. In connection with the Equipment Financing, the Company issued warrants to Vision (the "Vision Warrants") to purchase 75,000 shares of the Company's common stock at a price per share of $10.00 (subject to adjustment in certain circumstances) at any time prior to August 20, 2000. The Company has the right to redeem the Vision Warrants as follows: in the event that the closing bid price of the common stock equals or exceeds $15.00 for 20 consecutive trading days ended three days prior to the notice of redemption, the Company may, upon 10 days' notice to Vision, redeem up to 50% of the Vision Warrants at a price equal to $.01 per share of common stock issuable upon the exercise of the Vision Warrants; and 100% of the Vision Warrants are redeemable by the Company if the closing bid price of the Company's common stock equals or exceeds $20.00 for the 20 trading days ended three days prior to the notice of redemption. The value of the Vision Warrants ($178,980) is included in additional paid in capital, with the resulting original issue discount (OID) on the loan being amortized using a method which approximates the interest method over the term of the equipment financing. 8 (3) Lease The Company entered into a capitalized master lease and equipment financing agreement with a financial institution which permits the Company to finance its mobile video production units of up to $840,000 through May, 2000 at an interest rate of approximately 10%. At December 31, 1996, no amounts were drawn against this master capital lease. For the nine months ended September 30, 1997, the Company financed seven mobile video production units for $761,905 under this lease. Future payments under this capital lease for each of the following three years is $344,470. (4) Employment Agreements The Company entered into employment agreements with five executive employees expiring through December 1998 which provide for aggregate minimum annual compensation of approximately $555,000 in 1997, and $560,000 in 1998. The agreements are automatically renewed for additional one-year periods unless the Company or the employees provide timely notice of termination. The agreements also provide for bonuses and severance payments ranging from three to twelve months. In addition, two of the employment agreements provide for options for each employee to purchase an aggregate of up to 250,000 shares of common stock, at an exercise price per share equal to the IPO price of $5.00 per share, which was the per share price at the date of grant. Such options had a vesting term of five years, subject to acceleration if the trading price of the common stock reached certain thresholds. Specifically, the vesting of 300,000 of such options would accelerate to the date that the market price of the common stock equaled or exceeded $10.00 per share for at least five consecutive trading days prior to January 24, 1998, if such threshold was reached. This threshold was achieved on February 7, 1997, at which time such 300,000 options became exerciseable. The vesting of the remaining 200,000 options will be accelerated to the date that the trading price of the common stock equals or exceeds $15.00 per share for at least five consecutive trading days on or before January 24, 1999, if such threshold is reached. This threshold has not yet been reached. The original option agreement contained an error in that it did not include a provision for the options to vest in five years. Such error was corrected by revisions to the option agreements dated April 3, 1997. (5) Commitments and Contingencies Effective March 1, 1995 the Company entered into a license agreement (the "Agreement") with Greg Norman ("Norman"), a professional golfer, and Great White Shark Enterprises, Inc. ("Great White Shark"), pursuant to which the Company was granted a worldwide license to use Norman's name, likeness and endorsement in connection with the production and promotion of the Company's products. Norman will receive royalties of 8% of all net revenues, as defined, derived from the sale of One-on-One videotapes. As of June 3, 1997, the Company, Norman and Great White Shark executed an amendment (the "Amendment") to the Agreement. Norman and the Company agreed to restructure the terms of the payments due to Norman under the Agreement by: (i) altering the payments such that 9 Norman will receive $1,020,000 of his royalties in shares of the Company's common stock, at $10 per share, rather than cash as was originally contemplated by the Agreement; (ii) changing the schedule of the payments such that they will be paid to Norman over a period of time from January 1998 through April 2000; and (iii) granting to Norman 25,000 options to purchase shares of the Company's common stock. Such options are exercisable at a price of $10.00 per share, vest immediately and are exercisable at Norman's discretion at any time prior to their expiration on June 30, 2000. The Company recorded a non-cash marketing expense of $53,132 related to the options. The Amendment restructures the payments to Norman as follows: 1997 - as of June 30, 1997 $300,000 was paid with no further payments due for the remainder of the year; 1998 - $700,000 to be paid in addition to 30,000 shares of common stock to be issued during the year; 1999 - $1,200,000 to be paid in addition to 48,000 shares of common stock to be issued during the year; and 2000 - $480,000 to be paid in addition to 24,000 shares of common stock to be issued during the first three months of the year. Including the $300,000 cash payment made in 1996, it is a total commitment of $4 million. For the purpose of calculating the royalties payable to Norman, the amendment stipulates that the common stock issued to Norman will be valued at $10.00 per share regardless of the actual market price of the common stock at the time of payment. Any royalties earned by Norman pursuant to the Amendment that are in excess of the $1,020,000 paid in shares of common stock are to be paid in cash. After the initial term, which ends on June 30, 2000, the Company has the option to renew the Agreement for two additional five-year periods (each five-year period, a "Renewal Term"). The guaranteed fee to Norman in the first year of the first Renewal Term will be $1,300,000, increasing by $100,000 each successive year thereafter; all such fees will be payable in cash in equal quarterly installments. (6) Stockholders' Equity (Deficit) At September 30, 1997, the Company had a deficit of $697,434 in Stockholders' Equity. However, on January 1, 1998, when the convertible debt is converted to equity there will no longer be a deficit in Stockholders' Equity (see Note 2b). If the convertible debt had been converted at September 30, 1997, the Stockholders' Equity would have been approximately $4,300,000. 10 VISUAL EDGE SYSTEMS INC. Item 2. Management's Discussion and Analysis or Plan of Operations General Visual Edge Systems Inc. (the "Company") was organized to develop and market personalized videotape golf lessons featuring One-on-One instruction by leading professional golfer Greg Norman. Through December 31,1996, the Company focused its efforts on developing video production technology which digitally combines actual video footage of a golfer's swing with a synchronized "split-screen" comparison to Greg Norman's golf swing to produce a 45-minute One-on-One videotape golf lesson. The Company's One-on-One personalized videotape golf lesson analyzes a golfer's swing by comparing it to Greg Norman's swing at several different club positions from two camera angles using Greg Norman's pre-recorded instructional commentary and analysis and computer graphics to highlight important golf fundamentals intended to improve a golfer's performance. The Company sells its products under the name "One-on-One with Greg Norman". The Company was incorporated in July 1994 and commenced developmental operations in January 1995. From the Company's inception through the end of its last fiscal year, it was primarily engaged in product development, market development, testing technology, recruitment of key personnel, raising capital and preparing the software, hardware and videotape coaching instructions used in the production of its products. As a consequence, the Company did not generate any significant revenue and operated as a development stage company through December 31, 1996. The Company commenced generating revenue from its primary business activities during the first quarter of this year. The Company's primary marketing strategy is to sell "One-on-One with Greg Norman" videotapes on a prearranged basis to various organizers of amateur corporate, charity and member golf tournaments (who typically offer gifts to tournament participants), golf professionals at private and daily fee golf courses and driving ranges and indoor event planners who organize trade shows, conventions, sales meetings, retail store openings and promotions and automobile dealer showroom promotions. To implement its marketing and business strategy, the Company has developed 15 mobile One-on-One vans equipped with video and personal computer equipment to market, promote and produce the Company's products. The Company intends to position its One-on-One vans in selected geographic areas that will service golf courses and driving ranges throughout the United States, and has initially placed its first 15 vans in Arizona, California, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York and Texas. The Company anticipates that additional vans will be developed and situated based on the demand for the Company's products. The Company entered into an agreement with Cadillac Motor Car Division of General Motors ("Cadillac") on August 5, 1997. The agreement grants Cadillac the exclusive U.S. dealer showroom rights to the Company's One-on-One with Greg Norman concept, allowing Cadillac 11 to exclusively offer its customers a free video golf lesson personally analyzed by Greg Norman if they test drive a Cadillac. The Company is to provide each participating Cadillac dealership with all the marketing materials related to this promotion, including creative print and radio advertisements, banners, posters, and direct mail invitations. The contract includes a test phase that runs through December 31, 1997 with a test phase termination clause ending January 31, 1998, at Cadillac's sole option, and then guarantees the Company a total of $7,500,000 in revenue for 1998 if the agreement is not terminated. The contract runs until December 31, 2000 and provides the Company with up to approximately $34,750,000 in revenue over the term of the agreement if the Company has an adequate number of available vans to serve all participating Cadillac dealers. Cadillac may terminate the agreement as of December 31, 1998, as long as notice is given to the Company on or before June 30, 1998 and will be responsible for the guaranteed payment for the year 1998. Results of Operations The Company was a development stage company in 1996 and had no significant revenue for the fiscal year ended December 31, 1996. The Company commenced its introduction and marketing of personalized videotape golf lessons, featuring One-on-One instruction by leading professional golfer Greg Norman, during the fourth quarter of 1996. The Company completed and launched its first seven mobile production units ("vans") during the first three months of 1997 and an additional eight vans were launched by the end of May 1997. As of September 30, 1997, the Company had 15 vans in operation. During the first quarter of 1997 the Company began to generate revenue from the sales of its videotape golf lessons. For the three months ending September 30, 1997, the Company had sales of $518,365 and a gross profit of $52,909, or a gross profit margin of approximately 10%. For the nine months ending September 30, 1997, the Company generated revenue of $1,115,116 and a gross profit of $196,800, or a gross profit margin of approximately 18%. The Company anticipates that its gross margins will be higher in the future; its gross margins were significantly lower during the three and nine months ending September 30, 1997 due to significant training costs of van operators and low initial sales during its start-up phase. Operating expenses for the three month and nine month periods ending September 30, 1997 were $2,458,386 and $5,479,362, respectively, as compared to $1,100,113 and $1,254,483 for the three month and nine month periods ending September 30, 1996. The increase in operating expenses for the three month and nine month periods ending September 30, 1997, as compared to the three month and nine month periods ending September 30, 1996, is attributable to start-up expenses related to the launching of the Company's 15 vans and consisted of payroll, marketing, training, travel and other administrative expenses. These expenses also include non-cash depreciation expense, which totaled $455,557 and $646,498 for the three and nine months ending September 30, 1997, as compared to $57,238 for the nine months ending September 30, 1996, and amortization expense, which totaled $207,124 and $343,023 for the three and nine months ending September 30, 1997, as compared to $5,288 for the nine months ending September 30, 1996. Additionally, in the second quarter of 1997, in compliance with FASB #123, the Company recorded a non-cash marketing expense of $53,132 related to the 25,000 options granted to Greg Norman, and during the first quarter of 1997, the Company incurred a non-cash stock severance expense of $150,125. 12 The Company earned $47,378 in interest income for the nine month period ending September 30, 1997. Further, in connection with its bridge financings, the Company incurred financing fees of $1,250,000 in connection with the March financing and $1,739,866 in connection with the June financing, or a total of $2,989,866, of which $1,000,000 and $1,399,866, respectively, were non-cash expenses. In connection with the Equipment Financing, the Company incurred a non-cash expense of $178,980. The March financing fees have been fully expensed via amortization of $500,000 and the balance of $750,000 as an extraordinary item (see Note 2a). The June financing fees of $1,249,866 and the Equipment Financing costs of $178,980 are recorded as an original issue discount (OID) on the Bridge Notes and are being amortized using a method which approximates the interest method over the term of the note and equipment financing. The other debt issuance costs of $490,000 incurred with the June financing are recorded as deferred financing fees and are being amortized over the life of the Bridge Notes. Liquidity and Capital Resources At September 30, 1997 the Company had cash of $305,555 and cash equivalents (consisting of short- term investments) of $3,739,673 and working capital of $3,616,535. Net cash used in operating activities for the nine months ending September 30, 1997 was $4,325,149, primarily representing cash used for start-up expenses related to the launching of the Company's 15 vans. Net cash provided by financing was $6,087,221 and $1,689,634 was used in investing activities for a total increase in cash of $72,438 and cash equivalents of $1,870,621. A significant portion of the Company's disbursements during the nine months ending September 30, 1997 represented investment in fixed assets of $1,689,634. At September 30, 1997, the Company's cumulative investment in fixed assets was $3,448,539. At September 30, 1997 the Company had Stockholders' deficit of $697,434. On January 1, 1998 when the convertible debt is converted to equity pursuant to the terms of the Bridge Agreement there will no longer be a deficit in Stockholders' Equity. If the convertible debt had been converted at September 30, 1997 the Stockholders' Equity would have been approximately, $4,300,000. In March 1997, the Company completed a $3,500,000 bridge financing facility pursuant to which it issued to 13 investors, as a financing fee, an aggregate of 100,000 shares of common stock and 100,000 warrants (exercisable through March 26, 2002) to purchase 100,000 shares of common stock at a price of $10.00 per share. The investors pledged an aggregate of $3,500,000 in collateral, which resulted in the issuance of two letters of credit in the aggregate amount of $3,500,000. Such letters of credit were used by the Company to secure a line of credit of $3,500,000. In June 1997, the Company used a portion of the proceeds from the issuance and sale of certain equity securities, as described below, to repay the remaining outstanding balance due and owing on the line of credit. As a result, the letters of credit were returned to the issuing banks and the cash collateral was returned to the investors in the bridge financing. On June 13, 1997, the Company arranged a three-year $7,500,000 debt and convertible equity facility with a group of investment funds advised by an affiliate of Hunt Sports Group, a sports and entertainment management company controlled by the Lamar Hunt family of Dallas, Texas. The Company issued and sold to Infinity Investors Limited, Infinity Emerging 13 Opportunities Limited, Sandera Partners, L.P. and Lion Capital Partners, L. P. (collectively, the "Funds") the following securities pursuant to the Bridge Securities Purchase Agreement, dated as of June 13, 1997 (the "Bridge Agreement"), between the Company and the Funds: (i) 8.25% unsecured convertible bridge notes (the "Bridge Notes") in the aggregate principal amount of $7,500,000 with a maturity date of three years from the date of issuance (subject to the mandatory automatic exchange for the Company's preferred stock, par value $.01 per share (the "Preferred Stock"), as discussed below), which Bridge Notes are convertible into shares of common stock at any time and from time to time commencing January 1, 1998 at the option of the holder thereof, subject to certain limitations on conversion set forth in the Bridge Agreement; (ii) 93,677 shares of common stock (the "Grant Shares"); and (iii) five-year warrants (the "Bridge Warrants") to purchase 100,000 shares of common stock at an exercise price equal to $10.675. On June 13, 1997 (the "Closing Date"), 30% of the Bridge Warrants were assigned, with the Company's consent, to Alpine Capital Partners, Inc. The Bridge Warrants are redeemable commencing October 1, 1998 at a redemption price equal to $.10 per share, subject to adjustment based on a 20-day minimum closing bid price of the Company's common stock. The net proceeds to the Company from the sale of the Bridge Notes, Grant Shares and Bridge Warrants was $7,236,938. In addition, the Company issued 14,502 shares of common stock to Whale Securities Co., L.P. ("Whale"), the underwriter in the Company's initial public offering (the "IPO"), as a fee for services rendered in connection with the transactions contemplated by the Bridge Agreement. (see Note 2b). Pursuant to the Bridge Agreement, the Company will issue additional Grant Shares (the "Additional Grant Shares") to the Funds in the event that the closing bid price of the Company's common stock for each trading day during any consecutive 10 trading days from the Closing Date through December 31, 1997 does not equal at least $10.675 per share. In the event that any Additional Grant Shares are issued, the exercise price of the Bridge Warrants will be adjusted so that the value of the Bridge Warrants (using a Black-Scholes or similar model) equals the value of the Bridge Warrants as of the Closing Date. On August 20, 1997, the Company entered into an equipment financing agreement (the "Equipment Financing") with Vision Financial Group of Pittsburgh ("Vision"), whereby Vision has agreed to provide the Company with up to $2.5 million in financing by September 1998. Such arrangement provides the Company with equipment financing of $100,000 for each of its next 25 vans, each of which is anticipated to cost approximately $150,000. The Company has drawn on $800,000 of the facility to finance eight vans purchased in May 1997. The outstanding balance bears interest at the rate of 11.62% and is payable in 36 consecutive monthly payments of $25,328 which commenced in August 1997, followed by one balloon payment of $47,040. Further, the Company has agreed to pledge as collateral a certificate of deposit in the amount of $25,000 per van to Vision. Such collateral is returned to the Company within 5 days after the Company notifies Vision that (a) the Company has earned $1,000,000 or more on a pre-tax basis for fiscal 1998 or 1999, or (b) the Company's stock has traded at $20.00 per share for at least 5 consecutive trading days. The Company has pledged to Vision a certificate of deposit in the aggregate amount of $200,000 in connection with the financing of the first eight vans. The Company anticipates that its available cash will be sufficient to fund its operations through the end of this year. 14 Subsequent Events On November 7, 1997, the Company's former accountants, KPMG Peat Marwick LLP, were dismissed and Arthur Andersen LLP were engaged to audit the Company's financial statements. Such actions were approved by the Company's Board of Directors on November 12, 1997. Third Party Reports The Company does not make financial forecasts or projections nor endorse the financial forecasts or projections of third parties nor does it comment on the accuracy of third party reports. The Company does not participate in the preparation of the reports or the estimates given by the analysts. Analysts who issue financial reports are not privy to non-public financial information. Any purchase of the Company's securities based on financial estimates provided by analysts or third parties is done entirely at the risk of the purchaser. 15 VISUAL EDGE SYSTEMS INC. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not presently a party to any litigation. Item 2. Changes in Securities The following is a description of all sales of unregistered securities by the Company during the quarterly period ended September 30, 1997. All of such sales were private placements made in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, and no underwriters were involved in such placements. On August 20, 1997, the Company entered into an equipment financing agreement (the "Equipment Financing") with Vision Financial Group of Pittsburgh ("Vision"), whereby Vision has agreed to provide the Company with up to $2.5 million in financing by September 1998. Such arrangement provides the Company with equipment financing of $100,000 for each of its next 25 vans, each of which is anticipated to cost approximately $150,000. The Company has drawn on $800,000 of the facility to finance eight vans purchased in May 1997. The outstanding balance bears interest at the rate of 11.62% and is payable in 36 consecutive monthly payments of $25,328 which commenced in August 1997, followed by one balloon payment of $47,040. Further, the Company has agreed to pledge as collateral a certificate of deposit in the amount of $25,000 per van to Vision. Such collateral is to be returned to the Company within 5 days after the Company notifies Vision that (a) the Company has earned $1,000,000 or more on a pre-tax basis for fiscal 1998 or 1999, or (b) the Company's stock has traded at $20.00 per share for at least 5 consecutive trading days. The Company has pledged to Vision a certificate of deposit in the aggregate amount of $200,000 in connection with the financing of the first eight vans. In connection with the Equipment Financing, the Company issued to Vision warrants (the "Vision Warrants") to purchase 75,000 shares of the Company's common stock at a price per share of $10.00 (subject to adjustment in certain circumstances) at any time prior to August 20, 2000. The Company has the right to redeem the Vision Warrants as follows: in the event that the closing bid price of the common stock equals or exceeds $15.00 for 20 consecutive trading days ended three days prior to the notice of redemption, the Company may, upon 10 days' notice to Vision, redeem up to 50% of the Vision Warrants at a price equal to $.01 per share of common stock issuable upon the exercise of the Vision Warrants; and 100% of the Vision Warrants are redeemable by the Company if the closing bid price of the Company's common stock equals or exceeds $20.00 for the 20 trading days ended three days prior to the notice of redemption. 16 On September 30, 1997, the first interest payment on the Bridge Notes was made in shares of the Company's common stock. The Company issued an aggregate of 22,462 shares for payment of interest due. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 17 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.1 Form of Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.2 Form of Specimen Redeemable Warrant Certificate (Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.3 Form of Warrant Agreement between the Company and Whale Securities Co., L.P. (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.4 Form of Warrant among American Stock Transfer & Trust Company, the Company and Whale Securities Co., L.P. (Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 4.5 Form of Warrant Certificate issued to investors in the March 1997 Bridge Financing (Incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-24675) filed April 7, 1997) 4.6 Form of Common Stock Purchase Warrant issued to investors in the June 1997 Bridge Financing (Incorporated by reference to Exhibit 99.4 to the Registrant's Current Report on Form 8-K filed June 23,1997) 4.7 Form of Convertible Note issued to investors in the June 1997 Bridge Financing (Incorporated by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K filed June 23,1997) 4.8 Form of Common Stock Purchase Warrant issued to Vision Financial Group, Inc.* 10.1 License Agreement, dated March 1, 1995, between Great White Shark Enterprises, Inc. and the Company, as supplemented (Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.2 Amendment to License Agreement, dated as of June 3, 1997, by and among, the Company, Greg Norman and Great White Shark Enterprises, Inc. (Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K/A filed June 27, 1997) 18 10.3 Employment Agreement, dated as of January 1, 1996, between Earl Takefman and the Company (Incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.4 Employment Agreement, dated as of January 1, 1996, between Alan Lubell and the Company (Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.5 Employment Agreement, dated as of May 1, 1996, between Thomas S. Peters and the Company (Incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.6 License Agreement, dated as of November 1, 1996, between the Company and Visual Edge Systems (Australia) Pty. Ltd. (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.7 Form of Consulting Agreement between the Company and Whale Securities Co., L.P. (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.8 Amended and Restated 1996 Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-23519) filed April 7, 1997) 10.9 Employment Agreement, dated as of June 1, 1996, between the Company and Richard Parker (Incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.10 Assignment, dated April 19, 1996, from Thomas S. Peters to the Company (Incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-5193) effective July 24, 1996) 10.11 Share and Warrant Purchase Agreement, dated as of February 27, 1997, between the Company and Status-One Investments Inc. (Incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form SB-2 (Registration No. 333-24675) filed April 7, 1997) 10.12 Bridge Securities Purchase Agreement, dated as of June 13, 1997, among the Company and Infinity Investors Limited, Infinity Emerging Opportunities Limited, Sandera Partners, L.P. and Lion Capital Partners, L.P. (collectively, the "Funds") (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed June 23, 1997) 19 10.13 Registration Rights Agreement, dated as of June 13, 1997, between the Company and the Funds (Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed June 23, 1997) 10.14 Transfer Agent Agreement, dated as of June 13, 1997, among the Company, the Funds and American Stock Transfer & Trust Company (Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed June 23, 1997) 10.15 Guarantee and Agreement, dated as of August 5, 1997, between the Company and Cadillac Motor Car Division of General Motors Corporation (Incorporated by reference to Exhibit 10.1 to amendment No. 1 to the Registrants Registration Statement on Form S-3 (Registration No. 333-32247) filed August 12, 1997) 11 Computation of Per Share Loss * 27 Financial Data Schedule * * Filed herewith (b) Reports on Form 8-K None filed during quarter ended September 30, 1997. 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VISUAL EDGE SYSTEMS INC. /s/ Earl T. Takefman ---------------------------------------- Earl T. Takefman November 12, 1997 Chief Executive Officer/Chief Financial Officer /s/ Richard Parker ---------------------------------------- Richard Parker November 12, 1997 President 21 EX-4.8 2 EXHIBIT 4.8 Exhibit 4.8 THIS COMMON STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"); OR UNDER ANY APPLICABLE LAW OR REGULATION OF ANY STATE. THIS COMMON STOCK WARRANT MAY NOT BE SOLD, OFFERED, ASSIGNED OR TRANSFERRED UNLESS THE WARRANT IS REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES, ASSIGNMENTS AND TRANSFERS ARE MADE PURSUANT TO THE AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. VISUAL EDGE SYSTEMS INC. COMMON STOCK PURCHASE WARRANT DATED: August 20, 1997 - ------------------------------------------------------------------------------- No.1 Number of Common Shares: 75,000 Holder: Vision Financial Group, Inc. Purchase Price: $10.00 1100 Liberty Avenue Expiration Date: August 20, 2000 Pittsburgh, PA 15222 For identification only. The governing terms of this Warrant are set forth below. - ------------------------------------------------------------------------------- Visual Edge Systems Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, Vision Financial Group, Inc. or assigns (each a "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after the date hereof and prior to August 20, 2000 (the "Exercise Period"), at the Purchase price hereinafter set forth, seventy-five thousand (75,000) fully paid and nonassessable shares of Common Stock (as hereinafter defined) of the Company. The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. This Warrant (this "Warrant"; such term to include any warrants issued in substitution therefor) is issued in connection with that certain Letter (the "Letter"), dated of even date herewith between the initial Holder hereof and the Company. The purchase price per share of Common Stock issuable upon exercise of this Warrant (the "Purchase Price") shall initially be $10.00; provided, however, that the Purchase Price shall be adjusted from time to time as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Visual Edge Systems Inc. and any entity that shall succeed or assume the obligations of such corporation hereunder. (b) The term "Common Stock" includes (a) the Company's common stock, $.01 par value per share, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency) and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) that the holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or that at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. 1. Exercise of Warrant. 1.1. Method of Exercise. This Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period, by the Holder hereof by delivery of a notice of exercise (a "Notice of Exercise") substantially in the form attached hereto as Exhibit A via facsimile to the Company. Promptly thereafter the Holder shall surrender this Warrant to the Company at its principal office, accompanied by payment of the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is being exercised (the "Exercise Price"). Payment of the Exercise Price shall be made by check or bank draft payable to the order of the Company or by wire transfer to the account of the Company. If the amount of the payment received by the Company is less than the Exercise Price, the Holder will be notified of the deficiency and shall make payment in that amount within five (5) business days. In the event the payment exceeds the Exercise Price, the Company will promptly refund the excess to the Holder. Upon exercise, the Holder shall be entitled to receive, promptly after payment in full, one or more certificates, issued in the Holder's name or in such name or names as the Holder may direct, subject to the limitations on transfer contained herein, for the number of shares of Common Stock so purchased. The shares so purchased shall be deemed to be issued as of the close of business on the date on which the Company shall have received from the Holder payment of the Exercise Price (the "Exercise Date"). -2- 1.2. Regulation D Restrictions. The Holder hereof represents and warrants to the Company that it has acquired this Warrant and anticipates acquiring the shares of Common Stock issuable upon exercise of the Warrant solely for its own account for investment purposes and not with a view to or for distributing such securities unless such distribution has been registered with the Securities and Exchange Commission or an applicable exemption is available therefor. At the time this Warrant is exercised, the Company may require the Holder to state in the Notice of Exercise such representations concerning the Holder as are necessary or appropriate to assure compliance by the Holder with the Securities Act. 1.3. Company Acknowledgment. The Company will, at the time of the exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Holder any such rights. 1.4.Limitation on Exercise. Notwithstanding the rights of the Holder to exercise all or a portion of this Warrant as described herein, such exercise rights shall be limited solely in the manner set forth in the Purchase Agreement as if such provisions were specifically set forth herein. 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant, the Company at its expense (including the payment by it of any applicable issue, stamp or transfer taxes upon issuance to the Holder) will cause to be issued in the name of and delivered to the Holder to hereof, or, to the extent permissible hereunder, to such other person as the Holder may direct, a certificate or certificates for the number of full paid and nonassessable shares of Common Stock (or Other Securities) to which the Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to the such fraction multiplied by the then applicable Purchase Price, together with any other stock or other securities and property (including cash, where applicable ) to which the Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustment for Dividends in Other Stock Property, etc., Reclassification, etc. In case at any time or from time to time the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) by way of dividend or any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or other or additional stock or other securities or property (including cash) by way or spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock split (adjustments in respect of which are provided for in Section 5), then and in each such event, the -3- Holder of this Warrant, on the exercise hereof as provided in Section 1 shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) that the Holder would have been entitled to receive on the effective date of such event if the Holder had so exercised this Warrant immediately prior thereto, giving effect to all adjustments called for during such period by Sections 4 and 5. 4. Adjustment for Reorganization, Consolidation, Merger, etc. 4.1. Reorganization, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the Holder of this Warrant, nor the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation o such effective date, the stock and other securities and property (including cash) to which the Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if the Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided herein. 4.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of this Warrant after the effective date of such dissolution pursuant to this Section 4 to a bank or trust company, as trustee for the Holder or Holders of this Warrant. 4.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger to the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 7. 5. Adjustment for Extraordinary Events. The Purchase Price to be paid by the Holder upon exercise of this Warrant shall be adjusted in case at any time or from time to time the Company should (i) subdivide the outstanding shares of Common Stock into a greater number of shares, (ii) consolidate the outstanding shares of Common Stock into a smaller number of shares, (iii) issue -4- shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock as a dividend to all or substantially all holders of shares of Common Stock or (iv) issue by reclassification of shares of Common Stock or any shares of capital stock of the Company. 6. Redemption. 6.1. Voluntary Redemption. The Company may at any time, at its option and following at least ten (10) days prior written notice to the Holder, redeem (each, a "Redemption") for cash from funds legally available therefor, up to 50% of the Warrants for a redemption price per share (the "Redemption Price") equal to $.01 per share of Common Stock (or Other Securities) issuable upon exercise of this Warrant (the "Warrant Shares") on the Redemption Date (as hereinafter defined) if the Stock Price (as hereinafter defined) is equal to or in excess of $15.00, provided, that if the Stock Price is equal to or in excess of $20.00, then the Company may redeem up to 100% of the total number of Warrant Shares underlying this Warrant. As used herein, "Stock Price" shall mean the closing bid price for the Common Stock (as specified by Bloomberg, L.P.) during the 20 trading days ending three days prior to the date on which the Company delivers the Redemption Notice. 6.2. Notice of Redemption. If the Company elects to redeem any or all of this Warrant pursuant to the terms hereof, the Company shall give not less than ten (10) days prior written notice of such Redemption (the "Redemption Notice") to the Holder (together with each of the other holders of the warrants of the same class hereof) at such Holder's address as it appears on the books and records of the Company by facsimile transmission (if such Holder shall have provided a facsimile number), and the Warrant Shares then subject to Redemption and not otherwise converted prior to the Redemption Date shall, on the date which is ten (10) days after the deposit of Redemption Notice (the "Redemption Date"), cease to be outstanding and the rights of the Holders and owners thereof shall be limited to payment of the Redemption Price thereof. The Company shall deliver the Redemption Price to the Holders in cash or by wire transfer as indicated by the Holder within two (2) business days of the Redemption Date. The Redemption Price shall (in the reasonable discretion of the Board of Directors of the Company) be adjusted to take into account any stock split or other similar event. 6.3. Selection of Warrant Shares. The Company shall select the Warrants to be redeemed in a Redemption in which not all Warrants of this class are to be redeemed so that the Warrant Shares of each Holder selected for Redemption shall bear the same proportion to the total Warrant Shares owned by that Holder that the proportion of all Warrant Shares selected for Redemption bears to the total number of Warrant Shares. Should any Warrant Shares required to be redeemed under the terms hereof not be redeemed solely by reason of limitations imposed by law, the applicable Warrant Shares shall be redeemed on the earliest possible date that the applicable Warrant Shares may be redeemed to the maximum extent -5- permitted by law. Except as set forth above, the Board of Directors shall prescribe the manner in which any Redemption shall be effected. 7. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all of such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant and (c) will not transfer all or substantially all of its properties and assets to any other person (corporate or otherwise), or consolidate with or merge into any other persons or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person shall expressly assume in writing and will be bound by all the terms of this Warrant. 8. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to, or consolidation or merger of the Company with or into, any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, in each such event, the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger -6- dissolution, liquidation or winding-up. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any action is to be taken. 9. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant. 10. Exchange of Warrant. On surrender for exchange of this Warrant, properly endorsed, to the Company, the Company at is expense will issue and deliver to or on the order of the holder thereof of a new Warrant of like tenor, in the name of such Holder or as such Holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant so surrendered. 11. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation or surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 12. Remedies. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 13. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: (a) title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; -7- (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary; and (d) notwithstanding the foregoing, this Warrant may not be sold, transferred or assigned except pursuant to an effective registration statement under the Securities Act or, pursuant to an applicable exemption therefrom (including in accordance with Regulation D promulgated under the Securities Act). 14. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by the Holder or, until any the Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of New York, except where the Delaware General Corporation Law applies. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under seal. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. [SIGNATURE PAGE FOLLOWS] -8- DATED as of August __, 1997. VISUAL EDGE SYSTEMS INC. By:______________________________ Name:____________________________ Title:___________________________ -9- EXHIBIT A FORM OF NOTICE OF EXERCISE (To be executed only upon exercise or conversion of the Warrant in whole or in part) To Visual Edge Systems Inc. The undersigned registered holder of the accompanying Warrant hereby exercises such Warrant or portion thereof for, and purchases thereunder, __________(1) shares of Common Stock (as defined in such Warrant) and herewith makes payment therefor of $___________. The undersigned requests that the certificates for such shares of Common Stock be issued in the name of, and delivered to, __________________________ whose address is _____________________ _______________________________________________________. Dated:________________________ --------------------------------------- (Name must conform to name of holder as specified on the face of the Warrant) By:____________________________________ Name:_______________________________ Title:______________________________ Address of holder: _______________________________________ _______________________________________ _______________________________________ - ---------------------------- (1) Insert the number of shares of Common Stock as to which the accompanying Warrant is being exercised. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the accompanying warrant, to the holder surrendering the same. -10- EX-11 3 EXHIBIT 11 Visual Edge Systems Inc. Computation of Per Share Loss Exhibit 11 Nine Months Ending September 30, --------------------------- 1997 1996 ------------ ------------ Weighted average common shares outstanding.... 4,755,400 4,615,000 Net Loss...................................... $(7,321,453) $(1,279,757) Net Loss Per Share before Extraordinary item.. $ (1.38) $ (0.28) Extraordianry expense......................... (0.16) -- ------------ ------------ Net Loss Per Share............................ $ (1.54) $ (0.28) ------------ ------------ ------------ ------------ EX-27 4 EXHIBIT 27
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 305,555 3,739,673 55,083 0 79,850 4,722,043 3,448,539 766,125 8,187,636 1,105,508 0 0 0 48,532 (745,966) 8,187,636 1,115,116 1,115,116 918,316 5,479,362 1,022,431 0 313,838 6,571,453 0 6,571,453 0 750,000 0 7,321,453 1.54 1.54
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