Tuesday, June 24, 1997

[Editor's note: Following the publication of Tuesday's Daily Double, the Fool was contacted by Visual Edge CEO Earl Takefman. He was concerned about a few inaccuracies, which we have corrected. The original copy is printed below the revision for reference.]

Visual Edge Systems, Inc.
(Nasdaq: EDGE)
Phone: 561-750-7559
Price (6/24/97): $9 15/16

How would you like to have your own personalized instructional golf video featuring Greg Norman (aka The Shark)? Visual Edge thinks you will, and so, apparently, do investors. Still, the investment sharks are probably circling this one.

After languishing below $6 in January, the company's shares saw a new high of $13 3/4 by mid-May, as a string of positive news releases suggested that Visual had more than a sexy stock symbol going for it. First, there was a January distribution deal. Then on March 24, the company arranged a bridge loan for $3.5 million, part of it put up by a firm controlled by Visual Edge's CEO Earl Takefman. A favorable reception at some trade shows encouraged the firm to speed products to market.

The biggie came on May 9 -- an "agreement in principle" with Cadillac to offer its novel golf video to potential car customers through the year 2000. The deal, to be finalized by August, could provide the firm with up to $35 million directly from Cadillac over the next four years. Then on June 16, the company said it had arranged $7.5 million in financing (debt and convertible equity) from Lamar Hunt, part owner of the Chicago Bulls and Kansas City Chiefs and brother of the two Hunts who once tried to corner the world's silver supply.

BUSINESS DESCRIPTION

Based in Boca Raton, Florida, Visual Edge has one product: a set of twelve personalized 45-minute videotape golf lessons marketed as One-on-One with Greg Norman. The company's special software allows a golfer's swing to be captured by cameras and digitally added to the video to offer a split-screen comparison to Norman's swing.

Golfers spend $440 million each year on lessons. But Visual is actually aiming to capture part of the market for the gifts handed out by golf tournaments and so will sell the videos directly to amateur, corporate, charity, and member golf tournaments. To do so, it must have one of its specially equipped $150,000 vans and trained personnel on site. It now owns 15 vans and hopes to have up to 25 operational by year-end. The videos sell for $20 to $50. Norman will get 6.8% of gross profits. Earlier this month, Norman, a successful entrepreneur, agreed to accept about 100,000 shares of Visual in lieu of $1 million in cash payments, boosting his ownership stake to 400,000 shares.

FINANCIAL FACTS

Income Statement

12-month sales:    $0.2 million 
12-month income: ($3.3 million)
12-month EPS:     ($0.84)
Profit margins:       N/A 
Capitalization:       $41.3 million 

Balance Sheet*
Cash:                  $0.96 million
Current Assets:    $2.6 million
Current Liabilities: $2.3 million 
Long-term Debt:   $0.5 million     
(*Prior to the June 16 financing agreement)

Ratios
Price-to-earnings: N/A
Price-to-sales:     207

HOW COULD YOU HAVE FOUND THIS DOUBLE?

A licensing deal with Greg Norman is worth something. Add the novel instructional video for golfers and you've got a good story. Still, it might have been easy to argue in January that the company was actually overvalued given that it had no sales and a giant need for cash. The auditors, in fact, included a "going concern" clause in the company's year-end filing.

The agreement with Cadillac was good news but is not yet definitive. The financing arrangements were necessary, but the original bridge loan agreement opened up the risk of significant dilution if the company's stock hit a sand trap.

WHERE TO FROM HERE?

Ironically, Visual offers poor earnings visibility. Back in February, the investment newsletter Par Value set a 12-month target price of up to $16 a share. The only other analyst covering the stock is Richard Lilly of Whale Securities, Visual's underwriter and market maker. Even before the Cadillac deal, he expected the firm would earn $0.64 per share in FY98 on $14.8 million in revenue. However, Whale also owns 260,000 shares; these have just been registered for sale.

The bottom line is that this company has generated nothing but losses, and a recent public filing indicated that losses are "likely to continue for the foreseeable future," though Takefman says he expects the firm will become profitable in FY98. This same filing notes that the company "has limited experience in developing and commercializing new products based on innovative technology." Plus, while the "exclusive" licensing deal with Greg Norman applies to personalized high-tech videos similar to One-on-One, it actually permits Norman to continue offering instructional videos and multimedia presentations through other vendors.

Visual Edge also has outstanding options and warrants obligating it to issue at least another 3 million shares, though the recent Hunt financing alleviates concerns over possible dilution raised by the bridge loan. About 1.5 million warrants that convert to shares at $5 a piece become exercisable on July 24. Investors might also want to consider that Takefman was CEO of the public company SLM International for nearly five years before resigning in August of 1994, citing differences with the major shareholder over the company's direction. That firm filed for bankruptcy in October 1995.

Golfers shell out big money to improve their game, and Tigermania is sure to keep that market booming. Barring an ugly scandal, products associated with Greg Norman should remain a hot commodity. So the company's upside is open-ended. That being said, Visual Edge looks like a possible short candidate. Insert Jaws soundtrack theme here.

-Louis Corrigan (RgeSeymour@aol.com)

ORIGINAL COPY:

Visual Edge Systems, Inc.
(Nasdaq: EDGE)
Phone: 561-750-7559
Price (6/24/97): $9 15/16

HOW DID IT DOUBLE?

How would you like to have your own personalized instructional golf video featuring Greg Norman (aka The Shark)? Visual Edge thinks you will, and so, apparently, do investors. Still, the investment sharks are probably circling this one.

After languishing below $6 in January, the company's shares saw a new high of $13 3/4 by mid-May, as a string of positive news releases suggested that Visual had more than a sexy stock symbol going for it. First, there was a January distribution deal. Then on March 24, a firm controlled by Visual Edge's CEO put up $3.5 million in financing. A favorable reception at some trade shows encouraged the firm to speed products to market.

The biggie came on May 9 -- an "agreement in principle" with Cadillac to offer its novel golf video to potential car customers through the year 2000. The deal, to be finalized by August, could provide the firm with up to $35 million directly from Cadillac over the next four years. Then on June 16, the company said it had arranged $7.5 million in financing (debt and convertible equity) from one of the famous Hunt brothers of Texas, who once tried to corner the world's silver supply.

BUSINESS DESCRIPTION

Based in Boca Raton, Florida, Visual Edge has one product: One-on-One, a personalized 45-minute videotape golf lesson designed to capture part of the $440 million that golfers spend each year on lessons. The company's special software allows a golfer's swing to be captured by cameras and digitally added to the video to offer a split-screen comparison to Norman's swing.

Visual plans to sell the videos at amateur, corporate, charity, and member golf tournaments. But to do so, it must have one of its specially equipped $150,000 vans and trained personnel on site. It now owns 15 vans and hopes to have up to 25 operational by year-end. The videos sell for $20 to $50. Norman will get 8% of net profits, or a minimum of $3.3 million through July 1999.

FINANCIAL FACTS

Income Statement

      12-month sales: $0.2 million
      12-month income: ($3.3 million)
      12-month EPS: ($0.84)
      Profit margins: N/A
      Capitalization: $41.3 million

      Balance Sheet*
      Cash: $0.96 million
      Current Assets: $2.6 million
      Current Liabilities: $2.3 million
      Long-term Debt: $0.5 million
      (*Prior to the June 16 financing agreement)

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: 207

HOW COULD YOU HAVE FOUND THIS DOUBLE?

A licensing deal with Greg Norman is worth something. Add the novel instructional video for golfers and you've got a good story. But with only one untested product, no sales, continuing operating losses, and a giant need for cash, it would have been easy to argue that the company was overvalued in January at $20 million. The auditors, in fact, included a "going concern" clause in the company's year-end filing.

The agreement with Cadillac was good news but is not yet definitive. The financing arrangements were necessary but spell further dilution ahead.

WHERE TO FROM HERE?

Ironically, Visual offers no earnings visibility. The only analyst covering the stock is Richard Lilly of Whale Securities, Visual's underwriter and market maker. Even before the Cadillac deal, he expected the firm would earn $0.64 per share in FY98 on $14.8 million in revenue. However, Whale has a poor track record on underwritings, and it also owns 260,000 shares that have just been registered for sale.

The bottom line is that this company has generated nothing but losses, and these are "likely to continue for the foreseeable future." This same public filing notes that the company "has limited experience in developing and commercializing new products based on innovative technology." Plus, the "exclusive" licensing deal with Greg Norman actually permits him to continue offering instructional videos and multimedia presentations through other vendors!

Visual Edge also has outstanding options and warrants obligating it to issue at least another 3 million shares, and probably far more. About 1.5 million warrants that convert to shares at $5 a piece become exercisable on July 24. If all this doesn't inspire confidence, also consider that CEO Earl T. Takefman was CEO of the public company SLM International for nearly five years before it filed for bankruptcy in October 1995.

Golfers shell out big money to improve their game, and Tigermania is sure to keep that market booming. Barring an ugly scandal, products associated with Greg Norman should remain a hot commodity. So the company's upside is open-ended. That being said, Visual Edge looks like a possible short candidate. Insert Jaws soundtrack theme here.

-Louis Corrigan (RgeSeymour@aol.com)

WE DELIVER - Get The Daily Double delivered
straight to your e-mailbox every evening!


Daily Double Archive