UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended April 30, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
-------------------- --------------------
Commission File Number 0-21785
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NEW VISUAL ENTERTAINMENT, INC.
------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 95-4545704
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5920 Friars Road
Suite 104
San Diego, CA 92108
(Address of principal executive offices)
(619) 692-0333
(Issuer's telephone number)
---------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Check 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 ( )
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 26,035,605 shares of Common Stock,
$.001 par value, were outstanding as of June 12, 2001.
Transitional Small Business Disclosure Forms (check one):
Yes ( X ) No ( )
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
APRIL 30, 2001
Page Nos.
---------
PART I - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 1
At October 31, 2000 and April 30, 2001
CONSOLIDATED STATEMENTS OF OPERATIONS 2 - 3
For the Six Months Ended April 30, 2000 and 2001
For the Three Months Ended April 30, 2000 and 2001
For the Period from November 1, 1999 to April 30, 2001
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 4 - 7
For the Period from November 1, 1999 to April 30, 2001
For the Six Months Ended April 30, 2000 and 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
For the Period from November 1, 1999 to April 30, 2001
For the Six Months Ended April 30, 2000 and 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 - 31
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 32
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
PART II - OTHER INFORMATION 35
ITEM 1 - LEGAL PROCEEDINGS 35
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 35
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 36
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 5 - OTHER INFORMATION 36
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 36
SIGNATURES 37
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED BALANCE SHEETS
ASSETS
------
October 31, April 30,
2000 2001
------------- -------------
(Unaudited)
Current Assets:
Cash $ 189,234 $ 57,232
Receivable from related parties 27,563 69,011
Other current assets 30,227 8,394
------------- -------------
Total Current Assets 247,024 134,637
Property and equipment - net of accumulated depreciation 393,787 327,541
Other assets 117,200 154,999
Film and video library 35,944 -
Projects under development 638,707 1,119,651
------------- -------------
Total Assets $ 1,432,662 $ 1,736,828
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 446,921 $ 323,586
------------- -------------
Total Current Liabilities 446,921 323,586
------------- -------------
Long-term debt 756,886 756,886
------------- -------------
Total Liabilities 1,203,807 1,080,472
------------- -------------
Commitments, Contingencies and Other Matters
(Notes 2, 6, 7, 8 and 9)
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares authorized;
Series A junior participating preferred stock; -0- shares issued
and outstanding - -
Common stock - $0.001 par value; 100,000,000 shares
authorized; 24,072,455 and 25,110,016 shares issued and
outstanding at October 31, 2000 and April 30, 2001,
respectively 24,072 25,110
Additional paid-in capital 27,813,465 31,127,105
Unearned financing fees (2,583,333) (2,083,333)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during the development stage (12,725,316) (16,112,493)
------------- -------------
Total Stockholders' Equity 228,855 656,356
------------- -------------
Total Liabilities and Stockholders' Equity $ 1,432,662 $ 1,736,828
============= =============
See notes to consolidated financial statements.
1
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Six Months Ended
April 30, For the Period from
----------------------------- November 1, 1999 to
2000 2001 April 30, 2001
------------- ------------- -------------
REVENUES $ 6,800 $ - $ 12,200
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales - - 21,403
Amortization of costs of projects 35,696 - -
Projects costs written off 10,884 - 114,613
Depreciation of property and equipment 34,292 69,813 69,813
Acquired in-process research and development
expenses 6,050,000 - 6,050,000
Compensatory element of stock issuances 1,848,779 - 3,258,549
Research and development - 662,094 1,477,456
Selling, general and administrative expenses 856,822 1,136,840 3,178,782
------------- ------------- -------------
TOTAL OPERATING EXPENSES 8,836,473 1,868,747 14,170,616
------------- ------------- -------------
OPERATING LOSS (8,829,673) (1,868,747) (14,158,416)
------------- ------------- -------------
OTHER EXPENSES:
Interest expense - 18,430 37,410
Amortization of unearned financing costs - 500,000 916,667
Litigation settlement in shares of common stock
(Note 7) - 1,000,000 1,000,000
------------- ------------- -------------
TOTAL OTHER EXPENSES - 1,518,430 1,954,077
------------- ------------- -------------
NET LOSS $ (8,829,673) $ (3,387,177) $(16,112,493)
============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON
SHARE $ (0.45) $ (0.14)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,752,405 24,614,754
============= =============
See notes to consolidated financial statements.
2
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
April 30,
-----------------------------
2000 2001
------------- -------------
REVENUES $ 6,800 $ 0
------------- -------------
OPERATING EXPENSES:
Amortization costs of projects 20,290 -
Depreciation of property and equipment 19,073 34,933
Acquired in-process research and development 6,000,000 -
Compensatory element of stock issuances 1,814,729 -
Research and development - 299,392
Selling, general and administrative expenses 698,849 636,368
------------- -------------
TOTAL OPERATING EXPENSES (8,552,941) 970,693
------------- -------------
OPERATING LOSS (8,546,141) (970,693)
OTHER EXPENSES:
Interest Expense - 10,986
Amortization of unearned financing costs - 250,000
------------- -------------
TOTAL OTHER EXPENSES - 260,986
NET LOSS $ (8,546,141) $ (1,231,679)
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.39) $ (0.05)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 22,080,429 24,940,678
============= =============
See notes to consolidated financial statements.
3
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE SIX MONTHS ENDED APRIL 30, 2000 AND 2001
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
(1)
Balance - October 31, 1999 17,224,049 $ 17,224 $ 12,197,374
Issuance of common stock for cash
($1.00 to $4.00 per share) 805,994 805 2,733,583
Issuance of common stock for services:
($1.00 to $1.40 per share for quarter ended
January 31) 29,765 30 34,020
($1.20 to $12.00 per share for quarter ended
April 30) 1,161,065 1,161 1,813,568
($3.00 to $7.88 per share for quarter ended
July 31) 109,000 109 619,541
($.25 to $12.50 per share for quarter ended
October 31) 84,084 84 28,038
Acquisition of Impact Pictures, Inc.
($4.00 per share) 12,500 13 49,987
Acquisition of New Wheel Technology, Inc.
($2.00 per share) 3,000,000 3,000 5,997,000
Issuance of common stock under consulting
agreement ($2.00 per share) 1,500,000 1,500 2,998,500
Issuances of common stock upon exercise of
warrants ($2.40 per share) 68,750 69 164,931
Issuance of common stock in connection with private
placement ($5.00 to $5.50 per share) 77,248 77 414,923
Value assigned to issuance of 200,000 warrants - - 762,000
Amortization of unearned financing costs - - -
Net loss - - -
------------- ------------- -------------
Balance - October 31, 2000 24,072,455 $ 24,072 $ 27,813,465
============= ============= =============
(1) Share amounts have been restated to reflect the 1-for-4 reverse stock split
effected on June 22, 2000.
See notes to consolidated financial statements.
4
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE SIX MONTHS ENDED APRIL 30, 2000 AND 2001
Unearned Total
Financing Accumulated Stockholders'
Costs Deficit Equity
-------------- -------------- --------------
Balance - October 31, 1999 $ - $ (12,300,033) $ (85,435)
Issuance of common stock for cash
($1.00 to $4.00 per share) - - 2,734,388
Issuance of common stock for services:
($1.00 to $1.40 per share at January 31) - - 34,050
($1.20 to $12.00 per share at April 30) - - 1,814,729
($3.00 to $7.88 per share at July 31) - - 619,650
($.25 to $12.50 per share at October 31) - - 28,122
Acquisition of Impact Pictures, Inc.
($4.00 per share) - - 50,000
Acquisition of New Wheel Technology, Inc.
($2.00 per share) - - 6,000,000
Issuance of common stock under consulting
agreement ($2.00 per share) (3,000,000) - -
Issuances of common stock upon exercise of
warrants ($2.40 per share) - - 165,000
Issuance of common stock in connection with private
placement ($5.50 per share) - - 415,000
Value assigned to issuance of 200,000 warrants - - 762,000
Amortization of unearned financing costs 416,667 - 416,667
Net loss - (12,725,316) (12,725,316)
-------------- -------------- --------------
Balance - October 31, 2000 $ (2,583,333) $ (25,025,349) $ 228,855
============== ============== ==============
Accumulated deficit as of October 31, 1999 $ (12,300,033)
Accumulated deficit during development stage
(year ended October 31, 2000) (12,725,316)
--------------
Total Accumulated Deficit as of October 31, 2000 $ (25,025,349)
==============
See notes to consolidated financial statements.
5
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE SIX MONTHS ENDED APRIL 30, 2000 AND 2001
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
(1)
Six Months Ended April 30, 2000:
-------------------------------
Balance - October 31, 1999 17,224,049 $ 17,224 $ 12,197,374
Issuance of common stock for cash
($1.00 to $12.00 per share) 456,160 456 1,529,532
Issuance of common stock for services rendered
($1.00 to $6.00 per share) 1,190,830 1,191 1,847,588
Acquisition of Impact Pictures, Inc.
($4.00 per share) 12,500 13 49,987
Acquisition of New Wheel Technology, Inc.
($2.00 per share) 3,000,000 3,000 5,997,000
Issuance of common stock under consulting
agreement ($2.00 per share) 1,500,000 1,500 2,998,500
Net loss - - -
------------- ------------- -------------
Balance - April 30, 2000 23,383,539 $ 23,384 $ 24,619,981
============= ============= =============
Six Months Ended April 30, 2001:
-------------------------------
Balance - October 31, 2000 24,072,455 $ 24,072 $ 27,813,465
Issuance of common stock for cash
($2.68 to $5.00 per share) 240,904 241 704,759
Issuance of common stock with attached
warrants ($4.02 per share at January 31) 174,714 175 489,024
Issuance of common stock with attached
warrants ($5.10 per share at January 31) 30,600 31 85,649
Issuance of common stock with attached
warrants ($2.80 to $5.10 per share at April 30) 104,571 105 292,695
Issuance of common stock in connection with Private
Placement ($4.35 to $5.50 per share at
January 31) 32,445 32 151,968
Issuance of common stock in connection with private
placement($2.60 to $3.37 per share at
April 30) 207,307 207 619,793
Issuance of common stock in connection with
litigation settlement 250,000 250 999,750
Cancellation of common stock issued for cash (2,980) (3) (29,998)
Amortization of unearned financing costs - - -
Net loss - - -
------------- ------------- -------------
Balance - April 30, 2001 25,110,016 $ 25,110 $ 31,127,105
============= ============= =============
(1) Share amounts have been restated to reflect the 1-for-4 reverse stock
split effected on June 22, 2000.
See notes to consolidated financial statements.
6
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
THE SIX MONTHS ENDED APRIL 30, 2000 AND 2001
Unearned Total
Financing Accumulated Stockholders'
Costs Deficit Equity
-------------- -------------- --------------
Six Months Ended April 30, 2000:
-------------------------------
Balance - October 31, 1999 $ - $ (12,300,033) $ (85,435)
Issuance of common stock for cash
($1.00 to $12.00 per share) - - 1,529,988
Issuance of common stock for services
($1.00 to $6.00 per share) - - 1,848,779
Acquisition of Impact Pictures, Inc.
($4.00 per share) - - 50,000
Acquisition of New Wheel Technology, Inc.
($2.00 per share) - - 6,000,000
Issuance of common stock under consulting
agreement ($2.00 per share) (3,000,000) - -
Net loss - (8,829,673) (8,829,673)
-------------- -------------- --------------
Balance - April 30, 2000 $ (3,000,000) $ (21,129,706) $ 513,659
============== ============== ==============
Six Months Ended April 30, 2001:
-------------------------------
Balance - October 31, 2000 $ (2,583,333) $ (25,025,349) $ 228,855
Issuance of common stock for cash
($2.68 to $5.00 per share) - - 705,000
Issuance of common stock with attached
warrants ($4.02 per share at January 31) - - 489,199
Issuance of common stock with attached
warrants ($5.10 per share at January 31) - - 85,680
Issuance of common stock with attached
warrants ($2.80 to $5.10 per share at April
30) - - 292,800
Issuance of common stock in connection with Private
Placement ($4.35 to $5.50 per share at
January 31) - - 152,000
Issuance of common stock in connection with private
Placement ($2.60 to $3.37 per share at April 30) - - 620,000
Issuance of common stock in connection with
litigation settlement - - 1,000,000
Cancellation of common stock issued for cash - - (30,001)
Amortization of unearned financing costs 500,000 - 500,000
Net loss - (3,387,177) (3,387,177)
-------------- -------------- --------------
Balance - April 30, 2001 $ (2,083,333) $ (28,412,526) $ 656,356
============== ============== ==============
Accumulated deficit as of October 31, 1999 $ (12,300,033)
Accumulated deficit during development stage
(November 1, 1999 to April 30, 2001) (16,112,493)
--------------
Total accumulated deficit as of April 30, 2001 $ (28,412,526)
==============
See notes to consolidated financial statements.
7
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
April 30, For the Period from
----------------------------- November 1, 1999 to
2000 2001 April 30, 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,829,673) $ (3,387,177) $(16,112,493)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensatory elements of stock issuances 1,848,779 - 3,258,549
Stock issued for acquired in-process research and
development 6,050,000 - 6,050,000
Stock issued for litigation settlement - 1,000,000 1,000,000
Projects costs written-off 10,884 - 114,613
Amortization of unearned financing costs - 500,000 916,667
Depreciation of property and equipment 35,696 69,813 166,985
Amortization of costs of projects 34,292 - -
Increase (decrease) from changes in:
Other current assets (11,244) 21,833 (8,394)
Due from related parties 21,422 (41,448) (37,589)
Projects under development (15,143) (445,000) (1,100,519)
Accounts payable and accrued expenses (264,106) (123,336) (97,113)
Other assets (4,091) (37,799) (149,999)
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (1,123,184) (2,443,114) (5,999,293)
------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (223,039) (3,567) (392,300)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,529,988 2,314,679 5,464,067
Proceeds from note payable - - 756,886
Proceeds from exercise of warrants - - 165,000
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,529,988 2,314,679 6,385,953
------------- ------------- -------------
INCREASE (DECREASE) IN CASH 183,765 (132,002) (5,640)
CASH AND CASH EQUIVALENTS - BEGINNING 62,872 189,234 62,872
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 246,637 $ 57,232 $ 57,232
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ - $ -
============= ============= =============
Income taxes $ - $ - $ 800
============= ============= =============
See notes to consolidated financial statements.
8
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are unaudited. These statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in the 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 financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary
to state fairly the Company's financial position and results of
operations as of and for the periods indicated. These financial
statements should be read in conjunction with the Company's financial
statements and notes thereto for the year ended October 31, 2000,
included in the Company's Annual Report on Form 10-KSB as filed with
the SEC.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of New
Visual Entertainment, Inc. ("NVE") and its operating subsidiaries, NV
Entertainment, Inc. ("NV"), Impact Multimedia, Inc. ("IP") and New
Wheel Technology, Inc. ("New Wheel") (collectively, the "Company"). All
significant intercompany balances and transactions have been
eliminated.
DESCRIPTION OF BUSINESS
The Company (previously known as Bellwether Investment Inc.) was
incorporated under the laws of the State of Utah on December 5, 1985.
In November of 1999, the Company began to focus its business activities
on the development of new content telecommunications technologies.
Pursuant to such plan, the Company acquired New Wheel Technology, Inc.,
a development stage, California-based, technology company, in February
of 2000 (Note 2). As a result of the change in business focus, the
Company has become a development stage entity commencing November 1,
1999. The Company also produces and distributes 2-D and 3-D filmed
entertainment.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risks, are principally trade accounts
receivable. The Company maintains an allowance for uncollectible
accounts receivable and, generally, does not require collateral. At
April 30, 2001 and October 31, 2000, no allowance for uncollectible
accounts was deemed necessary by management.
9
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid investments with a
maturity of three months or less when purchased to be cash or cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on
a straight-line method over the estimated useful lives of the assets,
which generally range from five to seven years. Maintenance and repair
expenses are charged to operations as incurred.
FILM AND VIDEO LIBRARY AND PROJECTS UNDER DEVELOPMENT
Film and video library and projects under development are stated at the
lower of amortized cost or market. Upon completion, costs are amortized
on an individual production basis in the proportion that current gross
revenues bear to management's estimate of total gross revenues with
such estimates being reviewed at least quarterly. In prior years,
several projects under development were determined to have no estimated
realizable value and were accordingly written-off. Project costs
written-off during the six months ended April 30, 2000 and 2001 were
$10,884 and $-0-, respectively. For the six months ended April 30, 2000
and 2001, amortization expense related to the film and video library
was $35,696 and $-0-, respectively.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). SFAS No. 109 employs an asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred income taxes of a change in tax
rates is recognized income in the period that includes the enactment
date.
10
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information at April 30, 2001, as required by Statement of Financial
Accounting Standards 107, "Disclosures about Fair Value of Financial
Instruments". Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair
value to the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Cash Equivalents: The carrying amount approximates fair value
because of the short-term maturity of those instruments.
Receivables and Payables: The carrying amounts approximate fair value
because of the short maturity of those instruments.
All of the Company's financial instruments are held for purposes other
than trading.
REVENUE RECOGNITION
Substantially all revenues are derived from the production of
multimedia content, videos and commercial films. Revenue is recognized
over the shorter of the license term or the expected revenue term.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
Amounts allocated to acquired-in-process research and development
costs, from business combinations, are charged to earnings at the
consummation of the acquisition.
11
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are charged to operations when incurred. Advertising
expense for the six months ended April 30, 2000 and 2001 was $5,504 and
$247, respectively.
LOSS PER SHARE
Basic earnings per share ("Basic EPS") is computed by dividing net
income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share ("Diluted EPS") gives effect to all dilutive potential common
shares outstanding during a period. In computing diluted EPS, the
treasury stock method is used in determining the number of shares
assumed to be purchased from the conversion of common stock
equivalents.
REVERSE STOCK SPLITS
On October 18, 1995, the Company approved a one-for-two reverse split
of its issued and outstanding common stock. On June 22, 2000, the
Company effected a one-for-four reverse split of its issued and
outstanding common stock. The accompanying consolidated financial
statements, notes and other references to share and per share data have
been retroactively restated to reflect the reverse stock splits for all
periods presented.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for its stock-based compensation
arrangements pursuant to APB Opinion No. 25, "Accounting for Stock
Issued to Employees". In accordance with the provisions of SFAS No.
123, the Company discloses the pro forma effects of accounting for
these arrangements using the Black Scholes option-pricing model to
determine fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the total amount of an asset may not be recoverable. An
impairment loss is recognized when estimated future cash flows expected
to result from the use of the asset and its eventual disposition are
less than its carrying amount.
12
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for the way public
enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to stockholders. Adoption of SFAS No. 131 did not have a
material effect on the Company's financial position or results of
operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which establishes
accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments -- Deferral of the
Effective Date of SFAS Statement No.133 and in June 2000, the FASB
issued SFAS 138, Accounting for Certain Derivative Instruments -- an
amendment of SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. As a result of SFAS No. 137, SFAS No. 133 and SFAS
No. 138 will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company's adoption of the above
Financial Accounting Standards had no material impact on the Company's
financial statements for the six months ended April 30, 2001.
In June 2000, the American Institute of Certified Public Accountants
issued Statement of Position 00-2, Accounting by Producers or
Distributors of Films (SOP 00-2), which established new accounting
standards for producers and distributors of film and supersedes
Statement of Financial Accounting Standards ("SFAS" No. 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films". SOP
00-2 changes the accounting standards for costs to produce and
distribute film and television properties. The Company expects to adopt
the new standard effective November 1, 2001, and is evaluating the
effect that such adoption may have on its consolidated results of
operations and financial position.
In June 2000, the Financial Accounting Standards Board issued SFAS No.
139 which rescinds SFAS No. 53 and requires public companies to follow
the guidance provided by SOP 00-2.
13
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions
Involving Stock Compensation -- an interpretation of APB Opinion No.25.
FIN 44 clarifies the application of Opinion 25 for (a) the definition
of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. The
Company adopted FIN 44 effective July 1, 2000. The adoption of the
provisions of FIN 44 did not have a material effect on the financial
position or results of operations of the Company.
COMPREHENSIVE INCOME
The Company has no material components of other comprehensive income
and, accordingly, net loss approximates comprehensive loss for all
periods presented.
NOTE 2 - ACQUISITIONS
IMPACT PICTURES, INC.
In January 2000, the Company completed the acquisition of 100% of the
common stock of Impact Pictures, Inc. ("Impact"), a small
development-stage San Diego-based multi-media production firm, for
12,500 shares of the Company's common stock, valued at $50,000. The
Company has accounted for this acquisition under the purchase method of
accounting. As of the acquisition date, Impact had no tangible assets
and its intangible assets were in the development stage. Accordingly,
the $50,000 was charged to operations, under the caption "Acquired
in-process research and development expenses", during the six months
ended April 30, 2000.
Historical and proforma information have not been provided because the
operations of the acquired business were not material.
14
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACQUISITIONS (CONTINUED)
NEW WHEEL TECHNOLOGY, INC.
In February 2000, the Company completed the acquisition of New Wheel
Technology, Inc. ("New Wheel"), a development-stage California-based,
technology company, for 500,000 restricted shares of New Visual common
stock. New Wheel was merged with the Company's Astounding Acquisition
Corp. subsidiary, which changed its name to New Wheel Technology, Inc.
An additional 2,500,000 restricted shares of common stock were issued
and placed with an escrow agent to be released to the New Wheel
stockholders upon the achievement by New Wheel of a technological
development milestone. Also, additional compensation would be paid to
the New Wheel stockholders if New Wheel's high speed digital
transmission technology generates revenues for the Company in excess of
$1 billion, or if there is a sale of assets or stock, or a merger of
New Visual or any of its affiliates, in which the New Wheel technology
comprises at least 15% of the consideration. As of April 30, 2000, the
Company recorded the issuance of the full 3,000,000 shares, which were
valued at $6,000,000. The Company has accounted for this acquisition
under the purchase method of accounting. As of the acquisition date,
New Wheel had no tangible assets and its intangible assets were in the
development stage. Accordingly, the $6,000,000 was charged to
operations under the caption "Acquired in-process research and
development expenses", during the six months ended April 30, 2000.
Historical and proforma information have not been provided because the
operations of the acquired business were not material.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
October 31, April 30,
2000 2001
------------ ------------
Furniture and fixtures $ 51,584 $ 55,151
Camera equipment 544,664 544,664
Office equipment 99,658 99,658
------------ ------------
695,906 699,473
Less: Accumulated depreciation 302,119 371,932
------------ ------------
Total $ 393,787 $ 327,541
============ ============
For the six months ended April 30, 2000 and 2001, depreciation expense
was $35,696 and $69,813, respectively.
15
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
October 31, April 30,
2000 2001
------------ ------------
Professional fees $ 300,000 $ 182,981
Payroll and related taxes 47,511 -
Interest 17,906 36,600
Miscellaneous 81,504 104,005
------------ ------------
$ 446,921 $ 323,586
============ ============
NOTE 5 - LONG-TERM DEBT
On June 29, 2000, the Company entered into five credit agreements, each
of which granted the Company a credit facility of up to $300,000. As
of October 31, 2000, the Company had borrowed $756,886 under these
facilities, payable on June 29, 2003 in one payment, together with all
accrued and unpaid interest at 6% per annum.
On November 13, 2000, the above five credit agreements were amended,
reducing the Company's credit facility to $756,886 in aggregate. The
credit agreements terminate on June 29, 2003 and all accrued interest
and unpaid interest, along with the principal, is due in full on June
29, 2003.
NOTE 6 - STOCKHOLDERS' EQUITY
PREFERRED STOCK AND RIGHTS DIVIDEND
Effective June 22, 2000, the Company amended its articles of
incorporation to decrease the number of authorized shares of preferred
stock from 200,000,000 to 15,000,000 and to decrease the par value of
the preferred stock from $30.00 to $0.01 per share.
16
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK AND RIGHTS DIVIDEND (CONTINUED)
The Company adopted a shareholder rights plan, in which one right was
distributed on August 21, 2000 as a dividend on each outstanding share
of common stock to shareholders of record on that date. Each right will
entitle the shareholders to purchase 1/1000th of a share of a new
series of junior participating preferred stock of the Company at an
exercise price of $200 per right. The rights will be exercisable only
if another person acquires or announces its intention to acquire
beneficial ownership of 20% or more of the Company's common stock.
After any such acquisition or announcement, the Company's shareholders,
other than the acquirer, could then exercise each right they hold to
purchase the Company's common stock at a 50% discount from the market
price. In addition, if, after another person becomes an acquiring
person, the Company is involved in a merger or other business
combination in which it is not the surviving corporation, each right
will entitle its holder to purchase a number of shares of common stock
of the acquiring company having a market value equal to twice the
exercise price of the right. Prior to the acquisition by a person or
group of beneficial ownership of 20% or more of the Company's common
stock, at the option of the Board of Directors, the rights are
redeemable for $0.001 per right. The rights will expire on August
21, 2004.
On July 27, 2000, the Company created a series of preferred stock, par
value $0.01 per share, designated as "Series A Junior Participating
Preferred Stock". The number of shares constituting the Series A Junior
Participating Preferred Stock is 200,000, initially reserved for
issuance upon exercise of the rights discussed in Note 6. Subject to
the rights of the holders of any shares of any series of preferred
stock ranking prior and superior to the Series A Preferred Stock with
respect to dividends, the holders of shares of Series A Preferred
Stock, in preference to the holders of common stock, shall be entitled
to receive, when, as and if declared by the Board of Directors,
quarterly dividends payable in cash on the last day of each quarter in
each year, commencing on the first quarterly dividend payment date
after the first issuance of a share or fraction of a share of Series A
Preferred Stock, in an amount per share equal to the greater of $1.00
or 1,000 times the aggregate per share amount of all cash and non-cash
dividends or other distributions, other than a dividend payable in
shares of common stock. Each share of Series A Preferred Stock shall
entitle the holder to 1,000 votes. Upon any liquidation, no
distribution shall be made to the holders of shares of stock ranking
junior to the Series A Preferred Stock, unless the holders of shares of
Series A Preferred Stock shall have received $1,000 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon.
The shares of Series A Preferred Stock shall not be redeemable.
17
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
On April 30, 2000, the Board of Directors authorized, and on May 31,
2000, a majority vote of the shareholders approved, a one-for-four
reverse stock-split of the Company's outstanding common stock. The
reverse stock-split was effected on June 22, 2000.
COMMON STOCK ISSUANCES DURING THE YEAR ENDED OCTOBER 31,2000
During the year ended October 31, 2000, the Company issued 805,994
shares of restricted common stock to investors for cash proceeds of
$2,734,388, as indicated below. Such sales were sold in private
transactions in reliance on various exemptions from the registration
requirements of the Securities Act.
o During the three months ended January 31, 2000, the Company
sold 177,463 shares of common stock for $211,909.
o During the quarter ended April 2000, the Company sold 278,699
shares of common stock for $1,318,079.
o During the quarter ended July 31, 2000, the Company sold
314,832 shares of common stock for $1,064,400.
o During the quarter ended October 31, 2000, the Company sold
35,000 shares of common stock for $140,000.
During the three months ended January 31, 2000, the Company issued
29,765 shares of common stock between $1.00 and $1.40 for consulting
services totalling $34,050.
During the three months ended January 31, 2000, the Company issued
12,500 shares of common stock valued at $4.00 per share for the
acquisition of Impact Pictures, Inc.(Note 2)
On February 17, 2000, the Company issued 3,000,000 shares of common
stock valued at $2.00 per share for the acquisition of New Wheel
Technology, Inc.(Note 2)
18
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE YEAR ENDED OCTOBER 31,2000
(CONTINUED)
In connection with the acquisition of New Wheel, the Company entered
into an agreement with lenders to provide loans of up to $1.5 million.
As consideration for these loans and other services under the
agreement, in April of 2000 the Company issued 1,500,000 shares of its
common stock to the lenders valued at $3,000,000. The Company accounted
for the $3,000,000 as unearned financing costs as a reduction of
stockholders' equity as of April 30, 2000. During the quarter ended
July 31, 2000, the Company began to draw money down from the credit
facilities and accordingly, the Company at such time, began to amortize
the unearned financing costs over the three-year period ended June of
2003. Amortization of the unearned financing costs for the six months
ended April 30, 2001 was $500,000.
During the quarter ended April 2000, the Company issued 1,161,065
shares of common stock between $1.20 and $12.00 for consulting and
professional services totalling $1,814,729.
During the quarter ended July 31, 2000, the Company issued 109,000
shares of common stock between $3.00 and $7.88 for consulting and
professional services totalling $619,650.
On June 12, 2000, 68,750 warrants were exercised at $2.40 per share
totalling $165,000.
During the quarter ended October 31, 2000, the Company issued 84,084
shares of common stock between $.25 and $12.50 for consulting services,
totalling $28,122.
On October 31, 2000, the Company issued 77,248 shares of common stock
between $5.00 and $5.50 per share pursuant to the Company's November
17, 2000 private placement agreement.
COMMON STOCK ISSUANCES DURING THE SIX MONTHS ENDED APRIL 30, 2001
- Private Placement:
On November 17, 2000, and as amended on January 22, 2001, the Company
entered into a private placement agreement with various investors, to
sell $5,000,000 of the Company's common stock in several tranches at a
purchase price equal to 87% of the average market price of the
Company's common stock over the five days preceding the closing of each
draw down.
19
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE SIX MONTHS ENDED APRIL 30, 2001
(CONTINUED)
- Private Placement: (Continued)
The Company can sell stock to the investors in 5-day intervals not to
exceed $500,000 per sale. The investor may refuse to purchase the stock
in the event the average purchase price is below $2.00 per share, or if
the trading volume is below a certain number of shares within the
period, or if the Company sells capital stock in excess of $5,000,000,
but exclusive of any funding for the production project.
The Company may not apply any portion of the draw downs towards payment
of any costs related to its production of the Company's pending motion
picture project. This agreement terminates on November 17, 2002.
In addition, the investors received warrants to purchase 4,000,000
shares of common stock to be issued in two series (3,000,000 Series A
warrants and 1,000,000 Series B warrants). Each Series A warrant can be
exercised at a price per share equal to the lesser of $6.00 or 50% of
the average of the closing sales price of the Company's common stock
over the five consecutive trading days immediately preceding the date
of the exercise of the warrants. Each Series B warrant can be exercised
at a price per share of $6.00. The Series B warrants have a cashless
exercise provision. The Series A and Series B warrants expire on
November 17, 2003.
As of April 30, 2001, the Company has received proceeds under this
agreement of $1,187,000 from the investors in consideration for the
purchase of 317,000 shares of the Company's common stock. The following
are common stock issuances for the six months ended April 30, 2001,
pursuant to the company's November 17, 2001 Private Placement
Agreement.
o On November 17, 2000, the Company issued 9,456 shares of
common stock for $5.50 per share.
o On November 27, 2000, the Company issued 22,989 shares of
common stock for $4.35 per share.
o On March 13, 2001, the Company issued 29,639 shares of common
stock for $3.37 per share.
o On March 27, 2001, the Company issued 62,661 shares of common
stock for $3.19 per share.
20
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES DURING THE SIX MONTHS ENDED APRIL 30, 2001
(CONTINUED)
- Private Placement: (Continued)
o On April 6, 2001, the Company issued 57,773 shares of common
stock for $2.60 per share.
o On April 11, 2001, the Company issued 33,287 shares of common
stock for $3.00 per share.
o On April 25, 2001, the Company issued 23,947 shares of common
stock for $2.92 per share.
During December 2000, the Company sold 219,904 shares of common stock
for $600,000.
In February of 2001, the Company issued 250,000 shares of common stock
valued at $1,000,000 for the litigation settlement agreement with
Astounding.com, Inc. and Jack Robinson (Note 7). This settlement was
recorded during the three months ended January 31, 2001.
During January 2001, the Company issued 30,600 shares of common stock
with 15,300 attached warrants with an exercise price of $5.10 per
share, expiring in 3 years for $85,680.
During January 2001, the Company issued 174,714 shares of common stock
with 87,357 attached warrants with an exercise price of $4.02 per
share, expiring in 3 years for $489,199.
During January 2001, the Company sold 21,000 shares of common stock for
$105,000.
In April of 2001, the Company cancelled 2,980 shares for which the
Company was to receive $30,001. The shares issued were recorded by the
Company but never issued to the investor.
In March of 2001, the Company issued 46,250 shares of common stock with
23,125 attached warrants with an exercise price of $5.10 per share,
expiring in 3 years for $129,500.
During April 2001, the Company issued 58,321 shares of common stock
with 29,161 attached warrants with an exercise price of $5.10 per share
expiring in 3 years for $163,300.
21
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
- 2000 Omnibus Securities Plan:
During April 2000, the Board of Directors adopted, and subsequently on
May 31, 2000, the shareholders of the Company approved, the 2000
Omnibus Securities Plan. The 2000 Omnibus Securities Plan authorizes
the granting of stock options and restricted stock awards. The 2000
Omnibus Securities Plan may be administered by the Board of Directors
or a committee appointed by the Board. A total of 2,500,000 shares of
common stock are reserved for issuance under the 2000 Omnibus
Securities Plan. Options granted under the option plan may be either
(i) options intended to constitute incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or any
corresponding provisions of succeeding law (the "Code"), or (ii)
non-qualified stock options.
The exercise price for each stock option is determined by the Board.
Incentive stock options must have an exercise price of at least 100%
(or at least 110% in the case of incentive stock options granted to
certain employees owning more than 10% of the outstanding voting stock)
of the fair market value of the common stock on the date the stock
option is granted. Under the 2000 Omnibus Securities Plan, fair market
value of the common stock for a particular date will generally be the
closing sale price for the stock if the common stock is listed on an
established stock exchange. If the common stock is not listed on an
established stock exchange on a particular date, the fair market value
of the common stock will be the average of the closing bid and asked
prices per share for the stock as quoted by The NASDAQ SmallCap market
or on the OTC Bulletin Board of the National Association of Securities
Dealers or in the NQB Pink Sheets published by the National Quotation
Bureau Incorporated.
No stock option may be exercised after the expiration of ten years from
the date of grant (or five years in the case of incentive stock options
granted to certain employees owning more than 10% of the outstanding
voting stock). Pursuant to the 2000 Omnibus Securities Plan, the
aggregate fair market value of the common stock for which one or more
incentive stock options granted to any participant may, for the first
time, become exercisable as incentive stock options under the federal
tax laws during any one calendar year shall not exceed $100,000.
As of April 30, 2001, the company granted Non-Qualified Stock options
under this plan to purchase a total of 516,000 common shares at
exercise prices ranging from $3.92 to $4.00 per share. The options are
exercisable over a ten-year period.
22
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
- Options Outside of the Plan:
As of October 31, 2000, the Company granted options outside the Plan to
purchase a total of 1,563,750 common shares at exercise prices ranging
from $1.00 to $5.50 per share.
On November 13, 2000, the Company granted to a consultant options to
acquire 100,000 shares of its common stock. The exercise price for the
options is $4.00 per share. All options became vested immediately and
expire on November 13, 2010. In addition, the consultant is
additionally compensated for each day of service up to $1,300 per day.
The consulting agreement may be terminated at any time by either party
upon thirty days' written notice to the other party.
Since the exercise price of the options was not less than the fair
market value of the Company's common stock on each date of grant, no
compensation expense has been recorded. If the Company had elected to
record the issuance of stock options using the fair value method, the
Company's net loss and loss per share would be as follows:
Six Months Ended
April 30, 2001
------------------
Net Loss:
As reported $(3,387,177)
Proforma $(4,141,598)
Loss Per Share:
As reported $ (0.14)
Proforma $ (0.16)
The fair value of stock options granted during the six months ended
April 30, 2001 was estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair value and
related assumptions were as follows:
Grant Date
--------------------------------------------------------------
February 11, July 1, October 27, November 13, November 30,
2000 2000 2000 2001 2001
---------- ---------- ---------- ---------- ----------
Expected volatility 33.0% 33.0% 33.0% 33.0% 33.0%
Risk-free interest rate 5.5% 5.5% 5.5% 5.5% 5.5%
Expected lives 3 years 3 years 3 years 3 years 3 years
Dividend yield -0- -0- -0- -0- -0-
23
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
- Options Outside of the Plan: (Continued)
STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity and related
information follows:
Weighted Weighted
In the Plan Average Shares Under Average
Stock Options Exercise Price Option Exercise Price
------------- -------------- ------ --------------
Outstanding - 10/31/00 - $ - 1,563,750 $2.61
Options granted - 11/01 - 04 /30/01:
In the plan 516,000 3.93 100,000 4.00
Options granted - 11/01 - 04/30/01:
Outside the option plan - - - -
Outside expired/cancelled:
In the plan 3,750 3.94 - -
--------- ------ ----------- --------
Outstanding - 4/30/01 512,250 $3.94 1,663,750 $2.69
========= ===== =========== ========
Exercisable at April 30:
2001 276,188 $3.96 1,044,375 $2.99
2002 354,876 $3.95 1,354,063 $2.81
2003 433,564 $3.94 1,663,750 $2.69
2004 512,250 $3.94 - -
The exercise price for options outstanding as of April 30, 2001 ranged
from $1.00 to $5.50.
24
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
NET LOSS PER SHARE
Securities that could potentially dilute basic earnings per share
("EPS") in the future that were not included in the computation of
diluted EPS because to do so would have been anti-dilutive for the
periods presented consist of the following:
Warrants to purchase common stock 4,457,600
Options to purchase common stock 2,176,000
---------
Total as of April 30, 2001 6,633,600
=========
Substantial issuances after April 30, 2000 through June 14, 2001:
Warrants granted in connection with consulting agreement 1,000,000
=========
Sale of common stock for cash 319,781
=========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
ASTOUNDING.COM, INC.
In September 1999, the Company entered into a merger agreement with
Astounding.com, Inc. The merger agreement provided for the Company to
issue 10,000,000 (pre-June 22, 2000 reverse split) shares of its common
stock for all of the outstanding shares of Astounding. The closing of
the merger was subject to various conditions including the receipt of a
debt or equity financing of at least $1,000,000 and requisite
shareholders approval.
During the three months ended January 31, 2000, the Company terminated
its previously announced merger with Astounding.com, Inc. because
certain conditions had not been satisfied.
25
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ASTOUNDING.COM, INC. (CONTINUED)
The Company, on March 22, 2000, filed a lawsuit in the State District
Court in Dallas, Texas against Astounding.com, Inc. and Jack Robinson.
The Company's complaint alleged that, among other things,
Astounding.com, Inc. and Robinson breached certain contractual
obligations to New Visual and engaged in negligent and/or fraudulent
misrepresentation to induce New Visual to enter into the merger
agreement. New Visual sought a court order confirming that the merger
agreement was null and void, and an award of unspecified damages, court
costs and attorneys fees. Robinson and Astounding.com filed a
counterclaim against New Visual alleging breach of contract and unjust
enrichment and seeking unspecified damages, court costs and attorney
fees. This litigation was settled in February 2001.
Pursuant to the settlement agreement, the Company issued to Jack D.
Robinson and his attorneys 250,000 restricted shares of its common
stock, valued at $1,000,000. The Company in return received all the
issued and outstanding common stock of Astounding.com, Inc. The Company
also agreed to file a registration statement for all these 250,000
shares of its common stock by March 31, 2001 and to cause the
registration statement to become effective and the shares to become
freely tradable no later than June 29, 2001. This settlement was
recorded during the three months ended January 31, 2001.
As of February 16, 2001, Astounding.com, Inc. had no liabilities and
was engaged in no business activities.
INTELECON SERVICES, INC.
On March 31, 2000, the Company signed a definitive merger agreement to
acquire Intelecon Services, Inc. ("Intelecon"), a provider of
entertainment and business communication technology and value-added
services, in a stock transaction.
On September 26, 2000, the Company formally terminated its merger
agreement with Intelecon.
26
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTELECON SERVICES, INC. (CONTINUED)
The Company advanced to Intelecon monies to purchase certain equipment
on behalf of the Company. Intelecon did not purchase the equipment and,
therefore, breached its contract and was unjustly enriched. The Company
brought a claim against Intelecon for $105,000, which is included in
other assets at April 30, 2001.
During April 2001, the Company reached a settlement with Intelecon for
$117,000, payable in the amount of $15,000 per month, until $117,000
has been paid in full.
CONSULTING AGREEMENTS
In June 2000, the Company entered into a marketing and public relations
agreement to publicize the Company to brokers, prospective investors,
institutional investors, analysis and others, for a term of six months.
In consideration of the above services, the Company has paid the
consultant $50,000. In addition, the consultant was issued 50,000
shares of the Company's common stock. The consultant was also issued a
warrant entitling it to purchase, in the aggregate, up to 200,000
shares of the Company's common stock. The warrant is divided into four
tranches of fifty thousand (50,000) shares each, with each tranche to
have the following exercise prices: Tranche 1 - $7.00 per share;
Tranche 2 - $8.50 per share; Tranche 3 - $10.00 per share; and Tranche
4 - $11.50 per share. The consultant and the Company shall enter into a
registration rights agreement with respect to the registration of the
above common stock and Warrant Shares. The consultant has not exercised
any of these warrants as of April 30, 2001.
The warrants were assigned a value of $762,000, which was all charged
to operations during the year ended October 31, 2000.
In March 2001, the Company entered into a consulting agreement with a
company for developing a new corporate positioning strategy and
identifying an enhanced brand platform. The Company agreed to pay
$10,000 prior to the consulting company commencing work, $7,500 upon
delivery of the first stage and $7,500 upon fulfillment of the
contract.
During March 2001, the Company entered into a consulting agreement with
a company to provide financial advice and to arrange for equity
investments or other funding. The Company will pay for such services by
providing the consultant with fees equal to (i) 5% of the gross amount
of any cash financing obtained for the Company, payable in cash; (ii) a
number of shares of stock equal to 10% of the stock issued in
connection with any financing obtained for the Company; and (iii) a
number of warrants equal to 10% of the warrants issued in connection
with any financing obtained for the Company. The term of this agreement
is six months.
In April 2001, the Company entered into a consulting agreement with a
company for a comprehensive level of international communications
services. The Company agreed to pay minimums of $15,000 per month plus
related hard costs for services and expenses.
27
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
On February 11, 2000, the Company entered into an employment agreement
with its current Chief Executive Officer. The agreement, effective
April 1, 2000, is a three-year employment contract that provides for
base compensation in the first contract year of $250,000; in the second
contract year, base compensation of $300,000; and in the third year and
during any renewal term, base compensation of $350,000. The employee is
also entitled to an annual bonus based upon his performance which will
be at the sole discretion of the Board of Directors. The annual bonus
to the CEO shall be payable in cash or in an amount of shares of the
Company's common stock that equals the amount of the bonus based upon
the market price of the employer's common stock on the date that the
bonus is paid.
In connection with its New Wheel acquisition, in February 2000, the
Company entered into two employment agreements for executive services.
The agreements provide for the Company to pay base salaries of $208,000
each per annum and a bonus of $12,500 each upon the execution of the
agreement. The agreements were to expire in September 2000, but have
been extended through February 2001.
On June 20, 2000, the Company entered into a three-year employment
agreement with its Executive Vice President commencing July 1, 2000,
whereby the Executive Vice President shall receive a base salary of
$15,000 per year and options to purchase 210,000 shares of common stock
at $4.40 per share. Of these stock options, 35,000 vested on July 1,
2000, and the balance vests straight-line on the last day of each
quarter beginning September 30, 2000 and ending December 31, 2002, or
17,500 per quarter. The options expire on July 1, 2005.
JOINT VENTURE PRODUCTION AGREEMENT
In April 2000, the Company entered into a joint venture production
agreement to produce a feature length film for theatrical distribution.
The Company will provide the funding for the production in the amount
of $2,250,000 and, in exchange, will receive 50% share in all net
profits from worldwide distribution and merchandising, after receiving
funds equal to its initial investment of up to $2,250,000. The film is
to be completed and ready for a Summer 2002 release. The Company has
agreed to deposit into a separate account, on a monthly basis, funds to
assure a minimum balance of $200,000 at the beginning of each month,
until the total of $2,250,000 has been deposited into the account. As
of April 30, 2001, the Company has funded approximately $1,030,000 of
production and other costs, which was included in projects under
development in the accompanying consolidated balance sheet.
28
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
On January 3, 2000, the Company entered into an operating lease for
office space in San Diego, California. The lease commenced on February
1, 2000 and expires in January 2005. The lease provides for a minimum
annual rental of approximately $54,000, with a 3% annual increase each
year, starting on February 1, 2001 and each year thereafter.
On February 16, 2000, the Company entered into an operating lease for
office space in Livermore, California. The lease commenced on March 1,
2000 and expires on February 28, 2002. The lease provides for a minimum
annual rental of approximately $25,700 for the first year and $26,800
the following year. This lease was terminated during May 2001 (Note 9).
Rent expense for the six months ended April 30, 2000 and 2001 was
$17,788 and $48,250, respectively.
ROYALTY PAYMENTS
The Company's projects under development stipulate royalty payments
which are based on percentages of revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents.
At April 30, 2001, the Company had a bank balance in excess of
federally insured limits by approximately $12,583.
NOTE 8 - BUSINESS RISKS AND SEGMENT INFORMATION
The Company operates in two business segments, the production of motion
pictures, films and videos (entertainment segment) and development of
new content telecommunications technologies (telecommunication
segment). The success of the Company's entertainment business is
dependent on future revenues from the Company's current joint venture
production agreement to produce a feature-length film for theatrical
distribution.
29
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - BUSINESS RISKS AND SEGMENT INFORMATION (CONTINUED)
The success of the Company's telecommunication segment is dependent
upon the successful completion of development and testing of its New
Wheel technology. No assurances can be given that the Company can
complete development of such technology, or that with respect to such
technology that is fully developed, it can be commercialized on a large
scale basis or at a feasible cost. Even though subsequently the Company
has received independent third party verification that this technology
does work, there is no assurance can be given that such technology will
receive market acceptance.
Until the commencement of sales from either segment, the Company will
have no operating revenues, but will continue to incur substantial
operating revenues, capitalized costs and operating losses.
The Company funded its operations during the six months ended April 30,
2001 through sales of its common stock, resulting in net proceeds to
the Company of $2,314,679. Sales of common stock during the six months
ended April 30, 2001 were sold in private transactions in reliance on
various exemptions from the registration requirements of the Securities
Act. The Company is exploring other financing alternatives, including
private placements and public offerings.
Under an agreement which was concluded in November of 2000, the Company
has obtained an equity line of credit of up to $5 million to fund its
telecommunication segment. The equity line has various limits on
amounts of drawdowns and, under certain circumstances, the purchaser
may not be obligated to purchase stock offered for sale by the Company
(Note 6).
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
For the Six Months Ended April 30, 2001:
---------------------------------------
Telecommunication Entertainment Corporate
Business Business Headquarters Totals
----------------- -------------- ------------- -------------
Net Sales $ - $ - $ - $ -
Operating Loss $ (662,094) $ - $ (2,725,083) $ (3,387,177)
Depreciation and Amortization $ 506,614 $ 8,733 $ 54,466 $ 569,813
Total Identifiable Assets $ 86,663 $ 1,352,561 $ 297,604 $ 1,736,828
For the six months ended April 30, 2000, the Company's only reportable
segment consisted of the entertainment business.
30
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
(A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS
COMMON STOCK
In May 2001, the original investors that were parties to the Company's
November 17, 2000 private placement (Note 6) assigned their rights and
obligations to two institutional investors. In May 2001, the Company
issued 256,770 shares of common stock to the investors for proceeds of
$660,000.
In June 2001, the Company issued 63,011 shares of common stock to the
investors for $123,000.
CONSULTING AGREEMENT
In May 2001, the Company entered into a one-year consulting agreement
with a company for providing consulting and advisory services in
connection with strategic business planning and related matters. The
Company agreed to grant warrants to purchase 500,000 shares of common
stock at an exercise price of $2.50 per share; 250,000 shares of common
stock at an exercise price of $5.00 per share, and 250,000 shares of
common stock at an exercise price at $10.00 per share. The exercise
period is five years. The fair value of stock warrants are estimated on
the date of grant using the Black-Sholes option-pricing model range
from $0.32 to $1.32.
LEASES
On May 4, 2001, the Company terminated an operating lease for office
space in Livermore, California, which commenced on March 1, 2000.
Meanwhile, the Company entered into an operating lease for office space
in Pleasanton, California. The lease commenced on June 1, 2001 and
expires on May 31, 2004. The lease provides for a minimum annual rental
at approximately $120,000 for the first year and $156,000 the following
year.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of our results of operations
and should be read in conjunction with the financial statements and related
notes contained in this Form 10-Q.
RESULTS OF OPERATIONS
---------------------
For the Six Months Ended April 30, 2001 vs. the Six Months Ended April 30, 2000
-------------------------------------------------------------------------------
REVENUES. Revenues for the six months ended April 30, 2001 were $-0-.
Revenues for the six months ended April 30, 2000 were $6,800.
OPERATING EXPENSES. Operating expenses include amortization of project
costs, writedown of project costs, depreciation of property and equipment,
compensatory element of stock issuances, acquired in-process research and
development expenses, research and development expenses, and selling, general
and administrative costs. Total operating expenses decreased to $1,869,000 for
the six months ended April 30, 2001, from $8,836,000 for the six months ended
April 30, 2000. The decrease was principally related to $1,814,779 in
compensatory element of stock issuances and a $6,050,000 charge to earnings for
acquired in-process research and development costs for the six months ended
April 30, 2000. An increase of $280,000 in selling, general and administrative
expense was due to an increase in our corporate infrastructure, which includes
two separate office spaces.
The acquired in-process research and development costs in 2000 were
associated with the acquisitions of New Wheel Technology ($6,000,000) and Impact
Pictures ($50,000).
OTHER EXPENSES. Other expenses included amortization of unearned
financing fees, interest expense and settlement of litigation. Total other
expenses increased from $-0- for the six months ended April 30, 2000 to
$1,518,430 for the six months ended April 30, 2001. The increase was principally
related to $500,000 in amortization of unearned financing fees and $1,000,000 of
settlement of litigation. We issued 250,000 shares of common stock valued at
$1,000,000 for the February 16, 2001 settlement reached with Astounding.com,
Inc. and Jack Robinson in connection with certain disputes arising from a
non-consummated merger between us and Astounding.com, Inc.
32
For the Three Months Ended April 30, 2001 vs. the Three Months Ended April 30,
2000
------------------------------------------------------------------------------
REVENUES. Revenues for the three months ended April 30, 2001 were $-0-.
Revenues for the three months ended April 30, 2000 were $6,800.
OPERATING EXPENSES. Operating expenses include amortization of project
costs, depreciation of property and equipment, compensatory element of stock
issuances, acquired in-process research and development expenses, and selling,
general and administrative costs. Total operating expenses decreased from
$8,546,141 for the three months ended April 30, 2000 to $1,231,679 for the three
months ended April 30, 2001. The decrease was principally related to $1,814,729
in compensatory element of stock issuances and a $6,000,000 charge to earnings
for acquired in-process research and development costs during the second quarter
of 2000.
The acquired in-process research and development costs were associated
with the acquisition of New Wheel Technology.
OTHER EXPENSES. Other expenses included amortization of unearned
financing fees and interest expense. Total other expenses increased from $-0-
for the three months ended April 30, 2000 to $260,986 for the three months ended
April 30, 2001 due primarily to $250,000 in amortization of unearned financing
costs.
LIQUIDITY AND CAPITAL RESOURCES
Operations have been financed through private sales of common stock and
loans, resulting in net proceeds of approximately $2,315,000 and $1,530,000 for
the six months ended April 30, 2001 and April 30, 2000, respectively. In
addition, during the six months ended April 30, 2000, a portion of expenses were
paid by the issuance of stock.
In April 2000, we entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. Under the agreement,
we will provide the funding for the production in the amount of $2,250,000 and,
in exchange, we will receive a 50% share in all net profits from worldwide
distribution and merchandising, after receiving funds equal to our initial
investment of up to $2,250,000. The film is to be completed and ready for a
Summer 2002 release. We have agreed to deposit into a separate account, on a
monthly basis, funds to assure a minimum balance of $200,000 at the beginning of
each month, until the total of $2,250,000 has been deposited into the account.
As of April 30, 2001, we had funded approximately $1,030,000 of the production
costs towards this project.
Research and development expenses related to operations of our New
Wheel subsidiary totalled $662,000 and $-0- for the six months ended April 30,
2001 and the six months ended April 30, 2000, respectively.
33
On November 17, 2000, and as amended on January 22, 2001, we entered
into a private placement agreement with various investors, to sell $5,000,000 of
our common stock in several tranches at a purchase price equal to 87% of the
average market price of our common stock over the five days preceding the
closing of each draw down. We can sell stock to the investors in 5-day intervals
not to exceed $500,000 per sale. The investor may refuse to purchase the stock
in the event the average purchase price is below $2.00 per share, or if the
trading volume of our common stock is below a certain number of shares within
the period, or if we sell capital stock in excess of $5,000,000, exclusive of
any funding for our pending motion picture project. We may not apply any portion
of the draw downs towards payment of any costs related to the production of our
pending motion picture project. In May 2001, the original investors assigned
their rights and obligations under the agreement to two institutional investors.
This agreement terminates on November 17, 2002.
In addition, the investors received warrants to purchase 4,000,000
shares of common stock to be issued in two series (Series A warrants and Series
B warrants). Each Series A warrant can be exercised at a price per share equal
to the lesser of $6.00 or 50% of the average of the closing sales price of our
common stock over the five consecutive trading days immediately preceding the
date of the exercise of the warrants. Each Series B warrant can be exercised at
a price per share of $6.00. The Series B warrants have a cashless exercise
provision. The warrants expire on November 17, 2003.
Through April 30, 2001, we received proceeds under this agreement of
$1,187,000 from the investors in consideration of the purchase of 317,000 shares
of our common stock.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
-- Deferral of the Effective Date of SFAS Statement No.133" and in June 2000,
the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments -- an
amendment of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities". As a result of SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not expect that the adoption of this standard will have a material
impact on our financial position and results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 138 will be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect that the adoption of this standard will have a material impact on our
financial position and results of operations.
In June 2000, the Financial Accounting Standards Board issued SFAS No.
139, which rescinds SFAS No. 53 and requires public companies to follow the
guidance provided by SOP 00-2.
34
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No.25". FIN 44 clarifies the application of
Opinion 25 with respect to (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. We adopted FIN 44 effective July 1, 2000. The adoption of the
provisions of FIN 44 did not have a material effect on our financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market risk sensitive instruments and do
not purchase as investments, as hedges, or for purposes "other than trading,"
instruments that are likely to expose us to market risk, whether it be from
interest rate, foreign currency exchange, commodity price or equity price risk.
We have not entered into any forward or futures contracts, purchased options or
entered into swaps. Accordingly, we do not believe our exposure to market risk
is material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 22, 2000, the Company filed a lawsuit in the State District
Court in Dallas, Texas against Astounding.com, Inc. and Jack Robinson. The
Company's complaint alleged that, among other things, Astounding.com and
Robinson breached certain contractual obligations made to the Company and
engaged in negligent and/or fraudulent misrepresentation to induce the Company
to enter into a merger agreement. The Company sought a court order confirming
that the merger agreement is null and void, and an award of unspecified damages,
court costs and attorneys fees. Astounding.com and Robinson filed a counterclaim
against the Company that alleged breach of contract and unjust enrichment, and
sought unspecified damages, court costs and attorney fees.
On February 16, 2001, the Company, Astounding.com and Robinson entered
into a settlement agreement (the "Agreement"), pursuant to which, among other
things, (i) the parties mutually released each other from any and all claims
relating to the merger agreement and the above-referenced litigation, and (ii)
the Company acquired the outstanding stock of Astounding.com in exchange for
250,000 restricted shares of the Company's common stock issued to Robinson and
his attorneys. The Company also agreed to file a registration statement for
these shares by March 31, 2001 and to cause the registration statement to become
effective by June 29, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended Apri1 30, 2001, the Company sold
unregistered securities as follows:
1. On November 17, 2000, the Company entered into a Securities
Purchase Agreement with eight investors to sell up to $5,000,000
of the Company's common stock in several tranches over the next
two years at a purchase price equal to 87% of the average market
price of the Company's common stock over the five days preceding
each draw down. During the three months ended April 30, 2001, the
Company received $620,000 under this agreement in consideration
for the issuance of 207,307 shares of common stock.
2. In December 2000, the Company sold an aggregate of 219,904 shares
of common stock to two individuals for aggregate proceeds of
$600,000.
35
3. In March 2001, the Company sold 46,250 shares of common stock at
$2.80 per share to four individuals for aggregate proceeds of
$129,500. Attached to the 46,250 shares of common stock were
23,125 warrants with an exercise price of $5.10 per share, which
expire in March 2004.
4. In April 2001, the Company sold 58,321 shares of common stock at
$2.80 per share to four individuals for aggregate proceeds of
$163,300. Attached to the 58,321 shares of common stock were
29,161 warrants with an exercise price of $5.10 per share, which
expire in April 2004.
All transactions described above were deemed to be exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2) of
such Securities Act as transactions by an issuer not involving any public
offering. All purchasers represented that they were "accredited investors"
within the meaning of Regulation D under the Securities Act of 1933. All of the
securities issued in these transactions contained a restrictive legend to the
effect that they could not be sold or transferred without registration or an
applicable exemption.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Description
10.1 Consulting Agreement dated as of May 1, 2001 by and
between New Visual Entertainment, Inc. and Advisor
Associates, Inc.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended April 30, 2001.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VISUAL ENTERTAINMENT, INC.
Date: June 14, 2001 By: /s/ RAY WILLENBERG, JR.
------------------------
Ray Willenberg, Jr.
Chief Executive Officer
Date: June 14, 2001 By: /s/ THOMAS J. SWEENEY
---------------------
Thomas J. Sweeney
Chief Financial Officer
37