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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1996
Commission File No.0-21785
NEW VISUAL ENTERTAINMENT, INC.
(Exact name of small business issuer in its charter)
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<S> <C>
UTAH 95-4543704
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5737 PACIFIC CENTER BLVD. SAN DIEGO, CALIFORNIA 92121
(Address of principal executive office) (Zip Code)
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Issuer's telephone number - (619) 657-9777
Securities registered under Section 12 (b) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of each class)
NASDAQ - BULLETIN BOARD
(Name of each exchange on which registered)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 month (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 .
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $43,722
As of October 31, 1996 the registrant had outstanding 12,425,227 shares of its
Common Stock, par value of $0.001, its only class of voting securities. The
aggregate market value of the shares of Common Stock of the registrant held by
non-affiliates on February 13, 1997, was approximately $6,989,190 based on the
average sales prices on the NASDAQ-BB on such date (See Item 5).
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DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes ; No X .
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
New Visual Entertainment, Inc., a developmental stage enterprise (previously
known as Bellwether Investment Inc.) (the "Company"), was incorporated under the
laws of the State of Utah on December 5th, 1985, is a holding company which is
principally engaged in acquisitions and developing business related to the
entertainment industry. The Company presently has no wholly owned subsidiaries.
On October 18th, 1995, the Company acquired all of the outstanding shares of
Siliwood Entertainment Corporation ("Siliwood"), another developmental stage
company with no operations. The Company issued a total of 5,911,592 shares of
common stock to the shareholders of Siliwood to effect the reverse acquisition.
The reverse acquisition was accounted for as a recapitalization, and was
accounted for in a manner similar to a pooling of interest. The Company then
changed its name to Siliwood Entertainment Corporation.
On June 10th, 1996, the Company acquired certain assets and assumed various
liabilities from Infinity Vision Entertainment, a Nevada Corporation, and
("IVE"). Following the purchase, Siliwood changed its name to New Visual
Entertainment, Inc. ("NV Entertainment"). Accordingly, former IVE shareholders
own NV Entertainment (formerly known as Siliwood) common stock. The acquisition
of these assets and the assumption of these liabilities has been accounted for
under the purchase method, with the costs being allocated to the assets based on
fair market value. There were no operations of NV Entertainment prior to the
acquisition. There were minimal operations of IVE at the time of the
acquisition. The Company is currently engaged in the development, design and
distribution of software techniques, videos, and theaters for stereoscopic
("3D") entertainment. To date the Company has generated minimal revenues. Due to
the nature of the business, the Company has presented an unclassified balance
sheet.
New Visual Entertainment consists of three divisions which are located in Los
Angeles and San Diego: (1) The Administrative offices are located at 5737
Pacific Center Blvd, San Diego, California and coordinate corporate operations;
(2) The Theatrical/ Exhibition division is also located in San Diego and
functions primarily as a sales and distribution center for themed,
location-based, mobile theater sales and installations; (3) The Production
division, located at 1805 Colorado Ave., Santa Monica, CA, 90404, coordinates
all production efforts, develops industry relations, and markets the Company's
music library as well as in-home 3D viewing systems.
PRODUCTS
CAMERA & 3D SIGNATURE
NV Entertainment owns certain exclusive licenses to use intellectual properties
relating to its business. The Company has exclusive access to a patented dual
element, single lens system utilized in connection with the production of 3D
motion pictures. In addition, the Company believes it has exclusive ownership of
two of the only three "6 Perforation" cameras that have been manufactured; the
Company also has exclusive access to the third camera. Finally, the Company has
an exclusive
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license to use a patented 3D signature for the productions and products relating
to action sports and maintains unlimited access to all other subject matter.
MARKETING AND DISTRIBUTION
The Company's primary function is to facilitate the production and distribution
of its 3D technology, as well as the establishment of new, innovative platforms
for the presentation of 3D media. NV Entertainment has already produced two
completed 3D films: "Edge of Reality" and "Beyond 3D".
The Company will market its 3D technology by providing the industry with the
necessary tools to allow for 3D production and viewing within the current 2D
infrastructure. This will be accomplished by the following:
(i) Produce and distribute 3D content for the video, broadcast
television ("TV") and motion picture industries;
(ii) Establish special theaters for showcasing 3D content;
(iii) Create a mass audience and mainstream distribution channel; and
(iv) License the technology to the entertainment industry.
The immediate focus of the Company is to create a library of 3D products. The
Company has already produced and marketed the world's first wide-angle
35-millimeter extreme sports film, "Edge of Reality," which has been viewed by
nearly one half million people. In addition, the Company recently filmed the
nationwide "AT&T On Tour" concert series of alternative rock and pop artists.
This production was the first of its kind and is intended to have a broad market
appeal to the 3D target audience.
3D MARKETS
Three-dimensional entertainment markets are currently characterized by
relatively short content (one hour or less), and explosive action in color,
images, events or scenery. Prime 3D markets include music videos, action
television programming, nature documentaries, sports events, promotional
material, merchandising tie-ins, and specialized films for location-based visual
entertainment. The Company believes that with continued technology development
the re-emergence of full-length 3D movies may reappear in the near future.
VISUAL ENTERTAINMENT MARKET
The total potential market for NV Entertainment's 3D technology is estimated to
be $3.5 billion, and encompasses three distinct entertainment industries;
broadcast and cable television, video software, and motion pictures. In
addition, Location Based Entertainment ("LBE") theaters represent a
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profitable and rapidly growing market segment that could potentially represent
revenues exceeding $180 million.
I) BROADCAST AND CABLE TELEVISION INDUSTRY
Television advertising revenues in 1994 amounted to $ 34.2 billion, and is
currently estimated at about $ 38 billion annually. Household TV penetration now
exceeds 98% of the total households in the United States, with nearly 100% being
color television sets. Currently, the TV population in the United States exceeds
217 million sets, with the average household having a TV on over seven hours
each day. NV Entertainment believes there is substantial opportunity for
enhancing the visual experience with 3D technology.
Initial 3D penetration of visual broadcast markets will be focused on sports
events, music videos and special programming, such as the "AT&T On Tour"
projects. As the mass TV audience acquires 3D viewers, NV Entertainment believes
the scope of 3D programming will expand. Syndicated 3D programs, or even
dedicated time slots or channels, may be broadcast in 3D and could facilitate
widespread video software and motion picture opportunities.
(II) VIDEO SOFTWARE INDUSTRY
Video software (dubbed videotapes) is a $15 billion retail industry divided
almost equally between sales and rentals. During 1995, video software volume
reached 490 million pre-recorded tapes in addition to 375 million blank video
cassettes. Revenue generated by video (content) suppliers was just over $ 6.0
billion in 1995, or about $12.25/tape. Over 75 million households in the United
States have video cassette recorders ("VCR's"), or 80% of all households with
televisions. Currently, distribution of 3D content to the home entertainment
market is nearly non-existent
Distribution of video software is primarily controlled by over 27,000 specialty
video stores such as Blockbuster Entertainment. These video specialty stores
generate over 80% of total revenue from video rentals. Video tapes are primarily
sold through mass merchants, video specialty stores, and discount stores.
Collectively, these stores generate over 75% of video tape sales. NV
Entertainment is currently negotiating joint distribution agreements with
entertainment companies.
DEPENDENCE ON PRODUCTION OF FILM SOFTWARE
The ability of the Company to implement its business strategy depends upon its
ability to successfully create, produce, and market entertainment or educational
software for exhibition in its theater systems and home markets. The size and
quality of the Company's library of film software titles is a material factor in
competing for sales of the Company's attractions and developing the Company's
base of recurring revenue.
The Company intends to produce and develop specialty films and videos for its
library with production budgets in a range of approximately $ 100,000 to $ 4
million. While the Company may enter into participation, licensing or other
financial arrangements with third parties in order to
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minimize its financial involvement in production, the Company will be subject to
substantial financial risks relating to the production and development of new
entertainment and educational software. The Company expects that it will
typically be required to pay for the production of software during the
production period prior to release but will most likely be unable to recoup
these costs from revenues from exhibition licenses prior to 24 to 36 months
following release.
DISTRIBUTION METHOD OF PRODUCTS
The primary target markets for New Visual products are: home entertainment,
motion pictures production, theatrical/LBE exhibition, and theme/amusement park
markets. Other ancillary markets include PC gaming and special event venue
markets. The Company intends to distribute its products through network and
exhibition contracts, and through distribution agreements with other video and
programming distributors. Hardware products will, in most cases, accompany the
sale of software (content) in a bundled 3D viewer kit containing a video, 3D
eyewear, and 3D emitter/decoder box.
COMPETITION
Although a considerable number of companies have 3D products, NV Entertainment
believes it is positioned to deliver 3D content to mass in-home audiences which
presently is not done by its competitors.. The foundation for exploiting the
home market has been constructed by negotiations with Fox.
A low price structure is required to appeal to these markets that few
competitors are presently able to meet. Currently, no companies have established
a substantial presences in the home market. The competitive environment in this
market consists of limited suppliers of 3D viewers and content (CD-ROM, video
tape) kits, such as V-REX, VIDMAX, and others. Conversely, competition in the
special venue markets (theatrical) is much more developed. Currently, there are
four companies other than NV Entertainment that have carved a substantial niche
in special venue markets. The majority of the following competitors are public
entities. They are as follows:
- - IMAX
IMAX is the most formidable presence in both hardware and software special
format entertainment. After a 1994 loss of $11.5 million, the Company
gained momentum during the third and fourth quarters of 1995. IMAX
reported $0.41 earnings per share for the first 6 months of 1996 and
reported a sales backlog of $113.5 million as of June 1996.
The fact that IMAX uses a 15 perforation 70 mm system limits its ability
to market 3D content. As the leading 3D content hardware and software
provider however, IMAX is regarded as NV Entertainment foremost competitor
in special venue markets.
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- - IWERKS
IWERKS specializes in "ridefilm," an experience that combines motion
simulation with visual immersion and functions in either a fixed base or
portable capacity. During the year 1995, IWERKS had a net loss of $13.4
million on $45 million in revenues, preceded by a substantial loss in
1994. Under new management, however, IWERKS is returning to profitability.
- - SHOWSCAN
Showscan also specializes in motion simulation entertainment for specialty
theaters. Showscan operates some 50 theaters in 19 countries. Although the
company continues to lose money, it has a sales backlog of 37 theaters and
is therefore regarded as an NV Entertainment competitor.
- - CINEMA RIDE, INC.
Cinema Ride, Inc., is a minor competitor in specialty theater and motion
simulated entertainment. Cinema Ride technology combines 3D films with
motion to provide unique on screen action. Although incremental growth is
impressive, the company generated only $2.4 million over the past four
quarters. Due to the highly specialized niche of Cinema Ride, NV
Entertainment does not consider Cinema Ride to be a major competitor in
any 3D or special venue market.
NV Entertainment believes that it is in position for the successful marketing of
3D entertainment, particularly to mass in-home markets. The cost structure of
its technology positions it to be viable in the home market. Of the home 3D
technologies available, NV Entertainment research indicates that its technology
presently delivers the highest image quality and is the most adaptable to the
home viewing environment. Furthermore, due to NV Entertainment's low cost,
single camera 3D lens production and exhibition technologies, it is positioned
to provide 3D systems and software to the motion picture industry and special
venue markets.
PROPRIETARY INFORMATION
NV Entertainment's holographic 3D media is differentiated from past or
traditional 3D media in that it is true stereo-imagery as it is produced and
exhibited. It is also different in that NV Entertainment 3D is produced and
exhibited through a single lens. Prior methods used to create and exhibit 3D
employed simulated 3D filming and projection techniques using 2 cameras for
production and 2 projectors for exhibition. Production of true stereo imagery
requires the emulation of depth perception known to normal human eyesight, which
results from two (right and left) converging fields of perception on an object
from slightly different perspectives. The differing perspectives occur due to
the distance between a human's eyes. 3D content can be produced in a number of
formats for Film, Video, Computer/Internet and Broadcast TV. The shutter glass
viewing system can be utilized to view all of these formats, yet is primarily
used for video, computer/Internet, broadcast TV and satellite transmission
mediums.
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Once 3D content has been produced, whether by single or dual camera methods, it
can be viewed on any standard television monitor for most TV broadcast standards
(NTSC-North America, PAL-Asia, Australia) when accompanied by the shutter glass
system. When a 3D video tape or broadcast signal is displayed on the TV, the
naked eye sees two (2) separate, overlapping images; one for the right eye and
one for the left eye. The viewing system, however, isolates the right and left
eye views so as to allow the right eye to see only the right eye view, and the
left eye to see only the left eye view, but from slightly differing
perspectives. This is accomplished by the Liquid Crystal shutters within the
glasses that alternate, Lon-Roff, Ron-Loff, at a rate of 60-120 herts, or 30-60
times per second for each eye. The timing of the shutter is synchronized with
the action on the monitor by the wireless transmitter. The transmitter
communicates with the transmission medium (video tape, broadcast signal, etc.),
interprets the synchronization code and transmits instructions to the glasses by
means of an infrared signal.
EMPLOYEES
The company has a total of six (6) employees. These include three (3)
officers and three (3) production personnel.
ITEM 2. PROPERTIES
The Company's current corporate offices are located in San Diego,
California at 5737 Pacific Center Blvd, Suite A, which presently consists of
2,000 square feet. The term of the lease is five (5) years commencing on
December 1, 1996. In addition, the Company has 3,000 square feet leased for five
years for use as its production office, located at 1805 Colorado Avenue, Santa
Monica, California. This space will meet the Company's current needs and any
foreseen expansion in the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings other than
ordinary routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective, the name of the Company was changed to New Visual
Entertainment, Inc. Under Utah corporation law the amendment must be approved in
writing by at least a majority of the voting stock of the Company.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is currently listed on the NASDAQ
over-the-counter market under the symbol "NVXE" (previously "SLWC"). Prior to
its listing on February, 1996, the Company was not listed.
The following chart shows the quarterly high and low bid-ask prices of the
stock for the Company's common stock for the last two fiscal years, as reported
on the NASDAQ. The prices represent quotations by dealers without adjustments
for retail mark-ups, mark-downs or commission and may not represent actual
transactions.
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COMMON STOCK
------------
BID ASK
--- ---
HIGH LOW HIGH LOW
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Fiscal Quarters-1996
(November 1995 through
October 1996)
First Quarter Not Traded
Second Quarter 3/4 3/8 1 1/4 3/4
Third Quarter 3 3/4 7/8 4 1/2 1 1/4
Fourth Quarter 3 1 5/32 3 3/8 1 5/16
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HOLDERS
The approximate number of record holders of the Company's Common Stock as of
October 31, 1996 was 284, an undetermined number of which represent more than
one individual participant in securities positions with the Company.
DIVIDENDS
The Company has never paid cash dividends on its common stock, and intends
to utilize current resources to expand its operations. Therefore, it is not
anticipated that cash dividends will be paid on the Company's common stock in
the foreseeable future.
ITEM 6. PLAN OF OPERATION
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The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements set forth of pages 17 through 32 hereof,
including index.
The current plan of New Visual Entertainment incorporates operational resources
that will make holographic 3D media ("H3D") a mainstream entertainment form. The
Company plans to reach the mass market by aligning itself with
already-established, branded products and titles for the production, promotion
and distribution of H3D. New Visual management intends to aggressively evaluate
and pursue production opportunities in order to increase the Company's content
library and maintain a leadership position as the foremost provider of H3D. In
keeping with the rapid pace of technological growth in the entertainment
industry, the Company also plans to continually develop and implement new
entertainment forms for the production and exhibition of the New Visual
Experience ("NVX"), the Company's brand of H3D.
In order to satisfy cash requirements for the Company's production and revenue
goals, management must obtain working capital through either debtor equity
financings. For the purpose of general operations and production needs, the
Company anticipates the need for funding of approximately $3,000,000 over the
next 12 months. Such funding may be accomplished through public financial
markets, private offerings, and joint venture opportunities. In addition to the
need for production funds, the Company will need to raise capital for the
manufacturing and purchase of NVX shutter glasses in mass quantities. Funding
required for the purchase and sale of the glasses is dependant upon the timing
and size of the purchase orders.
As a development stage enterprise, the Company has minimal historical
operations, negative cash flows, and liquidity problems. These matter raise
substantial doubt as to the Company's ability to continue as a going concern.
The Company's future operations are dependent upon generating funds to finance
the production, marketing and expansion of its operations.
Financial characteristics of the industry include a relatively low cost of goods
sold with substantial operating expenses. Operating expenses are primarily
attributable to content production and are incurred in total prior to any income
realized from the product. Once content is produced, however, it is an asset
which may be distributed through multiple channels repeatedly over time. As a
result of front end production costs, New Visual Entertainment anticipates a net
loss for fiscal 1996, but expects to be profitable in fiscal 1997 and 1998.
The entertainment industry is highly competitive in the production and
distribution of content. Although there can be no assurances of any capital
appreciation or sufficient revenues to produce quarterly dividends, the Company
believes that due to the expansion and diversification of programming, an
opportunity exists for the introduction of a new mainstream entertainment
format.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of New Visual Entertainment, Inc.,
together with the reports thereon, are set forth on pages 17 through 32 hereof,
including index.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PHIL KUEBER, age 35, was elected President and Director of NV Entertainment in
1995 and resides in Los Angeles, California. Mr. Kueber has financed and managed
high technology growth companies, such as Offshore Navigational Systems and
Knave Digital Systems from 1991 to 1996. From 1983 to the present, Mr. Kueber
has also written and produced television and multi-media entertainment, and
recently completed research and development on a new product for digital video.
FRANK DEMILLE, age 50, was elected Director and Chief Financial Officer of NV
Entertainment in 1995 and currently resides in New York City. Mr. DeMille has
been actively involved in entertainment and venture financing for several
companies including Software Control Systems, and feature film financing since
1976. Mr. DeMille recently concluded a twelve year career as a stockbroker on
Wall Street. Prior to joining the Company, from November 1994 to November 1995,
Mr. DeMille was a broker with Rickel & Associates and from October 1991 through
September 1994, Mr. DeMille was a broker with the firm of The Stamford Company.
RAY WILLENBERG, JR., age 45, was elected Vice President and Corporate Secretary
of New Visual Entertainment, Inc. In 1996. Mr. Willenberg has over 25 years of
experience in the mortgage banking industry and executive level management. For
the Company, Mr. Willenberg is responsible for theater and internal operations,
project fund raising and personnel development. From 1972 to 1995, Mr.
Willenberg was Chief Executive Officer of Mesa Mortgage Company in San Diego,
California.
ITEM 10. EXECUTIVE COMPENSATION
For services rendered to the Company during the fiscal year ended October 31,
1996 and for the prior two fiscal years, no executive officers received cash
compensation in excess of $100,000. The following table sets forth information
concerning all annual cash compensation paid to the chief executive officer of
the Company for services rendered to the Company during the twelve month period
ended October 31, 1996.
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NAME AND FISCAL OTHER ALL
PRINCIPAL YEAR ANNUAL OTHER
POSITION END SALARY BONUS COMPENSATION COMPENSATION
--------- ------ ------ ----- ------------ ------------
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PHILLIP T. KUEBER, 1996 50,000
PRESIDENT
1995 -0- -0- -0- -0-
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information, as of October 31, 1996, all
persons known by the Company to own beneficially more than 5% of any class of
the Company's voting securities and concerning shares of each director and
officer and by all directors and officers as a group. Percent of class for all
beneficial owners assumes that all options and warrants have been exercised and
the preferred stock has been converted. Unless expressly indicated otherwise,
each stockholder exercises sole voting and investment power with respect to the
shares beneficially owned.
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NAME & ADDRESS NUMBER OF SHARES PERCENT
CLASS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ----- ------------------- ------------------ --------
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Common Phil Kueber 5,000 Common Less than 1%
Stock 5737 Pacific Center Blvd.
San Diego, CA 92121
Common Ray Willenberg, Jr. 155,619 Common 1.3 %
Stock 5737 Pacific Center Blvd.
San Diego, CA 92121
Common Frank DeMille 1,000,000 Common 8.6%
Stock 434 E. 58th, Suite 1D
New York, NY 10022
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
QUALIFYING TRANSACTIONS INVOLVING INTERESTED PERSONS OR ENTITIES
NONE
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS.
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PAGE
EXHIBIT NO. TYPE OF EXHIBIT NUMBER
- ----------- --------------- ------
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3 Articles of Incorporation and Bylaws - Certificate of Incorporation
of the Company are incorporated herein by reference to Form 10-K
for Fiscal year ended June 30, 1987, filed October 15, 1987. N/A
4 Instruments defining the rights of security holders, including indentures N/A
9 Voting Trust Agreement N/A
10 Material Contracts - N/A
Stock Purchase Agreement is incorporated herein by reference to
Registrant's Form 8-K dated February 14, 1994
11 Statement regarding Computation of Per Share Earnings 33
13 Annual Report to Security Holders N/A
16 Letter regarding Change in Accounting Principles N/A
18 Letter on Change in Accounting Principles N/A
21 Subsidiaries of the Registrant N/A
22 Published Report Regarding Matters Submitted to Vote of Security
Holders
23 Consents of Experts and Counsel N/A
24 Power of Attorney N/A
27 Financial Data Schedule 33
99 Additional Exhibits N/A
(b) REPORTS ON FORM 8-K. None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 5, 1997 By /s/ Philip Keuber
-----------------
President
Date: March 5, 1997 By /s/ Ray Willenberg
------------------
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Date
/s/Philip Kueber March 5, 1997
- --------------------------------
Philip Kueber,
President & Director
/s/Frank DeMille March 5, 1997
- --------------------------------
Frank DeMille
Chief Financial Officer
And Director
/s/Ray Willenberg March 5,1997
- --------------------------------
Ray Willenberg
Secretary and Director
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EXHIBITS HAVE BEEN OMITTED FROM THIS COPY. COPIES OF EXHIBITS MAY BE OBTAINED
FROM NEW VISUAL ENTERTAINMENT, INC., UPON REQUEST AND PAYMENT OF THE COSTS OF
FURNISHING SUCH COPIES. COPIES MAY ALSO BE OBTAINED FROM THE SECURITIES AND
EXCHANGE COMMISSION FOR A SLIGHT CHARGE.
(The foregoing is not applicable to the original(s) hereof.)
SECURITIES
AND EXCHANGE
COMMISSION
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<CAPTION>
PAGE
EXHIBIT NO. TYPE OF EXHIBIT NUMBER
- ----------- --------------- ------
<S> <C> <C>
3 Articles of Incorporation and Bylaws - Certificate of Incorporation of the
Company are incorporated herein by reference to Form 10-K for Fiscal year
ended June 30, 1987, filed October 15, 1987. N/A
4 Instruments defining the rights of security holders, including indentures N/A
9 Voting Trust Agreement N/A
10 Material Contracts - N/A
Stock Purchase Agreement is incorporated herein by reference to
Registrant's Form 8-K dated February 14, 1994
11 Statement regarding Computation of Per Share Earnings N/A
12 Statement Regarding Computation of Ratios N/A
13 Annual Report to Security Holders N/A
16 Letter on Change in Certifying Account N/A
18 Letter regarding Change in Accounting Principles N/A
19 Previously Unfiled Documents N/A
22 Subsidiaries of the Registrant N/A
23 Published Report Regarding Matters Submitted to Vote of Security Holders N/A
</TABLE>
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<CAPTION>
PAGE
EXHIBIT NO. TYPE OF EXHIBIT NUMBER
- ----------- --------------- ------
<S> <C> <C>
24 Consents of Experts and Counsel N/A
25 Power of Attorney N/A
28 Additional Exhibits N/A
</TABLE>
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NEW VISUAL ENTERTAINMENT, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants 18
Balance Sheet at October 31, 1996 19
Statements of Operations for the years ended October 31,
1996 and 1995, and the period December 5, 1985 (inception)
through October 31, 1996 20
Statements of Stockholders' Equity (Deficiency) for the years
October 31, 1996 and 1995 and for the period December 5, 1985
(inception) through October 31, 1996 21-23
Statements of Cash Flows for the years ended October 31, 1996
and 1995 and for the period December 5, 1985 (inception)
through October 31, 1996 24-25
Summary of Accounting Policies 26-27
Notice to Consolidated Financial Statements 28-32
</TABLE>
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
New Visual Entertainment, Inc.
(a Development Stage Enterprise)
Los Angeles, California
We have audited the accompanying consolidated balance sheet of New Visual
Entertainment, Inc. (a Development Stage Enterprise), as of October 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended October 31, 1996 and 1995 and for the period
December 5, 1985 (Inception) to October 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Visual
Entertainment, Inc., (a Development Stage Enterprise) at October 31, 1996, and
the results of its operations and its cash flows for the years ended October 31,
1996 and 1995 and for the period December 5, 1985 (Inception) to October 31,
1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9, the
Company has minimal historical operations, negative cash flows, and liquidity
problems. These matters raise substantial doubt as to the Company's ability to
continue as a going concern. The Company's future operations are dependent upon
generating funds to finance the marketing and expansion of its operations. Also,
as discussed in Note 9, management plans to generate these funds through support
from officer loans and the issuance of the Company's stock. There is no
assurance that this will generate sufficient funds to enable the Company to
continue its operations for the next twelve months. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
BDO SEIDMAN, LLP
Los Angeles, CA
February 9, 1997
18
<PAGE> 19
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
October 31,
1996
---------------
<S> <C>
Cash $ 981
Receivables 5,200
Due from related parties (Note 2) 92,041
Theater equipment held for sale 52,820
Film and video library, net (Note 4) 881,278
Projects under development (Note 8) 1,815,534
Music rights, net (Note 6) 1,995,000
Property and equipment, net (Note 3) 279,379
Deposits 300,022
Intangible assets net of accumulated amortization of
$ 82,307 330,893
Organization costs, net of accumulated amortization of
$ 2,735 10,942
--------
$ 5,764,090
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 251,084
Notes payable, related parties (Note 5) 294,500
-----------
Total liabilities 545,584
-----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 6)
Cumulative convertible preferred stock, series A and
B, $30 par value, 200,000,000 shares authorized,
liquidation price of $30 per share, 200,000
shares issued and outstanding 2,100,000
Common stock, $.001 par value, 100,000,000 shares authorized,
12,425,227 issued and outstanding 12,425
Additional paid-in capital 5,201,988
Deficit accumulated during the development stage (1,583,137)
Stock note receivable and subscription receivable (Note 6) (512,770)
-----------
Total stockholders' equity 5,218,506
-----------
$ 5,764,090
===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
19
<PAGE> 20
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 5,
1985
(Inception) to
October 31,
Years Ended October 31, 1996
------------------------------
1996 1995 (Cumulative)
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 43,722 $ -- $ 43,722
----------- ----------- -----------
EXPENSES:
Cost of sales 43,722 -- 43,722
Project written off (Note 4) 770,000 -- 770,000
Selling, general and administrative
expenses 707,496 14,400 813,137
----------- ----------- -----------
Total expenses 1,521,218 14,400 1,626,859
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,477,496) (14,400) (1,583,137)
INCOME TAX EXPENSE (Note 7) -- -- --
----------- ----------- -----------
Net loss before cumulative preferred
stock dividends (1,477,496) (14,400) (1,583,137)
CUMULATIVE PREFERRED STOCK DIVIDENDS (Note 6) (75,000) -- ===========
------------ -----------
NET LOSS APPLICABLE TO COMMON SHARES $(1,552,496) $ (14,400)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.18) $ (0.01)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 8,766,567 1,543,983
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
20
<PAGE> 21
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD DECEMBER 5, 1985 (INCEPTION) TO OCTOBER 31, 1996
AND FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the
------------------ -------------------- Paid-in Development
Shares Amount Shares Amount Capital Stage
------- --------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash ( $.02 per share) -
December 1985 -- $-- 500,000 $ 500 $ 9,500 $ --
Retirement of common stock - September 1986 -- -- (84,600) (85) 85 --
Issuance of common stock - via public offering, net
of issuance costs of $6,985,
($.10 per share) -
October 1986 -- -- 752,500 753 67,512 --
Net loss -- -- -- -- -- (3,165)
----- ----- ----------- ------- ------- --------
BALANCE, October 31, 1986 -- -- 1,167,900 1,168 77,097 (3,165)
Net loss -- -- -- -- -- (75,100)
----- ----- ----------- ------- ------- --------
BALANCE, October 31, 1987 -- -- 1,167,900 1,168 77,097 (78,265)
Net losses for years ended October 31, 1988 and 1989 -- -- -- -- -- --
----- ----- ----------- ------- ------- --------
BALANCE, October 31, 1989 -- -- 1,167,900 1,168 77,097 (78,265)
Issuance of common stock for services, at current
market value ($.10 per share) - June 1990 -- -- 129,767 130 12,846 --
Net loss -- -- -- -- -- (12,976)
----- ----- ----------- ------- ------- --------
BALANCE, October 31, 1990 -- -- 1,297,667 1,298 89,943 (91,241)
</TABLE>
<TABLE>
<CAPTION>
Stock Note
Receivable Total
and Stockholders'
Subscription Equity
Receivable (Deficiency)
------------ --------------
<S> <C> <C>
Issuance of common stock for cash ( $.02 per share) -
December 1985 $ -- $ 10,000
Retirement of common stock - September 1986 -- --
Issuance of common stock - via public offering, net
of issuance costs of $6,985,
($.10 per share) -
October 1986 -- 68,265
Net loss -- (3,165)
------- --------
BALANCE, October 31, 1986 -- 75,100
Net loss -- (75,100)
------- --------
BALANCE, October 31, 1987 -- --
Net losses for years ended October 31, 1988 and 1989 -- --
------- --------
BALANCE, October 31, 1989 -- --
Issuance of common stock for services, at current
market value ($.10 per share) - June 1990 -- 12,976
Net loss -- (12,976)
------- --------
BALANCE, October 31, 1990 -- --
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
21
<PAGE> 22
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD DECEMBER 5, 1985 (INCEPTION) TO OCTOBER 31, 1996
AND FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
(CONTINUED)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
------------------ -------------------------
Shares Amount Shares Amount
------- --------- --------- --------
<S> <C> <C> <C> <C>
Net losses for years ended October 31, 1991, 1992,
1993, and 1994 -- -- -- --
-- -- --------- ---------
BALANCE, October 31, 1994 -- -- 1,297,667 1,298
Issuance of common stock in acquisition of Siliwood
($.12 per share) - October 1995 (see Note 1) -- -- 5,911,592 5,911
Issuance of common stock for services from controlling
shareholders at current value ($.12 per share) -
October 1995 -- -- -- --
Issuance of common stock from controlling shareholders
to investors ($.37 per share) - October 1995 -- -- -- --
Net loss -- -- -- --
-- -- --------- ---------
BALANCE, October 31, 1995 -- -- 7,209,259 7,209
Issuance of common stock for services:
At $.50 per share, November 1995 -- -- 30,000 30
Issuance of common stock for acquisition of NVE:
At $1.40 per share, June 1996 -- -- 1,089,333 1,089
At $1.75 per share, June 1996 -- -- 466,857 467
</TABLE>
<TABLE>
<CAPTION>
Deficit Stock Note
Accumulated Receivable Total
Additional During the and Stockholders'
Paid-in Development Subscription Equity
Capital Stage Receivable (Deficiency)
--------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net losses for years ended October 31, 1991, 1992,
1993, and 1994 -- -- -- --
--------- -------- -------- ----------
BALANCE, October 31, 1994 89,943 (91,241) -- --
Issuance of common stock in acquisition of Siliwood
($.12 per share) - October 1995 (see Note 1) 714,109 -- (350,020) 370,000
Issuance of common stock for services from controlling
shareholders at current
value ($.12 per share) -
October 1995 14,400 -- -- 14,400
Issuance of common stock from controlling shareholders
to investors ($.37 per share) - October 1995 40,700 -- -- 40,700
Net loss -- (14,400) -- (14,400)
--------- -------- -------- ----------
BALANCE, October 31, 1995 859,152 (105,641) (350,020) 410,700
Issuance of common stock for services:
At $.50 per share, November 1995 14,970 -- -- 15,000
Issuance of common stock for acquisition of NVE:
At $1.40 per share, June 1996 1,523,977 -- -- 1,525,066
At $1.75 per share, June 1996 816,533 -- -- 817,000
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
22
<PAGE> 23
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD DECEMBER 5, 1985 (INCEPTION) TO OCTOBER 31, 1996
AND FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
(CONTINUED)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------- -------------------------
Shares Amount Shares Amount
------- --------- -------- --------
<S> <C> <C> <C> <C>
Issuance of common stock - July 1996:
Shares issued in private placement ($.05) per share -- -- 850,000 850
Issuance of common stock for cash:
At $.50 per share, July 1996 -- -- 1,780,000 1,780
Cost associated with private placement -- -- -- --
At $1.00 per share, July 1996 -- -- 157,000 157
Issuance of common stock for services:
At $.50 per share, July 1996 -- -- 50,000 50
At $1.00 per share, July 1996 -- -- 10,000 10
Issuance of preferred stock for acquisition of music
rights - July 1996 (see Note 6) 200,000 2,100,000 -- --
Issuance of common stock for cash:
At $.75 per share, August 1996 -- -- 200,000 200
At $1.00 per share, August 1996 -- -- 219,978 220
At $1.00 per share, September 1996 -- -- 144,000 144
At $1.00 per share, October 1996 -- -- 218,800 219
Cost associated with private placements -- -- -- --
Services from officers and employee -- -- -- --
Net loss -- -- -- --
------- ---------- ---------- -------
BALANCE, October 31, 1996 200,000 $2,100,000 12,425,227 $12,425
======= ========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
Deficit Stock Note
Accumulated Receivable Total
Additional During the and Stockholders'
Paid-in Development Subscription Equity
Capital Stage Receivable (Deficiency)
--------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Issuance of common stock - July 1996:
Shares issued in private placement ($.05) per share 41,650 -- -- 42,500
Issuance of common stock for cash:
At $.50 per share, July 1996 888,220 -- (25,750) 864,250
Cost associated with private placement (3,948) -- -- (3,948)
At $1.00 per share, July 1996 156,843 -- (137,000) 20,000
Issuance of common stock for services:
At $.50 per share, July 1996 24,950 -- -- 25,000
At $1.00 per share, July 1996 9,990 -- -- 10,000
Issuance of preferred stock for acquisition of music
rights - July 1996 (see Note 6) -- -- -- 2,100,000
Issuance of common stock for cash:
At $.75 per share, August 1996 149,800 -- -- 150,000
At $1.00 per share, August 1996 219,758 -- -- 219,978
At $1.00 per share, September 1996 143,856 -- -- 144,000
At $1.00 per share, October 1996 218,581 -- -- 218,800
Cost associated with private placements (2,344) -- -- (2,344)
Services from officers and employee 140,000 -- -- 140,000
Net loss -- (1,477,496) -- (1,477,496)
----------- ----------- --------- -----------
BALANCE, October 31, 1996 $ 5,201,988 $(1,583,137) $(512,770) $ 5,218,506
=========== =========== ========= ===========
</TABLE>
23
<PAGE> 24
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 5,
1985
(Inception) to
October 31,
Years Ended October 31, 1996
---------------------------
1996 1995 (Cumulative)
--------- --------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,477,496) $ (14,400) $(1,583,137)
Adjustments to reconcile net loss to net cash
used in operating activities:
Consulting fees paid by issuing common stock
by controlling shareholders -- 14,400 14,400
Professional fees paid by issuing common stock 50,000 -- 62,976
Services contributed by officers 140,000 -- 140,000
Project in progress written off 770,000 -- 770,000
Depreciation and amortization 257,120 -- 257,120
Increase (decrease) from changes in:
Receivables (5,200) -- (5,200)
Due from related parties (92,041) -- (92,041)
Projects under development (1,231,393) -- (1,231,393)
Deposits (50,022) -- (50,022)
Organization costs -- (13,677) (13,677)
Accounts payable and accrued expenses 104,489 -- 104,489
----------- ----------- -----------
Net cash used in operating activities (1,534,543) (13,677) (1,626,485)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (133,642) (5,893) (139,535)
----------- ----------- -----------
Net cash used in investing activities (133,642) (5,893) (139,535)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,653,236 -- 1,731,501
Proceeds from officer loan 45,000 19,614 64,614
Repayment on officer loan (19,614) -- (19,614)
Repayments on notes payable (9,500) -- (9,500)
----------- ----------- -----------
Net cash provided by financing activities 1,669,122 19,614 1,767,001
----------- ----------- -----------
NET INCREASE IN CASH 937 44 981
CASH AND CASH EQUIVALENTS, at beginning of year 44 -- --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, at end of year $ 981 $ 44 $ 981
=========== =========== ===========
</TABLE>
24
<PAGE> 25
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
(a) Non-cash transactions:
On June 21, 1990, the Company issued 129,767 shares of common stock for
consulting fees.
On September 8, 1995, the Company issued 3,293,998 shares of common stock to
a shareholder for a non-interest-bearing, non-recourse note receivable for
$350,020. (See Note 6).
On October 18, 1995, the controlling shareholders issued 118,232 shares of
common stock for consulting fees.
On October 31, 1995, the officers of the Company issued 110,000 shares of
common stock to a vendor of the Company in exchange for the rights to
certain Stereoscopic/3-D titles. (See Note 6).
On November 1, 1995, the Company issued 30,000 shares of common stock to an
individual for consulting services.
On June 10, 1996, the Company issued 1,556,190 shares of common stock to
purchase the net assets of a partnership involved in the same type of
business as the Company (see Note 6). As a result of this purchase the
Company acquired the following net assets:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Prepaid expenses and other assets $ 250,000
Theatre, film, and video library 2,331,961
Property and equipment 165,700
Accounts payable and accrued expenses (146,595)
Notes payable (259,000)
----------
$2,342,066
==========
</TABLE>
On July 23, 1996, the Company issued 200,000 shares of series "B"
convertible preferred stock to purchase the rights of a music library (see
Note 6).
(b) Cash paid:
For the years ended October 31, 1996 and 1995, the Company did not pay any
taxes and paid interest of $8,000 and $0.
See accompanying summary of accounting policies and notes to financial
statements.
25
<PAGE> 26
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of New Visual
Entertainment, Inc. ("NVE") (formerly known as Siliwood) and its subsidiary, NV
Entertainment ("NV") (collectively, "the Company"). All significant intercompany
balances and transactions have been eliminated.
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.
MUSIC RIGHTS AND INTANGIBLE ASSETS
Music rights consist of a music library of songs which the Company plans on
utilizing in their future films and videos. Intangible assets consists of
licenses purchased related to music rights and the stereoscopic imaging
technology and the rights to certain stereoscopic/3-D titles. These costs are
stated at the lower of cost or net realizable value and will be amortized over
their estimated economic life of 5 years. These costs are evaluated quarterly to
determine the net realizable value. For the years ended October 31, 1996 and
1995, amortization expense was $190,042 and $0.
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. For the years ended October 31, 1996 and 1995, amortization
expense related to the film and video library was $43,722 and $0.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes." The Statement
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 difference 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.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss (less cumulative
preferred dividends) by the weighted average number of common shares outstanding
during the year (see Note 6).
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure 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.
26
<PAGE> 27
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Quoted market prices generally are not available for all of the Company's
financial instruments. Accordingly, fair values are based on judgments regarding
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates involve uncertainties and matters
of judgment, and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
A description of the methods and assumptions used to estimate the fair value of
each class of the Company's financial instruments is as follows:
Cash, receivables, and accounts payable and accrued expenses have carrying
amounts that approximate fair value due to the short maturity of these
instruments. Management was not able to practically estimate the fair value of
notes payable due to their related party nature.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company makes quarterly assessments of its long-lived
assets using the discounted cash flow method and adjusts for any impairment. The
adoption of this statement did not have a material effect on its financial
position or results of operations other than that disclosed in Note 4.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and results of operations is currently unknown. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
27
<PAGE> 28
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
The Company, a development stage enterprise (previously known as Bellwether
Investment Inc.), incorporated under the laws of the State Utah on December 5,
1985. On October 18, 1995, the Company acquired all of the outstanding shares of
Siliwood Entertainment Corporation ("Siliwood"), another development stage
company with no operations. The Company issued 5,911,592 shares of common stock
to the shareholders of Siliwood Entertainment Corporation to effect the reverse
acquisition. The reverse acquisition was accounted for as a recapitalization,
and was accounted for in a manner similar to a pooling of interest. The Company
then changed its name to Siliwood Entertainment Corporation.
On June 10, 1996, the Company acquired certain assets and assumed various
liabilities from Infinity Vision Entertainment ("IVE"). Immediately following
the purchase, Siliwood changed its name to New Visual Entertainment, Inc.
("NVE"). Accordingly, former IVE partners have an interest in NVE (formerly
known as Siliwood) stock. The acquisition of these assets and the assumption of
these liabilities has been accounted for as a purchase and the costs were
allocated based on fair market value. There were no operations of NVE prior to
acquisition. Pro forma information related to IVE has not been disclosed as the
operations would not be materially different that actual results. The Company is
currently engaged in the development, design and distribution of software
techniques, videos, and theatres for stereoscopic (3-D) authoring and
visualization. The Company has generated minimal revenues to date. Due to the
nature of the business the Company has presented an unclassified balance sheet.
2. DUE FROM RELATED PARTIES
During fiscal year ended October 31, 1996, the Company repaid an amount of
$19,614 owed to a stockholder as of October 31, 1995 and has made advances to
officers and employees amounting to $92,041. The net receivable at October 31,
1996 is $92,041.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at October 31, 1996 consists of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 10,376
Camera equipment 276,868
Office equipment 15,491
--------
302,735
Less: accumulated depreciation 23,356
--------
Total property and equipment $279,379
========
</TABLE>
For the years ended October 31, 1996 and 1995, depreciation expense was $23,356
and $0.
28
<PAGE> 29
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
4. FILM AND VIDEO LIBRARY
In September 1996, the Company and a venture partner re-evaluated its 3-D movie
theatre project in Atlanta, Georgia and mutually agreed to terminate the
project. As a result, the Company wrote off $770,000 pertaining to this project.
5. NOTES PAYABLE, RELATED PARTIES
Notes payable at October 31, 1996 consists of the following:
<TABLE>
<S> <C>
Note payable to stockholder, interest, due
monthly at 12%, due on January 6, 2000 $ 200,000
Notes payable to stockholders, no interest, due
on demand 19,000
Notes payable to officer, no interest, due
on demand 45,000
Note payable to former IVE shareholder, no
interest, due on demand 28,000
Note payable to former IVE shareholder,
interest at 10%, due on demand 2,500
---------
$ 294,500
=========
</TABLE>
The Company incurred interest expense of $10,000 and $0 for the years ended
October 31, 1996 and 1995.
6. PREFERRED STOCK, COMMON STOCK, AND WARRANTS
DESCRIPTION OF SECURITIES
On October 18, 1995, the Company approved a 1 for 2 reverse stock split. All
common shares, and price per share information disclosed in the financial
statements and notes have been adjusted to give effect to the 1 for 2 reverse
stock split.
On October 31, 1995, the officers of the Company issued 110,000 shares of common
stock to a vendor of the Company to acquire the rights to certain
Stereoscopic/3-D titles. The stock was valued based on the asset received.
In November 1995, the Company issued 30,000 shares of common stock at $.50 for
professional services which included stock options of 30,000 shares at $.25 and
60,000 shares at $.50 which expire in November 1998. The Company issued an
additional 50,000 shares at $.50 for professional services.
29
<PAGE> 30
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
6. PREFERRED STOCK, COMMON STOCK, AND WARRANTS (Continued)
On June 10, 1996, the Company issued 466,857 shares of freely tradable common
stock at $1.75 and issued 1,089,333 shares of restricted common stock at $1.40
which totaled $2,342,066 in exchange for certain assets and liabilities of IVE
(see Note 1). The restricted shares were valued at a $1.40 as these shares are
not freely tradable.
On July 23, 1996, the Company issued 200,000 shares of non-voting series "B"
cumulative convertible preferred stock (3 to 1 conversion feature for common
stock) with a liquidation value of $30 per share for the acquisition of the
rights of a music library, which consist of 2,100 titles. Each music title was
appraised at a value range of $1,000 to $3,000. The value of the acquisition was
based upon the fair market value of the stock that was issued. The preferred
stock pays dividends, when declared, at $1.50 per share quarterly. Dividends are
cumulative from the date of original issuance and no declaration has been made.
In July 1996, the Company issued 850,000 shares of common stock related to a
private placement at $.05 per share. In addition, another 1,780,000 shares of
common stock and 1,750,000 shares of detachable stock warrants were issued at
$.50 per share. The stock warrants allow the holder to convert one warrant for
one share of common stock at $1.40 and expire three years after the date of
grant. The Company had costs of $3,948 associated with this private placement.
In August 1996, the Company issued 200,000 and 219,978 shares of common stock
related to a private placement at $0.75 and $1.00 per share, respectively. In
September 1996, the Company issued 144,000 shares of common stock related to a
private placement at $1.00. In October 1996, the Company issued 218,800 shares
of common stock related to a private placement at $1.00. The Company had costs
of $2,344 associated with the private placements for August, September, and
October 1996.
At October 31, 1996, the Company had a non-interest bearing, non-recourse note
receivable due from a shareholder for $350,020 related to the purchase of the
Company's common stock. The Company has subscription receivables of $162,750
related to a private placement offering completed in July 1996.
7. INCOME TAXES
At October 31, 1996, the Company has unused federal and state net operating loss
carryforward of approximately $1,553,100 and $776,600, respectively, available
to offset future years' taxable income through 2011 and 2002, respectively. The
Tax Reform Act of 1986 contains provisions which limit the federal net operating
loss carryforwards available that can be used in any given year in the event of
certain occurrences, which include significant ownership changes. At October 31,
1996, the Company has established a valuation allowance equal to the net
deferred tax asset of $600,000, as the Company cannot conclude that it is more
likely than not that the net deferred tax asset will be realized. There was no
current year tax provision for the years ended October 31, 1996 and 1995.
30
<PAGE> 31
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company has hired a television company to produce 26 episodes of live music
acts in 3-D. The fee agreement for this production is $1,200,000. As of October
31, 1996, the Company has paid $1,055,000 to the television company. All 26
episodes have yet to be completed as of October 31, 1996. The cost incurred to
date along with other non-commitment type capitalized expenses is included in
Projects under development on the balance sheet.
The Company's projects under development and music rights stipulate royalty
payments which are based on percentages of revenue.
The Company's headquarters are located in San Diego, California which has a
month to month lease. In December 1996, the Company decided to have a production
facility in Los Angeles, California and has entered into a five year lease with
a third party expiring in November 2001. The Company has a sub-lease with
another third party for a portion of the office expiring in November 2001.
Minimum rental payments are as follows:
<TABLE>
<CAPTION>
Years ending October 31,
<C> <C>
1997 $137,621
1998 167,460
1999 179,004
2000 190,560
2001 190,560
Thereafter 15,880
--------
881,085
Less: sub-lease rental receipts 589,318
--------
$291,767
========
</TABLE>
Rent expense on month to month leases for the years ended October 31, 1996 and
1995 were $8,250 and $0.
31
<PAGE> 32
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
9. GOING CONCERN CONSIDERATIONS
The Company has minimal historical operations, negative cash flow, and liquidity
problems. These conditions raise substantial doubt about the consolidated
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability of reported assets or liabilities should the Company be unable to
continue as a going concern.
The Company has been able to continue based upon the financial support of its
Officers and the continued existence of the Company is dependent upon this
support and its ability to acquire assets by the issuance of stock. Management's
plans in this regard are to receive the continued support of the Officers and/or
to obtain other financing until profitable operation and positive cash flow are
achieved and maintained. There can be no guarantee that the officers will
provide this support.
32
<PAGE> 33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 COMPUTATION OF PER SHARE EARNINGS
27 FINANCIAL DATA SCHEDULE
<PAGE> 1
EXHIBIT 11
NEW VISUAL ENTERTAINMENT, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C> <C>
1996 1995
---- ----
ENDING MARKET PRICE PER SHARE $ 1.22 $ N/A
------------ ---------
AVERAGE MARKET PRICE PER SHARE $ 1.53 $ N/A
------------ ---------
Net loss before preferred stock
dividends $(1,477,496) $ (14,400)
ADD:
Cumulative preferred stock
dividend (3) ( 75,000) ---
------------ ---------
Net loss applicable to common shares $(1,552,496) $ (14,400)
------------ ---------
Weighted average number of shares
outstanding 8,766,567 1,543,983
------------ ---------
Primary earnings per share (.18) (.01)
------------ ---------
FULLY DILUTED EARNINGS PER SHARE:
Net loss for fully diluted earnings
per share $(1,477,496) $ (14,400)
------------ ---------
Weighted average number of shares
outstanding 8,916,567 1,543,983
------------ ---------
Fully diluted earnings per share (.17) (.01)
------------ ---------
</TABLE>
(1) Shares assumed to be repurchased under the treasury stock method:
Primary common stock equivalents are assumed to be repurchased at
average market price.
Fully diluted common stock equivalents are assumed to be repurchased at
the greater of average or ending market price.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 981
<SECURITIES> 0
<RECEIVABLES> 5,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 302,735
<DEPRECIATION> 23,356
<TOTAL-ASSETS> 5,764,090
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
2,100,000
<COMMON> 12,425
<OTHER-SE> 3,106,081
<TOTAL-LIABILITY-AND-EQUITY> 5,764,090
<SALES> 43,722
<TOTAL-REVENUES> 43,722
<CGS> 43,722
<TOTAL-COSTS> 1,521,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,477,496
<EPS-PRIMARY> (.18)
<EPS-DILUTED> 0
</TABLE>
