<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
-----------
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 or 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 31, 2000
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to ______________.
Commission File Number 0-21785
NEW VISUAL ENTERTAINMENT, INC.
------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 95-4543704
------------------------------- -------------------
(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: 23,901,123 shares of Common Stock,
$.001 par value, were outstanding as of September 11, 2000.
Transitional Small Business Disclosure Forms (check one):
Yes ( ) No ( X )
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
JULY 31, 2000
Page Nos.
---------
PART I - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
At October 31, 1999 and July 31, 2000
CONSOLIDATED STATEMENTS OF OPERATIONS 3
For the Nine Months Ended July 31, 1999 and 2000
CONSOLIDATED STATEMENTS OF OPERATIONS 4
For the Three Months Ended July 31, 1999 and 2000
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY) 5 - 6
For the Nine Months Ended July 31, 1999 and 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
For the Nine Months Ended July 31, 1999 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 - 24
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 25
PART II - OTHER INFORMATION 30
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
------
October 31, July 31,
1999 2000
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 62,872 $ 762,769
Prepaid expenses and other current assets - 11,244
Receivable from related parties 31,422 12,700
--------------- ---------------
Total Current Assets 94,294 786,713
Property and equipment - net of accumulated depreciation 102,530 291,927
Film and video library, net 100,557 54,442
Projects under development, net 32,883 505,773
Other assets 5,000 9,091
--------------- ---------------
Total Assets $ 335,264 $ 1,647,946
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 420,699 $ 130,446
--------------- ---------------
Total Current Liabilities 420,699 130,446
--------------- ---------------
Long-term Debt - 529,000
--------------- ---------------
Total Liabilities - 659,446
--------------- ---------------
Commitments, Contingencies and Other Matters
(Notes 1, 2, 5, 6, 7 and 8)
Stockholders' Equity (Deficiency):
Preferred stock, - $0.01 par value; 15,000,000 shares
authorized at July 31, 2000; Series A junior participating
preferred stock; -0- shares issued and outstanding at
July 31, 2000 - -
Common stock - $0.001 par value; 100,000,000 shares authorized;
17,224,049 and 23,876,123 shares issued and outstanding at
October 31, 1999 and July 31, 2000, respectively 17,224 23,876
Unearned financing fees - (2,833,333)
Additional paid-in capital 12,197,374 26,468,539
Accumulated deficit (12,300,033) (22,670,582)
--------------- ---------------
Total Stockholders' Equity (Deficiency) (85,435) 988,500
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 335,264 $ 1,647,946
=============== ===============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Nine Months Ended
July 31,
-----------------------------
1999 2000
------------- -------------
REVENUES $ 82,436 $ 7,700
------------- -------------
OPERATING EXPENSES:
Amortization of costs of projects 60,870 51,242
Projects costs written off 131,250 10,844
Depreciation of property and equipment 45,645 63,610
Acquired in-process research and development - 6,050,000
Compensatory element of stock issuances 104,000 2,468,428
Research and development - 362,906
Selling, general and administrative expenses 594,082 1,200,746
------------- -------------
TOTAL OPERATING EXPENSES 935,847 10,207,776
------------- -------------
OPERATING LOSS (853,411) (10,200,076)
------------- -------------
OTHER EXPENSES:
Interest expense - 3,806
Amortization of unearned financing costs - 166,667
------------- -------------
TOTAL OTHER EXPENSES - 170,473
------------- -------------
NET LOSS $ (853,411) $(10,370,549)
============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.06) $ (0.50)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 14,071,186 20,700,263
============= =============
See notes to consolidated financial statements.
3
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
July 31,
-----------------------------
1999 2000
------------- -------------
REVENUES $ 37,989 $ 900
------------- -------------
OPERATING EXPENSES:
Amortization of costs of projects 20,290 15,507
Projects costs written off 43,750 -
Depreciation of property and equipment 15,215 29,068
Acquired in-process research and development - -
Compensatory element of stock issuances 100,000 619,650
Research and development - 182,697
Selling, general and administrative expenses 215,722 547,781
------------- -------------
TOTAL OPERATING EXPENSES 394,977 1,394,703
------------- -------------
OPERATING LOSS (356,988) (1,393,803)
------------- -------------
OTHER EXPENSES:
Interest expense - 3,806
Amortization of unearned financing costs - 166,667
------------- -------------
TOTAL OTHER EXPENSES - 170,473
------------- -------------
NET LOSS $ (356,988) $ (1,564,276)
============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.02) $ (0.07)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 14,512,091 22,028,085
============= =============
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 1999
<CAPTION>
Common Stock Additional Total
------------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficiency
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance - October 31, 1998 12,966,532 $ 12,966 $ 9,883,209 $(10,255,518) $ (359,343)
Issuance of common stock for services:
($.16 per share at December 1998) 25,000 25 3,975 - 4,000
($.16 per share at July 1999) 625,000 625 99,375 - 100,000
Issuance of common stock for cash
(November 1, 1998 - July 31, 1999) 1,309,309 1,309 196,958 - 198,267
Issuance of common stock in settlement of debt
($.20 per share at December 1998) 250,000 250 49,750 - 50,000
Net loss - - - (853,411) (853,411)
----------- ----------- ------------- ------------- -------------
Balance - July 31, 1999 15,175,841 $ 15,175 $ 10,233,267 $(11,108,929) $ (860,487)
=========== =========== ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 1999
<CAPTION>
Common Stock Additional Unearned Total
------------------------ Paid-in Financing Accumulated Stockholders'
Shares Amount Capital Costs Deficit Deficiency
----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - October 31, 1999 17,224,049 $ 17,224 $ 12,197,374 $ - $(12,300,033) $ (85,435)
Issuance of common stock for cash
($1.00 to $4.00 per share) 770,994 771 2,593,617 - - 2,594,388
Issuance of common stock for services:
($1.00 to $1.40 per share at January 31) 29,765 30 34,020 - - 34,050
($1.20 to $12.00 per share at April 30) 1,161,065 1,161 1,813,568 - - 1,814,729
($3.00 to $7.88 per share at July 31) 109,000 109 619,541 - - 619,650
Acquisition of Impact Pictures, Inc.
($4.00 per share) 12,500 12 49,988 - - 50,000
Acquisition of New Wheel Technology, Inc.
($2.00 per share) 3,000,000 3,000 5,997,000 - - 6,000,000
Issuance of common stock under consulting
agreement ($2.00 per share) 1,500,000 1,500 2,998,500 (3,000,000) - -
Issuances of stock for exercise of warrants
($2.40 per share) 68,750 69 164,931 - - 165,000
Amortization of unearned financing costs - - - 166,667 - 166,667
Net loss - - - - (10,370,549) (10,370,549)
----------- ----------- ------------- ------------- ------------- -------------
Balance - July 31, 2000 23,876,123 $ 23,876 $ 26,468,539 $ (2,833,333) $(22,670,582) $ 988,500
=========== =========== ============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Nine Months Ended
July 31,
-----------------------------
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (853,411) $(10,370,549)
Adjustments to reconcile net loss to net cash used by operating
activities:
Compensatory elements of stock issuances 104,000 2,468,428
Amortization of deferred financing fees - 166,667
Stock issued for acquired in-process research and
development - 6,050,000
Projects costs written-off 131,250 10,884
Amortization of costs of projects 60,870 51,242
Depreciation of property and equipment 45,645 63,610
Cash provided by (used in) the change in assets and liabilities:
Prepaid expenses and other current assets - (11,244)
Other assets - (4,091)
Receivable from related parties - 18,722
Projects under development (230,237) (488,901)
Accounts payable and accrued expenses 543,616 (290,252)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (198,267) (2,335,484)
------------- -------------
CASH USED IN INVESTING ACTIVITIES
Capital expenditures - (253,007)
------------- -------------
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of common stock 198,267 2,594,388
Proceeds from note payable - 529,000
Proceeds from exercise of warrants - 165,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 198,267 3,288,388
------------- -------------
INCREASE IN CASH - 699,897
CASH AND CASH EQUIVALENTS - BEGINNING - 62,872
------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ - $ 762,769
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ -
============= =============
Income taxes $ - $ -
============= =============
Accounts payable satisfied by issuance of stock $ 50,000 $ -
============= =============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
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 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, 1999, included in the Company's Form
10-KSB/A as filed with the SEC.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
general accepted accounting principles requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statement
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
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. On October 18, 1995, the Company acquired
all of the outstanding shares of Siliwood Entertainment
Corporation ("Siliwood"), a development-stage company with no
operations. The Company issued 1,477,898 shares of common
stock to the shareholders of Siliwood to effect the
acquisition. The 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.
8
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DESCRIPTION OF BUSINESS (CONTINUED)
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
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 this acquisition. The Company has
been engaged in the development, design and distribution of
software techniques, videos and theaters for stereoscopic
(3-D) authoring and visualization, but has recently expanded
its business plan to include the development of new content
transmission technologies as well.
The accompanying consolidated financial statements have been
performed in conformity with generally accepted accounting
principles, which contemplate continuation of the Company as a
going-concern. As of July 31, 2000, the Company has an
accumulated deficit of $22,670,582.
The Company has continued losses in each of its years of
operation, 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 certain of its stockholders 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 stockholders and/or to obtain other financing
until profitable operation and positive cash flow are achieved
and maintained. There can be no guarantee that the
stockholders will provide this support.
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.
9
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 nine months ended July
31, 1999 and 2000 were $131,250 and $10,884, respectively. For
the nine months ended July 31, 1999 and 2000, amortization
expense related to the film and video library was $60,869 and
$62,086, respectively.
INCOME TAXES
Deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amount
and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are
expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information at July 31, 2000 and October 31, 1999, 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.
10
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as
incurred.
ADVERTISING
Advertising costs are charged to operations when incurred.
Advertising expense for the nine months ended July 31, 1999
and 2000 was $2,403 and $67,833, respectively.
LOSS PER SHARE
Basic net loss per common share has been computed based on the
weighted average number of shares of common stock outstanding
during the periods presented, which were retroactively
adjusted to give recognition to a reverse stock split on
October 18, 1995 and a reverse stock split on June 8, 2000.
Common stock equivalents were not included in the calculation
of diluted loss per share because their inclusion would have
had the effect of decreasing the loss per share otherwise
computed.
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 8, 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 minimum value method 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.
11
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company has no material components of other comprehensive
income and, accordingly, net income approximates comprehensive
income for all periods presented.
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). This statement establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. The Company will be required to adopt FAS
133 for the quarter ended January 31, 2001. The Company does
not expect the adoption to have a material impact on its
financial statements.
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 nine months
ended July 31, 2000.
12
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
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 have been 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 nine months ended July 31,
2000.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
October 31, July 31,
1999 2000
--------- ---------
Furniture and fixtures $ 2,376 $ 37,689
Camera equipment 278,660 426,820
Office equipment 26,442 95,726
--------- ---------
307,478 560,235
Less: Accumulated depreciation 204,948 268,308
--------- ---------
Total $102,530 $291,927
========= =========
For the nine months ended July 31, 1999 and 2000, depreciation
expense was $45,645 and $63,610, respectively.
13
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the
following:
October 31, July 31,
1999 2000
--------- ---------
Professional fees $150,000 $ 60,000
Payroll and related taxes 29,485 43,607
Miscellaneous 241,214 26,839
--------- ---------
$420,699 $130,446
========= =========
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 July 31, 2000, the Company
had borrowed $529,000 under these facilities, payable on June
29, 2003 in one payment, together with all accrued and unpaid
interest at 6%. The credit agreements expire on October 28,
2002. As of July 31, 2000, the Company had $971,000 of unused
credit under these credit agreements.
NOTE 6 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
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.
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
shall be 200,000, initially reserved for issuance upon
exercise of the rights discussed in Note 8. 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
14
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
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.
COMMON STOCK ISSUANCES
- During the Year Ended October 31, 1999:
---------------------------------------
For the period from November 1, 1998 to October 31,
1999, the Company issued 1,849,592 shares of common
stock at prices ranging from $.08 to $1.64 per share,
totalling $610,062.
On December 15, 1998, the Company issued 25,000
shares of common stock at $.16 for professional
services totalling $4,000.
On December 28, 1998, the Company issued 250,000
shares of common stock at $.20 in settlement of debt
totalling $50,000.
On July 23, 1999, the Company issued 625,000 shares
of common stock at $.16 for professional services
totalling $100,000.
During August 1999, the Company issued 574,161 shares
of common stock between $.20 and $4.00 for
professional services totalling $123,686.
On August 13, 1999, the Company issued 93,750 shares
of common stock at $1.00 for director fees totalling
$93,750.
On August 20, 1999, the Company issued 182,322 shares
of common stock between $1.12 and $1.40 in settlement
of debt totalling $207,250.
During September 1999, the Company issued 98,875
shares of common stock between $.48 and $2.00 in
settlement of debt totalling $91,625.
15
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES (CONTINUED)
- During the Year Ended October 31, 1999: (Continued)
--------------------------------------
During September 1999, the Company issued 433,817
shares of common stock between $1.40 and $2.00 for
professional services totalling $610,062.
On September 27, 1999, the Company issued 125,000
shares of common stock at $1.40 for consulting fees
totalling $175,000.
- During the Nine Months Ended July 31, 2000:
------------------------------------------
During the three months ended January 31, 2000, the
Company sold 177,463 shares of common stock for
$211,909.
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.
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.
16
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES (CONTINUED)
- During the Nine Months Ended July 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, the Company issued 1,500,000 shares of its
common stock to the lenders. The Company has valued
the stock at $3,000,000 to be amortized over the life
of the debt instrument. As of April 30, 2000, the
Company had not received proceeds under the debt
financing. Accordingly, the Company has classified
the $3,000,000 as unearned financing costs in
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.
Accordingly, the Company at such time, began to
amortize the unearned financing costs over the
three-year period ended April of 2003.
On March 17, 2000, the Company issued 1,250 shares at
$2.80 for a signing bonus to an employee.
During March 2000, the Company issued 154,090 shares
of common stock between $1.40 and $12.00 for
consulting and professional services totalling
$388,329.
During April 2000, the Company issued 1,005,725
shares of common stock between $1.20 and $2.00 for
professional services totalling $1,422,900.
During the quarter ended April 2000, the Company sold
278,699 shares of common stock for $1,318,079.
During the quarter ended July 31, 2000, the Company
sold 314,832 shares of common stock for $1,064,400.
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.
17
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
On February 11, 2000, the Company granted to three directors
options to acquire 900,000 shares of its common stock. The
exercise price for the options is $4.00 per share. The options
vest in four equal annual installments of 225,000 shares
commencing February 11, 2000 and expire February 11, 2010.
On July 1, 2000, the Company granted to its Executive Vice
President options to purchase 210,000 shares of common stock
at $4.40 per share, as further described in Note 7.
Since the exercise price was equal to 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:
Three Months Nine Months
------------ -----------
Net Loss:
As reported $(1,564,276) $(10,370,549)
Proforma $(1,609,276) $(10,685,549)
Loss Per Share:
As reported $(0.07) $(0.50)
Proforma $(0.07) $(0.52)
The fair value of stock options granted during the nine months
ended July 31, 2000 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,
2000 2000
----------- -----------
Expected volatility 33.0% 33.0%
Risk-free interest rate 5.5% 5.5%
Expected lives 3 years 3 years
Dividend yield -0- -0-
18
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
EARNINGS 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 200,000
Options to purchase common stock 1,110,000
---------
Total as of July 31, 2000 1,310,000
=========
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.
19
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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.
Rent expense for the nine months ended July 31, 1999 and 2000
was $4,500 and $48,353, respectively.
ROYALTY PAYMENTS
The Company's projects under development stipulate royalty
payments which are based on percentages of revenue.
TERMINATED MERGER AND LITIGATION
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 8, 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.
20
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
TERMINATED MERGER AND LITIGATION (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 alleges 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 is
seeking a court order confirming that the merger agreement is
null and void, and an award of unspecified damages, court
costs and attorneys fees. Robinson and Astounding.com have
filed a counterclaim against New Visual alleging breach of
contract and unjust enrichment and seeking unspecified
damages, court costs and attorney fees. The Company denies
liability and intends to vigorously prosecute its claim and
defend itself against the counterclaim.
PROPOSED MERGER
- Intelecon Services, Inc.
------------------------
On March 31, 2000, the Company signed a definitive
merger agreement for it to acquire Intelecon
Services, Inc. ("Intelecon"), a leading provider of
entertainment and business communication technology
and value-added services, in a stock transaction.
Intelecon is a producer services audio-visual
rentals, sales, installations and staging services
company offering complete turn-key solutions for
productions, concerts, corporate entities, tradeshows
and multimedia. Intelecon has approximately 75 full
time employees and offices in Dallas, Los Angeles and
Las Vegas. In consideration of the merger, the former
shareholders of Intelecon will receive 500,000
restricted shares of the Company's common stock. An
additional 875,000 restricted shares of the Company's
common stock will be delivered to an escrow agent and
be released to the Intelecon shareholders over a
five-year period upon the achievement of certain
pre-tax income milestones. If the milestones are not
satisfied, the shares will not be released from
escrow until the end of the five-year escrow period,
and under certain circumstances would be forfeited by
the shareholders. An additional 17,500 shares of the
Company's common stock will be reserved for issuance
upon the exercise of stock options held by certain
Intelecon employees that will be exchanged for the
Company's stock options in the merger.
21
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
PROPOSED MERGER (CONTINUED)
- Intelecon Services, Inc. (Continued)
------------------------
Consummation of the merger is subject to various
conditions, including the filing by the Company of an
application for listing of its common stock on the
NASDAQ Stock market; the receipt by the Company of a
commitment letter from Lilly Beter Capital Group,
Ltd. concerning the placement of at least $18 million
of debt or equity securities of the Company within 12
months after the closing of the merger; Intelecon's
liabilities (excluding capital leases) being no
greater than $1.5 million; Intelecon's restructuring
of certain obligations that would permit certain
Intelecon indebtedness, preferred stock and warrants
to be cancelled at closing in exchange for the
issuance by the Company of no more than 500,000
restricted shares of common stock; and the completion
of an audit of Intelecon's 1998 and 1999 financial
statements acceptable to New Visual. The merger also
is subject to the satisfactory completion of each
party's due diligence and requisite board and
shareholder approval.
CONSULTING AGREEMENT
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 having 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 entered into a
registration rights agreement with respect to the registration
of the above common stock and warrant shares.
22
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
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 with the Company that provides for base compensation
in the first contract year of $250,000; in the second contract
year, the base compensation of $300,000; and in the third year
and during any renewal term, the 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 expire on October 20, 2000, with a renewal option
between six months and eleven months, based on certain
milestones.
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.
23
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash
equivalents. At July 31, 2000, the Company had a bank balance
in excess of federally insured limits by approximately
$744,311.
For the nine months ended July 31, 1999, substantially all of
the net revenues were derived from three companies. For the
nine months ended July 31, 2000 substantially all of the net
revenues were derived from one company.
NOTE 8 - SUBSEQUENT EVENT
RIGHTS DIVIDEND
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 1/1,000th 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.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
-------
The following is a discussion and analysis of the results of operations
of the Company and should be read in conjunction with the Company's financial
statements and related notes contained in this Form 10-QSB.
Certain information contained in this Form 10-QSB may contain
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties. Actual results could differ materially from
current expectations. Among the factors that could effect the Company's actual
results and could cause results to differ from those contained in the
forward-looking statements contained herein is the Company's ability to
commercialize its technologies successfully, which will be dependent on
business, financial and other factors beyond the Company's control, including,
among others, market acceptance, ability to manufacture on a large scale basis
and at feasible costs, together with all the risks inherent in the establishment
of a new enterprise and the marketing and manufacturing of new products.
PLAN OF OPERATION
-----------------
THE COMPANY. New Visual Entertainment, Inc. has historically focused on
the development of high-quality, cost-effective 3D film production and
exhibition for theme parks and attractions in the special venue marketplace. The
Company is still active in this industry as it continues to develop proprietary
short 3D film and video titles for distribution to a variety of markets
including the special venue, satellite TV, home video, and Internet markets.
However, the Company's primary focus has shifted to activities designed to
pioneer the development of high bandwidth technology in conjunction with high
data content production and animation. The Company's new mission is the
development of technology that would utilize existing copper telecommunications
infrastructure to deliver high data content to residential customers. The full
development of such technology would provide New Visual with the capability to
produce and deliver major studio quality content to mass media markets at speeds
exceeding current industry standards while using a telecommunications
infrastructure that is already in place and well-established.
NEW WHEEL TECHNOLOGY, INC. New Wheel Technology, Inc., a wholly owned
subsidiary of the Company, is developing its Cu@OCx technology, a "last mile"
solution that would extend the range over which data can be transmitted at rates
of 52Mbps over standard 26-gauge copper telephone wire.
25
<PAGE>
The developing trend towards High Definition Television ("HDTV") requires
bandwidth of 20 Mbps. Current Asymmetric Digital Subscriber Line ("ADSL")
deployment is limited to 8Mbps, even at optimum transfer speeds. ADSL cannot use
the existing telephone infrastructure to transmit HDTV transmissions to
residences from the telephone central office. The Company envisions the fully
developed New Wheel Cu@OCx technology would permit 52Mbps transmissions through
copper telephone wire for at least 8,500 feet, which would be adequate bandwidth
for HDTV transmission. The ability to deploy broadband transmissions over
existing copper wire could eliminate the complexities and costs involved in
installing new fiber optic cable to and throughout office buildings and complete
the last leg of "Fiber to the Curb".
IMPACT MULTIMEDIA, INC. Impact Multimedia, Inc., formerly Impact
Pictures, Inc., is a wholly owned subsidiary of the Company and a full service
production studio capable of producing CD-ROM, DVD, or web-based multimedia
presentations utilizing advanced technologies in animation, graphics design,
compression, digital audio, motion capture, digital video and vector-based
graphics for corporate, commercial, and consumer applications. Impact Multimedia
currently produces multimedia sales demos, business card size CD's, direct
mailers, and animated websites, and has plans to position itself as a multimedia
production house with marketing and advertising capabilities. Impact Multimedia
has the ability to satisfy many of the Company's content development and
marketing needs while also serving its own customers.
PLANS FOR FISCAL YEAR 2000. The Company's plans of operation for the
remainder of its 2000 fiscal year will consist of the following activities:
o developing the New Wheel broadband transmission technology;
o validating the performance of the broadband transmission technology;
o licensing the broadband transmission technology to telecommunications
manufacturers, service providers, and vendors;
o seeking manufacturing partners for delivering the broadband
transmission technology to localized markets;
o continuing to build a market for the Company's content production and
distribution capabilities; and
o continuing to evaluate merger/acquisition candidates with the potential
to enhance the Company's business plan.
26
<PAGE>
RESULTS OF OPERATIONS
---------------------
For the Nine Months Ended July 31, 2000 vs. the Nine Months Ended July 31, 1999
-------------------------------------------------------------------------------
REVENUES. Revenues for the nine months ended July 31, 2000 were
approximately $7,700. Revenues for the nine months ended July 31, 1999 were
approximately $82,000 due to revenue recognized from film and video library
productions.
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 expesnes, and selling, general
and administrative costs. Total operating expenses increased from $936,000 for
the nine months ended July 31, 1999 to $10,208,000 for the nine months ended
July 31, 2000. The increase was principally related to an increase in
compensatory element of stock issuances of $2,364,000, a $6,050,000 charge to
earnings for acquired in-process research and development costs, research and
development costs of $363,000 related to our New Wheel subsidiary and an
increase of $607,000 in selling, general and administrative expenses, as a
result of our increased in our corporate infrastructure.
The acquired in-process research and development costs were associated
with the acquisitions of New Wheel Technology ($6,000,000) and Impact Pictures
($50,000). Included in the acquisition of New Wheel Technology was 2,500,000
shares, valued at $5,000,000, that were issued and are being held in escrow. The
shares will be released from escrow upon the achievement of certain
technological development milestones. If these technological milestones are not
met, the shares will be returned to the Company.
OTHER EXPENSES. Other operating expenses included amortization of
unearned financing fees and interest expense. Total other expenses increased
from $-0- for the nine months ended July 31, 1999 to $170,000 for the nine
months ended July 31, 2000.
For the Three Months Ended July 31, 2000 vs. the Three Months Ended
July 31, 1999
-------------------------------------------------------------------
REVENUES. Revenues for the three months ended July 31, 2000 were
approximately $900. Revenues for the three months ended July 31, 1999 were
approximately $38,000.
OPERATING EXPENSES. Operating expenses increased from $395,000 for the
three months ended July 31, 1999 to $1,395,000 for the three months ended July
31, 2000. The increase was principally related to an increase in compensatory
element of stock issuances, of $520,000, and an increase in research and
development expenses of $183,000 due to the Company's acquisition of New Wheel
Technology and an increase of $232,000 in selling, general and administrative
expenses.
OTHER EXPENSES. Total other expenses increased from $-0- for the three
months ended July 31, 1999 to $170,000 for the three months ended July 31, 2000
due to interest expense and amortization of financing costs related to our new
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Operations have been financed through private sales of common stock
resulting in net proceeds of approximately $2,759,000 and $198,000 for the nine
months ended July 31, 2000 and July 31, 1999, respectively. In addition, during
these periods, a substantial portion of expenses were paid by the issuance of
stock.
27
<PAGE>
PROPOSED ACQUISITION
--------------------
INTELECON SERVICES, INC. In March of 2000, New Visual announced the
signing of an agreement to acquire, by way of a merger, Intelecon Services,
Inc., a Dallas-based studio and production company (the "Intelecon Merger").
Established in 1991, Intelecon is a privately held production, e-commerce,
multimedia, staging and audio-visual company. Intelecon offers complete turnkey
solutions for productions, concerts, corporate events, tradeshows, and
multimedia. Its services include stereoscopic 3D, 2D, and 3D animation, on-line
and off-line nonlinear non-compressed digital editing, special effects, 3D
visualization, audio, lighting, rigging, video walls, large screen and panoramic
projection.
In consideration of the Intelecon Merger, the former shareholders of
Intelecon will receive 500,000 restricted shares of New Visual common stock. An
additional 875,000 restricted shares of New Visual common stock will be
delivered to an escrow agent and be released to the Intelecon shareholders over
a five-year period upon the achievement of certain pre-tax net income
milestones.
Upon the consummation of the Intelecon Merger, Intelecon will be a
wholly-owned subsidiary of the Company, and will continue to operate under the
Intelecon name. Consummation of the Intelecon Merger is subject to various
conditions, including the filing by the Company of an application for listing of
its common stock on the NASDAQ Stock Market; the receipt by the Company of a
commitment letter from Lilly Beter Capital Group, Ltd. concerning the placement
of at least $18 million of debt or equity securities of the Company within 12
months after the closing of the Intelecon Merger; Intelecon's liabilities
(excluding capital leases) being no greater than $1.5 million; Intelecon's
restructuring of certain obligations that would permit certain Intelecon
indebtedness, preferred stock and warrants to be canceled at closing in exchange
for the issuance by the Company of no more than 500,000 restricted shares of
common stock; and the completion of an audit of Intelecon's 1998 and 1999
financial statements acceptable to New Visual. The Intelecon Merger is also
subject to the satisfactory completion of each party's due diligence and
requisite board and shareholder approval.
Upon completion of the Intelecon Merger, Edward Vakser and Vladimir
Vakser, Intelecon's founders, will be appointed to the Company's board of
directors and begin serving as officers of the Company. Edward Vakser will
become the Company's President, and Vladimir Vakser will become the Company's
Chief Financial Officer. Ray Willenberg, Jr., the Company's current CEO and
Chairman of the Board, will continue to serve as the Chief Executive Officer and
Chairman of the Board of the Company.
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.
GOING-CONCERN CONSIDERATION
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The Company has continued losses in each of its years of operation,
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
certain of its stockholders 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 stockholders and/or to obtain other financing until profitable operation and
positive cash flow are achieved and maintained. There can be no guarantee that
the stockholders will provide this support.
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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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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). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
will be required to adopt FAS 133 for the quarter ended January 31, 2001. The
Company does not expect the adoption to have a material impact on its financial
statements.
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PART II -- OTHER INFORMATION.
Item 1. Legal Proceedings.
In September 1999, the Company entered into a merger agreement with
Astounding.com, Inc. that provided for the issuance of 10 million
(pre-reverse stock split) shares of Company common stock. An individual
named Jack Robinson is the sole shareholder of Astounding.com, Inc. The
closing of the merger was conditioned on, among other things,
shareholder approval and at least $1 million of debt or equity
financing being contributed to the Company. The merger has not closed,
and the Company terminated this Agreement in February 2000.
In March 2000, the Company filed a lawsuit in state district court in
Dallas, Texas against Astounding.com and Jack Robinson relating to the
merger agreement. In this lawsuit the Company alleges breach of
contract, fraud, unconscionability and negligent misrepresentation with
respect to the merger agreement. The Company is seeking a court order
confirming that the merger agreement is null and void and an award of
unspecified damages, court costs and attorneys' fees. Robinson and
Astounding.com have filed a counterclaim against New Visual alleging
breach of contract and unjust enrichment. The Company denies liability
and intends to vigorously prosecute its claim and defend itself against
the counterclaim.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable
(c) The Company issued 423,832 shares of its common
stock in the preceding fiscal quarter, in
transactions exempt from registration under
Section 4(2) of the Securities Act of 1933, as
amended. See Note 6 to the Financial Statements
attached hereto.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company submitted the following matters to a vote of its security
holders at its annual meeting that was held on May 31, 2000:
(a) The Company's shareholders were asked to vote for the election
of Lilly Beter, John Howell, Celso B. Suarez, Jr., Ray
Willenberg, Jr., and C. Rich Wilson III to hold office until
the 2001 Annual Meeting of Shareholders. The shareholders
elected each director with 81,359,621 votes cast for, no votes
cast against, and 364,544 absentions.
(b) The Company's shareholders were asked to approve an Amendment
to Article IV of the Company's Articles of Incorporation to
effect a 1:4 reverse stock split, to decrease the number of
authorized shares of the Company's preferred stock from
200,000,000 to 15,000,000, and to decrease the par value of
such preferred stock from $30.00 to $0.01 per share. This
amendment to the Company's Articles of Incorporation was
approved with 78,313,611 votes cast for, 3,257,554 votes cast
against, and 153,000 abstentions.
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(c) The Company's shareholders were asked to ratify the selection
of Tabb, Conigliaro & McGann, P.C. as the Company's
independent auditors for the year ending October 31, 2000. The
shareholders ratified the selection of the independent
auditors with 81,004,655 votes cast for, 306,602 votes cast
against; and 232,008 abstentions.
(d) The Company's shareholders were asked to approve the Company's
2000 Omnibus Securities Plan. The 2000 Omnibus Securities Plan
was approved with 80,587,525 votes cast for, 1,141,212 votes
cast against, and 446,108 abstentions.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Articles of Incorporation(1).
3.2 Bylaws(2).
4.1 Specimen Stock Certificate(3).
4.2 Rights Agreement by and between New Visual
Entertainment, Inc. and First Union National Bank,
dated August 9, 2000(4).
10.1 Client Service Agreement by and between the Company
and Continental Capital and Equity Corporation, dated
June 7, 2000(5).
10.2 Employment Agreement by and between the Company and
John Howell, dated June 20, 2000(5).
10.3 Form of Credit Agreement dated June 29, 2000 by the
Company and each of the following trusts: Epics
Events Trust, Ltd.; Exodus Systems Trust, Ltd.;
Prospect Development Trust, Ltd.; Pearl Street
Investments Trust, Ltd.; and Riviera Bay Holdings
Trust, Ltd.(5).
10.4 Form of Note dated June 29, 2000 executed by the
Company in favor of each of the following trusts:
Epics Events Trust, Ltd.; Exodus Systems Trust, Ltd.;
Prospect Development Trust, Ltd.; Pearl Street
Investments Trust, Ltd.; and Riviera Bay Holdings
Trust, Ltd.(5).
27.1 Financial Data Schedule (5).
(b) Reports on Form 8-K.
Form 8-K filed May 17, 2000
--------------
(1) Previously filed as Exhibit 3.1 to the Registrant's Annual Report on Form
10-KSB/A filed on May 1, 2000.
(2) Previously filed as Exhibit 3.2 to the Registrant's Annual Report on Form
10-KSB/A filed on May 1, 2000.
(3) Previously filed as Exhibit 4.1 to the Registrant's Annual Report on Form
10-KSB/A filed on May 1, 2000.
(4) Previously filed as Exhibit 4.1 to the Company's Registration Statement on
Form 8-A, filed on August 10, 2000.
(5) Filed herewith.
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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.
Dated: September 14, 2000
NEW VISUAL ENTERTAINMENT, INC.
(Registrant)
/s/ Ray Willenberg, Jr.
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Chief Executive Officer
