<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended April 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to ______________
Commission File Number 0-21785
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: 94,509,107 shares of Common Stock,
$.001 par value, were outstanding as of June 13, 2000.
Transitional Small Business Disclosure Forms (check one):
Yes ( ) No ( X )
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
APRIL 30, 2000
Page Nos.
---------
PART I - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 1
At October 31, 1999 and April 30, 2000
CONSOLIDATED STATEMENTS OF OPERATIONS 2
For the Six Months Ended April 30, 1999 and 2000
CONSOLIDATED STATEMENTS OF OPERATIONS 3
For the Three Months Ended April 30, 1999 and 2000
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY) 4 - 5
For the Six Months Ended April 30, 1999 and 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
For the Six Months Ended April 30, 1999 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<CAPTION>
October 31, April 30,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 62,872 $ 246,637
Prepaid expenses and other current assets - 11,244
Receivable from related parties 31,422 10,000
------------- -------------
Total Current Assets 94,294 267,881
Property and equipment - net of accumulated depreciation 102,530 291,277
Other assets 5,000 9,091
Film and video library, net 100,557 69,949
Projects under development, net 32,883 32,054
------------- -------------
Total Assets $ 335,264 $ 670,252
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses $ 420,699 $ 156,593
------------- -------------
Total Current Liabilities 420,699 156,593
------------- -------------
Commitments, Contingencies and Other Matters
(Notes 1, 2, 5, 6 and 7)
Stockholders' Equity (Deficiency):
Cumulative convertible preferred stock, Series A and B - $30
par value; 200,000,000 shares authorized; liquidation price,
$30 per share; -0- shares issued and outstanding - -
Common stock - $0.001 par value; 100,000,000 shares
authorized; 68,896,194 and 93,534,157 shares issued and
outstanding at October 31, 1999 and April 30, 2000, respectively 68,896 93,534
Deferred financing fees - (3,000,000)
Additional paid-in capital 12,145,702 24,549,831
Accumulated deficit (12,300,033) (21,129,706)
------------- -------------
Total Stockholders' Equity (Deficiency) (85,435) 513,659
------------- -------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 335,264 $ 670,252
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the Six Months Ended
April 30,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
REVENUES $ 44,447 $ 6,800
------------- -------------
COSTS AND EXPENSES:
Amortization of costs of projects 40,580 35,696
Projects costs written off 87,500 10,884
Depreciation of property and equipment 30,430 34,292
Acquired in-process research and development - 6,050,000
Compensatory element of stock issuances 4,000 1,848,779
Selling, general and administrative expenses 378,360 856,822
------------- -------------
TOTAL COSTS AND EXPENSES 540,870 8,836,473
------------- -------------
LOSS BEFORE INCOME TAXES (496,423) (8,829,673)
INCOME TAX EXPENSE - -
------------- -------------
NET LOSS $ (496,423) $ (8,829,673)
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (.01) $ (.11)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 53,629,746 79,009,618
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the Three Months Ended
April 30,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
REVENUES $ 28,974 $ 6,800
------------- -------------
COSTS AND EXPENSES:
Amortization of costs of projects 20,290 20,290
Projects costs written off 43,750 -
Depreciation of property and equipment 15,215 19,073
Acquired in-process research and development - 6,000,000
Compensatory element of stock issuances - 1,814,729
Selling, general and administrative expenses 186,483 698,849
------------- -------------
TOTAL COSTS AND EXPENSES 265,738 8,552,941
------------- -------------
LOSS BEFORE INCOME TAXES (236,764) (8,546,141)
INCOME TAX EXPENSE - -
------------- -------------
NET LOSS $ (236,764) $ (8,546,141)
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (.01) $ (.10)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 54,511,555 88,321,715
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE SIX MONTHS ENDED APRIL 30, 1999
<CAPTION>
Convertible Total
Preferred Stock Common Stock Additional Stockholders
-------------- --------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
------ ------ ---------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - October 31, 1998 - $ - 51,866,128 $ 51,866 $ 9,844,309 $(10,255,518) $ (359,343)
Issuance of common stock for services
($.04 per share at December 1998) - - 100,000 100 3,900 - 4,000
Issuance of common stock for cash
(November 1, 1998 - April 30, 1999) - - 2,427,234 2,427 72,140 - 74,567
Issuance of common stock in settlement
of debt ($.05 per share at December 1998) - - 1,000,000 1,000 49,000 - 50,000
Net loss - - - - - (496,423) (496,423)
------ ------ ---------- --------- ----------- ------------- ------------
Balance - April 30, 1999 - $ - 55,393,362 $ 55,393 $ 9,969,349 $(10,751,941) $ (727,199)
====== ====== ========== ========= =========== ============= ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
FOR THE SIX MONTHS ENDED APRIL 30, 2000
<CAPTION>
Convertible Total
Preferred Stock Common Stock Additional Deferred Stockholders
-------------- --------------------- Paid-in Financing Accumulated Equity
Shares Amount Shares Amount Capital Costs Deficit (Deficiency)
------ ------ ---------- --------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - October 31, 1999 - $ - 68,896,194 $ 68,896 $12,145,702 $ - $(12,300,033) $ (85,435)
Issuance of common stock for cash
($.25 to $3.00 per share) - - 1,824,642 1,825 1,528,163 - - 1,529,988
Issuance of common stock for services
rendered ($.25 to $1.50 per share) - - 4,763,321 4,763 1,844,016 - - 1,848,779
Acquisition of Impact Pictures, Inc.
($1.00 per share) - - 50,000 50 49,950 - - 50,000
Acquisition of New Wheel Technology,
Inc. ($.50 per share) - - 12,000,000 12,000 5,988,000 - - 6,000,000
Issuance of common stock under
consulting agreement ($.50 per share) - - 6,000,000 6,000 2,994,000 (3,000,000) - -
Net loss - - - - - - (8,829,673) (8,829,673)
------ ------ ---------- --------- ----------- ------------- ------------ ------------
Balance - April 30, 2000 - $ - 93,534,157 $ 93,534 $24,549,831 $ (3,000,000) $(21,129,706) $ 513,659
====== ====== ========== ========= =========== ============= ============= ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Six Months Ended
April 30,
-------------------------------
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (496,423) $ (8,829,673)
Adjustments to reconcile net loss to net cash used by operating
activities:
Compensatory elements of stock issuances 4,000 1,848,779
Stock issued for acquired in-process research and
development - 6,050,000
Projects costs written-off 87,500 10,884
Amortization of costs of projects 40,580 35,696
Depreciation of property and equipment 30,430 34,292
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 - 21,422
Projects under development (154,392) (15,143)
Accounts payable and accrued expenses 413,738 (264,106)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (74,567) (1,123,184)
------------- -------------
CASH USED IN INVESTING ACTIVITIES
Capital expenditures - (223,039)
------------- -------------
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of common stock 74,567 1,529,988
------------- -------------
INCREASE IN CASH - 183,765
CASH AND CASH EQUIVALENTS - BEGINNING - 62,872
------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ - $ 246,637
============= =============
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.
6
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 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 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 effect 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 subsidiaries, NV
Entertainment, Inc. ("NV"), Impact Multimedia, Inc. 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 5,911,592 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.
7
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 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 April
30, 2000, the Company has an accumulated deficit of $21,129,706.
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.
8
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on
a straight-line method over the estimated useful lives of the assets
which generally range from five to seven years. Maintenance and repair
expenses are charged to operations as incurred.
FILM AND VIDEO LIBRARY AND PROJECTS UNDER DEVELOPMENT
Film and video library and projects under development are stated at the
lower of amortized cost or market. Upon completion, costs are amortized
on an individual production basis in the proportion that current gross
revenues bear to management's estimate of total gross revenues with
such estimates being reviewed at least quarterly. In prior years,
several projects under development were determined to have no estimated
realizable value and were accordingly written-off. Project costs
written-off during the six months ended April 30, 1999 and 2000 were
$87,500 and $10,884, respectively. For the six months ended April 30,
1999 and 2000, amortization expense related to the film and video
library was $40,580 and $35,696, 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.
9
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information at April 30, 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.
ADVERTISING
Advertising costs are charged to operations when incurred. Advertising
expense for the six months ended April 30, 1999 and 2000 was $1,870 and
$5,504, 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. 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.
10
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLIT
On October 18, 1995, the Company approved a one-for-two 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 split and stock dividend 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 proforma 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.
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.
11
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 2 - ACQUISITIONS
IMPACT PICTURES, INC.
In January 2000, the Company completed the acquisition of 100% of the
common stock of Impact Pictures, Inc., a small development-stage San
Diego-based multimedia production firm, for 50,000 shares of the
Company's common stock, valued at $50,000. The $50,000 was charged to
operations, under the caption "Acquired in-process research and
development expenses", during the six months ended April 30, 2000.
NEW WHEEL TECHNOLOGY, INC.
In February 2000, the Company completed the acquisition of New Wheel
Technology, Inc., a development-stage California-based technology
company, for 2,000,000 restricted shares of New Visual common stock.
New Wheel was merged with the Company's Astounding Acquisition Corp.
subsidiary, which operates under the New Wheel name. An additional
10,000,000 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 12,000,000 shares valued at
$6,000,000. The $6,000,000 was charged to operations under the caption
"Acquired in-process research and development expenses", during the six
months ended April 30, 2000.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
October 31, April 30,
1999 2000
----------- -----------
Furniture and fixtures $ 2,376 $ 12,014
Camera equipment 278,660 426,820
Office equipment 26,442 91,683
----------- -----------
307,478 530,517
Less: Accumulated depreciation 204,948 239,240
----------- -----------
Total $ 102,530 $ 291,277
=========== ===========
For the six months ended April 30, 1999 and 2000, depreciation expense
was $30,430 and $34,292, respectively.
12
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
October 31, April 30,
1999 2000
----------- -----------
Professional fees $ 150,000 $ 70,000
Payroll and related taxes 29,485 52,715
Miscellaneous 241,214 33,878
----------- -----------
$ 420,699 $ 156,593
=========== ===========
NOTE 5 - STOCKHOLDERS' EQUITY
COMMON STOCK ISSUANCES
- During the Year Ended October 31, 1999:
---------------------------------------
For the period from November 1, 1998 to October 31, 1999, the
Company issued 7,398,367 shares of common stock at prices ranging
from $.02 to $.41 per share, totalling $610,062.
On December 15, 1998, the Company issued 100,000 shares of common
stock at $.04 for professional services totalling $4,000.
On December 28, 1998, the Company issued 1,000,000 shares of
common stock at $.05 in settlement of debt totalling $50,000.
On July 23, 1999, the Company issued 2,500,000 shares of common
stock at $.04 for professional services totalling $100,000.
During August 1999, the Company issued 2,296,645 shares of common
stock between $.05 and $1.00 for professional services totalling
$123,686.
On August 13, 1999, the Company issued 375,000 shares of common
stock at $.25 for director fees totalling $93,750.
On August 20, 1999, the Company issued 729,287 shares of common
stock between $.28 and $.35 in settlement of debt totalling
$207,250.
During September 1999, the Company issued 395,500 shares of
common stock between $.12 and $.50 in settlement of debt
totalling $91,625.
13
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES (CONTINUED)
- During the Year Ended October 31, 1999: (Continued)
---------------------------------------
During September 1999, the Company issued 1,735,267 shares of
common stock between $.35 and $.50 for professional services
totalling $610,062.
On September 27, 1999, the Company issued 500,000 shares of
common stock at $.35 for consulting fees totalling $175,000.
- During the Six Months Ended April 30, 2000:
-------------------------------------------
During the three months ended January 31, 2000, the Company sold
709,850 shares of common stock for $211,909.
During the three months ended January 31, 2000, the Company
issued 119,060 shares of common stock between $.25 and $.35 for
consulting services totalling $34,050.
During the three months ended January 31, 2000, the Company
issued 50,000 shares of common stock at $1.00 for the acquisition
of Impact Pictures, Inc.
On February 17, 2000, the Company issued 12,000,000 shares of
common stock at $.50 for the acquisition of New Wheel Technology,
Inc.
During February 2000, the Company sold 157,143 shares of common
stock for $55,000.
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 6,000,000 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 deferred financing costs in stockholders' equity as
of April 30, 2000.
On March 17, 2000, the Company issued 5,000 shares at $.70 for a
signing bonus to an employee.
During March 2000, the Company issued 616,361 shares of common
stock between $.35 and $3.00 for consulting and professional
services totalling $388,329.
14
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUANCES (CONTINUED)
- During the Six Months Ended April 30, 2000: (Continued)
-------------------------------------------
During March 2000, the Company sold 945,134 shares of common
stock for $1,231,791.
During April 2000, the Company issued 4,022,900 shares of common
stock between $.30 and $.50 for professional services totalling
$1,422,900.
During April 2000, the Company sold 12,515 shares of common stock
for $31,288.
STOCK OPTIONS
On February 11, 2000, the Board of Directors of the Company granted to
three directors options to acquire 3,600,000 shares of its common
stock. The exercise price for the options is $1.00 per share. The
options vest in four equal annual installments of 900,000 shares
commencing February 11, 2000 and expire February 11, 2010.
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:
Options to purchase common stock 3,600,000
=========
Total as of April 30, 2000 3,600,000
=========
15
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 6 - 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 six months ended April 30, 1999 and 2000 was
$3,960 and $17,788, 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 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.
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, 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 attorneys fees. The
Company denies liability and intends to vigorously prosecute its claim
and defend itself against the counterclaim.
16
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 2,000,000 restricted
shares of the Company's common stock. An additional 3,500,000
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 70,000 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.
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 2 million 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.
17
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENT
In September 1999, the Company entered into a consulting agreement for
financial advisory services. The agreement provides for the Company to
pay consulting fees of $2,500 per month, plus out-of-pocket expenses
for 10 months. In addition, the Company issued to the consultant
warrants to purchase up to 350,000 shares of common stock at an
exercise price of $.60 per share. The warrants are exercisable provided
certain financial conditions are achieved and expire on September 23,
2003.
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 September 14, 2000, with a renewal
option between six months and eleven months, based on certain
milestones.
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.
18
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 6 - 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 April 30, 2000, the Company had a bank balance in excess of
federally insured limits by approximately $319,000.
For the six months ended April 30, 1999, substantially all of the net
revenues were derived from three companies. For the six months ended
April 30, 2000 substantially all of the net revenues were derived from
one company.
NOTE 7 - SUBSEQUENT EVENTS
STOCK SPLIT/PREFERRED STOCK
On April 30, 2000, the Board of Directors authorized, and on May 31,
2000, a majority vote of the shareholders approved, a one-for-four
reverse stock split of the Company's outstanding common stock. At the
same time the Board of Directors and shareholders approved a decrease
in the number of authorized shares of the Company's preferred stock
from 200,000,000 to 15,000,000, and also decreased the par value of its
preferred stock from $30 to $.01 per share. The above will become
effective by filing an amendment to the Company's articles of
incorporation. The filing with the Utah Secretary of State's Office is
to take place in June 2000.
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
(post-reverse stock split) shares of common stock will be 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.
19
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 7 - SUBSEQUENT EVENTS (CONTINUED)
2000 OMNIBUS SECURITIES PLAN (CONTINUED)
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 Small Cap market
or on the QTC 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.
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, analysts and others for a term of six months.
In consideration of the services to be performed by the consultant, the
Company agreed to pay compensation to the consultant as follows:
(a) Fifty thousand dollars ($50,000), payable as follows:
- $25,000 due upon the execution of the consulting agreement, plus
- $25,000 due upon the approval of certain marketing materials.
20
<PAGE>
NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2000
NOTE 7 - SUBSEQUENT EVENTS (CONTINUED)
CONSULTING AGREEMENT (CONTINUED)
(b) The consultant shall also be issued a certificate representing
two hundred thousand (200,000) "pre-reverse split" shares of the
Company's common stock, which certificate shall be issued within
three business days after the execution of the agreement by the
consultant. The consultant acknowledged that the Company intends
to effect a 1-for-4 reverse stock split and that such certificate
will thereafter represent fifty thousand (50,000) "post-reverse
split" shares of the Company's common stock. The consultant and
the Company shall enter into a registration rights agreement with
respect to the registration of such shares.
(c) Within three business days after the Company effects its 1-for-4
reverse stock split, the consultant shall be issued a warrant
entitling it to purchase, in the aggregate up to 200,000 shares
of the Company's "post-reverse split" common stock (the "Warrant
Shares"). The warrant shall be divided into four tranches of
fifty thousand (50,000) shares each, with each tranche to have
the following exercise prices: Tranche 1 - $7.00 per share;
Tranche 2 - $8.50 per share; Tranche 3 - $10.00 per share; and
Tranche 4 - $11.50 per share. Upon issuance of the warrant, the
consultant and the Company shall enter into a registration rights
agreement with respect to the registration of the Warrant Shares.
21
<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 allow data rates of 52Mbps over standard 26-gauge copper
telephone wire. To date, New Wheel has successfully tested transmission at 52
Mbps over copper wire at a distance 3,500 feet. New Wheel has recently entered
into an agreement with Lucent Technologies' NetworkCare Professional Services
for an independent evaluation of New Wheel's Cu@OCx broadband transmission
technology. New Wheel plans to continue to develop the Cu@OCx broadband
technology with a goal of meeting or exceeding 8,500 feet transmission at OC1
data rates (52 Mbps) over copper wire by fall 2000. New Wheel intends to expand
this range with a long-term target distance of 15,000 feet.
22
<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. ASDL 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.
23
<PAGE>
RESULTS OF OPERATIONS
For the Six Months Ended April 30, 2000 vs. the Six Months Ended April 30, 1999
-------------------------------------------------------------------------------
REVENUES. Revenues for the six months ended April 30, 2000 were
approximately $6,800. Revenues for the six months ended April 30, 1999 were
approximately $44,000.
COSTS AND EXPENSES. Cost and expense includes 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, and selling, general and administrative costs. Total costs
and expenses increased from $540,870 for the six months ended April 30, 1999 to
$8,836,473 for the six months ended April 30, 2000. The increase was principally
related to $1,848,779 in compensatory element of stock issuances and a
$6,050,000 charge to earnings for acquired in-process research and development
costs.
The acquired in-process research and development costs were associated
with the acquisitions of New Wheel Technology ($6,050,000) and Impact Pictures
($50,000). Included in the acquisition of New Wheel Technology was 10,000,000
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.
For the Three Months Ended April 30, 2000 vs. the Three Months Ended April 30,
1999
--------------------------------------------------------------------------------
REVENUES. Revenues for the three months ended April 30, 2000 were
approximately $6,800. Revenues for the three months ended April 30, 1999 were
approximately $29,000.
COSTS AND EXPENSES. Cost and expense includes 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, and selling, general and administrative costs. Total costs
and expenses increased from $265,758 for the three months ended April 30, 1999
to $8,552,941 for the three months ended April 30, 2000. The increase was
principally related to $1,814,729 in compensatory element of stock issuances and
a $6,000,000 charge to earnings for acquired in-process research and development
costs.
The acquired in-process research and development costs were associated
with the acquisition of New Wheel Technology. Included in the acquisition of
New Wheel Technology was 10,000,000 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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Operations have been financed through private sales of common stock
resulting in net proceeds of approximately $1,530,000 and $75,000 for the six
months ended April 30, 2000 and April 30, 1999, respectively. In addition,
during these periods, a substantial portion of expenses were paid by the
issuance of stock.
24
<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 2,000,000 restricted shares of New Visual common stock.
An additional 3,500,000 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 2 million 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. The Company's shareholders are not
required to approve the Intelecon Merger, which is scheduled to be completed in
the Summer of 2000.
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.
GOING-CONCERN CONSIDERATION
---------------------------
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.
25
<PAGE>
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.
26
<PAGE>
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
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. 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 23,759,053 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 5 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.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2.1(1) Agreement and Plan of Merger by and among
New Visual Entertainment, Inc., Intelecon
Acquisition, Inc., Intelecon Services, Inc. and
certain shareholders of Intelecon Services,
Inc., dated as of March 30, 2000.
27
<PAGE>
2.2(2) First Amendment to Agreement and Plan of Merger
by and among New Visual Entertainment, Inc.,
Intelecon Acquisition, Inc., Intelecon
Services, Inc. and certain shareholders of
Intelecon Services, Inc., dated as of April 20,
2000.
3.1(3) Restated Articles of Incorporation
3.2(4) Bylaws
4.1(5) Specimen Stock Certificate
27.1(6) Financial Data Schedule
(b) Reports on Form 8-K.
Not applicable.
--------------
(1) Previously filed as Exhibit 2.2 to the Registrant's Amended Form 10-KSB
filed on May 1, 2000.
(2) Previously filed as Exhibit 2.3 to the Registrant's Amended Form 10-KSB
filed on May 1, 2000.
(3) Previously filed as Exhibit 3.1 to the Registrant's Amended Form 10-KSB
filed on May 1, 2000.
(4) Previously filed as Exhibit 3.2 to the Registrant's Amended Form 10-KSB
filed on May 1, 2000.
(5) Previously filed as Exhibit 4.1 to the Registrant's Amended Form 10-KSB
filed on May 1, 2000.
(6) Filed herewith.
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: June 19, 2000
NEW VISUAL ENTERTAINMENT, INC.
(Registrant)
/s/ Ray Willenberg, Jr.
Chief Executive Officer
28
