VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998,
AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998, AND 1997
Visual Entertainment, Inc. And Subsidiary
Consolidated Financial Statements
As Of December 31, 1999 And 1998
<TABLE>
<S> <C> <C>
ASSETS 1999 1998
------ ---- ----
CURRENT ASSETS:
Cash $72,845 $176,838
Trade accounts receivable $833,180 $1,005,686
Due from affiliates, net $85,459
Prepaid expenses and other current $61,793 $92,778
assets ---------- ----------
Total current assets $1,053,277 $1,275,302
PROPERTY, PLANT AND EQUIPMENT, net $97,694 $25,052
OTHER ASSETS $2,839 $2,859
---------- ----------
Total assets $1,153,810 $1,303,213
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $546,349 $500,165
Due to affiliates, net $271,600
Accrued liabilities $188,239 $233,037
Accrued federal income taxes $38,995
---------- ----------
Total current liabilities $734,588 $1,043,797
DEFERRED INCOME TAXES (Note 5) $70,727 $39,453
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, class B, $0.01 par
value, 10,000 shares authorized,
1,000 issued and outstanding $10 $10
Common stock, class A, $0.01 par
value, 100,000 shares authorized,
61,110 and 55,000 issued and
outstanding, respectively $611 $550
Additional paid-in capital $990 $990
Retained earnings $346,884 $218,413
---------- ----------
Total stockholders' equity $348,495 $219,963
---------- ----------
Total liabilities and
stockholders' equity $1,153,810 $1,303,213
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Visual Entertainment, Inc. And Subsidiary
Consolidated Statements of Income
As Of December 31, 1999, 1998 and 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
SALES $4,179,148 $5,278,889 $4,079,336
COST OF GOODS $1,665,082 $2,110,650 $1,299,514
SOLD ---------- ---------- ----------
Gross $2,514,066 $3,168,239 $2,779,822
margin ---------- ---------- ----------
OPERATING
EXPENSES:
Selling,
general and
administrative $1,426,413 $1,608,014 $1,835,860
Salaries and $413,595 $388,180 $268,955
benefits
Royalty $504,086 $834,456 $480,000
expense ---------- ---------- ----------
Total $2,344,094 $2,830,650 $2,584,815
operating ---------- ---------- ----------
expenses
Operating $169,972 $337,589 $195,007
income
OTHER (EXPENSE)
INCOME, net $6,147 ($19,905) ($16,264)
---------- ---------- ----------
Net income
before income $176,119 $317,684 $178,743
taxes ---------- ---------- ----------
PROVISION FOR
INCOME TAXES:
Current $16,374 $50,195 $11,164
Deferred $31,274 $53,677 $40,409
---------- ---------- ----------
Net income $128,471 $213,812 $127,170
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Visual Entertainment, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Common Add. Retained Total
Stock Amount Stock Amount Paid in (Deficit)
Shares Shares Capital Earnings
BALANCE 1,000 $10 55,000 $550 $990 ($122,569) ($121,019)
12/31/96
Net
income - - - - - $127,170 $127,170
----- --- ----- ---- ---- --------- ---------
BALANCE 1,000 $10 55,000 $550 $990 $4,601 $6,151
12/31/97
Net
income - - - - - $213,812 $213,812
----- --- ----- ---- ---- --------- ---------
BALANCE 1,000 $10 55,000 $550 $990 $218,413 $219,963
12/31/98
Issuance
of 6,110
shares - - 6,110 61 - - 61
Net
income - - - - - $128,471 $128,471
----- --- ----- ---- ---- --------- ---------
BALANCE 1,000 $10 61,110 $611 $990 $346,884 $348,495
12/31/99 ===== === ===== ==== ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Visual Entertainment, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
--------------- -------------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $128,471 $213,812 $127,170
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization $16,952 $6,286 $3,918
Deferred income taxes $31,274 $53,677 $40,409
Allowance for sales returns $17,205 $14,500 -
Writedown of certain assets $9,209 - -
Issuance of common stock $61 - -
Net loss on dispositions of property, - $268 -
plant and equipment
Change in operating assets and
liabilities:
Accounts receivable $146,092 ($466,523) ($108,371)
Due to/from affiliate ($357,059) $59,876 ($90,989)
Prepaid expenses and other current $30,985 ($7,028) ($46,795)
assets
Accounts payable $46,184 $250,749 $72,347
Accrued liabilities ($83,793) $38,930 108165
--------------- -------------- -------------
Net cash (used in) provided by ($14,419) $164,547 $105,854
operating activities --------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and ($89,574) ($12,445) ($23,039)
equipment --------------- -------------- -------------
Net cash used in investing ($89,574) ($12,445) ($23,039)
activities --------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable - ($120,000) ($20,000)
--------------- -------------- -------------
Net cash used in financing - ($120,000) ($20,000)
activities --------------- -------------- -------------
NET (DECREASE) INCREASE IN CASH ($103,993) $32,102 $62,815
CASH, beginning of year $176,838 $144,736 $81,921
--------------- -------------- -------------
CASH, end of year $72,845 $176,838 $144,736
=============== ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the year $602 $22,514 $13,845
=============== ============== =============
Income taxes paid during the year $76,795 $23,043 -
=============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
VISUAL ENTERTAINMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
1. ORGANIZATION:
Visual Entertainment, Inc. (VE), a Texas corporation, commenced
operations in December, 1995. VE distributes a variety of family
oriented products centered primarily around visual presentations of
various books of the Bible using the product name The Visual Bible.
VE has been granted the exclusive distribution rights to distribute
The Visual Bible in the United States, Canada, and Mexico.
Visual Entertainment Music, LLC was created in March 1999. Although
the entity provided musical composition services for unrelated third
parties during 1999, its primary purpose is to compose and/or direct
substantially all musical scores in future renditions of The Visual
Bible. Visual Entertainment Music, LLC is a wholly owned subsidiary
of VE.
Visual Entertainment, Inc. and Visual Entertainment Music, LLC are
referred to collectively throughout these consolidated financial
statements as the "Company."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been
prepared on the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States. The
consolidated financial statements include the accounts of the parent
company, Visual Entertainment, Inc., and Visual Entertainment Music,
LLC after elimination of intercompany transactions.
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of trade accounts receivable, trade accounts
payable, and accrued liabilities in the financial statements
approximate the fair value for these financial instruments because
of the relatively short period of time between origination of the
instruments and their expected realization.
Property, Plant, and Equipment
Property, plant and equipment is stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful
lives of the assets. The Company periodically assesses the
realizability of its property, plant and equipment and records a
writedown if deemed necessary.
Revenue Recognition
Revenue from product sales is recognized upon shipment to customers.
Provisions for discounts and rebates to customers and estimated
sales returns and other adjustments are provided for in the same
period the related product sales are recorded. For the years ended
December 31, 1999, 1998 and 1997, the allowance for estimated sales
returns was approximately $32,000, $15,000 and $0, respectively.
Advertising
Costs relating to advertising are expensed as incurred. Advertising
expenses of approximately $89,000, $137,000, and $189,000 were
included with selling general and administrative expenses for 1999,
1998, and 1997, respectively.
Income Taxes
Deferred income taxes are provided to reflect temporary differences
between the financial statement and income tax basis of assets and
liabilities in accordance with Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes."
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. The Company's customer base is comprised primarily of
customers in the industry who are located throughout the United
States. Accounts receivable as of December 31, 1999 and 1998,
included amounts due from one and two customers in 1999 and 1998,
respectively, which individually comprised more than 10% of the
total accounts receivable balances. The Company's accounts
receivable from these customers totaled approximately $356,000 and
$390,000 as of December 31, 1999 and 1998, respectively.
During 1999 and 1997 the Company made sales to a customer who
comprised approximately 14% and 11% of total revenue, respectively.
No customer accounted for more than 10% of total revenue during the
year ended December 31, 1998.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at December
31, 1999 and 1998:
<TABLE>
<S> C> <C> <C>
Estimated
1999 1998 Useful Life
---- ---- -----------
Office Equipment $ 106,478 $ 19,571 5 years
Furniture and Fixtures 23,932 21,265 7 years
------- ------
130,410 40,836
Less - Accumulated depreciation (32,716) (15,784)
------- ------
Net property, plant and equipment $ 97,694 $ 25,052
====== ======
</TABLE>
4. OPERATING LEASE:
Operating Leases
The Company leases vehicles, office equipment and office space under
noncancellable operating leases. Commitments under these leases at
December 31, 1999 are as follows:
Year ending December 31 -
2000 $50,919
2001 30,927
Thereafter -
------
$81,846
======
5. INCOME TAXES:
Deferred tax liabilities and assets result primarily from the
difference in the timing of the recognition of depreciation,
accounts receivable, accounts payables and accrued liabilities for
financial reporting and income tax purposes.
The net deferred tax liabilities and their approximate tax effects
as of December 31, 1999 and 1998, are as follows:
<TABLE>
<S> <C> <C>
1999 1998
Current deferred tax assets $(219,649) $(339,774)
Current deferred tax liability 276,985 373,298
------- -------
Net current deferred tax liability 57,336 33,524
Long-term deferred tax liability 13,391 5,929
------- -------
Net deferred tax liabilities $ 70,727 $ 39,453
======= =======
</TABLE>
The effective income tax rate of the Company is different from the
statutory income tax rate of 34% due to its ability to apply
graduated tax rates based on its current income levels.
As of December 31, 1999 and 1998 the Company did not have an
operating loss carryforward or any unused tax credits.
6. BUSINESS ALLIANCES:
In December 1995, the Company entered into a business alliance with
Nest Entertainment (the "Nest Alliance") to market The Visual Bible
using an infomercial and telemarketing. In accordance with the
alliance agreement, the Company recognizes 50% of the Nest
Alliance's results of operations. Pursuant to the alliance
agreement, the Company is not entitled to any of the assets or
liabilities of the Nest Alliance but rather only to its pro rata
share of the Nest Alliance's net income. Accordingly, the
accompanying consolidated balance sheets do not reflect any portion
of the Nest Alliances's assets or liabilities.
In June 1997, the Company entered into another business alliance
with Harvest House Publishers, Inc. (the "Harvest Alliance") to
co-publish, market, and sell one or more religious books. In
accordance with the alliance agreement, the Company recognizes 50%
of the Harvest Alliance's results of operations. Pursuant to the
alliance agreement, the Company is not entitled to any of the assets
or liabilities of the Harvest Alliance but rather only to its pro
rata share of the Harvest Alliance's net income. Accordingly, the
accompanying consolidated balance sheets do not reflect any portion
of the Harvest Alliance's assets or liabilities.
The following is summarized combined financial information for both
the Nest and Harvest Alliances for the years ended December 31:
Unaudited (000s)
------------------------
1999 1998 1997
---- ---- ----
Net sales $631 $1,611 $2,502
Gross profit 427 1,390 2,179
Net income 91 48 215
The income (loss) from alliances reflected in the accompanying
consolidated income statements is as follows:
Unaudited (000s)
------------------------
1999 1998 1997
---- ---- ----
Nest Alliance $ 26 $ 2 $ 130
Harvest Alliance 20 22 (22)
---- ---- -----
Total $ 46 $ 48 $ 108
==== ==== =====
As of December 31, 1999, the Company and Nest had jointly agreed to
discontinue the operations of the Nest Alliance.
As of February 29, 2000, the Company had entered into a termination
agreement with Harvest House Publishers, Inc. terminating the
Harvest Alliance as of December 31, 1999. Harvest House Publishers,
Inc. will pay the Company a royalty based on net sales from the
products that were previously sold through the Harvest Alliance.
This royalty will be paid on all such sales for the two years ending
December 31, 2001.
7. TRANSACTIONS WITH RELATED PARTIES:
The Company has entered into various transactions with various
affiliates who are described below. As of December 31, 1999 and
1998, the Company had various amounts due (to) or from affiliates as
follows:
December 31,
1999 1998
Penton Investments $ 18,764 $ 18,764
Covenant KFT 149,909 (167,050)
LA Entertainment Group, Inc. (32,448) (123,726)
Bauhaus Partners, Ltd. (52,277) -
The Idea Agency, Inc. - (1,038)
Shareholders 1,511 1,450
--------- ---------
Amounts due (to) from affiliates $ 85,459 $(271,600)
========= =========
Penton
Penton Investments, Ltd. ("Penton") is the holder of all of the
Class B shares of the Company. The Class B shareholders are
entitled to 50% of the net assets of the Company upon liquidation.
In 1995, the predecessor to the Company advanced $18,764 to Penton.
When the Company acquired the assests and liabilities of this
predecessor company, they assumed this receivable. The receivable
is non-interest bearing and has no term for collection. As more
fully described in Note 10 below, the Company has entered into a
letter of intent to reacquire substantially all of the Class A and B
shares of the Company and retire those shares into the Treasury.
The Company and Penton have agreed that the amounts due from Penton
will be offset against the amount due to Penton for this share
acquisition.
Covenant
In 1996, Covenant KFT ("Covenant") granted the Company the exclusive
rights to distribute The Visual Bible products in the United States,
Canada and Mexico. The distribution royalty the Company must pay
Covenant is effectively 75% of the Company's cash flow with a
minimum royalty due of $480,000 per year.
The managing director of Visual International, Ltd., the parent
corporation of Covenant, is a board member of the Company.
Periodically throughout the term of the sublicense agreement, Visual
International, Ltd., has directed the Company to pay certain
expenses on Covenant's behalf in lieu of paying the required
royalties directly to Covenant. All amounts paid at the direction
of Visual International, Ltd., together with the royalties actually
paid to Covenant, have been reflected in the accompanying
consolidated statements of income as royalty expense. The amount due
from Covenant at December 31, 1999, represents the excess of amounts
paid on behalf of Covenant over the royalties due to Covenant.
LA Entertainment Group, Inc.
The controlling shareholder of LA Entertainment Group, Inc. ("LAEG")
is a Class A shareholder and director of the Company. The Company
entered into an agreement with LAEG whereby LAEG would be paid
$370,000 for consulting services provided to the Company in 1996.
Of this amount, $250,000 was to be paid by December 31, 1999. As of
December 31, 1999 and 1998, the Company still owed LAEG $20,000 and
$120,000, respectively for these previously rendered consulting
services. The Company also paid LAEG $120,000 for consulting
services in 1997.
The Company also entered into various other agreements with LAEG
related primarily to production and quality control services. These
agreements called for the payment of certain base amounts and/or
royalties on the sales of certain products produced by LAEG. The
Company paid LAEG approximately $96,000, $184,000 and $75,000 in
1999, 1998 and 1997, respectively, for these additional services.
At December 31, 1999 and 1998, the Company owed LAEG approximately
an additional $12,000 and $4,000, respectively, for these services.
Bauhaus
In March 1998, the Company guaranteed payment for consulting
services provided by Bauhaus Partners, Ltd. ("Bauhaus") related to
the creation of an entity to provide additional production
financing. The new entity was to pay Bauhaus $15,000 per month and
$250,000 in March 1999. Bauhaus is also entitled to an additional
$200,000 from Visual International, Ltd., upon the successful
raising of production capital. In March 1999, the parties agreed to
defer payment of the $250,000 until the production capital is
received. The parties also agreed to raise the monthly consulting
fee to $22,000 per month, effective April 1999.
From inception of the agreement, at the request of Visual
International, Ltd., the Company has paid Bauhaus the required
monthly fee. As of December 31, 1999, the Company owed Bauhaus
approximately $52,000 for unpaid consulting fees as well as certain
out of pocket expenses paid by Bauhaus. In addition, the Company is
contractually liable to pay the $450,000 owed by Visual
International, Ltd., in the event Visual International fails to pay
such amounts. (See Note 8.)
In December 1999, the CEO of Visual Entertainment, Inc. resigned and
was replaced by the controlling shareholder of Bauhaus.
Idea Agency
The controlling shareholder of the Idea Agency, Inc. is a Class A
shareholder and director of the Company. During 1998 and 1997, at
the request of Visual International, Ltd., the Company paid the Idea
Agency approximately $100,000 and $59,000, respectively for amounts
owed for consulting services rendered prior to 1996. These payments
are amounts paid on behalf of Covenant and are reflected as royalty
expense in the accompanying consolidated statements of income.
The Company paid the Idea Agency approximately $54,000 and $57,000
in 1998 and 1997 as commissions on sales made to referrals of the
Idea Agency. At December 31, 1998, the Company owed the Idea Agency
approximately $1,000 for unpaid commissions.
Finally, in 1996, the Company granted the controlling shareholder of
the Idea Agency the exclusive rights to manufacture and distribute
certain children's products using The Visual Bible. The
shareholder, in turn, granted certain of these rights to another
entity of which he was the CEO ("TNI"). Certain products were
developed in 1998 by TNI and the Company agreed to allow TNI to
retain up to approximately $65,000 of the production costs of these
products from the royalties that would otherwise be payable to the
Company. In 1999, the Company earned royalties of approximately
$30,000, which were offset against the production costs of TNI.
Shareholders
Certain of the shareholders owed the Company for the purchase price
of their shares. These amounts will be netted from the proceeds
paid to the shareholders when their shares are reacquired (See Note
10).
8. COMMITMENTS AND CONTINGENCIES:
As more fully described in Note 7, the Company has guaranteed the
payment terms of a contract entered into with Bauhaus. As of
December 31, 1999, the Company has reflected an outstanding payable
to Bauhaus of approximately $52,000. (See Note 7.) In addition, as
of December 31, 1999, Visual International, Ltd., owes Bauhaus
$450,000.
The Company has entered into contractual relationships with a
fulfillment services company and a related sales organization.
These companies provide sales and fulfillment services which
include, but are not limited to, making or receiving sales calls,
carrying inventory, shipping products, issuing invoices, managing
and collecting receivables, remitting collections (net of their
fees) to the Company, providing customer relations and
communications, and providing sales, collection and receivable
information to the Company.
As a result of these contractual relationships, the Company carries
only a minimal amount of inventory. The contracts provide for 90
days notice of termination. Upon termination, the Company is
responsible for paying for all services rendered as well as
purchasing all unsold inventory. As of December 31, 1999, neither
party had tendered a termination notice.
9. CAPITALIZATION:
The Company's capitalization consists of two classes of shares. The
class A common shareholders are four individuals who also constitute
the Company's Board of Directors. The class B preferred shareholder
is Penton (see Note 7). Upon liquidation of the Company, the class
A common and class B preferred shareholders are each collectively
entitled to 50% of the net assets of the Company.
10. SUBSEQUENT EVENTS:
In December 1999, the class A and B shareholders entered into a
letter of intent to sell their shares back to the Company for a
collective sum of $550,000. Except as discussed below, this buyback
of the Company's shares has not yet occurred. Accordingly, the
accompanying consolidated balance sheet as of December 31, 1999,
does not reflect this transaction.
In February 2000, management of the Company was asked by Visual
International, Ltd., not to buy back the share of a specified class
A shareholder to facilitate a proposed acquisition of the Company.
The Board of Directors and shareholders have agreed to this
modification and intend to consummate the contemplated transaction.
The shareholders have also been informed and agreed that the sole
remaining shareholder intends to exchange his remaining share in the
Company for a share of Visual Bible, Inc. ("Visual Bible"). When
these two transactions are consummated, the Company will be a wholly
owned subsidiary of Visual Bible.
In December 1999, the CEO of the Company tendered his resignation
subject to a formal termination agreement and share repurchase
agreement being consummated. In April 2000, the Company and the
former CEO entered into such agreements. Pursuant to the repurchase
agreement, the Company agreed to repurchase the former CEO's class A
shares for a note of $180,000. The note is non-interest bearing and
is payable at the rate of $7,500 per month beginning April 30, 2000.
