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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
__________________
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
OR
[ ] 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 CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 95-4545704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5920 FRIARS ROAD
SUITE 104
SAN DIEGO, CALIFORNIA 92108
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (619) 692-0333
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 Par Value
Series A Junior Participating Preferred Stock Purchase Rights
-------------------------------------------------------------
(Title of Class)
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of April 30, 2002, the last day of our second fiscal quarter, the aggregate
market value of the voting and non-voting common equity held by non-affiliates
was approximately $43,455,000.
As of January 23, 2003, the registrant had 52,647,063 shares of common stock
outstanding.
Documents incorporated by reference: Part III of this Report is incorporated by
reference to portions of the registrant's definitive proxy statement for the
2003 Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS.
GENERAL
New Visual Corporation ("New Visual," the "Company," "we," "our" or
"us") is developing advanced transmission technology to enable data to be
transmitted across copper telephone wire at speeds and over distances that
exceed those offered by industry-leading DSL technology providers. We intend to
market this breakthrough technology to leading equipment makers in the
telecommunications industry. Our technology is designed to dramatically increase
the capacity of the copper telephone network, allowing telephone companies to
provide enhanced video, data and voice services over the existing copper
telecommunications infrastructure.
Through our NV Technology, Inc. subsidiary ("NV Technology"), we intend
to design, develop, manufacture and license semiconductor products based upon
our technology. We believe that products using this technology will have a
significant advantage over existing broadband technologies, such as digital
subscriber line ("DSL"), by providing faster transmission speed capability and
by increasing the transmission distance capability.
During the 2000 fiscal year, we entered into a joint venture to produce
a feature length, surfing adventure film for mainstream theatrical release. The
film, entitled STEP INTO LIQUID, has been completed and is being shown to
distributors.
Our executive offices are located at 5920 Friars Road, Suite 104, San
Diego, California, and our telephone number at that address is (619) 692-0333.
OUR TELECOMMUNICATIONS BUSINESS
THE BROADBAND BOTTLENECK
The great, unfinished task of the telecom industry is to fill the "last
mile" gap that prevents businesses and consumers from enjoying the benefit of
the global, high-speed data backbone. The gap occurs where the low-speed
capacity of local loop telephone networks meets the demand for high-speed
services. Ninety-three percent of business buildings, for example, are unable to
get high-speed data services because the facilities that underlay them are
copper wires.
Filling the "last mile" gap with fiber is prohibitively expensive, so
New Visual has developed a silicon-based strategy, best described as "Fiber
Avoidance" - if a wireline carrier can avoid deploying fiber optics in
delivering fiber-like services, that carrier can increase its return on assets
in a dramatic way. The value proposition of New Visual can best be summarized as
a solution that will allow service providers to send digital information farther
and faster, utilizing a low-cost implementation/deployment strategy that
leverages the existing copper infrastructure.
New Visual's products will address critical gaps in the access portion
of the network at attractive prices for telecom companies anxious to save money
and increase profits. By utilizing the existing copper wire infrastructure, our
products are intended to enable telecom companies to sell high-margin services
and deliver bandwidth-hungry multimedia applications, such as video, voice, and
data, which otherwise would be unavailable without extraordinary capital
outlays.
WORLDWIDE DEMAND CONTINUES TO GROW
There are approximately one billion copper loops in the world today.
Two hundred million are in the United States. Europe and Southeast Asia, with
their high levels of teledensity, comprise most of the rest. A remarkable
feature of these lines is that they are being retrofitted to support broadband
data transmission at a quick pace. This retrofit activity is being performed by
the world's telephone operating companies in response to demand from end-user
businesses and residences for new services like high-speed data, virtual private
network, voice over Internet protocol, Internet access, video conferencing, and
cable company-like video delivery. These services typically yield higher margins
to the telephone companies than do voice services. For this reason, we believe
telephone companies will be receptive to offers from new semiconductor companies
like New Visual.
We are developing layer-one, integrated circuit-based solutions to
address the specific needs of both business class and residential markets. We
are entering the market at a time when many companies are promoting solutions to
enable broadband communications over the local loop, such as the various digital
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subscriber line technologies. Still others are sponsoring alternative means for
providing high-speed data communications such as wireless, satellite, fiber
optic and cable modem technologies. We believe the worldwide market for
high-speed communications is growing so quickly that all of these alternative
access technologies can grow while we are also establishing our access
technology.
NEW VISUAL'S "FIBER AVOIDANCE" STRATEGY
Wireline carriers around the world are experiencing high demand for
data-intensive transmission services from enterprises. These services such as
T1, Frame Relay, ATM Managed Services, Gigabit Ethernet, and other private line
services, are delivered across T1, E1, T1 IMA, N X T1, DS3, E3 and other
transmission protocols. While T1 and E1 can be used to reach the buildings that
are off the fiber ring, these protocols are limited by copper pair's low speed,
high costs, maintenance costs, and poor utilization.
Much has been made in recent years about the benefits of trenching
fiber to every building, but the reality is that it is financially feasible for
only the largest buildings. Telephone companies find that it is extremely
expensive and impractical to replace the existing copper wire infrastructure
with fiber optic technology to 90% of the offices. New fiber costs $500-$1000
per foot to install, and some municipalities have begun prohibiting new
trenching, making it impossible to start new upgrade projects. Other solutions
to enable broadband communications, such as wireless, satellite, and cable modem
network technologies, often suffer from poor performance, high deployment costs,
and lack of mass marketability. Most importantly, these technologies fail to
allow the telephone companies to leverage their existing investment in the
copper plant.
New Visual's integrated circuits are being designed to increase the
capacity and range of high-speed services on the existing copper network,
enabling telephone network operators to increase their offering of services and
reduce the cost of network upgrades. Worldwide, this network contains over 950
million copper lines, and currently delivers most of the world's telephone
traffic and broadband access. If service providers can leverage this huge
existing infrastructure, they can avoid the high costs and slow deployments
associated with replacing the local loop with fiber.
NV TECHNOLOGY'S SOLUTION
We are developing an advanced transmission technology to enable data to
be transmitted across copper telephone wire at faster speeds and over greater
distances than is presently offered by leading DSL technology providers. Our
technology, using the internal name Embarq(TM), offers significant improvements
over existing technologies by optimizing the bandwidth used and taking advantage
of dynamic changes in the available signal to noise ratio ("SNR"). Bandwidth is
maximized by dynamically operating as close as possible to the available
bandwidth, specifically by taking advantage of dynamic improvements in the SNR.
Telephone wiring has a static, known function of attenuation versus frequency,
while there are dynamic characteristics that present both significant and
exploitable dynamic changes during transmission. The NV Technology solution
takes advantage of these exploitable characteristics, resulting in dramatically
improved achievable throughput.
We intend to develop core technology and chip level solutions to be
licensed or sold to equipment makers that serve the following markets:
o SMALL-TO-MID-SIZED ENTERPRISES ("SMES"): defined as a direct
connection between a small business (20-500 employees) and the
telephone central office, including those businesses that
currently subscribe for T1, Multiple T1, or DS3 services.
Today, for example, local exchange carriers ("LECs") mostly
serve their DS3 (45Mbps) customers with coaxial cables that
are limited to 500 ft. in distance from the customer to the
source of the DS3 signal (typically a fiber optic terminal).
For a business in a building that is not on a fiber ring, the
LEC must determine if the customer is over 500 ft. from an
existing fiber optic terminal. If the distance is over 500
ft., the Telco must trench fiber to the building and place
fiber optic terminals. This capital expense renders the DS3
line unprofitable for the first 18 months of service.
o MXU (MTU, MDU, MHU): defined to include multi-tenant units,
multi-dwelling units, and multi-hotel units, in which a
multiplexer unit in the building serves bandwidth to multiple
users under the management of a service provider or the owner
of the building. Today, LECs serve their densest customer
locations with unshielded twisted pair copper (UTP) wire that
typically runs directly back to the wire center. LECs have
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tested a number of new technologies that would enable them to
serve MDUs and MTUs with network elements placed in the
LEC-owned wiring closet in the building. A common downfall
associated with all of these competing solutions is the
placement of fiber optics.
o REMOTE TERMINAL/FEEDER: defined as the connection between a
telephone central office and remote cabinets such as an RT,
DSLAM, SLC, or DLC. Today, phone companies (i.e., Local
Exchange Carriers or LECs) serve 30% of their UTP wires with
digital loop carriers. These network elements communicate with
the serving wire center, or central office, via digital
trunks. All of the physical layer technologies for these
trunks have drawbacks that frequently cause the LEC to spend
scarce capital dollars needlessly.
o RESIDENTIAL: defined as the home broadband (high-speed access)
consumers.
We believe that products based upon our technology will enable
providers of broadband services to these markets to:
o ENHANCE THEIR OFFERING OF CONVERGENT SERVICES. We believe that
deployment of our technology would permit the transmission of
television, telephone and Internet access services over
existing telephone lines to a large number of consumers.
o REACH MORE CUSTOMERS. The technology could permit service
providers such as telephone companies and other DSL providers
to reach more customers as a result of the extended range of
their data transmissions. For example, VDSL services are
presently unavailable to a large number of potential
residential and business class consumers that reside more than
1,000 feet at 52Mbps or 13Mbps at 4,500 feet from the central
office. Similarly, while standard ADSL services have a range
of 12,000 feet-18,000 feet, capacity decreases the farther the
end user is from the central office.
o LOWER COSTS BY USING EXISTING INFRASTRUCTURE. By deploying
products built upon our technology, we believe that service
providers will be able to reduce their technology investment
and shorten the length of time it takes to recover initial
capital outlay. Because our technology will increase the range
of transmission over copper, providers could provide enhanced
broadband services to larger markets, yet continue to utilize
the existing copper infrastructure and existing technologies.
OUR BUSINESS STRATEGY
Our objective is to initially deploy our technology in the SME, MxU and
Remote Terminal/Feeder business markets, and to subsequently expand into the
Residential market. We believe business class markets offer the nearest revenue
opportunity for commercial applications of our technology because:
o many businesses already have existing applications that
require greater bandwidth,
o businesses have demonstrated the ability and willingness to
pay for premium broadband services,
o spending by the business class markets significantly exceeds
spending by the residential market, and is projected to
continue to do so for the foreseeable future, and
o the return on investment for service providers is a more
attractive model (e.g., lower cost of deployment and customer
acquisition vs. revenue).
Residential broadband demand and DSL deployment is increasing rapidly, however,
and we intend to deploy our technology in the Residential market as that market
matures and new applications continue to drive demand for greater bandwidth.
We believe that the most prudent strategy for deploying our technology
will involve licensing, equipment sales in the form of evaluation units for
field trials, and integrated circuit ("IC") sales in the form of Application
Specific Integrated Circuits ("ASICs"). We intend to ultimately produce a small,
inexpensive chipset design that can be mass-produced with a high degree of
economic reliability. We expect to benefit from the following revenue models:
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o joint venture manufacturing relationships with equipment
makers and/or chip makers;
o manufacture and sale of ICs; and/or
o licensing our IC "recipe" to chip makers.
Out of these models, we anticipate future revenues will take the form of license
fees and royalty payments, development and support fees, and product sales of
ASICs.
COMPETITION
The market for high-speed telecommunications products is highly
competitive, and we expect that it will become increasingly competitive in the
future. Our potential competitors consist of some of the largest, most
successful domestic and international telecommunications companies, such as
Broadcom, Metalink, GlobespanVirata, Intel, and Texas Instruments and other
companies with well-established reputations in the broadband telecommunications
industry, such as Infineon Technologies. These and our other potential
competitors possess substantially greater name recognition, financial, sales and
marketing, manufacturing, technical, personnel, and other resources than we
have. These competitors may also have pre-existing relationships with our
customers or potential customers. These competitors may compete effectively with
us because in addition to the above-listed factors, they more quickly introduce
new technologies, more rapidly or effectively address customer requirements or
devote greater resources to the promotion and sale of their products than we do.
Further, in the event of a manufacturing capacity shortage, these competitors
may be able to manufacture products when we are unable to do so.
We believe we will be able to compete with these companies because our
products will provide advantages not otherwise available, most notably the
ability to significantly increase the speed and extend the range of broadband
transmission over copper telephone wire. It is therefore possible that our
products will enhance the broadband solutions of some of our competitors, and
that these competitors could become our customers or business partners.
Although we believe we will be able to compete based on the special
features of our products, our products will incorporate new concepts and may not
be successful even if they are superior to those of our competitors. In addition
to facing competition from providers of DSL-based products, our products will
compete with products using other broadband technologies, such as cable modems,
wireless, satellite and fiber optic telecommunications technology. Commercial
acceptance of any one of these competing solutions could decrease demand for our
products.
We also face competition from new technologies that are currently under
development that may result in new competitors entering the market with products
that may make ours obsolete. We cannot entirely predict the competitive impact
of these new technologies and competitors.
MANUFACTURING AND SUPPLIERS
We intend to contract with third party manufacturers to produce our
products and will rely on third party suppliers to obtain the raw materials
essential to our products' production. Manufacturing our products will be a
complex process and we cannot assure you that we will not experience production
problems or delays. Any interruption in operations could materially and
adversely affect our business and operating results.
There may be a limited number of suppliers of some of the components
necessary for the manufacture of our products. The reliance on a limited number
of suppliers, particularly if such suppliers are foreign, poses several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing, quality and timely delivery of
components. We cannot assure you that we will be able to obtain adequate
supplies of raw materials. Certain key components of our products may involve
long lead times, and in the event of an unanticipated increase in the demand for
our products, we could be unable to manufacture certain products in a quantity
sufficient to satisfy potential demand. If we cannot obtain adequate deliveries
of key components, we may be unable to ship products on a timely basis. Delays
in shipment could damage our relationships with customers and could harm our
business and operating results.
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GOVERNMENT REGULATION
The telecommunications industry is subject to extensive regulation by
federal and state agencies, including the Federal Communications Commission, or
FCC, and various state public utility and service commissions. There are some
regulations at present that have been interpreted by our target customers as
discouraging to the technical innovations that we are bringing to market, though
we do not believe this to be the case. Further, regulations affecting the
availability of broadband access services generally, the terms under which
telecommunications service providers conduct their business, and the competitive
environment among service providers, for example, could have a negative impact
on our business.
OUR LEGACY FILM PRODUCTION BUSINESS
From 1996 through February 1999, our business focused on the production
and distribution of 3-D films for special venue markets, such as theme parks,
amusement parks, family entertainment centers and casinos. In April 2000, we
entered into a joint venture with Dana Brown, Bruce Brown, and John-Paul Beeghly
to produce a feature length, surfing adventure film for mainstream theatrical
release. The film is titled "STEP INTO LIQUID" and was written, produced and
directed by Dana Brown, Bruce Brown and John-Paul Beeghly. STEP INTO LIQUID
continues the tradition of Academy Award-nominated director Bruce Brown's
classic surf documentary film, ENDLESS SUMMER, which is the second highest
grossing documentary film of all time, and Bruce and Dana Brown's mainstream
sequel, ENDLESS SUMMER 2. Bruce Brown is one of our directors.
STEP INTO LIQUID features over 50 surfers from around the world,
including long-board legends, short-board pros, aerial fanatics, tow-in heroics,
hydro-foil gliders, and supertanker sliders. The film tells tales from local
shores to far away lands -- from Wisconsin to Rapa Nui, Costa Rica to Ireland,
Texas to Hawaii, Vietnam to San Onofre, Western Australia to Tahiti, and Japan
to the Cortez Banks. The film is complete and is currently being shown to
distributors.
Under the terms of our joint venture, we agreed to finance the
production of the film for up to $2,250,000. Upon its release, we will receive
all revenues generated by the film until we recover 100% of our initial
investment. After we recoup our investment in the venture, 50% of the net
profits generated by the film will be paid to us.
OUR EMPLOYEES
We currently have four full-time employees and three part-time
employees. We may, from time to time, supplement our regular work force as
necessary with temporary and contract personnel. None of our employees are
represented by a labor union. We believe we have a good relationship with our
employees.
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report (including the foregoing "Business" section and the section
below entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations") contains forward-looking statements that involve risks
and uncertainties. You should exercise extreme caution with respect to all
forward looking statements contained in this report. Specifically, the following
statements are forward-looking:
o statements regarding our overall strategy for developing and
deploying our technology, including, without limitation our
intended markets and future projects;
o statements regarding our research and development efforts;
o statements regarding the plans and objectives of our
management for future operations, the production of products
incorporating our technology and the size and nature of the
costs we expect to incur and the people and services we may
employ;
o statements regarding the future of broadband communications
and opportunities therein, our competition or regulations that
may affect us;
6
o statements regarding our ability to compete with third
parties;
o any statements using the words "anticipate," "believe,"
"estimate," "expect," "intend," and similar words; and
o any statements other than historical fact.
We believe that it is important to communicate our future expectations
to our shareholders. Forward-looking statements reflect the current view of
management with respect to future events and are subject to numerous risks,
uncertainties and assumptions, including, without limitation, the factors listed
in "Risks Associated with Our Business." Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we can
give no assurance that such expectations will prove to be correct. Should any
one or more of these or other risks or uncertainties materialize or should any
underlying assumptions prove incorrect, actual results are likely to vary
materially from those described in this report. There can be no assurance that
the projected results will occur, that these judgments or assumptions will prove
correct or that unforeseen developments will not occur.
ITEM 2. PROPERTIES.
Our corporate headquarters are located at 5920 Friars Road, Suite 104,
San Diego, California. This property is occupied under a five-year lease that
commenced on February 1, 2000. We believe that this space will meet our needs
for at least the next 12 months.
We also lease space for our wholly-owned subsidiary, NV Technology,
Inc. in Pleasanton, California. This property is located at 1024 Serpentine
Lane, Pleasanton, California and includes 2,251 square feet of research and
development space, which was previously utilized by our consultants. This
property is occupied under a lease that commenced on May 4, 2001 and which was
amended on September 12, 2001. The lease expires on May 31, 2004. We are
currently trying to find a subtenant for this property.
ITEM 3. LEGAL PROCEEDINGS.
On August 2, 2002, a lawsuit was filed in California Superior Court in
Santa Clara County against New Visual Corporation and NV Technology, by Brad
Lundahl (d/b/a Lundahl Engineering) alleging that we breached a contract for
consulting services entered into between us and Mr. Lundahl in July 2000, by
failing to pay Mr. Lundahl for his services as provided under the agreement. The
lawsuit sought to compel arbitration based upon a provision mandating
arbitration contained in the contract in question. We have agreed to arbitrate
this matter. The amount in controversy is not stipulated in the lawsuit. We do
not believe the outcome of this arbitration will have a material impact on our
financial condition, results of operations, business or prospects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the three months ended October 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is currently traded on the Nasdaq Stock Market's
over-the-counter bulletin board (the "OTC Bulletin Board") under the trading
symbol "NVEI."
The following table shows the quarterly high and low bid prices and
high and low ask prices for our common stock over the last three fiscal years,
as reported on the OTC Bulletin Board. The prices represent quotations by
dealers without adjustments for retail mark-ups, mark-downs or commission and
may not represent actual transactions. All prices have been adjusted to give
effect to the 1-for-4 reverse stock split we effected in June 2000.
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BID ASK
--- ---
HIGH LOW HIGH LOW
---- --- ---- ---
NOVEMBER 2001 THROUGH OCTOBER 2002
First Quarter $ .73 $ .30 $ .80 $ .35
Second Quarter 1.79 .33 1.85 .38
Third Quarter 1.35 .74 1.43 .79
Fourth Quarter .90 .35 .94 .40
NOVEMBER 2000 THROUGH OCTOBER 2001
First Quarter $ 7.38 $ 2.25 $ 7.63 $ 2.63
Second Quarter 6.44 2.34 6.47 2.69
Third Quarter 3.62 .97 3.80 1.05
Fourth Quarter 1.50 .34 1.64 .38
NOVEMBER 1999 THROUGH OCTOBER 2000
First Quarter $ 3.69 $ .63 $ 4.00 $ .88
Second Quarter 30.88 2.69 31.00 3.25
Third Quarter 19.75 5.63 20.13 6.00
Fourth Quarter 13.56 6.88 13.69 7.25
HOLDERS
As of January 23, 2003 the approximate number of record holders of our
Common Stock was 893, an undetermined number of which represent more than one
individual participant in securities positions with us.
DIVIDENDS
We have not declared or paid any cash dividends on our capital stock
and do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. Payment of dividends on the common stock is within the
discretion of our Board of Directors. The Board currently intends to retain
future earnings, if any, to finance our business operations and fund the
development and growth of our business. The declaration of dividends in the
future will depend upon our earnings, capital requirements, financial condition,
and other factors deemed relevant by the Board.
RECENT SALES OF UNREGISTERED SECURITIES
During our past two fiscal years, we sold unregistered securities and
issued unregistered securities in consideration for services rendered and in
connection with acquisitions as described in Note 12 to our audited Consolidated
Financial Statements appearing in this report.
We have disclosed sales of unregistered securities in our prior filings
with the Commission, including our quarterly reports for fiscal year 2002.
During the fourth quarter of 2002, we issued the following unregistered
securities:
In August 2002, we:
o sold 75,000 shares of common stock to one investor for total
proceeds of $45,000; and
o issued an aggregate of $35,000 principal amount of convertible
promissory notes to four investors, which may be converted
into shares of our common stock at conversion prices ranging
from $.70 to $.82.
In September 2002, we:
o sold an aggregate of 239,000 shares of common stock to two
investors for total proceeds of $157,000;
o issued an aggregate of $176,000 principal amount of
convertible promissory notes to seven investors, which notes
are convertible into shares of our common stock at conversion
prices ranging from $.42 to $.70;
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o issued an aggregate of 104,484 shares of common stock upon
conversion of convertible promissory notes held by two
investors, resulting in the cancellation of $69,000 in
principal and interest that would have been outstanding under
the notes;
o issued 150,000 shares of common stock valued at $96,000 for
consulting services; and
o issued 50,000 shares of common stock to an executive officer
in lieu of $30,000 of compensation owed to the officer.
In October 2002, we:
o issued an aggregate of $76,500 principal amount of convertible
promissory notes to four investors, which notes are
convertible into shares of our common stock at a conversion
price of $.42; and
o issued 151,786 shares of common stock upon conversion of two
convertible promissory notes held by one investor, resulting
in the cancellation of $75,000 in principal and interest that
would have been outstanding under the notes.
Following the year ended October 31, 2002, we have issued the following
unregistered securities:
In November 2002, we:
o issued an aggregate of $85,000 principal amount of convertible
promissory notes to two investors, which notes are convertible
into shares of our common stock at a conversion price of $.39;
o issued 96,612 shares of common stock upon conversion of
convertible promissory notes to held by three investors,
resulting in the cancellation of $48,000 in principal and
interest that would have been outstanding under the notes;
o sold an aggregate of 166,667 shares of common stock to five
investors for total proceeds of $42,500;
o issued 32,258 shares of common stock to an executive officer
in lieu of $20,000 in compensation owed to the officer;
o issued 300,000 shares of common stock to a company valued at
$144,000 pursuant to a contractual arrangement; and
o sold 183,179 shares of common stock to a "non-US Person" (as
such term is defined in Regulation S of the Securities Act of
1933) for total proceeds of $27,164.
In December 2002, we:
o issued 379,121 shares of common stock upon conversion of two
convertible promissory notes held by one investor, resulting
in the cancellation of $150,000 in principal and interest that
would have been outstanding under the notes;
o sold an aggregate of 367,135 shares of common stock to 13
investors for total proceeds of $98,740;
o issued 56,452 shares of common stock to a director and former
officer of the Company in lieu of $35,000 in compensation owed
to the former officer;
o issued 25,000 shares of common stock valued at $15,750 to an
individual for past services rendered to the Company; and
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o issued 1,180,454 shares of common stock to a "non-US Person"
(as such term is defined in Regulation S under the Securities
Act of 1933) for total proceeds of $181,038.
In January 2003, we:
o sold an aggregate of 1,862,878 shares of common stock to 10
investors for total proceeds of $467,505, of which $337,535
were received in 2002;
o issued 46,875 shares of common stock to our vice chairman in
lieu of $30,000 of deferred compensation owed to the director;
and
o sold 638,683 shares of common stock to a "non-US Person" (as
such term is defined in Regulation S under the Securities Act
of 1933) for total proceeds of $109,573.
All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act or Regulation S under
such Securities Act. Except with respect to securities sold under Regulation S,
the recipients of securities in each such transaction acquired the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access, through
their relationships with the Company and its officers and directors, to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below for the five
years in the period ended October 31, 2002 has been derived from the Company's
audited consolidated financial statements. This information should be read in
conjunction with the audited consolidated financial statements and notes
thereto.
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Revenues $ -- $ -- $ 12,200 $ 129,845 $ 16,696
Cost of sales -- -- 21,403 81,159 26,988
Selling, general and administrative 3,585,253 4,086,795 2,041,942 811,703 1,454,061
expenses
Total operating expenses 7,313,472 9,492,584 12,301,869 2,174,360 3,128,282
Net loss (9,467,123) (11,875,915) (12,725,316) (2,044,515) (3,111,586)
Basic and diluted net loss per share (.23) (.46) (.59) (.14) (.28)
Weighted average number of common 41,861,295 25,988,990 21,579,916 15,130,000 10,956,750
shares outstanding
BALANCE SHEET DATA AT PERIOD-END:
Current assets $ 323,259 $ 560,109 $ 247,024 $ 94,294 $ 23,072
Property and equipment, net 64,533 284,896 393,787 102,530 163,391
Projects under development 2,178,831 1,912,650 638,707 32,883 60,124
Total assets 8,332,302 2,791,297 1,432,662 335,264 251,587
Accounts payable and accrued expenses 2,247,698 1,435,024 446,921 420,699 325,430
Total liabilities 4,907,605 2,306,910 1,203,807 420,699 610,930
Redeemable Series B Preferred Stock 3,192,000 -- -- -- --
Total stockholders' equity (deficit) 232,697 484,387 228,855 (85,435) (359,343)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following discussion should be read in conjunction with our
Financial Statements appearing on pages F-1 through F-46 of this report.
10
RESULTS OF OPERATION
COMPARISON OF THE YEAR ENDED OCTOBER 31, 2002 AND THE YEAR ENDED OCTOBER 31,
2001
REVENUES. Revenues for the fiscal years ended October 31, 2002 and
October 31, 2001 were $0.
OPERATING EXPENSES. Operating expenses included research and
development expenses, compensatory element of stock issuances, selling, general
and administrative expenses and the costs of settlement of litigation. Total
operating expenses decreased to approximately $7,313,000 for fiscal 2002 from
approximately $9,493,000 for fiscal 2001. The decrease was principally related
to reductions in general and administrative expenses. Compensatory element of
stock issuances for general and administrative expenses decreased from
approximately $3,559,000 to approximately $2,459,000 and selling, general and
administrative expenses decreased from approximately $4,087,000 to approximately
$3,556,000 as general and administrative costs associated with our Pleasanton
office were significantly reduced in the fourth quarter of fiscal 2001. Research
and development expenses increased to approximately $1,299,000 in fiscal 2002
from approximately $839,000 in fiscal 2001. During the second quarter of the
2001 fiscal period, 250,000 shares of common stock valued at $1,000,000 were
issued in connection with certain disputes arising from a non-consummated merger
between New Visual Corporation and Astounding.com, Inc. There was no similar
event during the 2002 fiscal period.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses decreased from
approximately $2,383,000 in fiscal 2001 to approximately $2,154,000 in fiscal
2002. Interest expense increased from approximately $337,000 in fiscal 2001 to
approximately $1,036,000 in fiscal 2002, primarily resulting from the interest
component of convertible notes payable issued during the fiscal year ended
October 31, 2002. In addition, several of these convertible notes were
convertible into common stock at a conversion rate lower than the market price
of our common stock at the time of issuance of the notes. As a result, there was
an additional charge to amortization of unearned financing costs of
approximately $654,000. The increases in these expenses were offset by a
reduction in the costs of amortization of unearned financing costs of
approximately $322,000 in connection with a long-term debt financing
arrangement. During the year ended October, 31, 2001 the Company paid down
long-term debt in connection with this financing arrangement amounting to
$500,000.
NET LOSS. The Company's net loss was approximately $9,467,000, or $0.23
per common share, for the fiscal year ended October 31, 2002, a decrease from
the net loss of approximately $11,876,000, or $0.46 per common share, for the
fiscal year ended October 31, 2001.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 2001 AND THE YEAR ENDED OCTOBER 31,
2000
REVENUES. Revenues for the fiscal year ended October 31, 2001 were $0.
Revenues for the fiscal year ended October 31, 2000 were approximately $12,200,
and were derived from the Company's Impact Multimedia, Inc. subsidiary.
OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances, research and development expenses, the acquisition
of in-process research and development expenses, the write-down of project
costs, selling, general and administrative expenses, and the costs of litigation
settlement. Total operating expenses decreased to approximately $9,493,000 for
fiscal 2001, from approximately $12,302,000 for fiscal 2000. The compensatory
element of stock issuances increased from approximately $3,259,000 in fiscal
2000 to approximately $3,559,000 in fiscal 2001. Selling, general and
administrative expenses increased from approximately $2,042,000 in fiscal 2000
to approximately $4,087,000 in fiscal 2001. Both of these increases resulted
from significant increases in technology development activities and increases in
administrative infrastructure largely associated with the acquisitions of New
Wheel Technology, Inc. and Impact Multimedia, Inc. during fiscal 2000. In fiscal
2000, the Company realized a $6,000,000 charge to earnings for acquired
in-process research and development costs connected with its acquisition of New
Wheel Technology, Inc. During the second quarter of the 2001 fiscal period,
250,000 shares of common stock valued at $1,000,000 were issued in connection
with certain disputes arising from a non-consummated merger between New Visual
Corporation and Astounding.com, Inc. There was no similar event during the 2000
fiscal period.
The acquired in-process research and development costs in fiscal 2000
were associated with the acquisitions of New Wheel and Impact Multimedia, and
represent the value of the common stock issued in connection with the
11
acquisitions. The acquisition of Impact Multimedia was in exchange for 12,500
shares of common stock valued at $50,000. The acquisition of New Wheel included
3,000,000 shares of restricted common stock, valued at $6,000,000.
OTHER EXPENSES. Other expenses increased from approximately $436,000 in
fiscal 2000 to approximately $2,383,000 in fiscal 2001. In fiscal 2000 other
expenses included interest expense of approximately $19,000 and amortization of
unearned financing costs of approximately $417,000 in connection with a
long-term debt financing arrangement. In fiscal 2001, interest expense increased
to approximately $337,000 due to increased borrowing activity and amortization
of unearned financing costs increased to approximately $2,046,000 as a full year
of amortization was incurred.
NET LOSS. The Company's net loss was approximately $11,876,000, or
$0.46 per common share, for the fiscal year ended October 31, 2001, a decrease
from the net loss of approximately $12,725,000, or $0.59 per common share, for
the fiscal year ended October 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $3,986,000 in
fiscal 2002, $4,281,000 in fiscal 2001 and $2,901,000, in fiscal 2000. Cash
balances totaled approximately $312,000 as of October 31, 2002 and $295,000 as
of October 31, 2001.
Operations have been financed principally through sales of common
stock, the exercise of warrants and options to purchase common stock, the
issuance of convertible notes payable and notes payable. Net proceeds from
financing activities amounted to approximately $5,201,000 for fiscal 2002,
$5,642,000 for fiscal 2001 and $4,071,000 for fiscal 2000. Net proceeds from
convertible notes payable amounted to approximately $1,795,000 in fiscal 2002,
$615,000 in fiscal 2001 and $0 in fiscal 2000. Proceeds from the exercise of
options and warrants amounted to approximately $728,000 in fiscal 2002, $100,000
in fiscal 2001 and $165,000 in fiscal 2000. The Company received proceeds from
the sale of common stock amounting to approximately $2,224,000 in fiscal 2002,
$5,427,000 in fiscal 2001 and $3,149,000 in fiscal 2000. Notes payable were
issued amounting to approximately $700,000, $0 and $757,000 in fiscal 2002,
fiscal 2001 and fiscal 2000, respectively. Notes payable amounting to
approximately $500,000 were repaid in fiscal 2001.
Stock was issued in payment of expenses amounting to approximately
$2,459,000 in fiscal 2002, $3,559,000 in fiscal 2001 and $3,259,000 in fiscal
2000. Stock was issued in settlement of litigation in the amount of $1,000,000
during the fiscal year ended October 31, 2001.
In April 2000, we entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. Under the agreement,
we are providing the funding for the production in the amount of up to
$2,250,000 and, in exchange, we will receive a 50% share in all net profits from
worldwide distribution and merchandising, after receiving funds equal to our
initial investment of up to $2,250,000. As of October 31, 2002, we had funded
approximately $2,179,000 of the production costs towards this project.
Research and development expenses totaled approximately $1,299,000 in
fiscal 2002, $839,000 in fiscal 2001 and $815,000 in fiscal 2000. During the
fiscal year ended October 31, 2002 the Company also paid approximately $825,000
in technology development fees to Adaptive Networks that were capitalized.
During the fiscal years ended October 31, 2002 and October 31, 2001, we
issued convertible notes payable totaling approximately $1,795,000 and $615,000,
respectively. We agreed to pay the principal and interest in an amount equal to
50% of the principal if certain milestones are reached from the distribution of
the feature length film currently in production. Because several of the notes
were convertible into common stock at a conversion rate lower than the market
price at the time of issuance of the notes, additional expense was recorded in
the approximate amount of $654,000. The notes are convertible at any time, in
whole or in part, into shares of common stock at conversion prices ranging from
$0.40 to $1.00 per share. During the fiscal year ended October 31, 2002, several
convertible notes were converted into 4,497,967 shares of our common stock,
resulting in the cancellation of $2,183,626 in principal and interest that would
have been outstanding under the notes.
12
In June 2000, we entered into five long-term credit facilities,
pursuant to which we borrowed $750,000. We repaid $500,000 of these borrowings
during fiscal 2001. The remaining principal and interest at 6% per year will be
due in June 2003.
In April 2002, we entered into a license and development agreement with
Adaptive Networks, Inc. which included development services relating to our
FPGA-based prototype. We agreed to pay Adaptive an aggregate of $1,559,000 for
these services. As of October 31, 2002, the remaining balance due to Adaptive is
$734,000 under the license and development agreement.
In April 2002, in consideration of the grant of a technology license
from Adaptive Networks, Inc., we assumed certain debt obligations of Adaptive to
Zaiq Technologies, Inc. ("Zaiq"). We then issued 3,192 shares of Series B
Preferred Stock, valued at $3,192,000, with a liquidation preference of $1,000
per share, and paid $250,000 in cash to Zaiq in satisfaction of the Zaiq debt.
We must offer to redeem all of the Series B Preferred Stock if we close a
corporate transaction resulting in a change of control or a financing
transaction of at least $15 million. If we close a financing transaction of at
least $3 million but less than $15 million, we must offer to redeem a portion of
the Series B Preferred Stock based on a fraction, the numerator of which is the
cash proceeds we receive in the financing transaction and the denominator of
which is $15 million. We are also required to offer to redeem the outstanding
Series B Preferred Stock in eight equal quarterly payments beginning March 31,
2005 and ending December 31, 2006.
In July 2002, we borrowed $500,000 from the Charles R. Cono Trust.
These borrowings are unsecured and bear interest at 10% per annum. Principal and
accrued interest are payable three days after we receive a written demand for
payment.
In December 2002, we entered into a separation agreement with Thomas
Cooper, our former President and Chief Executive Officer, terminating his
employment with the Company. Pursuant to the separation agreement, we agreed to
pay Mr. Cooper a total of $57,692 by March 31, 2003. This payment represents
salary that Mr. Cooper agreed to defer between August 1, 2002 and October 31,
2002.
Management believes funds on hand and available sources of financing
will enable us to meet our liquidity needs for at least the next three months.
However, funding for our operations has become more difficult to secure and more
expensive than in prior periods due to the current economic and stock market
climate, our recent stock price and market volatility, and general market
conditions in the semiconductor and telecommunications industries. Management is
presently taking steps to reduce monthly cash outlays through arrangements with
vendors to accept longer payment terms and reductions of recurring expenses,
when possible, including potential staff and management changes. Our management
team also agreed in August to temporarily defer a portion of executive salaries
in order to reduce monthly cash expenditures while we continue to pursue
additional financing. As of October 31, 2002, accrued management salaries
totaled approximately $184,000. However, additional cash must be raised in order
to continue to meet liquidity needs and satisfy the Company's proposed business
plan. Management is presently investigating potential financing transactions
that it believes can provide additional cash for operations and lead to
profitability in both the short and long-term. Management also intends to
attempt to raise funds through private sales of common stock and borrowings.
Although management believes these efforts will enable us to meet liquidity
needs in the future, there can be no assurance that these efforts will be
successful.
GOING CONCERN CONSIDERATION
We have continued losses in each of our years of operation, negative
cash flow and liquidity problems. These conditions raise substantial doubt about
our 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 we be unable to continue
as a going concern.
We have been able to continue based upon our receipt of funds from the
issuance of equity securities and borrowings, and by acquiring assets or paying
expenses by issuing stock. Our continued existence is dependent upon our
continued ability to raise funds through the issuance of our securities or
borrowings, and our ability to acquire assets or satisfy liabilities by the
issuance of stock. Management's plans in this regard are to obtain other debt
and equity financing until profitable operation and positive cash flow are
achieved and maintained. Although management believes, based on the fact that it
raised approximately $10,800,000 through sales of common stock and $3,867,000
from borrowings from November 1, 1999 through October 31, 2002, that it will be
able to secure suitable additional financing for the company's operations, there
can be no guarantee that such financing will continue to be available on
reasonable terms, or at all.
13
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets," which is effective for fiscal years beginning
after December 15, 2001. Certain provisions shall also be applied to
acquisitions initiated subsequent to June 30, 2001. SFAS 142 supercedes APB
Opinion No. 17, "Intangible Assets," and requires, among other things, the
discontinuance of amortization related to goodwill and indefinite lived
intangible assets. These assets will then be subject to an impairment test at
least annually. Adoption of SFAS No. 142, which occurred November 1, 2001 did
not have material effect on the Company's financial position or results of
operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supercedes Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. Adoption of SFAS No. 144, which occurred November 1, 2001 did
not have a material effect on the Company's financial position or results of
operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of SFAS Statement No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 requires that gains
and losses from extinguishment of debt be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual and infrequent that meet the criteria for classification as an
extraordinary item. The Company is required to adopt SFAS No. 145 no later than
the first quarter of fiscal 2003, although early adoption is allowed. The
Company has not yet evaluated the impact from SFAS No. 145 on its financial
position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring.)" SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company does not
expect the adoption of this statement to have a material effect on its financial
statements.
On December 31, 2002, the SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. Statement 148 amends SFAS Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. Statement 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While the statement does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123, or the intrinsic value
method of APB Opinion 25. The Company will continue to account for stock-based
compensation according to APB 25, while its adoption of SFAS No. 148 requires
the Company to provide prominent disclosures about the effect of SFAS No. 123 on
reported income and will require the Company to disclose these effects in the
interim financial statements as well.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for the Company during the first quarter ending January 31, 2003. The
Company does not expect the adoption of FIN 45 will have a significant impact on
its consolidated financial position or results of operations.
14
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of APB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
RISKS ASSOCIATED WITH OUR BUSINESS
THE GENERAL ECONOMIC SLOWDOWN, AND SLOWDOWN IN SPENDING IN THE
TELECOMMUNICATIONS INDUSTRY SPECIFICALLY, MAY ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.
The worldwide telecommunications industry has experienced and may
continue to experience further reductions in component inventory levels and
equipment production volumes and delays in the build-out of new infrastructure.
This slowdown has resulted in a decrease in spending on data equipment by
service providers and lower-than-expected sales volume for data equipment
manufacturers. If any of these trends continue, it could result in lower than
expected demand for our products under development and could have a material
adverse effect on our revenues and results of operations generally and cause the
market price of our common stock to decline.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
We operate in the semiconductor industry, which is cyclical and subject
to rapid technological change. Recently, the semiconductor industry has
experienced significant downturns characterized by diminished product demand,
accelerated erosion of prices and excess production capacity. The current
downturn and future downturns in the semiconductor industry may be severe and
prolonged. Future downturns in the semiconductor industry, or any failure of
this industry to fully recover from its recent downturn, could seriously impact
our revenues and harm our business, financial condition and results of
operations. This industry also periodically experiences increased demand and
production capacity constraints, which may affect our ability to ship products
in future periods. Accordingly, our quarterly results may vary significantly as
a result of the general conditions in the semiconductor industry, which could
cause our stock price to decline.
BECAUSE WE HAVE NOT YET BEGUN TO SELL OUR PRODUCTS, WE CANNOT BE SURE THAT WE
CAN SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.
We have not yet begun to sell the products we are developing, and
therefore have not generated any revenues from our fabless semiconductor
business. As a result, we have no historical financial data that can be used in
evaluating our business prospects and in projecting future operating results.
For example, we cannot forecast operating expenses based on our historical
results, and we are instead required to forecast expenses based in part on
future revenue projections. In addition, our ability to accurately forecast our
revenue going forward is limited.
You must consider our prospects in light of the risks, expenses and
difficulties we might encounter because we are at an early stage of development
in a new and rapidly evolving market. Many of these risks are described under
the sub-headings below. We may not successfully address any or all of these
risks and our business strategy may not be successful.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT.
Since inception, we have incurred significant operating losses. We
incurred operating losses of $7,313,472, $9,492,584 and $12,289,669 for the
years ended October 31, 2002, 2001 and 2000, respectively. As of October 31,
2002, we had an accumulated deficit of $46,368,387. We cannot assure you that we
will achieve or sustain profitability or that our operating losses will not
increase in the future. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis in
the future. We expect to expend substantial financial resources on research and
development, engineering, manufacturing, marketing, sales and administration as
we continue to develop and begin to deploy our products. These expenditures will
necessarily precede the realization of substantial revenues from sales of our
products, which may result in future operating losses.
15
WE WILL NEED ADDITIONAL CAPITAL FINANCING IN THE FUTURE.
We anticipate that our available sources of financing will be
sufficient to fund our current level of operations and capital requirements for
at least the next three months. Thereafter, implementation of our business plan,
or acceleration of such implementation, is likely to require funds not currently
available to us. We also may be required to seek additional financing in the
future to respond to increased expenses or shortfalls in anticipated revenues,
accelerate product development and deployment, respond to competitive pressures,
develop new or enhanced products, or take advantage of unanticipated acquisition
opportunities. We cannot be certain we will be able to find such additional
financing on reasonable terms, or at all. If we are unable to obtain additional
financing when needed, we could be required to modify our business plan in
accordance with the extent of available financing. We also may not be able to
accelerate the development and deployment of our products, respond to
competitive pressures, develop or enhance our products or take advantage of
unanticipated acquisition opportunities.
BECAUSE WE WILL DEPEND ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS, WE MAY EXPERIENCE DELAYS IN RECEIVING SEMICONDUCTOR DEVICES.
We do not own or operate a semiconductor fabrication facility. Rather,
our semiconductor devices will be manufactured at independent foundries. We
intend to rely solely on third-party foundries and other specialist suppliers
for all of our manufacturing, assembly and testing requirements. However, these
parties may not be obligated to supply products to us for any specific period,
in any specific quantity or at any specific price, except as may be provided in
a particular purchase order that has been accepted by one of them. As a result,
we will not directly control semiconductor delivery schedules, which could lead
to product shortages, poor quality and increases in the costs of our products.
In addition, we may experience delays in receiving semiconductor devices from
foundries due to foundry scheduling and process problems. We cannot be sure that
we will be able to obtain semiconductors within the time frames and in the
volumes required by us at an affordable cost or at all. Any disruption in the
availability of semiconductors or any problems associated with the delivery,
quality or cost of the fabrication assembly and testing of our products could
significantly hinder our ability to deliver our products to our customers and
may result in a decrease in sales of our products.
WE MAY INCUR SUBSTANTIAL EXPENSES DEVELOPING PRODUCTS BEFORE WE EARN ASSOCIATED
NET REVENUES AND MAY NOT ULTIMATELY SELL A LARGE VOLUME OF OUR PRODUCTS.
We are developing products based on forecasts of demand and will incur
substantial product development expenditures prior to generating associated net
revenues. We will receive limited orders for products during the period that
potential customers test and evaluate our products. This test and evaluation
period typically lasts from three to six months or longer, and volume production
of the equipment manufacturer's product that incorporates our products typically
would not begin until this test and evaluation period has been completed. As a
result, a significant period of time may lapse between our product development
and sales efforts and the realization of revenues from volume ordering of
products by customers. In addition, achieving a design win with a customer does
not necessarily mean that this customer will order large volumes of our
products. A design win is not a binding commitment by a customer to purchase
products. Rather, it is a decision by a customer to use our products in the
design process of that customer's products. A customer can choose at any time to
discontinue using our products in that customer's designs or product development
efforts. Even if our products are chosen to be incorporated into a customer's
products, we may still not realize significant net revenues from that customer
if that customer's products are not commercially successful.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR MAY BE SUED BY
THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.
Our success depends significantly on our ability to obtain and maintain
patent, trademark and copyright protection for our intellectual property, to
preserve our trade secrets and to operate without infringing the proprietary
rights of third parties. If we are not adequately protected, our competitors
could use the intellectual property that we have developed to enhance their
products and services, which could harm our business.
We will rely on patent protection, as well as a combination of
copyright and trademark laws, trade secrets, confidentiality provisions and
other contractual provisions, to protect our proprietary rights, but these legal
means afford only limited protection. Despite any measures taken to protect our
intellectual property, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries may not protect our proprietary
rights as fully as do the laws of the United States. If we litigated to enforce
our rights, it would be expensive, divert management resources and may not be
adequate to protect our intellectual property rights.
16
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of trade
secret, copyright or patent infringement. We may inadvertently infringe a patent
of which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware that will cause us to be infringing when it is issued in the future.
Although we are not currently involved in any intellectual property litigation,
we may be a party to litigation in the future to protect our intellectual
property or as a result of our alleged infringement of another's intellectual
property, forcing us to do one or more of the following:
o Cease selling, incorporating or using products or services
that incorporate the challenged intellectual property;
o Obtain from the holder of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms; or
o Redesign those products or services that incorporate such
technology.
A successful claim of infringement against us, and our failure to
license the same or similar technology, could adversely effect our business,
asset value or stock value. Infringement claims, with or without merit, would be
expensive to litigate or settle, and would divert management resources.
OUR MARKET IS HIGHLY COMPETITIVE AND OUR PRODUCTS, TECHNOLOGY AND BUSINESS MAY
NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER PRODUCTS OR TECHNOLOGIES.
The markets for semiconductors and other high-speed telecommunications
products are highly competitive, and we expect that they will become
increasingly competitive in the future. Our potential competitors operate their
own fabrication facilities, have longer operating histories and possess
substantially greater name recognition, financial, sales and marketing,
manufacturing, technical, personnel, and other resources than we have. As a
result, these competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote greater resources to the promotion and sale of their products. We will
compete with numerous companies with well-established reputations in the
broadband telecommunications industry, such as GlobespanVirata, Alcatel,
PMC-Sierra, Texas Instruments, Infineon Technologies, Motorola and Broadcom. In
all of our target markets, we also may face competition from newly established
competitors, suppliers of products based on new or emerging technologies, and
customers who choose to develop their own silicon solutions. We also expect to
encounter further consolidation in markets in which we compete. Although we
believe we will be able to compete based on the special features of our
products, our products will incorporate new concepts and may not be successful
even if they are superior to those of our competitors.
In addition to facing competition from the above-mentioned suppliers,
our products will compete with products using other broadband technologies, such
as cable modems, wireless, satellite and fiber optic telecommunications
technology. Commercial acceptance of any one of these competing solutions, or
new technologies, could decrease demand for our products. We cannot assure you
that we will be able to compete successfully or that competitive pressures will
not materially and adversely affect our business, financial condition and
results of operations.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKET IN ORDER TO REMAIN COMPETITIVE.
Our future success will depend on our ability to anticipate and adapt
to changes in technology and industry standards. We will also need to develop
and introduce new and enhanced products to meet our customers' changing demands.
The semiconductor industry and broadband communications market are characterized
by rapidly changing technology, evolving industry standards, frequent new
product introductions and short product life cycles. In addition, this industry
and market continues to undergo rapid growth and consolidation. A continued
slowdown in the semiconductor industry or other broadband communications markets
could materially and adversely affect our business, financial condition and
results of operations. Our success will also depend on the ability of our future
customers to develop new products and enhance existing products for the
broadband communications markets and to introduce and promote those products
successfully. The broadband communications markets may not continue to develop
to the extent or in the timeframes that we anticipate. If new markets do not
develop as we anticipate, or if upon their deployment our products do not gain
widespread acceptance in these markets, our business, financial condition and
results of operations could be materially and adversely affected.
17
BECAUSE OUR BUSINESS IS DEPENDENT UPON THE BROAD DEPLOYMENT OF DATA SERVICES BY
TELECOMMUNICATIONS SERVICE PROVIDERS, WE MAY NOT BE ABLE TO GENERATE SUBSTANTIAL
SALES OF OUR PRODUCTS IF SUCH DEPLOYMENT DOES NOT OCCUR.
Our products will be incorporated in equipment that is targeted at
end-users of data services offered by wireline telecommunications carriers.
Consequently, the success of our products depends upon the decision by
telecommunications service providers to broadly deploy data technologies and the
timing of such deployment. If service providers do not offer data services on a
timely basis, or if there are technical difficulties with the deployment of
these services, sales of our products would be adversely affected, which would
have a negative effect on our results of operations. Factors that may impact
data deployment include:
o a prolonged approval process, including laboratory tests,
technical trials, marketing trials, initial commercial
deployment and full commercial deployment;
o the development of a viable business model for data services,
including the capability to market, sell, install and maintain
data services;
o cost constraints, such as installation costs and space and
power requirements at the telecommunications service
provider's central office;
o evolving industry standards; and
o government regulation.
THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSE AND
IN UNDETECTED DEFECTS, WHICH COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF NEW
PRODUCTS AND DAMAGE OUR REPUTATION WITH PROSPECTIVE CUSTOMERS.
Highly complex products such as the semiconductors that we will offer
frequently contain defects and bugs when they are first introduced or as new
versions are released. If our products contain defects, or have reliability,
quality or compatibility problems, our reputation may be damaged and customers
may be reluctant to buy our semiconductors, which could materially and adversely
affect our ability to retain existing customers or attract new customers. In
addition, these defects could interrupt or delay sales to our customers. In
order to alleviate these problems, we may have to invest significant capital and
other resources. Although our products will be tested by our suppliers, our
customers and ourselves, it is possible that these tests will fail to uncover
defects. If any of these problems are not found until after we have commenced
commercial production of our products, we may be required to incur additional
development costs and product recall, repair or replacement costs. These
problems may also result in claims against us by our customers or others. In
addition, these problems may divert our technical and other resources from other
development efforts. Moreover, we would likely lose, or experience a delay in,
market acceptance of the affected product, and we could lose credibility with
our prospective customers.
IF LEADING EQUIPMENT MANUFACTURERS DO NOT INCORPORATE OUR PRODUCTS INTO
SUCCESSFUL PRODUCTS, SALES OF OUR PRODUCTS WILL SIGNIFICANTLY DECLINE.
Our products will not be sold directly to the end-user; rather, they
will be components of other products. As a result, we must rely upon equipment
manufacturers to design our products into their equipment. We must further rely
on this equipment to be successful. If equipment that incorporates our products
is not accepted in the marketplace, we may not achieve adequate sales volume of
products, which would have a negative effect on our results of operations.
Accordingly, we must correctly anticipate the price, performance and
functionality requirements of these data equipment manufacturers. We must also
successfully develop products that meet these requirements and make such
products available on a timely basis and in sufficient quantities. Further, if
there is consolidation in the data equipment manufacturing industry, or if a
small number of data equipment manufacturers otherwise dominate the market for
data equipment, then our success will depend upon our ability to establish and
maintain relationships with these market leaders. If we do not anticipate trends
in the market for products enabling the digital transmission of data, voice and
video to homes and business enterprises over existing copper wire telephone
lines and meet the requirements of equipment manufacturers, or if we do not
successfully establish and maintain relationships with leading data equipment
manufacturers, then our business, financial condition and results of operations
will be seriously harmed.
18
WE CANNOT PREDICT THE EFFECT FUTURE SALES OF OUR COMMON STOCK WILL HAVE ON THE
MARKET PRICE OF OUR COMMON STOCK.
We cannot predict the effect, if any, that future sales of our common
stock will have on the market price of our common stock prevailing from time to
time. Sales of substantial amounts of common stock or the perception that such
sales could occur may adversely affect prevailing market prices for our common
stock.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock will likely fluctuate
significantly in response to the following factors, some of which are beyond our
control:
o Variations in our quarterly operating results;
o Changes in financial estimates of our revenues and operating
results by securities analysts;
o Changes in market valuations of telecommunications equipment
companies;
o Announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
o Additions or departures of key personnel;
o Future sales of our common stock;
o Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
o Commencement of or involvement in litigation; and
o Announcements by us or our competitors of technological
innovations or new products.
In addition, the equity markets have experienced volatility that has
particularly effected the market prices of equity securities issued by high
technology companies and that often has been unrelated or disproportionate to
the operating results of those companies. These broad market fluctuations may
adversely effect the market price of our common stock.
WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR COMMON STOCK.
We have not paid any dividends on our common stock since our inception
and do not anticipate paying any dividends on our common stock in the
foreseeable future. Instead, we intend to retain any future earnings for use in
the operation and expansion of our business.
BECAUSE WE ARE SUBJECT TO SEC REGULATIONS RELATING TO LOW-PRICED STOCKS, THE
MARKET FOR OUR COMMON STOCK COULD BE ADVERSELY EFFECTED.
The Securities and Exchange Commission has adopted regulations
concerning low-priced (or "penny") stocks. The regulations generally define
"penny stock" to be any equity security that has a market price less than $5.00
per share, subject to certain exceptions. If our shares continue to be offered
at a market price less than $5.00 per share, and do not qualify for any
exemption from the penny stock regulations, our shares will continue to be
subject to these additional regulations relating to low-priced stocks.
The penny stock regulations require that broker-dealers who recommend
penny stocks to persons other than institutional accredited investors make a
special suitability determination for the purchaser, receive the purchaser's
written agreement to the transaction prior to the sale and provide the purchaser
with risk disclosure documents that identify risks associated with investing in
penny stocks. Furthermore, the broker-dealer must obtain a signed and dated
acknowledgment from the purchaser demonstrating that the purchaser has actually
received the required risk disclosure document before effecting a transaction in
penny stock. These requirements have historically resulted in reducing the level
of trading activity in securities that become subject to the penny stock rules.
19
The additional burdens imposed upon broker-dealers by these penny stock
requirements may discourage broker-dealers from effecting transactions in the
common stock, which could severely limit the market liquidity of our common
stock and our shareholders' ability to sell our common stock in the secondary
market.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not currently have any indebtedness or income from foreign
sources that would subject us to market risk. We do not engage in commodity
futures trading or hedging activities and do not participate in derivative
financial instrument transactions for trading or other speculative purposes. In
addition, we do not engage in interest rate swap transactions that could expose
us to market risk. However, to the extent that changes in interest rates and
currency exchange rates affect general economic conditions, we may be affected
by such changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our audited Consolidated Balance Sheets as of October 31, 2002 and 2001
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the years ended October 31, 2002, 2001 and 2000
are included in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference our definitive proxy statement for our 2003
annual meeting of shareholders (the "2003 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to our 2003 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to our 2003 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to our 2003 Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES.
Incorporated by reference to our 2003 Proxy Statement.
20
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)
1. Index to Financial Statements and financial statement schedules, filed
as part of this report:
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS
At October 31, 2002 and 2001 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31, 2002, 2001 and 2000
For the Period from November 1, 1999 to October 31, 2002 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended October 31, 2000, 2001 and 2002 F-4 to F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31, 2002, 2001 and 2000
For the Period from November 1, 1999 to October 31, 2002 F-12 to F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-14 to F-46
2. None.
3. The management contracts or compensatory plans or arrangements are
followed an asterisk (*) in the list of Exhibits found in part (c) of
this Item 15.
(b) Reports on Form 8-K
-------------------
Form 8-K/A dated September 6, 2002, was filed pursuant to Item 4
(Changes in Registrant's Certifying Accountant)
Form 8-K dated October 31, 2002, was filed pursuant to Item 5 (Other
Events and Regulation FD Disclosure)
(c) Exhibits.
---------
3.1 Articles of Amendment to the Articles of Incorporation of New Visual
Entertainment, Inc. (incorporated by reference to Exhibit 3.1 of the
Company's Report on Form 10-Q for the period ended July 31, 2001).
3.2 Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 of the Company's Annual Report on Form 10-KSB/A for the
fiscal year ended October 31, 1999 (the "1999 10-KSB/A")).
3.3 Certificate of Designation of Series A Preferred Stock (incorporated by
reference to Exhibit A of Exhibit 4.1 of the Company's Registration
Statement on Form 8-A, filed with the Commission on August 10, 2000).
3.4 Certificate of Designation of Series B Preferred Stock (incorporated by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the period ended April 30, 2002 (the "April 2002 10-Q"))
3.5 Bylaws of New Visual Corporation, as amended (incorporated by reference
to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the
period ended January 31, 2002 (the "January 2002 10-Q")).
21
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 3.1 of
the 1999 10-KSB/A.
4.2 Rights Agreement by and between New Visual Entertainment, Inc. and
First Union National Bank, dated August 9, 2000 (incorporated by
reference to Exhibit 4.2 of the 1999 10-KSB/A).
10.1 Agreement to Produce Film, dated April 9, 2000 between New Visual
Entertainment, Inc., Bruce Brown, Dana Brown and John-Paul Beeghly
(incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-KSB for the period ended October 31, 2000 (the "2000
10-KSB")).*
10.2 2000 Omnibus Securities Plan of New Visual Entertainment, Inc.
(incorporated by reference to Appendix A of the Company's definitive
Proxy Statement filed with the Commission on May 2, 2000).*
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. (incorporated by reference
to Exhibit 10.3 of the Company's Report on Form 10-Q for the period
ended July 31, 2000 (the "July 2000 10-QSB")).
10.4 Form of Amendment to Credit Agreement dated November 13, 2000 by New
Visual Entertainment Inc. 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. (incorporated by reference to Exhibit 10.9 of the
2000 10-KSB).
10.5 Consulting Agreement dated as of March 6, 2001, by and between New
Visual Entertainment, Inc. and Strategica Services Corporation
(incorporated by reference to Exhibit 10.9 of the Company's Annual
Report for the fiscal year ended October 31, 2001 (the "2001 10-K")).
10.6 Consulting Agreement dated as of May 1, 2001, by and between New Visual
Entertainment, Inc. and Advisor Associates Inc. (incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the
period ended April 30, 2001).
10.7 Office Building Lease dated May 4, 2001, by and between Valley Park
Associates LLC and New Wheel Technology, Inc., a subsidiary of New
Visual Entertainment, Inc. (incorporated by reference to Exhibit 10.11
of the 2001 10-K).
10.8 2001 Stock Incentive Plan for New Visual Corporation (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form S-8 (No. 333-68716), as filed with the Commission on August 30,
2001).*
10.9 Consulting Agreement dated August 30, 2001, by and between New Visual
Corporation and Jack Burstein (incorporated by reference to Exhibit
10.13 of the 2001 10-K).
10.10 Stock Option Agreement dated August 30, 2001, by and between New Visual
Corporation and Jack Burstein (incorporated by reference to Exhibit
10.14 of the 2001 10-K).
10.11 Promissory Note dated September 6, 2001 by John Howell in favor of New
Visual Corporation (incorporated by reference to Exhibit 10.15 of the
2001 10-K).*
10.12 First Amendment to Office Building Lease dated September 12, 2001, by
and between Valley Park Associates, LLC and New Wheel Technology, Inc.,
a subsidiary of New Visual Entertainment, Inc. (incorporated by
reference to Exhibit 10.16 of the 2001 10-K).
10.13 Technology Planning and Assistance Agreement dated September 28, 2001,
by and between New Visual Corporation and Adaptive Networks, Inc.
(incorporated by reference to Exhibit 10.17 of the 2001 10-K).
10.14 Convertible Promissory Note dated October 10, 2001 by New Visual
Corporation in favor of Nellie Streeter Crane, Ltd. (incorporated by
reference to Exhibit 10.18 of the 2001 10-K).
22
10.15 Warrant Certificate, issued to Advisor Associates, Inc. in October
2001. (1)
10.16 Convertible Promissory Note dated October 15, 2001 by New Visual
Corporation in favor of Quail Run Trust Limited (incorporated by
reference to Exhibit 10.19 of the 2001 10-K).
10.17 Convertible Promissory Note dated October 23, 2001 by New Visual
Corporation in favor of Charles R. Cono (incorporated by reference to
Exhibit 10.20 of the 2001 10-K).
10.18 Convertible Promissory Note dated December 14, 2001 by New Visual
Corporation in favor of the Gerald and Judith Handler Living Trust
(incorporated by reference to Exhibit 10.21 of the 2001 10-K).
10.19 Convertible Promissory Note dated December 14, 2001 by New Visual
Corporation in favor of W.P. Lill, Jr. Trust dated 12/22/99
(incorporated by reference to Exhibit 10.22 of the 2001 10-K).
10.20 Convertible Promissory Note dated December 14, 2001 by New Visual
Corporation in favor of the Handler Children Trust (incorporated by
reference to Exhibit 10.23 of the 2001 10-K).
10.21 Employment Agreement dated as of January 1, 2002 by and between New
Visual Corporation and John Howell (incorporated by reference to
Exhibit 10.24 of the 2001 10-K).*
10.22 Promissory Note dated as of January 1, 2002, by John Howell in favor of
New Visual Corporation (incorporated by reference to Exhibit 10.25 of
the 2001 10-K). *
10.23 Warrant Agreement dated February 11, 2002, by and between New Visual
Corporation and Elite Financial Communications, LLC (incorporated by
reference to Exhibit 10.6 of the January 2002 10-Q).
10.24 Consulting Agreement dated February 22, 2002, by and between New Visual
Corporation and Bruce McLeod (incorporated by reference to Exhibit
10.19 of the April 2002 10-Q).
10.25 Employment Agreement dated February 25, 2002, by and between New Visual
Corporation and C. Rich Wilson III (incorporated by reference to
Exhibit 10.11 of the January 2002 10-Q).*
10.26 Restricted Stock Award Agreement dated as of February 25, 2002, by and
between New Visual Corporation and John Howell (incorporated by
reference to Exhibit 10.12 of the January 2002 10-Q).*
10.27 Consulting Agreement dated February 26, 2002, by and between New Visual
Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
10.13 of the January 2002 10-Q).*
10.28 Stock Option Agreement dated February 26, 2002, by and between New
Visual Corporation and Thomas J. Cooper (incorporated by reference to
Exhibit 10.14 of the January 2002 10-Q).*
10.29 Convertible Promissory Note dated March 8, 2002, by New Visual
Corporation in favor of Tony Finn (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q for the period
ended July 31, 2002 (the "July 2002 10-Q)).
10.30 Convertible Promissory Noted dated March 8, 2002, by New Visual
Corporation in favor of James Joseph Redmon (incorporated by reference
to Exhibit 10.2 of the July 2002 10-Q).
10.31 Convertible Promissory Note dated March 22, 2002, by New Visual
Corporation in favor of the M. Lucile Way Trust (incorporated by
reference to Exhibit 10.3 of the July 2002 10-Q).
10.32 Convertible Promissory Note dated March 22, 2002, by New Visual
Corporation in favor of D W Construction, Inc. (incorporated by
reference to Exhibit 10.4 of the July 2002 10-Q).
10.33 Employment Agreement dated March 22, 2002, by and between New Visual
Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
10.10 of the April 2002 10-Q).*
23
10.34 Stock Option Agreement dated March 22, 2002, by and between New Visual
Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
10.11 of the April 2002 10-Q).*
10.35 Employment Agreement dated March 22, 2002, by and between New Visual
Corporation and Ray Willenberg, Jr. (incorporated by reference to
Exhibit 10.12 of the April 2002 10-Q).*
10.36 Stock Option Agreement dated March 22, 2002, by and between New Visual
Corporation and Ray Willenberg, Jr. (incorporated by reference to
Exhibit 10.13 of the April 2002 10-Q).*
10.37 Stock Option Agreement dated March 22, 2002, by and between New Visual
Corporation and Brad Ketch (incorporated by reference to Exhibit 10.14
of the April 2002 10-Q).*
10.38 Consulting Agreement dated March 22, 2002, by and between New Visual
Corporation and Brad Ketch. (1)*
10.39 Convertible Promissory Note dated April 5, 2002, by New Visual
Corporation in favor of D W Construction, Inc. (incorporated by
reference to Exhibit 10.5 of the July 2002 10-Q).
10.40 Development and License Agreement dated as of April 17, 2002, by and
between Adaptive Networks, Inc. and New Visual Corporation
(Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Commission) (incorporated by reference to Exhibit 10.15 of the
April 2002 10-Q).
10.41 Right of First Refusal, Credit of Payments and Revenue Sharing
Agreement dated as of April 17, 2002, by and among New Visual
Corporation, Adaptive Networks and Certain Shareholders of Adaptive
Networks, Inc. (incorporated by reference to Exhibit 10.16 of the April
2002 10-Q).
10.42 Receivables Purchase and Stock Transfer Restriction Agreement dated as
of April 17, 2002, by and among New Visual Corporation, Zaiq
Technologies, Inc. and Adaptive Networks, Inc. (incorporated by
reference to Exhibit 10.17 of the April 2002 10-Q).
10.43 Receivables Purchase and Stock Transfer Restriction Agreement dated as
of April 17, 2002, by and among New Visual Corporation, TLSI, Inc. and
Adaptive Networks, Inc. (incorporated by reference to Exhibit 10.18 of
the April 2002 10-Q).
10.44 Convertible Promissory Note dated May 21, 2002, by New Visual
Corporation in favor of John Marsden (incorporated by reference to
Exhibit 10.6 of the July 2002 10-Q).
10.45 Convertible Promissory Note dated May 21, 2002, by New Visual
Corporation in favor of Randy Arnett (incorporated by reference to
Exhibit 10.7 of the July 2002 10-Q).
10.46 Convertible Promissory Note dated May 30, 2002, by New Visual
Corporation in favor of the M. Lucile Way Trust (incorporated by
reference to Exhibit 10.8 of the July 2002 10-Q).
10.47 Convertible Promissory Note dated May 31, 2002, by New Visual
Corporation in favor of Robert E. Casey, Jr. (incorporated by reference
to Exhibit 10.9 of the July 2002 10-Q).
10.48 Convertible Promissory Note dated June 12, 2002, by New Visual
Corporation in favor of Bonnie Davis (incorporated by reference to
Exhibit 10.10 of the July 2002 10-Q).
10.49 Employment Agreement dated July 1, 2002, by and between New Visual
Corporation and Brad Ketch (incorporated by reference to Exhibit 10.11
of the July 2002 10-Q).*
10.50 Consulting Agreement dated as of July 17, 2002, by and between New
Visual Corporation and Charles R. Cono (incorporated by reference to
Exhibit 10.13 of the July 2002 10-Q).
24
10.51 Promissory Note dated July 17, 2002, by New Visual Corporation in favor
of Charles R. Cono Trust, Charles R. Cono, TTEE (incorporated by
reference to Exhibit 10.14 of the July 2002 10-Q).
10.52 Consulting Agreement dated as of July 30, 2002, by and between New
Visual Corporation and Advisor Associates, Inc. (incorporated by
reference to Exhibit 10.15 of the July 2002 10-Q).
10.53 Severance Agreement and General Release dated September 17, 2002 and
effective September 30, 2002 by and between New Visual Corporation and
John Howell. (1)*
10.54 Consulting Agreement dated as of September 2002, by and between New
Visual Corporation and Starburst Innovations, LLC. *
10.55 Agreement dated as of September 2002 by and between New Visual
Corporation and Starburst Innovations, LLC. (1)
10.56 Regulation S Purchase Agreement dated September 23, 2002 between New
Visual Corporation and Starz Investments Limited. (1)
10.57 Promissory Note dated October 29, 2002 in favor of Robert E Casey, Jr.
(1)
10.58 Severance Agreement and Release dated December 2, 2002, by and between
New Visual Corporation and Thomas J. Cooper. (1)
10.59 Employment Agreement dated December 2, 2002, by and between New Visual
Corporation and Brad Ketch. (1)*
10.60 Stock Option Agreement dated December 2, 2002, by and between New
Visual Corporation and Brad Ketch. (1)*
10.61 Promissory note dated October 31, 2002 in favor of Charles R Cono
Trust, Charles R. Cono, TTEE (incorporated by reference to Exhibit 10.1
of the Company's Report on Form 8-K dated October 31, 2002).
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Marcum & Kliegman LLP, Independent Auditors (1)
__________________________
(1) Filed herewith.
* Signifies a management agreement or compensatory plan or arrangement.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: January 29, 2002 NEW VISUAL CORPORATION
By: /s/ Brad Ketch
-------------------------------------
Brad Ketch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brad Ketch President, Chief Executive Officer and Director January 29, 2003
- ----------------------- (PRINCIPAL EXECUTIVE OFFICER)
Brad Ketch
/s/ Thomas J. Sweeney Chief Financial Officer (PRINCIPAL FINANCIAL January 29, 2003
- ----------------------- OFFICER AND PRINCIPAL ACCOUNTING OFFICER)
Thomas J. Sweeney
/s/ Ray Willenberg, Jr. Chairman of the Board January 29, 2003
- -----------------------
Ray Willenberg, Jr.
/s/ C. Rich Wilson III Vice President, Secretary and Director January 29, 2003
- -----------------------
C. Rich Wilson III
/s/ Ivan Berkowitz Director January 29, 2003
- -----------------------
Ivan Berkowitz
/s/ Bruce Brown Director January 29, 2003
- -----------------------
Bruce Brown
Director January 29, 2003
- -----------------------
Thomas J. Cooper
Director January 29, 2003
- -----------------------
John Howell
26
CERTIFICATIONS
I, Brad Ketch, President and Chief Executive Officer of New Visual Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of New Visual Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant, as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003 /s/ Brad Ketch
Brad Ketch, President
and Chief Executive Officer
27
I, Thomas J. Sweeney, Chief Financial Officer of New Visual Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of New Visual Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant, as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 29, 2003 /s/ Thomas J. Sweeney
Thomas J. Sweeney
Chief Financial Officer
28
EXHIBIT INDEX
3.1 Articles of Amendment to the Articles of Incorporation of New Visual
Entertainment, Inc. (incorporated by reference to Exhibit 3.1 of the
Company's Report on Form 10-Q for the period ended July 31, 2001).
3.2 Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 of the Company's Annual Report on Form 10-KSB/A for the
fiscal year ended October 31, 1999 (the "1999 10-KSB/A")).
3.3 Certificate of Designation of Series A Preferred Stock (incorporated by
reference to Exhibit A of Exhibit 4.1 of the Company's Registration
Statement on Form 8-A, filed with the Commission on August 10, 2000).
3.4 Certificate of Designation of Series B Preferred Stock (incorporated by
reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the period ended April 30, 2002 (the "April 2002 10-Q"))
3.5 Bylaws of New Visual Corporation, as amended (incorporated by reference
to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the
period ended January 31, 2002 (the "January 2002 10-Q")).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 3.1 of
the 1999 10-KSB/A.
4.2 Rights Agreement by and between New Visual Entertainment, Inc. and
First Union National Bank, dated August 9, 2000 (incorporated by
reference to Exhibit 4.2 of the 1999 10-KSB/A).
10.1 Agreement to Produce Film, dated April 9, 2000 between New Visual
Entertainment, Inc., Bruce Brown, Dana Brown and John-Paul Beeghly
(incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-KSB for the period ended October 31, 2000 (the "2000
10-KSB")).
10.2 2000 Omnibus Securities Plan of New Visual Entertainment, Inc.
(incorporated by reference to Appendix A of the Company's definitive
Proxy Statement filed with the Commission on May 2, 2000).
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. (incorporated by reference
to Exhibit 10.3 of the Company's Report on Form 10-Q for the period
ended July 31, 2000 (the "July 2000 10-QSB")).
10.4 Form of Amendment to Credit Agreement dated November 13, 2000 by New
Visual Entertainment Inc. 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. (incorporated by reference to Exhibit 10.9 of the
2000 10-KSB).
10.5 Consulting Agreement dated as of March 6, 2001, by and between New
Visual Entertainment, Inc. and Strategica Services Corporation
(incorporated by reference to Exhibit 10.9 of the Company's Annual
Report for the fiscal year ended October 31, 2001 (the "2001 10-K")).
10.6 Consulting Agreement dated as of May 1, 2001, by and between New Visual
Entertainment, Inc. and Advisor Associates Inc. (incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the
period ended April 30, 2001).
10.7 Office Building Lease dated May 4, 2001, by and between Valley Park
Associates LLC and New Wheel Technology, Inc., a subsidiary of New
Visual Entertainment, Inc. (incorporated by reference to Exhibit 10.11
of the 2001 10-K).
10.8 2001 Stock Incentive Plan for New Visual Corporation (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form S-8 (No. 333-68716), as filed with the Commission on August 30,
2001).
10.9 Consulting Agreement dated August 30, 2001, by and between New Visual
Corporation and Jack Burstein (incorporated by reference to Exhibit
10.13 of the 2001 10-K).
10.10 Stock Option Agreement dated August 30, 2001, by and between New Visual
Corporation and Jack Burstein (incorporated by reference to Exhibit
10.14 of the 2001 10-K).
10.11 Promissory Note dated September 6, 2001 by John Howell in favor of New
Visual Corporation (incorporated by reference to Exhibit 10.15 of the
2001 10-K).
10.12 First Amendment to Office Building Lease dated September 12, 2001, by
and between Valley Park Associates, LLC and New Wheel Technology, Inc.,
a subsidiary of New Visual Entertainment, Inc. (incorporated by
reference to Exhibit 10.16 of the 2001 10-K).
10.13 Technology Planning and Assistance Agreement dated September 28, 2001,
by and between New Visual Corporation and Adaptive Networks, Inc.
(incorporated by reference to Exhibit 10.17 of the 2001 10-K).
10.14 Convertible Promissory Note dated October 10, 2001 by New Visual
Corporation in favor of Nellie Streeter Crane, Ltd. (incorporated by
reference to Exhibit 10.18 of the 2001 10-K).
10.15 Warrant Certificate, issued to Advisor Associates, Inc. in October
2001. (1)
10.16 Convertible Promissory Note dated October 15, 2001 by New Visual
Corporation in favor of Quail Run Trust Limited (incorporated by
reference to Exhibit 10.19 of the 2001 10-K).
10.17 Convertible Promissory Note dated October 23, 2001 by New Visual
Corporation in favor of Charles R. Cono (incorporated by reference to
Exhibit 10.20 of the 2001 10-K).
10.18 Convertible Promissory Note dated December 14, 2001 by New Visual
Corporation in favor of the Gerald and Judith Handler Living Trust
(incorporated by reference to Exhibit 10.21 of the 2001 10-K).
10.19 Convertible Promissory Note dated December 14, 2001 by New Visual
Corporation in favor of W.P. Lill, Jr. Trust dated 12/22/99
(incorporated by reference to Exhibit 10.22 of the 2001 10-K).
10.20 Convertible Promissory Note dated December 14, 2001 by New Visual
Corporation in favor of the Handler Children Trust (incorporated by
reference to Exhibit 10.23 of the 2001 10-K).
10.21 Employment Agreement dated as of January 1, 2002 by and between New
Visual Corporation and John Howell (incorporated by reference to
Exhibit 10.24 of the 2001 10-K).
10.22 Promissory Note dated as of January 1, 2002, by John Howell in favor of
New Visual Corporation (incorporated by reference to Exhibit 10.25 of
the 2001 10-K).
10.23 Warrant Agreement dated February 11, 2002, by and between New Visual
Corporation and Elite Financial Communications, LLC (incorporated by
reference to Exhibit 10.6 of the January 2002 10-Q).
10.24 Consulting Agreement dated February 22, 2002, by and between New Visual
Corporation and Bruce McLeod (incorporated by reference to Exhibit
10.19 of the April 2002 10-Q).
10.25 Employment Agreement dated February 25, 2002, by and between New Visual
Corporation and C. Rich Wilson III (incorporated by reference to
Exhibit 10.11 of the January 2002 10-Q).
10.26 Restricted Stock Award Agreement dated as of February 25, 2002, by and
between New Visual Corporation and John Howell (incorporated by
reference to Exhibit 10.12 of the January 2002 10-Q).
10.27 Consulting Agreement dated February 26, 2002, by and between New Visual
Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
10.13 of the January 2002 10-Q).
10.28 Stock Option Agreement dated February 26, 2002, by and between New
Visual Corporation and Thomas J. Cooper (incorporated by reference to
Exhibit 10.14 of the January 2002 10-Q).
10.29 Convertible Promissory Note dated March 8, 2002, by New Visual
Corporation in favor of Tony Finn (incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q for the period
ended July 31, 2002 (the "July 2002 10-Q)).
10.30 Convertible Promissory Noted dated March 8, 2002, by New Visual
Corporation in favor of James Joseph Redmon (incorporated by reference
to Exhibit 10.2 of the July 2002 10-Q).
10.31 Convertible Promissory Note dated March 22, 2002, by New Visual
Corporation in favor of the M. Lucile Way Trust (incorporated by
reference to Exhibit 10.3 of the July 2002 10-Q).
10.32 Convertible Promissory Note dated March 22, 2002, by New Visual
Corporation in favor of D W Construction, Inc. (incorporated by
reference to Exhibit 10.4 of the July 2002 10-Q).
10.33 Employment Agreement dated March 22, 2002, by and between New Visual
Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
10.10 of the April 2002 10-Q).
10.34 Stock Option Agreement dated March 22, 2002, by and between New Visual
Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
10.11 of the April 2002 10-Q).
10.35 Employment Agreement dated March 22, 2002, by and between New Visual
Corporation and Ray Willenberg, Jr. (incorporated by reference to
Exhibit 10.12 of the April 2002 10-Q).
10.36 Stock Option Agreement dated March 22, 2002, by and between New Visual
Corporation and Ray Willenberg, Jr. (incorporated by reference to
Exhibit 10.13 of the April 2002 10-Q).
10.37 Stock Option Agreement dated March 22, 2002, by and between New Visual
Corporation and Brad Ketch (incorporated by reference to Exhibit 10.14
of the April 2002 10-Q).
10.38 Consulting Agreement dated March 22, 2002, by and between New Visual
Corporation and Brad Ketch. (1)
10.39 Convertible Promissory Note dated April 5, 2002, by New Visual
Corporation in favor of D W Construction, Inc. (incorporated by
reference to Exhibit 10.5 of the July 2002 10-Q).
10.40 Development and License Agreement dated as of April 17, 2002, by and
between Adaptive Networks, Inc. and New Visual Corporation
(Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Commission) (incorporated by reference to Exhibit 10.15 of the
April 2002 10-Q).
10.41 Right of First Refusal, Credit of Payments and Revenue Sharing
Agreement dated as of April 17, 2002, by and among New Visual
Corporation, Adaptive Networks and Certain Shareholders of Adaptive
Networks, Inc. (incorporated by reference to Exhibit 10.16 of the April
2002 10-Q).
10.42 Receivables Purchase and Stock Transfer Restriction Agreement dated as
of April 17, 2002, by and among New Visual Corporation, Zaiq
Technologies, Inc. and Adaptive Networks, Inc. (incorporated by
reference to Exhibit 10.17 of the April 2002 10-Q).
10.43 Receivables Purchase and Stock Transfer Restriction Agreement dated as
of April 17, 2002, by and among New Visual Corporation, TLSI, Inc. and
Adaptive Networks, Inc. (incorporated by reference to Exhibit 10.18 of
the April 2002 10-Q).
10.44 Convertible Promissory Note dated May 21, 2002, by New Visual
Corporation in favor of John Marsden (incorporated by reference to
Exhibit 10.6 of the July 2002 10-Q).
10.45 Convertible Promissory Note dated May 21, 2002, by New Visual
Corporation in favor of Randy Arnett (incorporated by reference to
Exhibit 10.7 of the July 2002 10-Q).
10.46 Convertible Promissory Note dated May 30, 2002, by New Visual
Corporation in favor of the M. Lucile Way Trust (incorporated by
reference to Exhibit 10.8 of the July 2002 10-Q).
10.47 Convertible Promissory Note dated May 31, 2002, by New Visual
Corporation in favor of Robert E. Casey, Jr. (incorporated by reference
to Exhibit 10.9 of the July 2002 10-Q).
10.48 Convertible Promissory Note dated June 12, 2002, by New Visual
Corporation in favor of Bonnie Davis (incorporated by reference to
Exhibit 10.10 of the July 2002 10-Q).
10.49 Employment Agreement dated July 1, 2002, by and between New Visual
Corporation and Brad Ketch (incorporated by reference to Exhibit 10.11
of the July 2002 10-Q).
10.50 Consulting Agreement dated as of July 17, 2002, by and between New
Visual Corporation and Charles R. Cono (incorporated by reference to
Exhibit 10.13 of the July 2002 10-Q).
10.51 Promissory Note dated July 17, 2002, by New Visual Corporation in favor
of Charles R. Cono Trust, Charles R. Cono, TTEE (incorporated by
reference to Exhibit 10.14 of the July 2002 10-Q).
10.52 Consulting Agreement dated as of July 30, 2002, by and between New
Visual Corporation and Advisor Associates, Inc. (incorporated by
reference to Exhibit 10.15 of the July 2002 10-Q).
10.53 Severance Agreement and General Release dated September 17, 2002 and
effective September 30, 2002 by and between New Visual Corporation and
John Howell. (1)
10.54 Consulting Agreement dated as of September 2002, by and between New
Visual Corporation and Starburst Innovations, LLC. (1)
10.55 Agreement dated as of September 2002 by and between New Visual
Corporation and Starburst Innovations, LLC. (1)
10.56 Regulation S Purchase Agreement dated September 23, 2002 between New
Visual Corporation and Starz Investments Limited. (1)
10.57 Promissory Note dated October 29, 2002 in favor of Robert E Casey, Jr.
(1)
10.58 Severance Agreement and Release dated December 2, 2002, by and between
New Visual Corporation and Thomas J. Cooper. (1)
10.59 Employment Agreement dated December 2, 2002, by and between New Visual
Corporation and Brad Ketch. (1)
10.60 Stock Option Agreement dated December 2, 2002, by and between New
Visual Corporation and Brad Ketch. (1)
10.61 Promissory note dated October 31, 2002 in favor of Charles R Cono
Trust, Charles R. Cono, TTEE (incorporated by reference to Exhibit 10.1
of the Company's Report on Form 8-K dated October 31, 2002).
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Marcum & Kliegman LLP, Independent Auditors (1)
____________________
(1) Filed herewith.
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
---------------------------------------------------------
(A Development-Stage Company Commencing November 1, 1999)
---------------------------------------------------------
FINANCIAL REPORT
----------------
OCTOBER 31, 2002
----------------
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Nos.
---------
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2
At October 31, 2002 and 2001
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
For the Years Ended October 31, 2002, 2001 and 2000
For the Period from November 1, 1999 to October 31, 2002
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) F-4 - 11
For the Years Ended October 31, 2000, 2001 AND 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS F-12 - 13
For the Years Ended October 31, 2002, 2001 and 2000
For the Period from November 1, 1999 to October 31, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-14 - 46
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors and Stockholders
New Visual Corporation
We have audited the accompanying consolidated balance sheets of New Visual
Corporation and Subsidiaries (formerly New Visual Entertainment, Inc. and
Subsidiaries) (a development stage company commencing November 1, 1999) (the
"Company") as of October 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
the years ended October 31, 2002, 2001 and 2000 and for the period from November
1, 1999 to October 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Visual
Corporation and Subsidiaries (formerly New Visual Entertainment, Inc. and
Subsidiaries)(a development stage company commencing November 1, 1999) at
October 31, 2002 and 2001 and the results of its operations and its cash flows
for each of the three years ended October 31, 2002, 2001 and 2000 and for the
period from November 1, 1999 to October 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred net losses of approximately
$9,467,000, $11,876,000 and $12,725,000 during the years ended October 31, 2002,
2001 and 2000, respectively. As of October 31, 2002, the Company had a working
capital deficiency of approximately $4,584,000. These conditions raise
substantial doubt about the Company's ability to continue as a going-concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ MARCUM & KLIEGMAN LLP
New York, New York
January 21, 2003
F-1
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED BALANCE SHEETS
ASSETS
------
At October 31,
-----------------------------
2002 2001
------------- -------------
Current Assets:
Cash and cash equivalents $ 311,577 $ 294,802
Note receivable from related party -- 100,708
Other receivable from officers 10,032 70,183
Other current assets 1,650 94,416
------------- -------------
Total Current Assets 323,259 560,109
Property and equipment - net of accumulated depreciation 64,533 284,896
Technology license and capitalized software development fee 5,751,000 --
Project under development 2,178,831 1,912,650
Other assets 14,679 33,642
------------- -------------
Total Assets $ 8,332,302 $ 2,791,297
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable $ 954,500 $ 615,000
Notes payable 971,407 --
Accounts payable and accrued expenses 2,247,698 1,435,024
License and development fees payable 734,000 --
------------- -------------
Total Current Liabilities 4,907,605 2,050,024
Notes payable -- 256,886
------------- -------------
Total Liabilities 4,907,605 2,306,910
------------- -------------
Redeemable Series B preferred stock 3,192,000 --
------------- -------------
Commitments, Contingencies and Other Matters
Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares
authorized; Series A junior participating preferred
stock; -0- shares issued and outstanding -- --
Common stock - $0.001 par value; 100,000,000 shares
authorized; 49,787,069 and 30,003,681 shares issued
and outstanding at October 31, 2002 and 2001,
respectively 49,787 30,003
Additional paid-in capital 47,097,830 38,478,279
Subscription receivable -- (103,500)
Unearned financing fees (214,952) (537,380)
Unearned compensation (331,581) (481,751)
Accumulated deficit at October 31, 1999 (12,300,033) (12,300,033)
Deficit accumulated during development stage (34,068,354) (24,601,231)
------------- -------------
Total Stockholders' Equity 232,697 484,387
------------- -------------
Total Liabilities and Stockholders' Equity $ 8,332,302 $ 2,791,297
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
from
For the Years Ended October 31, November 1, 1999
--------------------------------------------- to
2002 2001 2000 October 31, 2002
------------- ------------- ------------- -------------
REVENUES $ -- $ -- $ 12,200 $ 12,200
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales -- -- 21,403 21,403
Projects written off -- -- 114,613 114,613
Research and development 1,298,560 839,402 815,362 2,953,324
Acquired in-process research
and development -- -- 6,050,000 6,050,000
Compensatory element of stock
issuances for selling,
general and administrative
expenses 2,459,158 3,558,887 3,258,549 9,276,594
Selling, general and
administrative expenses 3,555,754 4,086,795 2,041,942 9,684,491
Litigation settlement -- 1,000,000 -- 1,000,000
Loss on disposal of equipment -- 7,500 -- 7,500
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 7,313,472 9,492,584 12,301,869 29,107,925
------------- ------------- ------------- -------------
OPERATING LOSS (7,313,472) (9,492,584) (12,289,669) (29,095,725)
------------- ------------- ------------- -------------
OTHER EXPENSES:
Interest expense 1,036,434 337,378 18,980 1,392,792
Amortization of unearned
financing costs 1,117,217 2,045,953 416,667 3,579,837
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES 2,153,651 2,383,331 435,647 4,972,629
------------- ------------- ------------- -------------
NET LOSS $ (9,467,123) $(11,875,915) $(12,725,316) $(34,068,354)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.23) $ (.46) $ (.59)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 41,861,295 25,988,990 21,579,916
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Common Stock Additional
-------------------------- Paid-in
Shares Amount Capital
------------ ------------ ------------
(1)
Balance - November 1, 1999 17,224,049 $ 17,224 $12,197,374
Issuance of common stock for cash
($1.00 to $4.00 per share for year ended
October 31) 805,994 805 2,733,583
Issuance of common stock for services:
($1.00 to $1.40 per share for quarter ended
January 31) 29,765 30 34,020
($1.20 to $12.00 per share for quarter ended
April 30) 1,161,065 1,161 1,813,568
($3.00 to $7.88 per share for quarter ended
July 31) 109,000 109 619,541
($.25 to $12.50 per share for quarter ended
October 31) 84,084 84 28,038
Acquisition of Impact Pictures, Inc.
($4.00 per share) 12,500 13 49,987
Acquisition of New Wheel Technology, Inc.
($2.00 per share) 3,000,000 3,000 5,997,000
Issuance of common stock under consulting
agreement ($2.00 per share) 1,500,000 1,500 2,998,500
Issuances of stock for exercise of warrants
($2.40 per share) 68,750 69 164,931
Issuance of stock in connection with private
placement ($5.00 to $5.50 per share) 77,248 77 414,923
Value assigned to issuance of 200,000 warrants -- -- 762,000
Amortization of unearned financing costs -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance - October 31, 2000 24,072,455 $ 24,072 $27,813,465
============ ============ ============
(1) Share amounts have been restated to reflect the 1-for-4 reverse stock split
effected on June 22, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Unearned Total
Financing Accumulated Stockholders'
Costs Deficit Equity
------------- ------------- -------------
Balance - November 1, 1999 $ -- $(12,300,033) $ (85,435)
Issuance of common stock for cash
($1.00 to $4.00 per share for the year ended
October 31) -- -- 2,734,388
Issuance of common stock for services:
($1.00 to $1.40 per share for the quarter ended
January 31) -- -- 34,050
($1.20 to $12.00 per share for the quarter ended
April 30) -- -- 1,814,729
($3.00 to $7.88 per share for the quarter ended
July 31) -- -- 619,650
($.25 to $12.50 per share for the quarter ended
October 31) -- -- 28,122
Acquisition of Impact Pictures, Inc.
($4.00 per share) -- -- 50,000
Acquisition of New Wheel Technology, Inc.
($2.00 per share) -- -- 6,000,000
Issuance of common stock under consulting
agreement ($2.00 per share) (3,000,000) -- --
Issuances of stock for exercise of warrants
($2.40 per share) -- -- 165,000
Issuance of stock in connection with private
placement ($5.00 to $5.50 per share) -- -- 415,000
Value assigned to issuance of 200,000 warrants -- -- 762,000
Amortization of unearned financing costs 416,667 -- 416,667
Net loss -- (12,725,316) (12,725,316)
------------- ------------- -------------
Balance - October 31, 2000 $ (2,583,333) $(25,025,349) $ 228,855
============= ============= =============
Accumulated deficit as of November 1, 1999 $(12,300,033)
Accumulated deficit during development stage
(year ended October 31, 2000) (12,725,316)
-------------
Total Accumulated Deficit as of October 31, 2000 $(25,025,349)
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Common Stock Additional
----------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
Balance - November 1, 2000 24,072,455 $ 24,072 $ 27,813,465
Issuance of common stock for cash
($.25 to $5.00 per share) 1,212,254 1,212 1,075,763
Issuance of common stock with attached
warrants ($4.02 per share for quarter ended
January 31) 174,714 175 489,024
Issuance of common stock with attached
warrants ($5.10 per share for quarter ended
January 31) 30,600 31 85,649
Issuance of common stock with attached
warrants ($2.80 to $5.10 per share for
quarter ended April 30) 104,571 105 292,695
Issuance of common stock in connection with
Private Placement
($4.35 to $5.50 per share for quarter ended
January 31) 32,445 32 151,968
($2.60 to $3.37 per share for quarter ended
April 30) 207,307 207 619,793
($1.74 to $2.80 per share for quarter ended
July 31) 1,446,355 1,446 2,742,008
Issuance of common stock in connection with
litigation settlement 250,000 250 999,750
Issuance of stock to Vice-Chairperson of Board
of Directors for services ($1.8984 per share
at June 11) 500,000 500 948,700
Issuance of stock under consulting agreement
($2.90 to $3.90 per share at July 31) 50,960 51 171,693
Issuance of stock under consulting agreements
($.41 to $.95 per share at October 31) 1,175,000 1,175 558,075
Issuance of stock in connection with exercising
of option ($.27 at September 30) 750,000 750 199,250
Value assigned to warrants issued to
consultants at quarter ended July 31 -- -- 1,289,250
Value assigned to options issued to consultants
at August 30 -- -- 540,000
Value assigned to warrants issued to
consultants at quarter ended October 31 -- -- 380,000
Value assigned to options issued to advisory
board members at quarter ended October 31 -- -- 151,194
Cancellation of common stock issued for cash (2,980) (3) (29,998)
Amortization of unearned financing costs -- -- --
Amortization of unearned compensation expenses -- -- --
Net loss -- -- --
------------- ------------- -------------
Balance - October 31, 2001 30,003,681 $ 30,003 $ 38,478,279
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Unearned Unearned
Subscription Financing Compensation
Receivable Costs Expense
------------ ------------ ------------
Balance - October 31, 2000 $ -- $(2,583,333) $ --
Issuance of common stock for cash
($.25 to $5.00 per share) (3,500) -- --
Issuance of common stock with attached
warrants ($4.02 per share for quarter ended
January 31) -- -- --
Issuance of common stock with attached
warrants ($5.10 per share for quarter ended
January 31) -- -- --
Issuance of common stock with attached
warrants ($2.80 to $5.10 per share for
quarter ended April 30) -- -- --
Issuance of common stock in connection with
Private Placement
($4.35 to $5.50 per share for quarter ended
January 31) -- -- --
($2.60 to $3.37 per share for quarter ended
April 30) -- -- --
($1.74 to $2.80 per share for quarter ended
July 31) -- -- --
Issuance of common stock in connection with
litigation settlement -- -- --
Issuance of stock to Vice-Chairperson of Board
of Directors for services ($1.8984 per share
at June 11) -- -- --
Issuance of stock under consulting agreement
($2.90 to $3.90 per share at July 31) -- -- --
Issuance of stock under consulting agreements
($.41 to $.95 per share at October 31) -- -- --
Issuance of stock in connection with exercising
of option ($.27 at September 30) (100,000) -- --
Value assigned to warrants issued to
consultants at quarter ended July 31 -- -- --
Value assigned to options issued to consultants at
August 30 -- -- (540,000)
Value assigned to warrants issued to
consultants at quarter ended October 31 -- -- --
Value assigned to options issued to advisory
board members at quarter ended October 31 -- -- (151,194)
Cancellation of common stock issued for cash -- -- --
Amortization of unearned financing costs -- 2,045,953 --
Amortization of unearned compensation expenses -- -- 209,443
Net loss -- -- --
------------ ------------ ------------
Balance - October 31, 2001 $ (103,500) $ (537,380) $ (481,751)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Total
Accumulated Stockholders'
Deficit Equity
------------- -------------
Balance - October 31, 2000 $(25,025,349) $ 228,855
Issuance of common stock for cash
($.25 to $5.00 per share) -- 1,073,475
Issuance of common stock with attached
warrants ($4.02 per share for quarter ended
January 31) -- 489,199
Issuance of common stock with attached
warrants ($5.10 per share for quarter ended
January 31) -- 85,680
Issuance of common stock with attached
warrants ($2.80 to $5.10 per share for
quarter ended April 30) -- 292,800
Issuance of common stock in connection with
Private Placement
($4.35 to $5.50 per share for quarter ended
January 31) -- 152,000
($2.60 to $3.37 per share for quarter ended
April 30) -- 620,000
($1.74 to $2.80 per share for quarter ended
July 31) -- 2,743,454
Issuance of common stock in connection with
litigation settlement -- 1,000,000
Issuance of stock to Vice-Chairperson of Board
of Directors for services ($1.8984 per share
at June 11) -- 949,200
Issuance of stock under consulting agreement
($2.90 to $3.90 per share at July 31) -- 171,744
Issuance of stock under consulting agreements
($.41 to $.95 per share at October 31) -- 559,250
Issuance of stock in connection with exercising
of option ($.27 at September 30) -- 100,000
Value assigned to warrants issued to
consultants at quarter ended July 31 -- 1,289,250
Value assigned to options issued to consultants at
August 30 -- --
Value assigned to warrants issued to
consultants at quarter ended October 31 -- 380,000
Value assigned to options issued to advisory
board members at quarter ended October 31 -- --
Cancellation of common stock issued for cash -- (30,001)
Amortization of unearned financing costs -- 2,045,953
Amortization of unearned compensation expenses -- 209,443
Net loss (11,875,915) (11,875,915)
------------- -------------
Balance - October 31, 2001 $(36,901,264) $ 484,387
============= =============
Accumulated deficit as of November 1, 1999 $(12,300,033)
Accumulated deficit during development stage (24,601,231)
-------------
Total Accumulated Deficit as of October 31, 2001 $(36,901,264)
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Common Stock Additional
---------------------------- Paid-in
Shares Amount Capital
------------- ------------- -------------
Balance - November 30, 2001 30,003,681 $ 30,003 $ 38,478,279
Issuance of common stock under consulting
agreements ($.40 to $1.24 per share) 1,967,312 1,968 1,156,912
Issuance of common stock for cash
($.25 to $1.00 per share) 6,448,675 6,449 2,114,476
Cash received for subscription receivable -- -- --
Issuance of common stock in connection with the
exercise of warrants ($.25 per share) 2,912,000 2,912 725,088
Cashless exercise of warrants 736,008 736 (736)
Issuance of common stock for conversion of
promissory notes and interest($.40 to $.70
per share) 4,497,967 4,498 2,179,128
Issuance of common stock for release of claims 1,261,946 1,262 (1,262)
Issuance of common stock for technology license
acquisition 624,480 624 749,376
Issuance of common stock to employees 1,035,000 1,035 432,203
Issuance of common stock for financing fee 300,000 300 140,700
Stock offering costs -- -- (246,993)
Value assigned to beneficial conversion -- -- 653,789
Value assigned to warrants issued to
consultants -- -- 533,370
Value assigned to options issued to consultants -- -- 183,500
Amortization of unearned compensation expense -- -- --
Amortization of unearned financing costs -- -- --
Net loss -- -- --
------------- ------------- -------------
Balance - October 31, 2002 49,787,069 $ 49,787 $ 47,097,830
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Unearned Unearned
Subscription Financing Compensation
Receivable Costs Expense
------------ ------------ ------------
Balance - October 31, 2001 $ (103,500) $ (537,380) $ (481,751)
Issuance of common stock under consulting
agreements ($.40 to $1.24 per share) -- -- (344,280)
Issuance of common stock for cash
($.25 to $1.00 per share) -- -- --
Cash received for subscription receivable 103,500 -- --
Issuance of common stock in connection with the
exercise of warrants ($.25 per share) -- -- --
Cashless exercise of warrants -- -- --
Issuance of common stock for conversion of
promissory notes and interest ($.40 to $.70 per
share) -- -- --
Issuance of common stock for release of claims -- -- --
Issuance of common stock for technology license
acquisition -- -- --
Issuance of common stock to employees -- -- (100,000)
Issuance of common stock for financing fee -- (141,000) --
Stock offering costs -- -- --
Value assigned to beneficial conversion -- (653,789) --
Value assigned to warrants issued to
consultants -- -- (467,370)
Value assigned to options issued to consultants -- -- (183,500)
Amortization of unearned compensation expense -- -- 1,245,320
Amortization of unearned financing costs -- 1,117,217 --
Net loss -- -- --
------------ ------------ ------------
Balance - October 31, 2002 $ -- $ (214,952) $ (331,581)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002
Total
Accumulated Stockholders'
Deficit Equity
------------- -------------
Balance - October 31, 2001 $(36,901,264) $ 484,387
Issuance of common stock under consulting
Agreements ($.40 to $1.24 per share) -- 814,600
Issuance of common stock for cash
($.25 to $1.00 per share) -- 2,120,925
Cash received for subscription receivable -- 103,500
Issuance of common stock in connection with the
exercise of warrants ($.25 per share) -- 728,000
Cashless exercise of warrants -- --
Issuance of common stock for conversion of
promissory notes and interest($.40 to $.70 per
share) -- 2,183,626
Issuance of common stock for release of claims -- --
Issuance of common stock for technology license
acquisition -- 750,000
Issuance of common stock to employees -- 333,238
Issuance of common stock for financing fee -- --
Stock offering costs -- (246,993)
Value assigned to beneficial conversion -- --
Value assigned to warrants issued to
consultants -- 66,000
Value assigned to options issued to consultants -- --
Amortization of unearned compensation expense -- 1,245,320
Amortization of unearned financing costs -- 1,117,217
Net loss (9,467,123) (9,467,123)
------------- -------------
Balance - October 31, 2002 $(46,368,387) $ 232,697
============= =============
Accumulated deficit as of November 1, 1999 $(12,300,033)
Accumulated deficit during development stage
(November 1, 1999 to October 31, 2002) (34,068,354)
-------------
Total Accumulated Deficit as of October 31, 2002 $(46,368,387)
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
from
For the Years Ended October 31, November 1, 1999
--------------------------------------------- to
2002 2001 2000 October 31, 2002
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,467,123) $(11,875,915) $(12,725,316) $(34,068,354)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Consulting fees and other
compensatory elements of stock
issuances 2,429,659 3,558,887 3,258,549 9,247,095
Stock issued for litigation
settlement -- 1,000,000 -- 1,000,000
Loss on disposal of equipment -- 7,500 -- 7,500
Projects written-off -- -- 114,613 114,613
Amortization of unearned
financing costs 1,117,217 2,045,953 416,667 3,579,837
Depreciation 77,260 118,693 97,172 293,125
Stock issued for acquired in-
process research and
development -- -- 6,050,000 6,050,000
(Increase) decrease from changes in:
Other current assets 92,766 (106,809) (30,227) (44,270)
Due from related parties 160,859 (100,708) 3,859 64,010
Other assets 18,963 83,558 (112,200) (9,679)
Increase (decrease) from changes in:
Accounts payable and accrued
expenses 1,584,573 988,103 26,223 2,598,899
------------- ------------- ------------- -------------
NET CASH USED IN OPERATING
ACTIVITIES (3,985,826) (4,280,738) (2,900,660) (11,167,224)
------------- ------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (2,513) (17,302) (388,733) (408,548)
Proceeds from sale of equipment 145,616 -- -- 145,616
Projects under development (266,181) (1,237,999) (655,519) (2,159,699)
Acquisition of license (1,075,000) -- -- (1,075,000)
------------- ------------- ------------- -------------
NET CASH USED IN INVESTING
ACTIVITIES (1,198,078) (1,255,301) (1,044,252) (3,497,631)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,224,422 5,426,607 3,149,388 10,800,417
Offering costs related to stock
issuances (246,993) -- -- (246,993)
Proceeds from notes payable 700,000 -- 756,886 1,456,886
Proceeds from convertible notes payable
payable 1,795,250 615,000 -- 2,410,250
Repayments of notes payable -- (500,000) -- (500,000)
Proceeds from exercise of options and
warrants 728,000 100,000 165,000 993,000
------------- ------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,200,679 5,641,607 4,071,274 14,913,560
------------- ------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 16,775 105,568 126,362 248,705
CASH AND CASH EQUIVALENTS - BEGINNING 294,802 189,234 62,872 62,872
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS - ENDING $ 311,577 $ 294,802 $ 189,234 $ 311,577
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
For the Period
from
For the Years Ended October 31, November 1, 1999
------------------------------------------------ to
2002 2001 2000 October 31, 2002
-------------- -------------- -------------- --------------
Cash paid during the period for:
Interest $ -- $ -- $ 526 $ 526
============== ============== ============== ==============
Income taxes $ -- $ -- $ -- $ --
============== ============== ============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
--------------------------------------------
Notes and interest
satisfied by issuance of common stock $ 2,183,626 $ -- $ -- $ 2,183,626
============== ============== ============== ==============
Common stock issued for acquisition of
license $ 750,000 $ -- $ -- $ 750,000
============== ============== ============== ==============
Redeemable Series B Preferred Stock issued
for acquisition of license $ 3,192,000 $ -- $ -- $ 3,192,000
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION,BUSINESS AND CONTINUED OPERATIONS
- ----------------------------------------------------------------------
The consolidated financial statements include the accounts of New Visual
Corporation and its wholly-owned operating subsidiaries, NV Entertainment, Inc.,
Impact Multimedia, Inc. and NV Technology, Inc. (formerly New Wheel Technology,
Inc.) ("New Wheel") (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated.
New Visual Corporation was incorporated under the laws of the State of Utah on
December 5, 1985.
In November of 1999, the Company began to focus its business activities on the
development of new content telecommunications technologies. Pursuant to such
plan, in February of 2000, the Company acquired New Wheel Technology, Inc., a
development stage, California-based, technology company, which now operates as
the Company's wholly-owned subsidiary, NV Technology, Inc., a Delaware
corporation. As a result of the change in business focus, the Company became a
development stage entity commencing November 1, 1999.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, for the years ended October 31, 2002, 2001 and 2000, the Company
incurred net losses of approximately $9,467,000, $11,876,000 and $12,725,000,
respectively, and as of October 31, 2002, had a working capital deficiency of
approximately $4,584,000. The Company has limited finances and requires
additional funding in order to accomplish its growth objectives and marketing of
its products and services. There is no assurance that the Company can reverse
its operating losses, or that it can raise additional capital to allow it to
expand its planned operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan in this
regard is to obtain other debt and equity financing until profitable operation
and positive cash flows are achieved and maintained.
The Company operates in two business segments, the production of motion
pictures, films and videos (entertainment segment) and development of new
content telecommunications technologies (telecommunication segment). The success
of the Company's entertainment business is dependent on future revenues from the
Company's current joint venture production agreement to produce a feature-length
film for theatrical distribution.
Until the commencement of sales from either segment, the Company will have no
operating revenues, but will continue to incur substantial operating expenses,
capitalized costs and operating losses.
The Company funded its operations during 2002, 2001 and 2000 through sales of
its common stock, proceeds from notes and convertible notes and the exercise of
options and warrants resulting in approximate net proceeds to the Company of
$5,201,000, $6,142,000 and $4,071,000, respectively. The Company is exploring
other financing alternatives, including private placements and other offerings.
The Company's ability to continue as a going concern is dependent upon obtaining
additional financing. These financial statements do not include any adjustments
relating to the recoverability of recorded asset amounts that might be necessary
as a result of the above uncertainty.
F-14
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2- SUMMARY OF ACCOUNTING POLICIES
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.
Project Under Development
- ---------------------------
Statement of Positions SOP-00-2, "Accounting by Producers or Distributors of
Films" ("SOP-00-2") requires that film costs be capitalized and reported as a
separate asset on the balance sheet. Film costs include all direct negative
costs incurred in the production of a film, as well as allocations of production
overhead and capitalized interest. Direct negative costs include cost of
scenario, story, compensation of cast, directors, producers, writers, extras and
staff, cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2 also
requires that film costs be amortized and participation costs accrued, using the
individual-film-forecast-method-computation method, which amortizes or accrues
such costs in the same ratio that the current period actual revenue (numerator)
bears to the estimated remaining unrecognized ultimate revenue as of the
beginning of the fiscal year (denominator).
In addition, SOP-00-2 also requires that if an event or change in circumstances
indicates that an entity should assess whether the fair value of a film is less
than its unamortized film costs, then an entity should determine the fair value
of the film and write-off to the statement of operations the amount by which the
unamortized capital costs exceeds the film's fair value. The Company adopted the
standard effective November 1, 2001, which did not have a material effect on the
Company's financial position or results of operations.
During the year ended October 31, 2000, several projects under development were
determined to have no estimated realizable value and were accordingly
written-off. Project costs written-off during the year ended October 31, 2000
was $114,613.
The Company commences amortization of capitalized film costs and accrues
(expenses) of participation costs when a film is released and it begins to
recognize revenue from the film.
F-15
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 employs an asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to the difference between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Under SFAS No. 109, the effect on deferred income taxes of a change in tax rates
is recognized income in the period that includes the enactment date.
Accounting Estimates
- --------------------
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts payable, accrued expenses, amounts due from related
parties and convertible notes approximate fair value because of their immediate
or short-term nature. The fair value of long-term notes payable approximates
their carrying value because the stated rates of the debt either reflect recent
market conditions or are variable in nature.
Revenue Recognition
- -------------------
Substantially all past revenues were derived from the production of multimedia
content, videos and commercial films. Revenue is recognized over the shorter of
the license term or the expected revenue term.
Research and Development
- ------------------------
Research and development costs are charged to expense as incurred. Amounts
allocated to acquired-in-process research and development costs, from business
combinations, are charged to earnings at the consummation of the acquisition.
F-16
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Capitalized Software Development Costs
- --------------------------------------
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs requires
considerable judgement by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product by product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
revenue for a product bears to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, the capitalized costs of each software product is
then valued at the lower of its remaining unamortized costs or net realizable
value.
The Company has no amortization expense for the years ended October 31, 2002,
2001 and 2000 for its capitalized software development costs.
Advertising
- -----------
Advertising costs are charged to operations when incurred. Advertising expense
was $-0-, $942 and $71,528, respectively, for the years ended October 31, 2002,
2001 and 2000, respectively.
Loss Per Common Share
- ---------------------
Basic loss per common share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted loss per share reflects
the potential dilution from the exercise or conversion of all dilutive
securities into common stock based on the average market price of common shares
outstanding during the period. No effect has been given to outstanding options,
warrants or convertible debentures in the diluted computation, as their effect
would be antidilutive.
The number of potentially dilutive securities excluded from computation of
diluted loss per share was approximately 18,910,000, 9,828,000 and 1,764,000 for
the years ended October 31, 2002, 2001 and 2000, respectively.
F-17
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Reverse Stock Splits
- --------------------
On June 22, 2000, the Company effected a one-for-four reverse split of its
issued and outstanding common stock. The accompanying consolidated financial
statements, notes and other references to share and per share data have been
retroactively restated to reflect the reverse stock splits for all periods
presented.
Stock-Based Compensation
- ------------------------
The Company follows Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation". SFAS 123 establishes
accounting and reporting standards for stock-based employee compensation plans.
This statement allows companies to choose between the "fair value-based method
of accounting" as defined in this statement and the "intrinsic value-based
method of accounting" as prescribed by Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees". The Company has elected
to continue to follow the accounting guidance provided by APB 25 for stock
compensation issued to employees or directors, as permitted. Stock compensation
issued to non-employees/directors are accounted for in accordance with SFAS No.
123.
Impairment of Long-Lived Assets
- -------------------------------
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company evaluates its long-lived assets for financial
impairment, and continues to evaluate them as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001. Certain provisions shall also be applied to acquisitions initiated
subsequent to June 30, 2001. SFAS 142 supercedes APB Opinion No. 17, "Intangible
Assets," and requires, among other things, the discontinuance of amortization
related to goodwill and indefinite lived intangible assets. These assets will
then be subject to an impairment test at least annually. Adoption of SFAS No.
142, which occurred November 1, 2001 did not have material effect on the
Company's financial position or results of operations.
F-18
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards (Continued)
- ----------------------------------------------
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. Adoption of SFAS No. 144, which occurred November 1, 2001 did
not have a material effect on the Company's financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statement No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of
Opinion No. 30 will distinguish transactions that are part of an entity's
recurring operations from those that are unusual and infrequent that meet the
criteria for classification as an extraordinary item. The Company is required to
adopt SFAS No. 145 no later than the first quarter of fiscal 2003, although
early adoption is allowed. The Company has not yet evaluated the impact from
SFAS No. 145 on its financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
expect the adoption of this statement to have a material effect on its financial
statements.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. Statement 148 amends SFAS Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. Statement 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While the statement does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure
F-19
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards (Continued)
- ----------------------------------------------
provisions of SFAS 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using the
fair value method of SFAS No. 123, or the intrinsic value method of APB Opinion
25. The Company will continue to account for stock-based compensation according
to APB 25, while its adoption of SFAS No. 148 requires the Company to provide
prominent disclosures about the effect of SFAS No. 123 on reported income and
will require the Company to disclose these effects in the interim financial
statements as well.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S ACCOUNTING
AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS (" FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002 and adoption of the disclosure requirements are effective for
the Company during the first quarter ending January 31, 2003. The Company does
not expect the adoption of FIN 45 will have a significant impact on its
consolidated financial position or results of operations.
Comprehensive Income
- --------------------
The Company has no material components of other comprehensive income and,
accordingly, net income approximates comprehensive income for all periods
presented.
F-20
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - 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 year ended October 31,
2000. Revenues from Impact business totaled approximately $-0-, $-0- and
$12,200, respectively, for the years ended October 31, 2002, 2001 and 2000.
Historical and proforma information have not been provided because the
operations of the acquired business were not material.
NV Technology, Inc.
- -------------------
In February 2000, the Company completed the acquisition of New Wheel Technology,
Inc. ("New Wheel"), a development-stage, California-based, technology company.
New Wheel was merged with Astounding Acquisition Corp., a Delaware corporation
and wholly-owned subsidiary of New Visual, which following the merger changed
its name to New Wheel Technology, Inc. On July 13, 2001, New Wheel changed its
name to NV Technology, Inc., which the Company now uses to conduct the
development of its broadband technology ("NV Technology"). An aggregate of
3,000,000 restricted shares of common stock valued at $6,000,000 were issued to
the New Wheel stockholders in consideration of the merger. The merger agreement
also provided that additional compensation may be payable 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. The
Company has accounted for this acquisition under the purchase method of
accounting. As of the acquisition date, NV Technology 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 year ended October 31, 2000.
Historical and proforma information were not provided because the operations of
the acquired business were not material.
See note 14 for discussion of a settlement agreement with the former owners of
New Wheel.
F-21
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTE RECEIVABLE FROM RELATED PARTIES
On September 6, 2001, the Company converted advances made to an officer in the
amount of $99,656 into a promissory note, which was payable on demand and bore
an interest rate of 7.0% per annum. On January 1, 2002, the Company converted
additional advances made to the officer in the amount of $67,631 into a
promissory note, which was payable on demand and bore an interest rate of 7.0%
per annum.
On September 30, 2002, the Company and the officer discussed above mutually
decided to end their relationship. The principal balance of $167,287 and accrued
interest of $11,113 was satisfied by the Company agreeing to provide the officer
with a termination payment equal to the remaining balance of the note receivable
and accrued interest. The $178,400 was charged to selling, general and
administrative expenses for the year ended October 31, 2002.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, consists of the following:
At October 31,
--------------------------
2002 2001
----------- -----------
Furniture and fixtures $ 54,097 $ 51,584
Camera equipment 298,109 544,664
Office equipment 109,460 109,460
----------- -----------
461,721 705,708
Less: Accumulated depreciation 397,188 420,812
----------- -----------
Total $ 64,533 $ 284,896
=========== ===========
For the years ended October 31, 2002, 2001 and 2000, depreciation expense was
$77,260, $118,693 and $97,172, respectively.
NOTE 6 - TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT
On April 17, 2002, the Company entered into a development and license agreement
with Adaptive Networks, Inc. ("ANI") to acquire a worldwide, perpetual license
to ANI's Powerstream technology, intellectual property, and patent portfolio for
use in products relating to all applications in the field of the copper
telephone wire telecommunications network. In consideration of the grant of the
license, the Company assumed certain debt obligations of ANI to Zaiq
Technologies, Inc. ("Zaiq") and TLSI, Inc. ("TLSI"). The Company then issued
3,192 shares of its Series B Preferred Stock, valued at $3,192,000, with a
liquidation preference of $1,000 per share and paid $250,000 in cash to Zaiq in
satisfaction of the Zaiq debt. The Company also issued 624,480 shares of common
stock, valued at $750,000, to TLSI in satisfaction of the TLSI debt. The value
of the consideration issued by the Company in connection with the license
agreement totaled $4,192,000.
The Company also agreed to pay ANI a development fee of $1,559,000 for software
development services and to pay ANI a royalty equal to a percentage of the net
sales of products sold by the Company and license revenue received by the
Company. As of October 31, 2002, $734,000 of this development fee was
outstanding.
F-22
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT (Continued)
The Company capitalized the consideration issued in connection with the license
fee and development fee totaling $5,751,000. The Company's technical employees
and advisors concluded that as of March 2002 the Company had established
technological feasibility for its ultimate telecommunication product to be
marketed (see Note 1). Additional development services and testing, to be
performed principally by ANI, are necessary to complete the product development.
The success of the Company's telecommunication segment is dependent upon the
successful completion of development and testing of its broadband technology
currently under development by its wholly-owned subsidiary, NV Technology, Inc.
No assurance can be given that the Company can complete development of such
technology, or that with respect to such technology that is fully developed, it
can be commercialized on a large scale basis or at a feasible cost. No assurance
can be given that such technology will receive market acceptance.
NOTE 7 - PROJECT UNDER DEVELOPMENT
In April 2000, the Company entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. The Company agreed to
provide the funding for the production in the amount of up to $2,250,000 and, in
exchange, received a 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 Company's management currently expects to receive revenue
from the film in three categories. These categories are upfront distribution
licenses, product or title sponsorships, and, of course, box-office ticket
sales. As of October 31, 2002, the Company has funded approximately $2,179,000
of production and other costs, which was included in projects under development
in the accompanying consolidated balance sheet. As of October 31, 2002, the film
was in production. Management of the Company expects to sign a distribution
agreement during the year ended October 31, 2003. No amortization of the
capitalized film costs was necessary for the years ended October 31, 2002, 2001
and 2000.
NOTE 8 - CONVERTIBLE NOTES PAYABLE
During fiscal 2001 and 2002, the Company entered into several convertible
promissory note agreements with various trusts and individuals, totaling
$2,410,250. The Company agreed to pay the principal and an additional amount
equal to 50% of the principal. The notes are due when the Company reaches
certain milestones from the distribution of its motion picture.(Note 7). The
notes may be converted at any time, in whole or in part, into that number of
fully paid and non-assessable shares of common stock at conversion prices
ranging from $.40 to $1.00. During the fiscal year ended October 31, 2002,
principal and unpaid interest on several convertible promissory notes, totaling
$2,183,625, of which $727,875 represented accrued interest, were converted into
4,497,967 shares of the Company's common stock. The remaining principal balance
was $954,500 at October 31, 2002.
Several of the above convertible note agreements that were entered into during
the fiscal year ended October 31, 2002, were convertible into common stock at a
conversion rate lower than the market price at the issuance of the convertible
notes. The value of such beneficial conversion features was $653,789 and such
amount was charged to financing costs during the fiscal year ended October 31,
2002.
F-23
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - NOTES PAYABLE
On June 29, 2000, the Company entered into five credit agreements, each of which
granted the Company a credit facility of up to $300,000. As of October 31, 2000,
the Company had borrowed $756,886 under these facilities, payable on June 29,
2003 in one payment, together with all accrued and unpaid interest at 6% per
annum.
On November 13, 2000, the above five credit agreements were amended, reducing
the Company's credit facility to $756,886 in the aggregate. The credit
agreements terminate on June 29, 2003 and all accrued interest and unpaid
interest, along with the principal, is due in full on June 29, 2003.
On July 12, 2001, the Company repaid $500,000 under the above five credit
agreements and reduced the balance to $256,886.
During the fiscal year ended October 31, 2002, no repayment was required or made
under the above five credit agreements.
On July 17, 2002, the Company entered into a promissory note agreement with an
individual totaling $500,000. The Company agreed to pay the principal and
interest at 10% per annum on November 1, 2002.
On October 31, 2002, the Company renewed the above note and entered into a new
promissory note for the above principal, plus accrued interest of $14,521 (total
amount of the note $514,521). The note accrues interest at a rate of 10% per
annum, compounded annually, on a 365-day year. The note is payable 3 days after
written demand, but not before December 16, 2002. As of October 31, 2002, the
balance outstanding under this note was $514,521.
On October 29, 2002, the Company entered into a promissory note agreement with
an individual, totaling $200,000. The Company agreed to pay the principal and
interest at 10% per annum on April 29, 2003.
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consist of the following:
At October 31,
--------------------------
2002 2001
----------- -----------
Deferred Officers Compensation $ 181,596 $ --
Accrued bonuses and payroll 334,307 --
Professional fees 623,044 606,807
Interest payable 541,350 356,601
Consulting fees 62,018 204,192
Miscellaneous 505,383 267,424
----------- -----------
$2,247,698 $1,435,024
=========== ===========
F-24
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - REDEEMABLE SERIES B PREFERRED STOCK
On April 10, 2002, the Company amended its Articles of Incorporation and
designated 4,000 of its authorized preferred stock as a Series B Preferred
Stock, par value $.01 per share, with a liquidation preference of $1,000 per
share.
The Series B Preferred Stock are mandatorily redeemable by the Company at the
liquidation preference as follows:
(i) Closing of financing transaction of at least $15 million.
(ii) Closing of a corporate transaction, (such as a merger, consolidation,
reorganization, sale of significant assets, etc.) resulting in a change of
control.
(iii) In the event the Company completes a financing, which is at least $3
million but less than $15 million, the Company must partially redeem the Series
B Preferred Stock based on a fraction, the numerator of which is the net cash
proceeds received by the Company, as a result of the financing transaction, and
the denominator of which is $15 million.
(iv) The Company is obligated to redeem any outstanding Series B Preferred Stock
at its liquidation preference, in eight equal quarterly payments, commencing on
March 31, 2005 and ending on December 31, 2006.
Holders of Series B Preferred Stock are entitled to receive dividends if, as and
when declared by the Company's Board of Directors in preference to the holders
of its common stock and of any other stock ranking junior to the Series B
Preferred Stock with respect to dividends.
The Company cannot declare or pay any dividend or make any distribution on its
common stock unless a dividend or distribution of at least two times the
dividend paid on the common stock is also paid on the Series B Preferred Stock.
Holders of Series B Preferred Stock are also entitled to share pro-rata (based
on the aggregate liquidation preference) in any dividend, redemption or other
distribution made to any other series of the Company's preferred stock. The
Series B Preferred Stock does not have voting rights, except as required by law.
F-25
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - REDEEMABLE SERIES B PREFERRED STOCK (Continued)
Each share of the Series B Preferred Stock is convertible into shares of the
Company's common stock by dividing $1,000 by the conversion price. The
conversion price is the fair market value of the Company's common stock at the
time of conversion, but not to be less than $.34 per share, subject to
adjustment, and not to exceed $4.00 per share, subject to adjustment. Holders of
the Series B Preferred Stock were granted piggy-back registration rights to
register common shares reserved for such conversion.
In April 2002, the Company issued 3,192 shares of its Series B Preferred Stock,
with redemption and liquidation preference of $3,192,000, in connection with a
development and license agreement discussed in Note 6. As of October 31, 2002,
there were 4,000 authorized shares Series B Preferred Stock and 3,192 shares
issued and outstanding. Based on the redemption term, the Series B Preferred
Stock is not included in stockholders' equity.
NOTE 12 - STOCKHOLDERS' EQUITY
Preferred Stock and Rights Dividend
- -----------------------------------
Effective June 22, 2000, the Company amended its Articles of Incorporation to
decrease the number of authorized shares of preferred stock from 200,000,000 to
15,000,000, and to decrease the par value of the preferred stock from $30.00 to
$0.01 per share.
The Company adopted a shareholder rights plan, in which one right was
distributed on August 21, 2000 as a dividend on each outstanding share of common
stock to shareholders of record on that date. Each right will entitle the
shareholders to purchase 1/1000th of a share of a new series of junior
participating preferred stock of the Company at an exercise price of $200 per
right. The rights will be exercisable only if another person acquires or
announces its intention to acquire beneficial ownership of 20% or more of the
Company's common stock. After any such acquisition or announcement, the
Company's shareholders, other than the acquirer, could then exercise each right
they hold to purchase the Company's common stock at a 50% discount from the
market price. In addition, if, after another person becomes an acquiring person,
the Company is involved in a merger or other business combination in which it is
not the surviving corporation, each right will entitle its holder to purchase a
number of shares of common stock of the acquiring company having a market value
equal to twice the exercise price of the right. Prior to the acquisition by a
person or group of beneficial ownership of 20% or more of the Company's common
stock, at the option of the Board of Directors, the rights are redeemable for
$0.001 per right. The rights will expire on August 21,2004.
F-26
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock and Rights Dividend (Continued)
- -----------------------------------
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".
200,000 shares of the Series A Junior Participating Preferred Stock are
initially reserved for issuance upon exercise of the rights. Subject to the
rights of the holders of any shares of any series of preferred stock ranking
prior and superior to the Series A Preferred Stock with respect to dividends,
the holders of shares of Series A Preferred Stock, in preference to the holders
of common stock, shall be entitled to receive, when, as and if declared by the
Board of Directors, quarterly dividends payable in cash on the last day of each
quarter in each year, commencing on the first quarterly dividend payment date
after the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share equal to the greater of $1.00 or 1,000 times the
aggregate per share amount of all cash and non-cash dividends or other
distributions, other than a dividend payable in shares of common stock. Each
share of Series A Preferred Stock shall entitle the holder to 1,000 votes. Upon
any liquidation, no distribution shall be made to the holders of shares of stock
ranking junior to the Series A Preferred, 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. No Series A Preferred Stock was issued
during the years ended October 31, 2002, 2001 and 2000, respectively.
Common Stock
- ------------
Common Stock Issuances During the Year Ended October 31, 2002:
- -------------------------------------------------------------
In February 2002, the Company issued an aggregate of 1,261,946 shares of its
common stock to seven individuals who purchased common stock of the Company in a
private placement completed in March 2001 and contended that they were entitled
to receive these additional shares in connection with their initial purchase
agreements. The parties reached an amicable resolution of the matter and the
Company received a full and complete release from each investor.
In February 2002, the Company issued a stock award of 500,000 shares of common
stock to an executive officer in consideration of his services to the Company.
The stock award was granted pursuant to the Company's 2000 Plan. The executive
officer purchased the shares for $.001 per share. The value assigned to the
stock award was $225,000 and was charged to operations during the year ended
October 31, 2002.
F-27
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Common Stock Issuances During the Year Ended October 31, 2002: (Continued)
- -------------------------------------------------------------
In February 2002, the Company issued 485,000 shares of restricted common stock
to two employees in consideration of their services to the Company. The value
assigned to the common stock totalled $178,238 and was charged to operations for
the year ended October 31, 2002.
During October 2002, the Company issued 50,000 shares of common stock, valued at
$29,500, for deferred salary due to an employee.
During the year ended October 31, 2002, the Company sold 6,448,675 shares of
common stock to investors for cash proceeds of $2,120,925, as indicated below.
Such sales were sold in private transactions in reliance on various exemptions
from the registration requirements of the Securities Act.
- - During the quarter ended January 31, 2002, the Company sold 1,445,015 shares
of common stock for $409,501.
- - During the quarter ended April 30, 2002, the Company sold 4,123,989 shares of
common stock for $1,275,224.
- - During the quarter ended July 31, 2002, the Company sold 284,671 shares of
common stock for $190,200.
- - During the quarter ended October 31, 2002, the Company sold 595,000 shares of
common stock for $246,000.
During the quarter ended January 31, 2002, the Company issued 950,000 shares of
its common stock as consideration for consulting services performed by four
consultants. Shares issued under these arrangements were valued at $494,898,
which was all charged to operations during the year ended October 31, 2002.
During the quarter ended April 30, 2002, the Company issued 306,250 shares of
its common stock as consideration for consulting services performed by two
consultants. Shares issued under these arrangements were valued at $131,500,
which was all charged to operations during the year ended October 31, 2002.
During the quarter ended July 31, 2002, the Company issued 359,500 shares of its
common stock as consideration for consulting services performed by two
consultants at prices ranging from $.95 to $1.24 per share, totaling $344,280.
During the quarter ended October 31, 2002, the Company issued 351,562 shares of
its common stock as consideration for consulting services performed by two
consultants at prices from $.45 to $.64 per share, totaling $188,203.
During March 2002, the Company issued 736,008 shares of its common stock due to
a cashless exercise of warrants to purchase 1,000,000 shares of common stock.
During the year ended October 31, 2002, warrants to purchase 2,912,000 shares of
common stock were exercised at $.25 per share, resulting in proceeds totaling
$728,000.
During the year ended October 31, 2002, principal and accrued interest of
several convertible promissory notes, totaling $2,183,625, was converted into
4,497,967 shares of the Company's common stock (Note 8).
During April 2002, the Company issued 624,480 shares of common stock, valued at
$750,000, in connection with its technology license agreement with ANI (Note 6).
F-28
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Common Stock Issuances During the Year Ended October 31, 2001:
- -------------------------------------------------------------
- - Private Placement:
On November 17, 2000, and as amended on January 22, 2001, the Company entered
into a private placement agreement with various investors to sell $5,000,000 of
the Company's common stock in several tranches at a purchase price equal to 87%
of the average market price of the Company's common stock over the five days
preceding the closing of each drawdown.
The Company can sell stock to the investors in five-day intervals not to exceed
$500,000 per sale. The investor may refuse to purchase the stock in the event
the average purchase price is below $2.00 per share, or if the trading volume is
below a certain number of shares within the period, or if the Company sells
capital stock in excess of $5,000,000.
The Company may not apply any portion of the drawdowns towards payment of any
costs related to its production of the Company's pending motion picture project.
In addition, the investors received warrants to purchase 4,000,000 shares of
common stock to be issued in two series (3,000,000 Series A warrants and
1,000,000 Series B warrants). Each Series A warrant can be exercised at a price
per share equal to the lesser of $6.00 or 50% of the average of the closing
sales price of the Company's common stock over the five consecutive trading days
immediately preceding the date of the exercise of the warrants. Each Series B
warrant can be exercised at a price per share of $6.00. The Series B warrants
have a cashless exercise provision. Both the Series A and Series B warrants
expire on November 17, 2003.
For the years ended October 31, 2001 and 2000, the Company has sold 1,686,107
and 77,248 shares of its common stock, respectively, under the above agreement
and received proceeds of $3,515,454 and $415,000, respectively. As of October
31, 2001, this private placement was terminated. The Company does not expect any
future proceeds from this private placement.
- - Other:
During the year ended October 31, 2001, the Company issued 1,212,254 shares of
restricted common stock to investors for cash proceeds of $1,073,475, as
indicated below.
- - During December 2000, the Company sold 219,904 shares of common stock for
$600,000.
- - During January 2001, the Company sold 21,000 shares of common stock for
$105,000.
- - In August of 2001, the Company issued 221,966 shares of common stock for
$166,475.
- - In October of 2001, the Company issued 749,384 shares of common stock for
$205,500. The Company received $202,000 in October of 2001 and the remaining
$3,500 was recorded as a subscription receivable and collected subsequent to
October 31, 2001.
F-29
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Common Stock Issuances During the Year Ended October 31, 2001: (Continued)
- -------------------------------------------------------------
In February of 2001, the Company issued 250,000 shares of common stock valued at
$1,000,000 pursuant to a litigation settlement agreement with Astounding.com,
Inc. and Jack Robinson. This settlement has been recorded during the three
months ended January 31, 2001.
During January 2001, the Company issued 30,600 shares of common stock with
15,300 attached warrants for $85,680. The attached warrants have an exercise
price of $5.10 per share and expire in January 2004.
During January 2001, the Company issued 174,714 shares of common stock with
87,357 attached warrants for $489,199. The warrants have an exercise price of
$4.02 per share and expire in January 2004.
In April of 2001, the Company cancelled 2,980 shares for which the Company was
to receive $30,001. The shares issued were recorded by the Company but never
issued to the investor.
During March and April 2001, the Company issued 104,571 shares of common stock
with 52,286 attached warrants for total proceeds of $292,800. The warrants have
an exercise price of $5.10 per share and expire in 3 years from the date of
their respective issuances.
In May of 2001, the Company issued 500,000 shares to its Board of Directors'
Vice Chairperson for past services, which were valued at $1.89 per share, or
$949,200, and all of which was charged to operations during the year ended
October 31, 2001.
During the quarter ended July 31, 2001, the Company issued 50,960 shares of
common stock between $2.90 and $3.90 per share for consulting services, valued
at $171,744 and all of which was charged to operations during the year ended
October 31, 2001.
During September and October of 2001, the Company issued to various consultants
1,175,000 shares of common stock for consulting services valued at $559,250 and
all of which was charged to operations during the year ended October 31, 2001.
Common Stock Issuances During the Year Ended October 31,2000:
- ------------------------------------------------------------
During the year ended October 31, 2000, the Company issued 805,994 shares of
restricted common stock to investors for cash proceeds of $2,734,388, as
indicated below. Such sales were sold in private transactions in reliance on
various exemptions from the registration requirements of the Securities Act.
- - During the quarter ended January 31, 2000, the Company sold 177,463 shares of
common stock for $211,909.
- - During the quarter ended April 30, 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.
F-30
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Common Stock Issuances During the Year Ended October 31,2000: (Continued)
- ------------------------------------------------------------
- - During the quarter ended October 31, 2000, the Company sold 35,000 shares of
common stock for $140,000.
During the quarter 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 quarter 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.
In connection with the acquisition of New Wheel, the Company entered into an
agreement with lenders to provide loans of up to $1.5 million. As consideration
for these loans and other services under the agreement, in April of 2000 the
Company issued 1,500,000 shares of its common stock to the lenders valued at
$3,000,000. The Company accounted for the $3,000,000 as unearned financing costs
reducing stockholders' equity as of April 30, 2000. During the quarter ended
July 31, 2000, the Company began to draw money down from the credit facilities
and accordingly, the Company at such time began to amortize the unearned
financing costs over the three-year period ended June of 2003. Amortization of
the above financing costs for the years ended October 31, 2002, 2001 and 2000
was $537,380, $2,045,953 and $416,667, respectively.
During the quarter ended April 2000, the Company issued 1,161,065 shares of
common stock between $1.20 and $12.00 for consulting and professional services
totalling $1,814,729.
During the quarter ended July 31, 2000, the Company issued 109,000 shares of
common stock between $3.00 and $7.88 for consulting and professional services
totalling $619,650.
On June 12, 2000, 68,750 warrants were exercised at $2.40 per share totalling
$165,000.
During the quarter ended October 31, 2000, the Company issued 84,084 shares of
common stock between $.25 and $12.50 for consulting services, totalling $28,122.
On October 31, 2000, the Company issued 77,248 shares of common stock between
$5.00 and $5.50 per share pursuant to the Company's November 17, 2000 private
placement agreement.
F-31
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans
- ------------------
- - Stock Options
During 2000, the Board of Directors and the stockholders of the Company approved
the 2000 Omnibus Securities Plan (the "2000 Plan"), which provides for the
granting of incentive and nonstatutory options and restricted stock for up to
2,500,000 shares of common stock to officers, employees, directors and
consultants of the Company.
During August of 2001, the Board of Directors of the Company approved the 2001
Stock Incentive Plan (the "2001 Plan" and together with the 2000 Plan, the
"Plans"), which provides for the granting of incentive and non-statutory
options, restricted stock, dividend equivalent rights and stock appreciation
rights for up to 2,500,000 shares of common stock to officers, employees,
directors and consultants of the Company. The Stockholders of the Company
ratified the 2001 Plan in July 2002.
On February 25, 2002, the Company granted non-qualified stock options under its
2000 Plan to purchase 862,500 shares of common stock to employees and employee
directors of the Company at an exercise price of $.42 per share. The options
vest in four equal quarterly installments starting April 30, 2002. All options
expire on February 25, 2012. During the year ended October 31, 2002, 2,500
options were cancelled.
On February 25, 2002, the Company granted two directors options under its 2000
Plan to purchase 400,000 shares of its common stock at an exercise price of $.42
per share. The options vest in four equal quarterly installments starting April
30, 2002. These options also expire on February 25, 2012.
On February 25, 2002, the Company granted an advisory board member options under
the Company's 2000 Omnibus Securities Plan to purchase 40,000 shares of its
common stock at an exercise price of $.42 per share. The options vest
immediately and expire ten years from the grant date. The fair value of stock
options estimated on the date of grant using the Black-Scholes option pricing
model was $.30 per share, or $12,000.
On July 1, 2002, the Company granted its Chief Marketing Officer non-qualified
stock options under its 2000 Plan to purchase 405,000 shares of common stock at
an exercise price of $1.09 per share. Options covering 105,000 shares are
exercisable immediately and the remaining vest in eight equal quarterly
installments starting May 31, 2003. These options expire on July 1, 2012.
- - Options Outside of the Plan:
On February 11, 2000, the Company granted to three directors and four employees
options to acquire 1,028,750 shares of its common stock. The exercise price for
the options is $4.00 per share. The options vest in four equal annual
installments commencing February 11, 2000 and expire on 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, 140,000 of which
have vested and 70,000 of which were cancelled.
F-32
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
- ------------------
- - Options Outside of the Plan: (Continued)
On October 27, 2000, the Company granted to a director options to purchase
275,000 shares of its common stock. The exercise price for the options is $4.00
per share. The options vested on the grant date.
On October 27, 2000, the Company granted to an employee options to purchase up
to an aggregate of 50,000 shares of its common stock. The options vest and are
fully exercisable upon achievement of a technological development milestone by
the Company. The exercise price for the options is $5.50 per share and were to
expire on October 27, 2005. These options expired during the year ended October
31, 2002
On November 30, 2000, the Company granted to two employees options to purchase
225,000 shares of its common stock at $4.00 per share. The options vested on the
grant date and expire in 10 years from the grant date.
On May 15, 2001, the Company granted to a member of the Company's advisory board
options to purchase 50,000 shares of common stock at $3.92 per share. The
options vested on the grant date and expire on May 15, 2011.
On June 7, 2001, the Company granted options to purchase 50,000 shares of its
common stock to an advisory board member. The exercise price is $2.30 per share,
with 25,000 options vesting and exercisable immediately and the remaining 25,000
vesting and exercisable equally on the anniversary date over the next three
years. These options expire on June 7, 2011.
On August 3, 2001, the Company granted options to purchase 50,000 shares of its
common stock to an advisory board member. The exercise price is $1.07 per share,
with 25,000 vesting and exercisable immediately and the remaining 25,000 vesting
and exercisable equally on the anniversary date over the next three years. These
options expire on August 3, 2011.
On February 25, 2002, the Company granted its then Chief Executive Officer
options outside the Company's stock option plans to purchase 500,000 shares of
its common stock at $.39. The options vest in four equal quarterly installments
starting April 30, 2002. These options expire on February 25, 2012.
On February 22, 2002, the Company granted non-qualified stock options to
purchase 250,000 shares of common stock to a consultant at an exercise price of
$.40 per share. The options vest in five equal quarterly installments starting
February 22, 2002. These options expire on February 22, 2012. The fair value of
stock options estimated on the date of grant using the Black-Scholes option
pricing model was $.32, or $80,000. On September 11, 2002, the consulting
agreement was cancelled and the Company cancelled 50,000 of the above options.
On March 22, 2002, the Company granted outside the Company's stock option plans
to a director and employee who became its Chief Executive Officer on June 1,
2002, options to purchase 1,500,000 shares of its common stock at $1.02. The
options vest in four equal quarterly installments starting June 1, 2002. These
options were to expire on March 22, 2012. During December 2002, the above
Officer terminated his employment with the Company and forfeited his 1,500,000
options.
F-33
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
- ------------------
- - Options Outside of the Plan: (Continued)
On March 22, 2002, the Company granted its Chief Executive Officer on that date
options outside the Company's stock option plans to purchase 100,000 shares of
its common stock at $1.02. The options vest immediately and expire on March 22,
2012.
On March 22, 2002, the Company granted two consultants options outside the
Company's stock option plans to purchase 75,000 shares of its common stock at
$1.02. The options vest immediately and expire on March 22, 2012. The fair value
of stock options estimated on the date of grant using the Black-Scholes option
pricing model was $1.16, or $87,000.
F-34
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
- ------------------
A summary of the Company's stock option activity and related information
follows:
Weighted Weighted
Under the Plans Average Outside the Plans Average
Stock Options Exercise Price Stock Options Exercise Price
-------------- -------------- ---------------- --------------
Balance at October 31, 1999 - $ - - $ -
Options granted - 11/01-10/31/00:
In the 2000 plan - - - -
Options granted - 11/01-10/31/00:
Outside the option plan - - 1,563,750 4.10
----------- ------ ----------- -------
Outstanding - October 31, 2000 - - 1,563,750 4.10
Options granted - 11/01 - 10/31/01:
In the 2000 plan 516,000 3.92 - -
In the 2001 plan 750,000 .27 - -
Options granted - 11/01 - 10/31/01:
Outside the option plan - - 375,000 3.37
Options expired/cancelled:
In the 2000 plan (3,750) 3.92 - -
Options exercised in the 2001 plan (750,000) .27 - -
----------- ------ ----------- -------
Outstanding - October 31, 2001 512,250 $3.92 1,938,750 $3.96
Options granted - 11/01 - 10/31/02:
In the plans 1,707,500 .58 - -
Options granted - 11/01 - 10/31/02:
Outside the option plan - - 2,425,000 .83
Options expired/cancelled:
In the plans (51,000) 3.74 - -
Outside the plans - - (171,250) 3.55
Options exercised in the plans - - - -
----------- ------ ----------- -------
Outstanding - October 31, 2002 2,168,750 $1.29 4,192,500 $2.16
=========== ====== =========== =======
Exercisable at October 31:
2002 1,248,125 $1.20 2,339,792 $2.78
The exercise price for options outstanding as of October 31, 2002 ranged from
$.39 to $4.40.
At October 31, 2002, 331,250 options are available under the 2000 Plan and -0-
options are available under the 2001 Plan, respectively.
F-35
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
- ------------------
The weighted average fair value at date of grant for options granted during 2002
and 2001 was $.72 and $1.82 per option, respectively. The fair value of options
at date of grant was estimated using the Black-Scholes option pricing model
utilizing the following assumptions:
2002 2001 2000
-------------- --------------- --------------
Risk-free interest rates 5.00% to 5.50% 5.00% to 5.50% 5.50%
Expected option life in years 5 5 3
Expected stock price volatility 51.65% to 53.89% 47.25% to 96.25% 33.00%
Expected dividend yield 0% 0% 0%
Had the Company elected to recognize compensation cost based on the fair value
of the options at the date of grant, as prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", net
loss in 2002, 2001 and 2000 would have been $12,093,673, $13,838,750 and
$16,249,000, or $.24, $.51 and $ .75 per share, respectively
Warrants Granted
- ----------------
On November 5, 2001, the Company granted two companies warrants to purchase
200,000 shares of its common stock at an exercise price of $.51. The warrants
vested immediately and expire on November 5, 2005. The fair value of stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model is $.33 per share, or $66,000.
On February 11, 2002, the Company granted a company warrants to purchase 300,000
shares of its common stock at an exercise price ranging from $.75 to $2.25. The
fair value of stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $4,500.
On July 30, 2002, the Company granted a consulting company warrants to purchase
1,000,000 shares of its common stock at an exercise price of $.75. These
warrants replaced warrants covering 1,000,000 shares of common stock issued to
the consulting company in May 2001 that had exercise prices of $2.50 (as to
500,000 shares), $5.00 (as to 250,000 shares) and $10.00 (as to 250,000 shares).
The fair value of stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $.47 per share, or $467,370.
F-36
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Warrants
- --------
At October 31, 2002, the Company had outstanding warrants to purchase shares of
common stock as follows:
Number of Exercise Expiration
Grant Date Shares Price Date
----------------- --------- ---------- -----------------
June 7, 2000 50,000 $ 7.00 June 7, 2003
June 7, 2000 50,000 8.50 June 7, 2003
June 7, 2000 50,000 10.00 June 7, 2003
June 7, 2000 50,000 11.50 June 7, 2003
November 17, 2000 1,000,000 6.00 November 17, 2003
November 17, 2000 88,000 Lesser of $6.00 November 17, 2003
or 50% of market
($.45 at 10/31/02)
March 12, 2001 67,586 5.10 March 12, 2004
March 12, 2001 87,357 4.02 March 12, 2004
June 14, 2001 50,000 2.50 June 14, 2006
June 14, 2001 25,000 5.00 June 14, 2006
June 14, 2001 25,000 10.00 June 14, 2006
November 5, 2001 200,000 .51 November 5, 2005
February 11, 2002 50,000 .75 February 11, 2004
February 11, 2002 50,000 1.25 February 11, 2004
February 11, 2002 100,000 1.75 February 11, 2004
February 11, 2002 100,000 2.25 February 11, 2004
July 30, 2002 1,000,000 .75 May 30, 2007
--------- ------
3,042,943 $0.20-$11.50 June 7, 2003 - May 30, 2007
========= ============
Exercisable at
October 31, 2002 3,042,943
=========
Warrants Exercised
- ------------------
During the year ended October 31, 2002, warrants to purchase 2,912,000 shares of
common stock were exercised at $.25 per share, resulting in proceeds totaling
$728,000.
During March 2002, warrants to purchase 1,000,000 shares of common stock were
exercised on a cashless basis, for which the Company issued 736,008 shares of
common stock.
F-37
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Net Loss Per Share
- ------------------
Securities that could potentially dilute basic earnings per share ("EPS"), which
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 3,042,943
Options to purchase common stock 6,361,250
Convertible notes payable and accrued interest 2,411,921
Series B Preferred stock 7,094,000
----------
Total as of October 31, 2002 18,910,114
==========
Substantial issuances after October 31, 2002
through January 23, 2003:
Common stock issued in connection with
consulting agreements 300,000
==========
Convertible notes payable and accrued interest 475,733
==========
Sale of common stock for cash 4,398,996
==========
Common stock issued for deferred salaries
and for past services 160,585
==========
NOTE 13 - INCOME TAXES
At October 31, 2002, the Company had approximately $37,726,000 of net operating
loss carryforwards for income tax purposes which expire as follows:
Year Net Operating Losses
---- --------------------
2011 $ 1,583,000
2012 4,714,000
2018 4,472,000
2019 1,698,000
2020 4,759,000
2021 9,503,000
2022 10,997,000
-----------
$37,726,000
===========
F-38
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES (Continued)
At October 31, 2002 and 2001, the Company has a deferred tax asset of
approximately $18,062,000 and $14,822,000, respectively, representing the
benefits of its net operating loss and certain expenses not currently deductible
for tax purposes, principally related to the granting of stock options and
warrants and the difference in tax basis of certain intangible assets. The
Company's deferred tax asset has been fully reserved by a valuation allowance
since realization of its benefit is uncertain. The difference between the
Federal statutory tax rate of 34% and the Company's effective Federal tax rate
of -0-% is due to the increase in the valuation allowance of $3,787,000 (2002),
$4,204,000 (2001) and $4,642,000 (2000). The Company's ability to utilize its
carryforwards may be subject to any annual limitation in future periods,
pursuant to Section 382 of the Internal Revenue Code of 1986, as amended.
NOTE 14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Consulting Agreement
- --------------------
On February 11, 2002, the Company entered into a one-year consulting agreement
for financial communications services, pursuant to which the Company agreed to
pay the consultant $10,000 in cash per month. The consulting agreement provides
that the Company may terminate the consulting services at any time following 90
consecutive days of representation by the consultant. Pursuant to the agreement,
the Company granted the consultant warrants to purchase 300,000 shares of its
common stock at exercise prices ranging from $.75 to $2.25. All of the warrants
are exercisable immediately, hold piggy-back registration rights and expire two
years from the grant date. The fair value of the warrants is estimated on the
date of grant using the Black-Scholes option pricing model is $4,500.
On March 22, 2002, the Company entered into a one-year consulting agreement with
an individual for advisory services relating to the Company's technology for
transmitting high speed data over extended ranges of copper telephone wire. The
Company agrees to pay the consultant $15,000 per month and options to purchase
50,000 shares of its common stock at an exercise price of $1.02. All of the
options are exercisable immediately and expire ten years from the grant date.
The fair value of stock options estimated on the date of grant using the
Black-Scholes option pricing model is $1.16, or $58,000.
On July 17, 2002, the Company entered into a one-year consulting agreement with
an individual for consulting, advisory and related services. The Company agreed
to pay the consultant a one-time payment of $250,000 in the event the Company
receives gross revenue in the amount of at least $2,250,000 from the
distribution of the Company's motion picture.
On July 30, 2002, the Company entered into a five-month consulting agreement
with a consulting company for consulting and advisory services in connection
with strategic business planning. The Company agreed to issue 350,000 restricted
shares of the Company's common stock and warrants to purchase an aggregate of
1,000,000 shares of the Company's common stock at an exercise price of $.75 per
share. All of the warrants are exercisable immediately and expire five years
from the grant date. The fair value of warrants estimated on the date of grant
using the Black-Scholes option pricing model is $467,370.
F-39
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Employment Agreements
- ---------------------
On February 25, 2002, the Company entered into a one year employment agreement
with its Vice President and Secretary. The agreement provides for the Company to
pay a base salary of $13,383 per month. The employee may receive an annual bonus
to be determined at the sole discretion of the Board of Directors.
On March 22, 2002, the Company entered into a new three-year employment
agreement with its Chief Executive Officer at the time, Ray Willenberg, Jr.
Pursuant to the agreement, Mr. Willenberg continued to serve as the Company's
Chief Executive Officer until June 1, 2002, at which time Mr. Willenberg stepped
down as CEO and became an Executive Vice President of the Company. The
employment agreement provides for a base salary of $14,583 per month and options
to purchase 100,000 shares of common stock at $1.02 per share. All options are
exercisable immediately and expire ten years from the grant date. In addition,
the employment agreement provides for a bonus based on monies raised by the
Company from debt or equity offerings.
On March 22, 2002, the Company entered into a three-year employment agreement
with its then Chief Executive Officer, Thomas Cooper. Pursuant to the agreement,
Mr. Cooper worked part-time until June 1, 2002, at which time he assumed the
role of Chief Executive Officer. The Company agreed to pay a base salary of
$10,417 per month prior to June 1, 2002 and $20,833 per month after June 1,
2002. In addition, Mr. Cooper may receive an annual bonus based on his
performance as determined at the sole discretion of the Board of Directors.
Pursuant to the terms of the agreement, Mr. Cooper was issued options to
purchase 1,500,000 shares of the Company's common stock at $1.02 per share. The
options vest in twelve equal quarterly installments starting June 1, 2002. These
options were to expire on March 22, 2012 but were forfeited subsequent to
October 31, 2002 when Mr. Cooper terminated his employment with the Company.
On July 1, 2002, the Company entered into a three-year employment agreement with
its then Chief Marketing Officer, Brad Ketch. Brad Ketch subsequently became the
Company's Chief Executive Officer and entered into a new employment agreement.
Pursuant to the agreement, the Company will pay Mr. Ketch a base salary of
$15,000 per month and an annual bonus based upon his performance, as determined
at the sole discretion of the Board of Directors. In addition, the employment
agreement provides non-qualified stock options to purchase 405,000 shares of
common stock at $1.09 per share. Options with respect to 105,000 shares are
exercisable immediately and the remaining vest in eight equal quarterly
installments, starting May 31, 2003. These options expire on July 1, 2012.
F-40
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Leases
- ------
On January 3, 2000, the Company entered into an operating lease for office space
in San Diego, California. The lease commenced on February 1, 2000 and expires in
January 2005. The lease provides for a minimum annual rental of approximately
$54,000, with a 3% annual increase each year, starting on February 1, 2001 and
each year thereafter.
On May 4, 2001, the Company terminated an operating lease for office space in
Livermore, California, which commenced on March 1, 2000. Meanwhile, the Company
entered into an operating lease for office space in Pleasanton, California. The
lease commenced on June 1, 2001 and expires on May 31, 2004. The lease provides
for a minimum annual rental of approximately $120,000 for the first year and
$156,000 the following years. During August 2001, the Company reduced its rental
space and amended its lease agreement in Pleasanton, along with other proactive
measures to re-organize its technology development effects, and is currently in
negotiation to sublease a portion of this space. The amended lease provides for
a minimum annual rental at approximately $43,000 for the first year, $56,000 for
the second year and $69,240 in the last year.
The Company's future minimum lease payments are as follows:
Years Ending October 31:
-----------------------
2003 $ 119,448
2004 106,790
2005 5,065
----------
$ 231,303
==========
Rent expense for the years ended October 31, 2002, 2001 and 2000 was $115,500,
$136,000 and $41,000, respectively.
Concentration of Credit Risk
- ----------------------------
The Company maintains cash balances in two financial institutions. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000 per
institution. From time to time, the Company's balances may exceed these limits.
At October 31, 2002 and 2001, uninsured cash balances were approximately
$212,000 and $227,000, respectively. The Company believes it is not exposed to
any significant credit risk for cash.
F-41
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Legal Proceedings and Settlements
- --------------------------------
On February 4, 2002, a lawsuit was filed against the Company by Creditors
Adjustment Bureau, Inc., a California corporation, who was allegedly assigned
rights to any judgement collected on amounts allegedly owed to Arter & Hadden,
LLP, the Company's former legal counsel. The plaintiff seeks damages in the
amount of $110,560, plus 10% interest, costs of the suit and reasonable
attorney's fees. In October of 2002, the Company reached an agreement to settle
the above lawsuit. The Company agreed to pay Creditors Adjustment Bureau, Inc.
an aggregate of $80,000 in eight monthly installments beginning in October 2002,
or an aggregate of $70,000, if the Company pays the entire amount due on or
before December 31, 2002. The Company has paid $37,500 as of October 31, 2002
and the remaining balance has been accrued as of October 31, 2002.
On June 28, 2002, the Company entered into a settlement agreement and mutual
releases in certain litigation filed by the former owners of New Wheel and
former officers of the Company ("Blevins and Shepperd"). Under the terms of the
settlement agreement, Blevins and Shepperd agreed to return to the Company 2.2
million shares of the Company's common stock previously issued to them in
connection with the acquisition of New Wheel (Note 3). The return of the 2.2
million common shares is conditioned on the Company, or its assignee, purchasing
from Blevins and Shepperd a total of 500,000 shares of the Company's common
stock for $375,000, payable in four equal installments of $93,750, due on August
1, 2002, September 15, 2002, November 1, 2002 and December 15, 2002.
The Company assigned to a third party all of its rights to purchase the 500,000
shares of common stock. As of October 31, 2002, $187,500 was paid to Blevins and
Shepperd and the balance of $187,500 was subsequently paid during December of
2002. Accordingly, in December of 2002, the 2.2 million shares of common stock
were returned to the Company and were subsequently cancelled. The Company
intends to account for this settlement agreement during the quarter ended
January 31, 2003.
On August 2, 2002, a lawsuit was filed in California Superior Court in Santa
Clara County against New Visual Corporation and NV Technology, by Brad Lundahl
(d/b/a Lundahl Engineering) alleging that the Company breached a contract for
consulting services it entered into with Mr. Lundahl in July 2000, by failing to
pay Mr. Lundahl for his services as provided under the agreement. The lawsuit
sought to compel arbitration based upon a provision mandating arbitration
contained in the contract in question. The Company has agreed to arbitrate and
intends to vigorously dispute whether any amount is due to Mr. Lundahl. The
amount in controversy is not stipulated in the lawsuit, but is believed to be
approximately $45,000. The Company does not believe that the resolution of this
matter will have a material adverse effect on the Company's financial condition
or results of operations.
F-42
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
For the Year Ended October 31, 2002:
Telecommunication Entertainment
Business Business Unallocable Totals
----------------- ------------- ----------- -----------
Net Sales $ - $ - $ - $ -
Operating Loss $(1,869,946) $ - $(5,443,526) $(7,313,472)
Depreciation $ 14,913 $ 14,792 $ 47,555 $ 77,260
Total Identifiable Assets $ 5,783,427 $ 2,226,787 $ 322,088 $ 8,332,302
For the Year Ended October 31, 2001:
- -----------------------------------
Telecommunication Entertainment
Business Business Unallocable Totals
----------------- ------------- ----------- -----------
Net Sales $ - $ - $ - $ -
Operating Loss $ (846,902) $ - $ (8,645,682) $ (9,492,584)
Depreciation $ 14,007 $ 16,893 $ 87,793 $ 118,693
Total Identifiable Assets $ 57,723 $ 2,069,457 $ 664,117 $ 2,791,297
For the Year Ended October 31, 2000:
- -----------------------------------
Telecommunication Entertainment
Business Business Unallocable Totals
----------------- ------------- ----------- -----------
Net Sales $ - $ 12,200 $ - $ 12,200
Operating Loss $(8,494,636) $ - $ (3,795,033) $(12,289,669)
Depreciation $ 7,699 $ 74,641 $ 14,832 $ 97,172
Total Identifiable Assets $ 67,521 $ 865,659 $ 499,482 $ 1,432,662
F-43
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
Common Stock
- ------------
As of January 21, 2003, the Company has received approximately $769,386 for the
issuance of 4,398,996 shares of common stock to investors.
The Company has subsequently issued 325,000 shares of its common stock in
connection with various consulting agreements and services.
On January 21, 2003 the Company issued 135,585 shares of common stock to various
individuals of the Company in satisfaction of $85,000 in compensation.
Convertible Promissory Notes
- ----------------------------
During November 2002, the Company entered into two convertible promissory note
agreements with three individuals, totaling $85,000. The Company agreed to pay
the principal and an amount equal to 50% of the principal sum, if the Company
reaches certain milestone from the distribution of its motion picture, which is
currently in production. The notes may be converted at any time, in whole or in
part, into that number of fully paid and non-assessable shares of common stock
at a conversion price of $.39.
During November through December 2002, several convertible promissory
noteholders converted principal and unpaid interest on several convertible
promissory notes, totaling $198,000, of which $99,000 represented accrued
interest, into 475,733 shares of the Company's common stock.
Consulting Agreements
- ---------------------
In January 2003, the Company entered into a one-year consulting agreement for
financial consulting services, pursuant to which the Company agreed to issue
1,000,000 shares of the Company's common stock to a principal of the consultant.
The consulting agreement provides that either party may terminate the consulting
services at any time upon thirty days' written notice to the other party.
In January 2003, the Company entered into a one-year consulting agreement for
financial consulting services, pursuant to which the Company agreed to issue to
each of two principals of the consultant 1,000,000 shares of the Company's
common stock. The consulting agreement provides that either party may terminate
the consulting services at any time upon thirty days' written notice to the
other party.
New Employment Agreement
- ------------------------
On December 2, 2002, the Company entered into a new three-year employment
agreement with its Chief Marketing Officer replacing the executive's former
employment agreement. Under the terms of the new agreement, the executive will
become the Company's President and Chief Executive Officer and receive a base
salary of $20,833 per month. In addition, the employment agreement provides that
the executive will be entitled to receive an annual bonus at the discretion of
the Board of Directors of the Company. Pursuant to the terms of the agreement,
the executive was issued options to purchase 1,500,000 shares of the Company's
common stock at $.64 per share. The options vest in twelve equal, quarterly
installments starting March 1, 2003. The options expire on December 2, 2012.
F-44
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS (Continued)
Legal Disputes
- --------------
- - Gary Tomsic Dispute
--------------------
In August 1998, the Company authorized the issuance to Gary Tomsic of an option
to purchase 130,000 shares of the Company's common stock in satisfaction of
monies owed to Tomsic for services rendered to the Company. Tomsic exercised the
option in 1999 and 55,000 shares were delivered. A dispute arose between the
parties concerning their respective obligations, but did not result in
litigation. In December 2002, the Company and Tomsic entered into a settlement
agreement and mutual release. In accordance with the settlement agreement, the
Company paid $15,000 to Tomsic and issued to him 51,562 shares of common stock.
As of October 31, 2002, the Company has accrued the $15,000 and the related
shares of common stock.
- - Douglas Furth Dispute
---------------------
In September 2002, the Company entered into a consulting agreement with an
individual, pursuant to which, among other things, the individual agreed to
provide certain consulting services and the Company agreed to pay for these
services by, among other things, issuing 200,000 shares of common stock. A
dispute arose between the parties concerning their respective obligations, but
did not result in litigation. In December 2002, the Company and the individual
entered into a settlement agreement and mutual release. In accordance with the
settlement agreement, the Company has agreed to issue 150,000 shares of common
stock in three equal installments due on January 15, February 10 and March 10,
2003. The settlement agreement cancelled the consulting agreement and provided
for additional shares to be issued in the event of any failure to perform by the
Company.
f-45
NEW VISUAL CORPORATION AND SUBSIDIARIES
(Formerly New Visual Entertainment, Inc. and Subsidiaries)
(A Development-Stage Company Commencing November 1, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - QUARTERLY RESULTS (UNAUDITED)
Quarter Ended
--------------------------------------------------------------
January 31 April 30 July 31 October 31 Total Year
-------------- -------------- ------------- ------------- ---------------
2002:
- ----
Revenues $ -- $ -- $ -- $ -- $ --
Net loss $ (1,942,000) $ (3,182,000) $ (2,283,000) $ (2,060,000) $ (9,469,000)
Loss per share - basic
and diluted $ (0.06) $ (0.08) $ (0.05) $ (0.04) $ (0.23)
2001:
- -----
Revenues $ -- $ -- $ -- $ -- $ --
Net loss $ (2,155,000) $ (1,232,000) $ (4,654,000) $ (3,835,000) $ (11,876,000)
Loss per share - basic
and diluted (a) $ (.09) $ (.05) $ (.18) $ (.13) $ (.46)
2000:
- -----
Revenues $ -- $ 6,800 $ 900 $ 4,500 $ 12,200
Net loss $ (284,000(a))$ (8,546,000) $ (1,564,000) $ (2,331,000) $ (12,725,000)
Loss per share - basic
and diluted (a) $ (.02) $ (.39) $ (.07) $ (.12) $ (.59)
(a) Per common share amounts for the quarters and full year have been calculated
separately. Accordingly, quarterly amounts do not add to the annual amount
because of differences in the weighted average common shares outstanding during
each period due to the effect of the Company's issuing shares of its common
stock during the year.
Unaudited interim financial information plus all adjustments , which in the
opinion of management, are necessary to a fair statement of the results of the
interim period presented. All adjustments are of a normal recurring nature.
F-46