As filed with the Securities and Exchange Commission on February 9, 2004
Registration No. 333- _____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEW VISUAL CORPORATION
(Name of small business issuer in its charter)
UTAH 95-4545704
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3674
(Primary Standard Industrial
Classification Code Number)
5920 FRIARS ROAD, SUITE 104
SAN DIEGO, CALIFORNIA, 92108
(619) 692-0333
(Address and telephone number of principal executive offices)
BRAD KETCH
NEW VISUAL CORPORATION
5920 FRIARS ROAD
SAN DIEGO, CALIFORNIA 92108
(619) 692-0333
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
G. DAVID GORDON, ESQ. DAVID ABOUDI, ESQ.
7633 E. 63rd PLACE ABOUDI & BROUNSTEIN
SUITE 210 3 GAVISH STREET
TULSA, OKLAHOMA 74133 KFAR SABA, 44641, ISRAEL
918-254-4997 972-9-764-4833
Approximate date of proposed sale to the public: From time to time
after the effective date of the registration statement until such time that all
of the shares of common stock registered hereunder have been sold.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed
maximum Proposed
Title of each offering maximum
class of price aggregate Amount of
securities to Amount to be per offering registration
be registered registered (1) share price fee
--------------------------------------------------------------------------------
Common Stock .......... 44,200,014(2) $0.25 (6) $11,050,004 $1400.04
1,000,000(4) $0.25 (6) $250,000 $126.70
2,033,334(5) $0.25 (6) $508,334 $126.70
----------- ----- ----------- ---------
47,233,348 $11,808,338 $1,653.44
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
Registration Statement also covers such indeterminate number of additional
shares of Common Stock as may be issuable upon conversion of the Convertible
Debentures and exercise of the Warrants and the Other Warrants to prevent
dilution resulting from stock splits, stock dividends or similar transactions.
(2) Represents 150% of (a) up to 13,333,338 shares of Registrant's Common Stock,
par value $0.001 (the "Common Stock"), issuable upon conversion of $2,000,000 in
aggregate principal amount of the Registrant's 7% Convertible Debentures (the
"Convertible Debentures"), at a per share conversion price of $0.15 and (b) up
to 2,800,000 shares of Common Stock issuable upon conversion of the Convertible
Debentures with respect to interest accrued thereon through the maturity date
thereof on the third anniversary of their issuance, and (c) up to 13,333,338
shares of Common Stock issuable upon exercise of warrants ("Warrants") issued in
connection with the Convertible Debentures. The shares registered also include
the shares, if any, issuable to the holders of the Convertible Debentures or the
Warrants as liquidated damages or as a result of adjustments to those debentures
or warrants.
(3) Represents shares of Common Stock held by a certain selling stockholder.
(4) Represents shares of Common Stock issuable upon exercise of certain other
warrants and options ("Other Warrants") held by certain selling stockholders.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon
the average of the high and low sale price of the Common Stock as reported on
the OTC Electronic Bulletin Board on February 6, 2004.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 2004
PROSPECTUS
NEW VISUAL CORPORATION
47,233,348 Shares of Common Stock
This prospectus relates to the sale by the selling stockholders of
47,233,348 shares of our common stock, par value $0.001 (the "Common Stock").
The selling stockholders may sell the shares from time to time at the prevailing
market price or in negotiated transactions.
We will not receive any of the proceeds from the sale of the shares by
the selling stockholders.
Each of the selling stockholders may be deemed to be an "underwriter," as
such term is defined in the Securities Act of 1933.
Our common stock is quoted on the OTC Electronic Bulletin Board under the
trading symbol "NVEI".
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission (the "SEC") nor any state
securities commission has approved or disapproved of these securities or passed
on the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this Prospectus is __________, 2004
PRINCIPAL EXECUTIVE OFFICE:
New Visual Corporation
5920 Friars Road
Suite 104
San Diego, California, 92108
(619) 692-0333
1
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 3
Our Company................................................................ 3
Our History................................................................ 4
The Offering............................................................... 4
Summary Financial Data..................................................... 5
Risk Factors............................................................... 46
Forward-Looking Statements................................................. 12
Use of Proceeds............................................................ 13
Description of the Agreements with the Convertible Debenture Holders....... 13
Dividend Policy............................................................ 16
Price Range of Common Stock ............................................... 16
Management's Discussion and Analysis....................................... 17
Business................................................................... 23
Description of Properties.................................................. 28
Legal Proceedings.......................................................... 28
Management................................................................. 29
Executive Compensation..................................................... 31
Selling Stockholders....................................................... 36
Description of Securities.................................................. 39
Plan of Distribution....................................................... 41
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities............................................................ 43
Interest of Named Expert and Counsel....................................... 45
Legal Matters.............................................................. 45
Experts.................................................................... 45
Where You can find more Information........................................ 45
Index to Financial Statements.............................................. 46
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF ANY
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
2
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK
FACTORS" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS
PROSPECTUS, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
OUR COMPANY
We are developing advanced transmission technology designed to enable
data to be transmitted across copper wire at speeds and over distances that
exceed those offered by existing forms of broadband technologies, such as
digital subscriber lines ("DSL"). Our technology is designed to dramatically
increase the capacity of the copper telephone network, enabling telephone
companies to leverage their existing copper wiring infrastructure and provide
enhanced video, data and voice services over the existing copper
telecommunications infrastructure. The proprietary equipment, components and
related technologies and semiconductor hardware and software products that we
are designing, developing and testing will be referred to throughout this
Prospectus as the "Semiconductor Technologies."
Wire-line carriers around the world are experiencing high demand for new
services from business and other users such as high-speed data transmission,
voice over Internet protocol, broadband Internet access, video conferencing, and
cable company-like video delivery. These services typically yield higher margins
to the telephone companies than do voice services. The provision of these
services, however, is limited by the telephone companies' existing copper based
communication physical infrastructure. Communication networks were originally
designed to handle voice traffic. The infrastructure of existing prior
generation networks consists of copper cabling along which voice communications
are transmitted in the form of electronic signals. While copper cabling is
generally a reliable transmission medium, its ability to transmit large volumes
of data at high speed is limited, and it is prone to electromagnetic
interference from nearby electronic equipment and other sources, which in turn
interfere with the transmission of a signal and degrade signal quality. To
overcome the limitations of the copper cable infrastructure and meet increasing
demand for high capacity and high-speed voice and data transmission,
communication service providers have tended to adopt optical fiber optic
technology in their networks. Fiber optic technology involves the transmission
of data over fiber optic cable via digital pulses of light, which allows for
greater bandwidth over longer distances than copper cable and higher quality
transmissions that are not subject to electromagnetic interference. Telephone
companies, however, find that it is extremely expensive and impractical to
replace the existing copper wire infrastructure with fiber optic technology to
the vast majority of their customers. Accordingly, the existing wiring
infrastructure is being retrofitted to support broadband data transmission and
other services.
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 existing forms of broadband technologies,
including DSL. We are developing layer-one, integrated circuit based solutions
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. We intend to
market our Semiconductor Technologies to leading telecommunications equipment
providers. The Semiconductor Technologies are in the design and development
stage. We conduct the Semiconductor Technologies activities through our wholly
owned subsidiary NV Technology, Inc., a Delaware corporation ("NV Technology").
In April 2000, our wholly owned subsidiary, NV Entertainment, Inc. a
Delaware company ("NV Entertainment") entered into a joint venture production
agreement to produce "STEP INTO LIQUID", a feature length surfing documentary
for theatrical distribution (the "Film"). NV Entertainment is a fifty-percent
owner of Top Secret Productions, LLC, the producer of the Film. The Film opened
in Hawaii, New York and Los Angeles on August 8, 2003 and played in more than
100 theaters across the United States during its 5-month theatrical run. The
estimated cumulative total box office revenues for the film's theatrical run,
generated by widening the release to more theaters, amounted to approximately
$3.7 million. We recognized revenues of $379,980 for the year ended October 31,
2003 as a result of consolidation of the joint venture.
With the completion of the film "Step Into Liquid" and its revenue
generation during the fourth quarter of fiscal 2003 we are no longer
considered a development stage entity. Our Semiconductor Technologies have
generated no revenues to date.
3
OUR OBJECTIVE
Our primary objective is to commercially deploy our Semiconductor
Technologies in specific market targets, focusing on the business user. We
believe business class markets offer the nearest revenue opportunity for
commercial applications of the Semiconductor Technologies. Through NV
Technology, we are currently working to complete the design and development of
our semiconductor chip utilizing our Semiconductor Technologies. We outsource to
independent third parties all significant design, development and testing
activities relating to our Semiconductor Technologies.
For us to be commercially successful, the Semiconductor Technologies must
be incorporated by leading telecommunications equipment and data service
providers into commercially successful product offerings. We believe that the
ultimate decision by telecommunications equipment and data service providers to
use our Semiconductor Technology will also be influenced by developments in the
broadband industry generally, including the performance and acceptance of
alternative broadband access technologies and solutions.
We have a history of operating losses and have incurred net losses in
each fiscal quarter since our inception. Our independent accountants have
included a "going concern" exception in their audit reports on our audited 2003
and 2002 financial statements. The financial statements do not include any
adjustment that might result from the outcome of such uncertainty.
RISK FACTORS
Investing in shares of our Common Stock involves significant risk. You
should consider the information under the caption "Risk Factors" beginning on
page 6 of this Prospectus in deciding whether to purchase the Common Stock
offered under this Prospectus.
OUR HISTORY
We were organized in December 1985 as a Utah corporation. From our
inception through December 1999, we were primarily engaged in the entertainment
field. In November 1999, we began to focus on the development of new content
telecommunications technologies and, pursuant to such plan, in February 2000 we
acquired New Wheel Technology, Inc., a development stage technology company and
the predecessor-in-interest to NV Technology.
Our principal executive offices are located at 5920 Friars Road, Suite
104, San Diego, California, 92108. Our telephone number at that location is
619-692-0333. Our Internet address is WWW.NEWVISUAL.COM. The information
contained in such website is not, and should not be deemed to be, a part of this
prospectus. All references to "we," "us," "our," or similar terms used in this
prospectus refer to New Visual Corporation
THE OFFERING
Securities offered 47,233,348 shares of Common Stock. (1)
Shares outstanding 76,948,886 shares of Common Stock. (2)
Use of Proceeds We will not receive any proceeds from the sale
of the Common Stock by the selling stockholders.
See "USE OF PROCEEDS."
(1) As of February 9, 2004. Includes (i) 150% of (a) 13,333,338 shares of
our Common Stock issuable upon conversion of $2,000,000 in aggregate principal
amount of our three year 7% Convertible Debentures (the "Convertible
Debentures") at a per share conversion price of $0.15, (b) up to 2,800,000
shares of Common Stock issuable upon conversion of the Convertible Debentures
with respect to interest accrued thereon through the maturity date thereof, and
(c) 13,333,338 shares of Common Stock issuable upon exercise of warrants issued
in connection with the Convertible Debentures (the "Warrants") and (ii)
3,033,334 shares of Common Stock issuable upon exercise of certain other
warrants and options held by certain selling stockholders who are not holders of
the Convertible Debentures (the "Other Warrants"). The shares described in
clause (i) above also includes the shares, if any, issuable to the holders of
the Convertible Debentures or Warrants as liquidated damages or as a result of
adjustments to those debentures and warrants. For a description of the agreement
between us and the holders of the Convertible Debentures, see "DESCRIPTION OF
THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
4
(2) As of February 9, 2004. Does not include (a) up to an aggregate of
2,188,750 shares of Common Stock issuable upon exercise of options granted under
our 2001 Stock Incentive Plan, the 2000 Omnibus Securities Plan and the 2003
Consultants Stock Plan, (b) any of the shares described in clauses (i) and (ii)
in footnote (1) above, or (c) 7,135,443 shares issuable upon exercise of certain
outstanding options and warrants held by the selling stockholders and others.
SUMMARY FINANCIAL INFORMATION
This table summarized our operating data and balance sheet data for and
as of the periods indicated. You should read this summary financial data in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and notes
thereto included elsewhere in this Prospectus.
Year Ended October 31,
2003 2002 2001 2000 1999
STATEMENT OF OPERATIONS DATA:
Revenues $ 379,980 $ -- $ -- $ 12,200 $ 129,845
Cost of Sales 192,889 -- -- 21,403 81,159
Selling, general and administrative 4,189,348 6,014,912 4,086,795 2,041,942 811,703
Total operating expenses 4,563,502 7,313,472 9,492,584 12,301,869 2,174,360
Net loss (3,316,500) (9,467,123) (11,875,915) (12,725,316) (2,044,515)
Basic and diluted net loss per share $ (.05) $ (.23) $ (.46) $ (.59) $ (.14)
Weighted average number of common 60,643,489 41,861,295 25,988,990 21,579,916 15,130,000
OTHER FINANCIAL DATA
Net cash used in operations $ (2,283,297) $ (3,985,826) $ (4,280,738) $ (3,556,179) $ (800,178)
Net cash used in investing activities (852,134) (1,198,078) (1,255,301) (388,733) --
Net cash provided by financing activities $ 3,143,640 $ 5,200,679 $ 5,641,607 $ 4,071,274 $ 863,050
BALANCE SHEET DATA AT PERIOD-END
Current Assets $ 324,801 $ 323,259 $ 560,109 $ 247,024 $ 94,294
Property and equipment, net 41,301 64,533 284,896 393,787 102,530
Technology license and capitalized software
Development fee 5,751,000 5,751,000 -- -- --
Film in Distribution 2,142,212 -- -- -- --
Projects under development -- 2,178,831 1,912,650 638,707 32,883
Total assets 8,272,350 8,332,199 2,791,297 1,432,662 335,264
Accounts payable and accrued expenses 1,744,833 2,247,585 1,435,024 446,921 420,699
Redeemable Series B Preferred Stock 3,192,000 -- -- -- --
Total liabilities 7,175,194 4,907,502 2,306,910 1,203,807 420,699
Redeemable Series B Preferred Stock -- 3,192,000 -- -- --
Total shareholders' equity (deficit) $ 1,097,156 $ 232,697 $ 484,387 $ 228,855 $ (85,435)
5
RISKS FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE YOU
PURCHASE ANY OF OUR COMMON STOCK. THESE RISKS AND UNCERTAINTIES ARE NOT THE ONLY
ONES WE FACE. UNKNOWN ADDITIONAL RISKS AND UNCERTAINTIES, OR ONES THAT WE
CURRENTLY CONSIDER IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY
OF THESE RISKS OR UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THIS EVENT YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF
THE SEMICONDUCTOR INDUSTRY AND 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 begun to
emerge from a significant downturn 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 delay or hinder
the commercialization of our Semiconductor Technologies and 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 utilizing
the Semiconductor technologies 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.
WE HAVE A LIMITED OPERATING HISTORY.
We have been engaged in the semiconductor business only since February
2000. We have not yet commercialized the Semiconductor Technologies and
therefore have not generated any revenues from our 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 $4,183,522, $7,313,472 and $9,492,584 for the years
ended October 31, 2003, 2002 and 2001, respectively. As of October 31, 2003, we
had an accumulated deficit of $49,684,887. We expect to continue to incur net
losses for the foreseeable future as we continue to further develop and further
the commercialization of Semiconductor Technologies. We have been funding our
operations through the sale of our securities and expect to continue doing so
for the foreseeable future. Our ability to generate and sustain significant
additional revenues or achieve profitability will depend upon the factors
discussed elsewhere in this "Risk Factors" section, as well as numerous other
factors outside of our control. 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 Semiconductor Technologies. These
expenditures will necessarily precede the realization of substantial revenues
from the commercialization of the Semiconductor Technologies and sales of
products, if any, which may result in future operating losses. 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.
6
WE WILL NEED ADDITIONAL CAPITAL FINANCING IN THE FUTURE.
We have sold $1 million in principal amount of our Convertible Debentures
and upon the effectiveness of the registration statement (the "Registration
Statement") of which this Prospectus is a part, we expect to sell an additional
$1 million in principal amount of such debentures. See "DESCRIPTION OF THE
AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS" We believe that the net
proceeds from the sale of the Convertible Debentures that we have sold will be
sufficient for our needs through April 1, 2004. Proceeds of the additional
Convertible Debentures we expect to sell following the effectiveness of the
Registration Statement will provide sufficient funds to continue our operations
as presently conducted for an additional three months. Beyond that, we will need
to raise additional funds in order to commercialize the Semiconductor
technologies and realize our business plan. Under the terms of the Convertible
Debenture financing, except for certain prospective pre-approved transactions,
we granted to the holders of the Convertible Debentures a right of first refusal
to participate in the purchase of equity securities we propose to sell to third
parties. The existence of these rights may impair our ability to obtain equity
financing from third parties on terms satisfactory to us or at all because
investors may be reluctant to devote the time and expense necessary to negotiate
the terms of a transaction which we may not be able to fully consummate with
them if holders of the Convertible Debentures elect to exercise its rights. In
addition, under the terms of the agreements entered into between us and the
purchasers of the Convertible Debentures, if the Registration Statement is not
declared effective by June 28, 2004, then they are not required to purchase the
$1 million principal amount of Convertible Debentures we anticipate selling to
them following such effectiveness. See "DESCRIPTION OF THE AGREEMENTS WITH THE
CONVERTIBLE DEBENTURE HOLDERS."
In addition, unforeseen contingencies and developments may arise that
will require us to raise additional capital. We may have difficulty obtaining
additional funds as and if needed, and we may have to accept terms that would
adversely affect our stockholders. 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 commercially 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 Semiconductor Technologies, respond to competitive pressures, develop or
take advantage of unanticipated acquisition opportunities.
Our independent accountants have included a "going concern" exception in
their audit reports on our 2003 financial statements. The going concern
exception may make it more difficult for us to raise funds than if we did not
have a "going concern" exception. The financial statements do not include any
adjustment that might result from the outcome of such uncertainty.
OUR SUCCESS IS CONTINGENT UPON THE INCORPORATION OF THE SEMICONDUCTOR
TECHNOLOGIES INTO SUCCESSFUL PRODUCTS OFFERED BY LEADING EQUIPMENT
MANUFACTURERS.
Our Semiconductor Technologies 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 the Semiconductor Technologies into their
equipment. We must further rely on this equipment to be successful. If equipment
that incorporates the Semiconductor Technologies is not accepted in the
marketplace, we may not achieve adequate sales volume, 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 containing
the Semiconductor Technologies 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.
7
BECAUSE WE WILL DEPEND ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST
THE SEMICONDUCTOR TECHNOLOGIES, WE MAY EXPERIENCE DELAYS IN RECEIVING
SEMICONDUCTOR DEVICES.
We do not own or operate a semiconductor fabrication facility. Rather,
semiconductor devices that will contain our Semiconductor Technologies 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 the Semiconductor Technologies or
related products could significantly hinder our ability to deliver future
products to our customers.
WE MAY INCUR SUBSTANTIAL EXPENSES DEVELOPING THE SEMICONDUCTOR
TECHNOLOGIES BEFORE WE EARN ASSOCIATED NET REVENUES AND MAY NOT ULTIMATELY SELL
A LARGE VOLUME OF OUR PRODUCTS.
We are developing the Semiconductor Technologies based on forecasts of
demand and will incur substantial development expenditures prior to generating
associated net revenues. We will receive limited orders for products containing
the Semiconductor Technologies during the period that potential customers test
and evaluate products utilizing the Semiconductor technologies. 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
Semiconductor Technologies typically would not begin until this test and
evaluation period has been completed. As a result, a significant period of time
may lapse between product development and sales efforts and the realization of
revenues from volume ordering by customers of products containing the
Semiconductor Technologies. In addition, achieving a design win with a customer
does not necessarily mean that this customer will order large volumes of
products containing the Semiconductor Technologies. 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 Semiconductor Technologies in the design process of
that customer's products. A customer can choose at any time to discontinue using
our Semiconductor Technologies in that customer's designs or product development
efforts. Even if the Semiconductor Technologies 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.
We outsource to independent third parties all significant design,
development and testing activities relating to our Semiconductor Technologies.
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 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 Semiconductor
Technologies 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.
8
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 THE SEMICONDUCTOR TECHNOLOGIES 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. Certain of 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 the
Semiconductor Technologies, our proposed 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, the
Semiconductor Technologies will compete with products using other broadband
access 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 proposed
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 potential
telecommunications equipment 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.
9
BECAUSE OUR SUCCESS IS DEPENDENT UPON THE BROAD DEPLOYMENT OF DATA
SERVICES BY TELECOMMUNICATIONS SERVICE PROVIDERS, WE MAY NOT BE ABLE TO GENERATE
SUBSTANTIAL REVENUES IF SUCH DEPLOYMENT DOES NOT OCCUR.
Our Semiconductor Technologies will be incorporated in equipment that is
targeted at end-users of data services offered by wire-line telecommunications
carriers. Consequently, the success of the Semiconductor Technologies 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 the Semiconductor Technologies
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 THE SEMICONDUCTOR TECHNOLOGIES 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 expect to
offer frequently contain defects and bugs when they are first introduced or as
new versions are released. If the Semiconductor Technologies 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 potential customers. In order to alleviate these problems, we may have to
invest significant capital and other resources. Although our suppliers, our
potential customers and ourselves, will test the Semiconductor Technologies and
related products 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 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.
WE HAVE NO AGREEMENT RELATING TO REVENUE GENERATING ACTIVITIES.
We presently have no agreement or understanding with any third party as
to commercial exploitation of the Semiconductor Technologies, and no assurance
can be provided that we will be successful in concluding any significant-revenue
generating agreement on terms commercially acceptable to us.
WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL.
We are highly dependent on the principal members of our management and
technology staff. The loss of their services might significant delay or prevent
the achievement of development or strategic objectives. Our success depends on
our ability to certain key employees and to attract additional qualified
employees. We cannot assure you that we will be bale to retain existing
personnel or attract and retain highly qualified employees in the future.
OUR FILM IN DISTRIBUTION MAY NOT PRODUCE THE FINANCIAL RESULTS WE
ANTICIPATE.
Our Film may not produce the financial results we anticipated and
therefore may have an adverse impact on our financial position. Some of the
risks include:
o Cash flow assumptions are based on a revenue stream from the Film
that may not materialize due to lower than anticipate box office
sales or sales of DVD's.
10
o We have contracted with a third party for distribution of the Film
in the United States. We cannot be assured that this distributor
will perform as expected.
o We are contracting with foreign distributors in various countries.
We are receiving guarantee payments before releasing the Film. We
cannot be assured of accurate reporting of foreign box office
sales or that moneys due us from box office sales will ever be
remitted.
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.
SHARES ELIGIBLE FOR PUBLIC SALE
As of February 9, 2004, we had 76,948,866 shares of our Common Stock
issued and outstanding. We are registering up to 44,200,014 shares of our Common
Stock, which will be issued upon the conversion of the Convertible Debenture,
payment of interest as well as upon exercise of the Warrants being issued in
connection with these debentures. Under certain conditions, we can require a
mandatory conversion of the outstanding Convertible Debentures. We are also
registering 3,033,334 shares held by certain other selling stockholders and
shares issuable upon exercise of certain other warrants. See "DESCRIPTION OF THE
AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
Sales of substantial amounts of our Common Stock in the public market,
whether by purchasers in this offering or stockholders holding shares of our
registered Common Stock, or the perception that such sales could occur, may
adversely affect the market price of 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 affected 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 HAVE RELIED ON THE PRIVATE PLACEMENT EXEMPTION TO RAISE SUBSTANTIAL
AMOUNTS OF CAPITAL, AND COULD SUFFER SUBSTANTIAL LOSSES IF THAT EXEMPTION WAS
DETERMINED NOT TO HAVE BEEN PROPERLY RELIED UPON.
We have raised substantial amounts of capital in private placements from
time to time. The securities offered in such private placements were not
registered with the SEC or any state agency in reliance upon exemptions from
such registration requirements. Such exemptions are highly technical in nature
and if we inadvertently failed to comply with the requirements of any of such
exemptive provisions, investors would have the right to rescind their purchase
of our securities or sue for damages. If one or more investors were to
successfully seek such rescission or institute any such suit, we could face
severe financial demands that could materially and adversely affect our
financial position.
11
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.
WE HAVE ESTABLISHED SEVERAL ANTI-TAKEOVER MEASURES WHICH COULD DELAY OR
PREVENT A CHANGE OF OUR CONTROL.
Under the terms of our amended and restated certificate of incorporation,
the board of directors will be authorized, without any need for action by our
stockholders, but subject to any limitations prescribed by law, to issue shares
of our preferred stock in one or more series. Each series may consist of such
number of shares and have the rights, preferences, privileges and restrictions,
such as dividend rights, dividend rates, conversion rights, voting rights, terms
of redemption, redemption prices, liquidation preferences and the right to
increase or decrease the number of shares of any series, as the board of
directors shall determine. The board of directors may issue preferred stock with
voting or conversion rights that may have the effect of delaying, deferring or
preventing a change in control of our company and that could adversely affect
the market price of the Common Stock and the voting and other rights of the
holders of Common Stock. Additionally, our board of directors adopted a
stockholder rights plan and declared a dividend distribution of one right for
each outstanding share of our Common Stock. Each right, when exercisable,
entitles the registered holder to purchase securities at a specified purchase
price, subject to adjustment. The rights plan may have the anti-takeover effect
of causing substantial dilution to the person or group that attempts to acquire
our company on terms not approved by the board of directors. The existence of
the rights plan could limit the price that certain investors might be willing to
pay in the future for shares of our capital stock and could delay, defer or
prevent a merger or acquisition of our company that stockholders may consider
favorable.
BECAUSE WE ARE SUBJECT TO SEC REGULATIONS RELATING TO LOW-PRICED STOCKS,
THE MARKET FOR OUR COMMON STOCK COULD BE ADVERSELY AFFECTED.
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.
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.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain financial information and statements
regarding our operations and financial prospects of a forward-looking nature.
Any statements contained in this prospectus, which are not statements of
historical fact, may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as, "may", "will",
"intend", "expect", "believe", "anticipate", "could", "estimate", "plan" or
"continue" or the negative variations of those words or comparable terminology
are intended to identify forward-looking statements. We make forward-looking
statements in this prospectus, regarding, among other items:
o statements regarding our overall strategy for deploying our
Semiconductor Technologies, including without limitation our
intended markets and future products;
o statements regarding our research and development efforts;
12
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;
o statements regarding our ability to compete with third parties;
o statements relating to the anticipated financial results of our
Film;
o any statements using the words "anticipate," "believe,"
"estimate," "expect," "intend," "may," "will," "should," "expect,"
"plan," "predict," "potential," "continue" and similar words; and
o any statements other than historical fact.
There can be no assurance of any kind that such forward-looking
information and statements will be reflective in any way of our actual future
operations and/or financial results, and any of such information and statements
should not be relied upon either in whole or in part in connection with any
decision to invest in the shares. There are a number of important factors that
could cause actual events or our actual results to differ materially from those
indicated by such forward-looking statements. These factors include, without
limitation, those set forth above under the caption "Risk Factors" included in
this prospectus and other factors expressed from time to time in our filings
with the SEC. We do not undertake to update any forward-looking statements.
USE OF PROCEEDS
The selling stockholders will receive the net proceeds from sales of the
shares of the Common Stock included in this Prospectus. We will not receive any
proceeds from the sale of Common Stock by the selling stockholders.
Assuming all of the warrants and options for which the underlying shares
of Common Stock that are covered by this Prospectus are exercised for cash, we
will receive approximately $3.6 million in cash proceeds (before deducting fees
and commission). The holders of the Warrants have cashless exercise provisions
and if the Warrants are exercised by the cashless exercise provision, then we
will not receive any cash proceeds from such exercise. See, also "DESCRIPTION OF
AGREEMENTS WITH CONVERTIBLE DEBENTURE HOLDERS."
DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS
We are registering the shares offered hereby in order to satisfy our
obligations to the holders of our Convertible Debentures.
Under a Securities Purchase Agreement, dated as of December 31, 2003 in
each case a "Securities Purchase Agreement", between us and each of the holders
of the Convertible Debentures those holders committed to advance us an aggregate
of $2,000,000, repayment of which is represented by our Convertible Debentures.
The funding is to be made in two equal installments. The first installment was
paid to us on December 31, 2003, at which time $1,000,000 in principal amount of
Convertible Debentures were released to such holders. The second installment is
due within five days after the effective date of the Registration Statement. If,
however, for any reason, the effective date does not happen by the close of
business on June 28, 2004, the holders' obligations to fund the second
installment and our obligations to issue the Convertible Debentures relating
thereto and related warrants will be canceled.
The Convertible Debentures are convertible into shares of our Common
Stock at a conversion rate equal to $0.15 per share at any time on or after the
earlier of the (i) sixty-fifth (65th) day following the issue date or (ii)
effective date of the Registration Statement. This conversion price is subject
to adjustment if there are certain capital adjustments or similar transactions,
such as a stock split or merger. Interest at 7% per annum is due on the earlier
to occur of the conversion of such debenture or the maturity date. On conversion
or at maturity, we have the option to pay accrued interest in cash or shares of
our Common Stock valued at the conversion price in effect at that time. The
option to pay interest in shares of our Common Stock, however, is subject to the
following conditions: the Registration Statement covering the resale of such
shares must be in effect at the time of issuance and the issuance of such shares
of Common Stock to the holder of a debenture cannot result in such holder and
its affiliates beneficially owning more than 4.99% of the then outstanding
shares of our Common Stock. This limitation is further discussed below in this
section.
13
The terms of the Convertible Debentures provide that under certain
conditions (primarily relating to the effectiveness of the Registration
Statement and the closing bid price of our traded Common Stock exceeding $1.00
for each of 20 consecutive trading days), we can require a mandatory conversion
of the Convertible Debentures. If not converted earlier and provided that
certain conditions (primarily relating to the effectiveness of the Registration
Statement and the closing bid price of our traded Common Stock exceeding the
conversion price for each of the 10 trading days immediately before the maturity
date), on the scheduled maturity date the Convertible Debentures will
automatically convert into shares of our Common Stock at the conversion price.
If all of the relevant conditions do no exist on the maturity date, we may be
obligated to pay the balance of the Convertible Debentures and accrued interest
in cash. In addition, after one year from their issuance, we would have the
right to prepay the principal (and accrued interest thereon) on the Convertible
Debentures if certain conditions are met.
In connection with the issuance of each installment of the Convertible
Debentures, we issued or will issue to the holders thereof Warrants to purchase
shares of our Common Stock in an amount equal to one (1) share of Common Stock
for each one (1) share of Common Stock issuable upon (and assuming) conversion
of the Convertible Debentures at the conversion price on the date of issuance.
The Warrants are exercisable at any time on or after the earlier of the (i)
sixty-fifth (65th) day following their issue date or (ii) effective date of the
Registration Statement, at a per share exercise price equal to $0.25. This
exercise price is also subject to adjustment if there are certain capital
adjustments or similar transactions, such as a stock split or merger. The
Warrants provide for cashless exercise. The Warrants expire approximately five
years after issuance, provided, that, under certain conditions (primarily
relating to the effectiveness of the registration statement and the closing
price of our Common Stock being more than $1.00 for each of 20 consecutive
trading days), we will have the option to accelerate the expiration date to a
date at least 60 days from the last day of that 20 consecutive trading day
period.
The terms of the Convertible Debentures and Warrants specify that the
beneficial owner can convert such debenture or exercise such warrant by giving
notice to us. Each conversion or warrant exercise is subject to the following
limitation: the holder may not convert the Convertible Debentures or exercise
its Warrant to the extent that such conversion or exercise would result in such
owner and its affiliates beneficially owning more than 4.99% of our then
outstanding stock (after taking into account the shares of our Common Stock
issuable upon such conversion or warrant exercise). If the holder then disposes
of some or all of its holdings, it can again convert its debenture or exercise
its warrant. Similarly, we cannot require the holder to convert the Convertible
Debentures at maturity or on an earlier mandatory conversion date or issue
shares in payment of interest on the debenture where that limit would be
exceeded.
Pursuant to the Securities Purchase Agreement and a Registration Rights
Agreement executed and delivered at the same time, we are obligated initially to
register under the Act 150% of the number of shares issuable on conversion of
the full aggregate principal amount of the Convertible Debentures (from both
installments) plus interest thereon accrued through the maturity date thereof
and 150% of the number of shares of Common Stock issuable upon exercise of the
Warrants issued in connection with such Convertible Debentures. We are also
obligated to keep the Registration Statement of which this Prospectus forms a
part effective until the earliest of the date on which the holders may sell
without restriction all shares registered on their behalf under this Prospectus
under Rule 144 promulgated under the Act, or the date on which such holders no
longer own any of those shares. If at any time the number of shares of Common
Stock to which the holders of our Convertible Debentures and Warrants are
entitled exceeds 80% of the number of shares of Common Stock actually included
or registered under the Registration Statement, then we are required to amend
the Registration Statement or file a new registration statement for additional
shares of our Common Stock in an amount equal to (i) the number of shares
theretofore issued on conversion of the Convertible Debentures (including any
shares issued in respect of accrued interest) and the exercise of the Warrants
plus (ii) 150% of the number of shares issuable (y) on conversion of the full
aggregate principal amount of the then unconverted Convertible Debentures, plus
interest thereon accrued through the maturity date thereof and (z) upon exercise
of the then unexercised Warrants.
We are also registering 3,033,334 shares held by certain other selling
stockholders and shares issuable upon exercise of certain other warrants.
14
In the Securities Purchase Agreement, we have agreed that, without the
prior consent of a majority in interest of the holders of our Convertible
Debentures, we will not enter into any offer or sale of our Common Stock (or
securities convertible into Common Stock) with any third party on any date which
is earlier than 180 days after the effective date of this Prospectus (plus the
number of days, if any, during which the registration statement is suspended in
the interim). These limitations, however, do not apply to the sale of our Common
Stock or similar convertible debentures and warrants in one or more transactions
to accredited investors where (i) the aggregate gross proceeds of such
transactions, together with the proceeds of the Convertible Debentures, do not
exceed $7 million, (ii) each of such transactions does not provide for the
filing of a registration statement in respect of the resale of the Common Stock
underlying such securities on any date which is earlier than the end of six
months after the effective date of the Registration Statement and (iii) either
(x) such transaction is one of a series of prospective transactions that have
been pre-approved by the holders of the Convertible Debentures ("Permitted New
Transaction") or (y) if such transaction is not a Permitted New Transaction,
each holder of the Convertible Debentures is afforded an opportunity to
participate in such transaction in an amount equal to the holder's allocable
share (with certain adjustments if less than all of those holders participate to
the fullest extent of their respective shares) If, during that period, we
actually consummate a transaction referred to in clause (z) of the preceding
sentence, and that transaction provides for any one or more of the following (a)
either a sale price lower than the conversion price provided in the Convertible
Debentures, (b) the inclusion of any terms more beneficial to the holder of such
instrument than the corresponding terms of the debenture, (c) the issuance of
warrants at an exercise price lower than that provided in the Warrants issued in
connection with the Convertible Debentures, (d) the issuance of warrants in an
amount greater than the ratio used in connection with the Warrant, or (e) the
inclusion of any terms more beneficial to the holder of such instrument than the
corresponding terms of the Warrant, then the terms of any unissued or
unconverted Convertible Debentures or any unissued or unexercised Warrants shall
be modified to adjust the relevant conversion price in such debenture, the
warrant exercise price or the number of warrant shares to be equal to that
provided in the transaction as so consummated and to incorporate any such
beneficial term, if any, included in the instruments relating to such
transaction. We may also be required to issue additional shares with respect to
portions of a Convertible Debentures previously converted, based on the adjusted
conversion price.
The foregoing restrictions will not apply to the issuance of securities
(a) in connection with the exercise of conversion or other rights under
documents executed and transactions consummated prior to December 31, 2003, (b)
pursuant to any of our existing employee or consultants stock option plans, (c)
in an aggregate amount not exceeding 3,000,000 shares, of which (i) up to
1,000,000 shares may be issued as compensation to certain of our employees hired
on or after December 1, 2003, (ii) up to 1,000,000 shares may be utilized to
retire deferred cash compensation owing to certain of our employees and
directors, and (iii) up to 1,000,000 shares may be issued as compensation to our
employees and directors, including in exchange for deferred compensation, and
(d) pursuant to a strategic transaction (as defined in the Securities Purchase
Agreement), so long as the securities issuable in connection therewith are not
registered prior to the ninth month following the effective date of the
Registration Statement.
If we breach our obligations relating to any such third party
transactions, (i) the conversion price then in effect in the Convertible
Debentures will be adjusted to be equal to the lowest of (x) 90% of the
conversion price then in effect or (y) 80% of the lower of (A) lowest fixed
price of any security in the new transaction or (B) the lowest conversion price
that would be applicable in the new transaction, (ii) the exercise price and
number of shares specified in the Warrant will be adjusted to correspond to the
instruments relating to such transaction, and (iii) any term more beneficial to
the holder of the instruments in such new transactions than the corresponding
term in the Convertible Debentures or the Warrants shall be incorporated into
such debentures and the warrants. We may also be required to issue additional
shares with respect to portions of a Convertible Debentures previously
converted, based on the adjusted conversion price. In addition, in case of
breach, the Convertible Debentures holders may require us to redeem each
unconverted debenture for an amount, payable in cash, determined pursuant to a
formula provided in the Convertible Debentures.
The additional shares, if any, which might be issued to a holder on
account of any of the adjustments referred to in the preceding paragraphs are
covered by the Registration Statement and this Prospectus.
15
Under the Registration Rights Agreement, we will be obligated to pay
liquidated damages to the holders of the Convertible Debentures if the
Registration Statement is not declared effective by March 30, 2004 or if, the
effectiveness of the Registration Statement is subsequently suspended for more
than certain permitted periods (described below). The permitted suspension
periods are up to two periods during any consecutive 12-month period, but each
period shall not be for more than 15 days or begin less than 10 days after the
preceding suspension period ended. (The date any such suspension commences,
beyond such permitted restrictions, is referred to as a "Restricted Sale Date").
The amount that we must pay to the debenture holders in respect of the
liquidated damages associated with the delays in the effective date or after a
Restricted Sale Date will be (A) 2% of the principal amount of all the
Convertible Debentures during the first 30-day period, and (B) 3% of the
principal amount of all Convertible Debentures for each subsequent 30-day period
(or part). After the effective date, the principal amount of the Convertible
Debentures used in determining the liquidated damages will be adjusted to equal
the sum of (X) the principal amount of all debentures not yet converted and (Y)
the principal amount of the Convertible Debenture converted within the preceding
30 days but not yet sold. Notwithstanding the foregoing, no such liquidated
damages will be due for the delay in the effective date if the effective date of
this Prospectus actually occurs by April 29, 2004. The Convertible Debentures
holders have the right to have these liquidated damages paid in shares of Common
Stock (valued at the conversion price). We may make that election also if the
effective date has occurred by May 29, 2004, provided the Registration Statement
is then currently effective. The additional shares, if any, which might be
issued to a holder of the Convertible Debentures in payment of these liquidated
damages are covered by the Registration Statement and this Prospectus.
Each of our officers and directors has signed an agreement limiting the
shares of our Common Stock that they can sell during certain periods of time
(the "Principal's Agreement"). The Principals' Agreement applies to each of
those officers separately from the other named officers. The agreement provides
that, without the prior consent of a majority in interest of the holders of the
Convertible Debentures in each instance, the officer will not sell or otherwise
transfer or offer to sell or otherwise transfer (except in a private transaction
in which the transferee agrees to be bound by the Principal's Agreement) any
shares of Common Stock directly or indirectly held by him at any time prior to
180 days after the effective date of the Registration Statement of which this
Prospectus forms a part (plus any days during which the Registration Statement
is suspended, if any).
Reference is made to the forms of Convertible Debentures, the Warrants,
the Securities Purchase Agreement, the Registration Rights Agreement and the
Principal's Agreement that are filed as exhibits to the Registration Statement
for more complete description of the complex provisions that are summarized
under this caption.
DIVIDEND POLICY
We have not declared or paid dividends on our Common Stock since our
formation, and we do not anticipate paying dividends in the foreseeable future.
Declaration or payment of dividends, if any, in the future, will be at the
discretion of our Board of Directors and will depend on our then current
financial condition, results of operations, capital requirements and other
factors deemed relevant by the board of directors.
PRICE RANGE OF COMMON STOCK
Our Common Stock is traded on the OTC Electronic Bulletin Board of the
National Association of Securities Dealers, Inc., Automated Quotation System
under the symbol "NVEI". Although trading in our Common Stock has occurred on a
relatively consistent basis, the volume of shares traded has been sporadic.
There can be no assurance that an established trading market will develop, that
the current market will be maintained or that a liquid market for our Common
Stock will be available in the future. Investors should not rely on historical
stock price performance as an indication of future price performance.
16
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. The closing price of our Common Stock on February
6, 2004 was $0.25 per share.
BID ASK
--- ---
HIGH LOW HIGH LOW
---- --- ---- ---
NOVEMBER 2002 THROUGH OCTOBER 2003
First Quarter $ .75 $ .36 $ .77 $ .40
Second Quarter .45 .27 .46 .29
Third Quarter .42 .30 .42 .32
Fourth Quarter .41 .23 .42 .24
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
As of February 9, 2004, there were approximately 1,027 holders of record
of our Common Stock. We believe that a significant number of shares of our
Common Stock are held in either nominee name or street name brokerage accounts
and, consequently, we are unable to determine the number of beneficial owners of
our stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND EXPOSITIONS SHOULD BE READ IN CONJUNCTION
WITH OUR FINANCIAL STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS, AS WELL
AS OTHER FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS. SOME OF OUR
DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR
INFORMATION REGARDING RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS, REFER TO RISK FACTORS SECTION OF THIS PROSPECTUS.
OVERVIEW
The Semiconductor Technologies are in the design and development stage.
Our objective over the next twelve months is to complete the design, development
and testing of our Semiconductor Technologies. Through our subsidiary, NV
Entertainment, we recognized in fiscal year 2003 gross profit from the revenues
from the Film. See "BUSINESS". During fiscal year 2003, we emerged from being a
development stage business solely as a result of the commencement of commercial
distribution of the Film.
FILM. The Film has completed its domestic theater run grossing
approximately $3.7 million in box office revenues and netting our joint venture
approximately $200,000 in revenues. The remaining Film revenues are licensing
and foreign distribution guarantee fees. The Film is currently being distributed
to foreign markets. We anticipate revenues in fiscal 2004 will exceed fiscal
2003 revenues as we anticipate additional foreign revenues, television rights
and DVD sales. The DVD is scheduled for release in the United States in April
2004. After 2004, we expect that revenues from the film will decline. See
"BUSINESS." All references henceforth to our business relating to the film will
sometimes be referred to in this Prospectus as our "Entertainment Business."
SEMICONDUCTOR TECHNOLOGIES. We continued development of our Semiconductor
Technologies during fiscal 2003 and are moving closer to having a semiconductor
chip available. Currently, we estimate that we will need to raise, in addition
to the $1 million in principal amount of our Convertible Debentures that we
expect to sell following the effectiveness of the Registration Statement of
which this Prospectus is a part, an additional $3 million to $4 million in order
to complete the design and development of the Semiconductor Technologies,
produce a semiconductor chip and market the chip.
17
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, investments, intangible assets and
income taxes. Our estimates are based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.
We have identified the accounting policies below as critical to our
business operations and the understanding of our results of operations.
REVENUE RECOGNITION
We recognize Film revenue from the distribution of our feature Film and
related products when earned and reasonably estimable in accordance with
Statement of Position 00-2 -- "Accounting by Producers or Distributors of Films"
(SOP 00-2). The following are the conditions that must be met in order to
recognize revenue in accordance with SOP 00-2:
(i) persuasive evidence of a sale or licensing arrangement with a
customer exists;
(ii) the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate and unconditional
delivery;
(iii) the license period of the arrangement has begun and the customer
can begin its exploitation, exhibition or sale;
(iv) the arrangement fee is fixed or determinable; and
(v) collection of the arrangement fee is reasonably assured.
Under a rights agreement with our distributor for our feature length film
entitled "STEP INTO LIQUID", we share with the distributor in the profits of the
film after the distributor recovers its marketing, distribution and other
predefined costs and fees. The agreement provides for the payment of minimum
guaranteed license fees, usually payable on delivery of the completed film, that
are subject to further increase based on the actual distribution results in the
respective territory.
In accordance with the provisions of SOP 00-2, a film is classified as a
library title after three years from the film's initial release. The term
library title is used solely for the purpose of classification and for
identifying previously released films in accordance with the provisions of SOP
00-2. Revenue recognition for such titles is in accordance with our revenue
recognition policy for film revenue.
FILM PRODUCTION COSTS
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- 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). We make certain estimates and judgments of future
gross revenue to be received for each film based on information received by its
distributor, historical results and management's knowledge of the industry.
Revenue and cost forecasts are continually reviewed by management and revised
when warranted by changing conditions. A change to the estimate of gross
revenues for an individual film may result in an increase or decrease to the
percentage of amortization of capitalized film costs relative to a previous
period.
18
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.
We commenced amortization of capitalized film costs and accrue expenses
of participation costs when a film is released and it begins to recognize
revenue from the film.
STOCK-BASED COMPENSATION
SFAS 123, SFAS 148 and APB 25 (and any related interpretations) will
continue to have impact on our reporting and operating results as we have used
stock in the past to raise capital and as a means of compensation to employees.
We believe we will need to continue using stock for these same purposes.
RESEARCH AND DEVELOPMENT
Research and development expenses relate to the design and development of
Semiconductor Technologies. We outsource to independent third parties all design
and development activities relating to the Semiconductor Technologies. Payments
made to independent software developers under development agreements are
capitalized to software development costs once technological feasibility is
established or if the development costs have an alternative future use. Prior to
establishing technological feasibility, software development costs are expensed
to research and development costs and to cost of revenues subsequent to
confirmation of technological feasibility. Internal development costs are
capitalized to software development costs once technological feasibility is
established. Technological feasibility is evaluated on a product-by-product
basis.
Research and development expenses generally consist of salaries, related
expenses for engineering personnel and third-party development costs.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED OCTOBER 31, 2003 (THE "2003 PERIOD") AND THE YEAR
ENDED OCTOBER 31, 2002 ("2002 PERIOD")
REVENUES. Revenues for the 2003 Period of $380,000 were attributable to
our Entertainment Business. Revenues of $295,000 were in the form of guaranteed
and license payments and the remainder was foreign distribution fees. No
revenues were recorded in connection with our Semiconductor Technologies.
COST OF SALES. Cost of sales for the 2003 Period of $193,000 represent
the amortization of film cost for our Film in distribution.
OPERATING EXPENSES. Operating expenses included research and development
expenses in connection with the Semiconductor Business, compensatory element of
stock issuances, selling, general and administrative expenses and the costs of
settlement of litigation. Total operating expenses decreased 38% to $4,564,000
for the 2003 Period from $7,313,000 for the 2002 Period or a $2,749,000
decrease. Selling, general and administrative expenses decreased 40% or
$1,429,000 primarily as a result of a reduction in staffing, lower professional
fees and lower travel and entertainment expenses. Research and development costs
decreased $1,181,000 to $118,000 due to the fact that the Company entered into a
development and license agreement in fiscal 2002. Compensatory element of stock
issuances decreased 16% from $2,459,000 in fiscal 2002 to $2,062,000 in fiscal
2003 as we better managed the use of stock for compensation purposes. Projects
written off increased by $57,000 (there were none written off in fiscal 2002) as
we determined we would not pursue several projects.
OTHER EXPENSES. Other expenses included interest expense, amortization of
unearned financing costs and a non-cash gain on the settlement of a law suit.
Interest expense decreased $766,000 as a primarily as a result of issuing fewer
convertible notes payable in the 2003 Period that had interest of 50% for the
life of the note due when the notes were paid, causing us to recognize the
interest expense immediately in the 2002 Period. Additionally, including these
notes, our overall debt level was lower in the 2003 Period compared to the 2002
Period. Amortization of unearned financing costs decreased to $336,000 from
$1,117,000 as a result of the issuance of less debt with conversion features or
warrants with strike prices less than the market price of the stock at the time
of issuance. We record a non-cash gain of $1,474,000 on the settlement of a law
suit with two former officers and shareholders. The gain was the result of the
former officers returning 2,200,000 shares of stock.
19
NET LOSS. The net loss decreased $6,150,000 or 46% from 9,467,000 to
$3,317,000 as the result of gross profit generated on the film ($187,000), lower
operating expenses ($2,749,000), lower interest costs ($765,000), lower
amortization of financing costs ($791,000) and the non-cash gain recorded as a
result of the law suit settlement ($1,474,000).
COMPARISON OF THE YEAR ENDED OCTOBER 31, 2002 (THE "2002 PERIOD") AND THE YEAR
ENDED OCTOBER 31, 2001 ("2001 PERIOD")
REVENUES. Revenues for the 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 $7,313,000 for fiscal 2002 from $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 $3,559,000 to $2,459,000 and selling,
general and administrative expenses decreased from $4,087,000 to $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 $1,299,000 in fiscal 2002 from $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 Period.
OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses decreased from
$2,383,000 in the 2001 Period to $2,154,000 in the 2002 Period. Interest expense
increased from $337,000 in the 2001 Period to $1,036,000 in the 2002 Period,
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 $654,000. The increases in these expenses were offset by a
reduction in the costs of amortization of unearned financing costs of $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 $9,467,000, or $0.23 per common
share, for the fiscal year ended October 31, 2002, a decrease from the net loss
of $11,876,000, or $0.46 per common share, for the fiscal year ended October 31,
2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $320,000 as of October 31, 2003 and $312,000 as of
October 31, 2002.
Net cash used in operating activities was $2,283,000 in fiscal 2003,
$3,986,000 in fiscal 2002 and $4,281,000, in fiscal 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 $3,144,000 for fiscal 2003, $5,201,000 for
fiscal 2002 and $5,642,000 for fiscal 2001. Net proceeds from convertible notes
and debentures payable amounted to approximately $551,000 in fiscal 2003,
$1,795,000 in fiscal 2002 and $615,000 in fiscal 2001. Proceeds from the
exercise of options and warrants amounted to approximately $60,000 in fiscal
2003, $728,000 in fiscal 2002 and $100,000 in fiscal 2001. We received net
proceeds from the sale of Common Stock amounting to approximately $2,764,000 in
fiscal 2003, $1,977,000 in fiscal 2002 and $5,427,000 in fiscal 2001. Notes
payable were issued amounting to approximately $0, $700,000 and $0 in fiscal
2003, fiscal 2002 and fiscal 2001, respectively. Notes payable amounting to
$231,000 were repaid in fiscal 2003 and $500,000 were repaid in fiscal 2001.
Stock was issued in payment of expenses amounting to approximately
$2,062,000 in fiscal 2003, $2,459,000 in fiscal 2002 and $3,559,000 in fiscal
2001. Stock was returned to the Company in settlement of litigation and resulted
in a gain in the amount of $1,474,000 during fiscal 2003. Stock was issued in
settlement of litigation in the amount of $1,000,000 during fiscal 2001.
20
Research and development expenses in connection with the Semiconductor
Business totaled approximately $118,000 in fiscal 2003, $1,299,000 in fiscal
2002 and $839,000 in fiscal 2001. During the fiscal year ended October 31, 2003
the Company paid $639,000 in technology development fees.
As of October 31, 2003 we have outstanding convertible notes payable
totaling $1,103,000. 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. 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.
In June 2000, we entered into five long-term credit facilities, pursuant
to which we borrowed $750,000. The balance on these notes at October 31, 2003 is
$256,886. The maturity date on these notes has been extended beyond its original
maturity date until our receipt of the proceeds of the Convertible Debentures
that we anticipate receiving following the effectiveness of the Registration
Statement of which this Prospectus is a part.
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, 2003, the remaining balance due to Adaptive is
$95,000 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"), a stockholder. 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. The balance on this note at October 31, 2003 is $483,425.
On October 31, 2003 we entered into a 7% convertible debenture agreement
in the amount of $300,000. The debenture was convertible into Common Stock at
$.26 per share and was scheduled to come due April 30, 2004. The Company also
issued warrants to the debenture holder at a strike price of $.15 per share,
subject to cashless exercise rights. The debenture was subsequently paid in
January 2004 from the proceeds of the first installment of the Convertible
Debentures. See "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE
HOLDERS."
As of December 31, 2003, we entered into an agreement with certain
persons who are selling stockholders included in this Prospectus pursuant to
which we sold to them $1,000,000 in aggregate principal amount of our
Convertible Debentures. See "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS" These holders agreed to purchase an additional $1,000,000 in
principal amount of the Convertible Debentures not later than five days after
the effective date of such Registration Statement. See "RISK FACTORS" We issued,
as of December 31, 2003, Convertible Debentures in the principal amount of
$1,000,000 due December 31, 2006. The debentures are convertible into Common
Stock at $.15 per share. As part of this transaction, we issued and, upon
effectiveness of the Registration Statement of which this Prospectus is a part,
expect to issue warrants to purchase 6,666,667 shares of common stock at an
exercise price of $.25 were issued to the debenture holders, subject to cashless
exercise provisions.
21
Taking into account the proceeds of the Convertible Debentures, the
Company believes that it has sufficient cash resources available to maintain its
operations through April 2004. Assuming that the proceeds of the Additional
debentures are received, the Company believes that it has sufficient cash
resources available to maintain its operations through July 2004. Thereafter,
unless Entertainment Business generates revenues, we will need to raise an
additional $3 million to $4 million to realize our business plan as contemplated
and complete the design, development, and testing of Semiconductor Technologies.
Management believes funds on hand and available sources of financing will
enable us to meet our liquidity needs at least April 2004. The net proceeds of
approximately $850,000 of the Convertible Debentures that we expect to sell
following the effectiveness of this Registration Statement will enable us to
maintain operations as presently conducted for an additional three months.
Thereafter, we will need to raise additional capital to maintain our operations
as presently conducted. While we are actively seeking to raise additional
capital, except for the agreement of the Convertible Debenture holders to
purchase an additional $1 million of our Convertible Debentures following the
effectiveness of the Registration Statement of which this Prospectus is a part,
we have no commitments for any such financing, and there can be no assurance
that additional capital will be available to us on commercially acceptable
terms. 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. The
inability to obtain such financing will have a material adverse effect on our
business, its operations and future business prospects. It is also anticipated
that any successful financing will have a significant dilutive effect on
existing stockholders.
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
continues to take 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. We continue to
curtail expenses in many areas in an effort to control costs. During year ended
October 31, 2003, we cut overhead cost approximately $100,000 per month and
subsequent to year-end have cut an additional $50,000 per month. These cost
cutting measures combined with our focus on the Semiconductor Technologies will
allow us to more carefully use moneys raised to complete development of the
chipset design for our Semiconductor Technologies.
However, additional cash must be raised in order to continue to meet
liquidity needs and satisfy the Company's proposed business plan.
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 auditor's report accompanying
our financial statements for the year ended October 31, 2003, includes an
explanatory paragraph relating to the uncertainty of our ability to continue as
a going concern, which may make it more difficult for us to raise additional
capital. 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. However, except for the $1,000,000 in principal amount
of our Convertible Debentures that we expect to sell following the effectiveness
of this Registration Statement, we have no commitments for any such financing.
See "RISK FACTORS."
22
BUSINESS.
GENERAL
We are 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. The proprietary equipment, components and
related technologies and semiconductor hardware and software products that we
are designing, developing and testing will be referred to throughout this
Prospectus as the "Semiconductor Technologies."
Through our wholly-owned subsidiary, NV Technology, we intend to design,
develop, manufacture and license semiconductor hardware and software products
based upon our Semiconductor Technologies. We believe that system-level products
that use this set of technologies will have a significant advantage over
existing forms of broadband technologies, such as DSL, by providing faster
transmission speed capability and by increasing the transmission distance
capability. The technologies underlying our proposed products are in the design
and development stage.
Through our wholly owned subsidiary NV Entertainment, we recognized in
the year ended October 31, 2003, gross profit from the revenues from the hit
feature-length documentary, STEP INTO LIQUID. According to its distributor,
Artisan Pictures, the Film has grossed $3.7 million since its US theatrical
release in August 2003. It is now in theatrical distribution internationally,
and the US DVD release is scheduled for April 2004.
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 Internet address is WWW.NEWVISUAL.COM. The information contained in such
website is not, and should not be deemed to be, a part of this Prospectus.
OUR TELECOMMUNICATIONS BUSINESS
THE BROADBAND BOTTLENECK
The great, unfinished task of the telecom industry is to service 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. For example, approximately ninety-three percent of business buildings
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 we
have 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 designed to
allow service providers to send digital information farther and faster,
utilizing a low-cost implementation/deployment strategy that leverages the
existing copper infrastructure.
Our 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 telephone density, comprise most of the rest. Wire-line carriers
around the world are experiencing high demand for data intensive transmission
services from business and other users. The provision of these services,
however, is limited by copper pair's low speed, high costs, maintenance costs,
and poor utilization. Communication networks were originally designed to handle
23
voice traffic. The infrastructure of existing prior generation networks consists
of copper cabling along which voice communications are transmitted in the form
of electronic signals. While copper cabling is generally a reliable transmission
medium, its ability to transmit large volumes of data at high speed is limited,
and it is prone to electromagnetic interference from nearby electronic equipment
and other sources, which in turn interfere with the transmission of a signal and
degrade signal quality. To overcome the limitations of the copper cable
infrastructure and meet increasing demand for high capacity and high-speed voice
and data transmission, these lines is that they are being retrofitted to support
broadband data transmission at a quick pace. This retrofit activity is being
performed by leading 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
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 Semiconductor
Technologies.
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.
Our 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 name Embarq(TM), offers significant improvements over
existing broadband 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.
24
We intend to develop core technology and chip level solutions to be
licensed or sold to equipment makers that serve the following markets:
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.
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 telephone company's wire center. LECs have 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.
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.
RESIDENTIAL: defined as the home broadband (high-speed access) consumers.
We believe that products based upon our Semiconductor Technologies will
enable providers of broadband services to these markets to:
ENHANCE THEIR OFFERING OF CONVERGENT SERVICES. We believe that deployment
of our Semiconductor Technologies would permit the transmission of television,
telephone and Internet access services over existing telephone lines to a large
number of consumers.
REACH MORE CUSTOMERS. The Semiconductor Technologies 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 52
Mbps or 13 Mbps at 4,500 feet from the central office. Similarly, while standard
ADSL services have a range of 12,000 to 18,000 feet, capacity decreases the
farther the end user is from the central office.
LOWER COSTS BY USING EXISTING INFRASTRUCTURE. By deploying products built
upon our Semiconductor Technologies, 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 the Semiconductor Technologies
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 the Semiconductor Technologies 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
25
o the return on investment for service providers is a more
attractive model (e.g., lower cost of deployment and customer
acquisition versus revenue).
o Residential broadband demand and DSL deployment is increasing
rapidly 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 the Semiconductor
Technologies 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 one or more of
the following revenue models:
o joint venture manufacturing relationships with equipment makers
and/or chip makers;
o manufacture and sale of IC's; 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.
We presently have no agreement with any third party respecting any
revenue generating arrangement relating to out Semiconductor technologies and no
assurance can be provided that we will in fact be able to enter into such
agreements or arrangements on terms that are commercially acceptable to us. Our
success in successfully concluding any revenue generating commercial agreement
is premised, in part, on the integration of our Semiconductor technologies by
one or more of leading telecommunications equipment and data providers of our
Semiconductor Technologies into its product offerings. However, no assurance can
be provided that we will in fact successfully complete the design and
development of our Semiconductor technologies or that subsequent testing and
field trials will prove successful and, even if successful, that our
Semiconductor Technologies will in fact be deployed with a commercially
successful product offering.
As we have been focused on the design and development of our
Semiconductor technologies, we presently have a limited marketing capability.
However, as we approach commercialization of the Semiconductor Technologies, we
anticipate that we will need to expand our marketing capability.
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
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 the
Semiconductor Technologies 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.
Although we believe we will be able to compete based on the special
features of the Semiconductor Technologies, products containing these
technologies 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, the Semiconductor Technologies 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 the
Semiconductor Technologies.
26
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 products
utilizing the Semiconductor Technologies and will rely on third party suppliers
to obtain the raw materials essential to our products' production. Manufacturing
of products utilizing the Semiconductor Technologies 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 products utilizing the Semiconductor
Technologies. 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 the Semiconductor Technologies 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.
GOVERNMENT REGULATION
The Semiconductor Technologies is subject to extensive regulation by
federal and state agencies, including the Federal Communications Commission (the
"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 FILM
In April 2000, our wholly owned subsidiary, NV Entertainment, entered
into a joint venture production agreement to produce a feature length surfing
documentary for theatrical distribution marketed under the name STEP INTO
LIQUID. NV Entertainment is a fifty-percent owner of Top Secret Productions,
LLC, producer of the Film. Artisan Pictures is distributing the Film in the
United States and Canada. The co-production agreement includes a substantial
print and advertising promotional commitment for the theatrical release,
distribution fees, performance-driven minimum guarantees for the theatrical and
video/DVD releases, a modest cash advance and a 10-year license.
The Film opened in Hawaii, New York and Los Angeles on August 8, 2003 and
played in more than 100 theaters across the United States during its 5-month
theatrical run. The per theater average for the opening weekend was more than
$27,000, which ranks the Film among the best performing films of 2003. The
estimated cumulative total box office revenues for the Film's theatrical run,
generated by widening the release to more theaters, amounted to an estimated
$3,681,000. Additional international guarantee fees amount to an estimated
$120,000.
Based on the performance of the domestic theatrical run, management
believes that the Film will continue to generate positive cash flow throughout
2004 and beyond.
Under the terms of our joint venture, we agreed to finance the production
of the Film for up to $2,250,000. We will receive all net profits 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. We recognized revenues of $379,980 for the year ended October 31,
2003 as a result of consolidation of the joint venture.
27
RESEARCH & DEVELOPMENT
The Company out-sources all of its research and development with respect
to the Semiconductor Technologies to independent third party developers. During
each of fiscal year 2003 and 2002 we expended $118,000 and $1,299,000,
respectively, in respect of the Semiconductor Technologies. Research and
development expenditures the year ended 2002 were higher than those for the year
ended 2003 due to development costs in 2002.
OUR EMPLOYEES
We currently have four full-time employees and two 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 anticipate that we will need to retain additional employees and other
personnel in order to achieve the commercialization of our Semiconductor
Technologies. The retention of additional employees is subject to our raising
additional capital.
Our future performance depends highly upon the continued service of the
senior members of our management team.
We believe that our future success will also depend upon our continuing
ability to identify, attract, train and retain other highly skilled managerial,
technical, sales and marketing personnel. Hiring for such personnel is
competitive, and there can be no assurance that we will be able to retain our
key employees or attract, assimilate or retain the qualified personnel necessary
for the development of our business.
DESCRIPTION OF PROPERTY
We do not own any real property. 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. Subsequent to
October 31, 2003, we decided to move our corporate headquarters to Portland,
Oregon.
In anticipation of moving our corporate headquarters to Portland, Oregon,
we have leased 1,000 square feet of space on a month-to-month basis in Portland.
We also lease 2,251 square feet of space at 1024 Serpentine Lane,
Pleasanton, California, which was previously used by NV Technology. 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 March 31, 2004. We are
currently trying to find a subtenant for this property and have recognized the
entire liability for the remaining cost ($28,850) of the lease in the financial
statements for the year ended October 31, 2003.
LEGAL PROCEEDINGS
We are not subject to any legal proceedings that would have a material
impact on our financial condition, results of operations, business or prospects.
28
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of our directors, executive officers and
key employees are as follows:
NAME AGE POSITION
---- --- --------
Brad Ketch 41 President, Chief Executive Officer and
Director
Ray Willenberg, Jr. 52 Chairman of the Board and Executive Vice
President
James W. Cruckshank 49 Chief Financial Officer
Ivan Berkowitz 56 Vice Chairman of the Board)
Bruce Brown 66 Director
Thomas J. Cooper 54 Director
John Howell 58 Director
The business experience, principal occupations and employment, as well as
the periods of service, of each of our directors and executive officers during
at least the last five years are set forth below.
BRAD KETCH. Mr. Ketch has served the Company in various roles since March
2002. In March 2002, Mr. Ketch became a consultant with us on our broadband
technology and served in that capacity until July 2002, when he became our Chief
Marketing Officer. He has served as our President and Chief Executive Officer,
as well as a director, since December 2002. With over 18 years experience
creating shareholder value through broadband telecommunications products and
services, Mr. Ketch, from October 2001 to March 2002, served as CEO of Kentrox
LLC, a manufacturer and marketer of data networking equipment. At Kentrox, Mr.
Ketch was responsible for a company with 260 employees and $90 million in annual
revenues. From January 2001 to October 2001 Mr. Ketch implemented strategic
plans for telecom service providers and equipment manufacturers through his
telecommunications consulting company, Brad Ketch & Associates, of which he was
founder and President. From February 1999 to January 2001 he was Senior Vice
President of Sales and Marketing for HyperEdge Corporation, a company he
co-founded. HyperEdge acquired and integrated broadband access equipment
manufacturers to further enable service providers to deliver broadband access to
the "Last Mile." From August 1997 through February 1999, Mr. Ketch implemented
strategic business and technical plans for competitive local exchange carrier
network access and created products targeted at the incumbent local exchange
carrier market as a consultant to various telecommunications companies as a
consultant with Brad Ketch & Associates. Prior to August 1997 he served in
various capacities at Nortel, Advanced Fibre Communications and Cincinnati Bell.
Mr. Ketch has a Bachelor of Arts degree in Economics from Wheaton College and a
MBA from Northwestern University.
RAY WILLENBERG, JR. Mr. Willenberg served as our President, Chief
Executive Officer and Chairman of the Board from April 1997 to March 2002, and
was elected a director in October 1996. Mr. Willenberg joined us as Vice
President and corporate Secretary in 1996. He currently serves as our Executive
Vice President and Chairman of the Board of Directors. From 1972 to 1995, Mr.
Willenberg was Chief Executive Officer of Mesa Mortgage Company in San Diego,
California.
JAMES W. CRUCKSHANK. Mr. Cruckshank has served as our Chief Financial
Officer since December 2003. He holds a B.B.A. in Accounting, Marketing and
Management from the University of Portland and a M.B.A. from The University of
Notre Dame. Since November of 2003, Mr. Cruckshank has been a partner in Tatum
CFO Partners LLP. From March 2003 to December 2003 Mr. Cruckshank was an
independent financial consultant. From November 2001 to March 2003, Mr.
Cruckshank was Vice President of Finance of Christenson Electric, Inc. From
March 2000 to October 2001, Mr. Cruckshank served as Chief Financial Officer for
a number of Internet startup companies. From January 1999 to February 2000, Mr.
Cruckshank was Vice President and Chief Financial Officer of Assisted Living
Concepts, Inc. From February 1984 to January 1999, Mr. Cruckshank was Corporate
Controller and Assistant Treasurer of Schnitzer Steel Industries, Inc. a
publicly traded company. Prior to that Mr. Cruckshank was with PriceWaterhouse
Coopers for six years.
29
IVAN BERKOWITZ. Mr. Berkowitz has served as a member of our board of
directors since August 2000 and was named Vice Chairman of the Board in June
2001. Since 1993, Mr. Berkowitz has served as the managing general partner of
Steib & Company, a privately held New York-based investment company. Currently,
Mr. Berkowitz serves on the board of directors of ConnectivCorp, a deep content
provider that facilitates online connections between consumers and
health-oriented companies. Since 1989, Mr. Berkowitz has served as President of
Great Court Holdings Corporation, a privately held New York-based investment
company. Mr. Berkowitz holds a B.A. from Brooklyn College, an MBA from Baruch
College, City University of New York, and a Ph.D. in International Law from
Cambridge University.
BRUCE BROWN. Mr. Brown has served as a member of our board of directors
since June 2000. Over the past 30 years, Mr. Brown has been an independent
director and producer of motion pictures. He was nominated for an Academy Award
in 1971 for directing "ON ANY SUNDAY," a motorcycle adventure film starring
Steve McQueen. Mr. Brown has earned worldwide distinction as the director and
producer of the first of its kind documentary, "ENDLESS SUMMER," which is the
second highest grossing documentary film of all time. Its sequel, "ENDLESS
SUMMER 2," also directed by Mr. Brown, grossed more than $10 million in its
first year of theatrical distribution. Mr. Brown has collaborated with us to
produce the Film. Mr. Brown's other movie credits include "SLIPPERY WHEN WET,"
"SURFIN' SHORTS," "SURF CRAZY," "SURFIN' HOLLOW DAYS," "BAREFOOT ADVENTURE" and
"WATERLOGGED."
THOMAS J. COOPER. Mr. Cooper has served as a member of our board of
directors since March 2002. From June 1 to December 2, 2002, Mr. Cooper served
as our President and Chief Executive Officer. Mr. Cooper has been engaged in the
development, creation and management of global sales and marketing platforms for
businesses operating in the areas of high technology, real estate, office
automation, and telecommunications for the past 30 years. From 1994 to 2002, Mr.
Cooper served in various high-ranking positions at GlobespanVirata Corporation
(formerly Virata), most recently as Senior Vice President, Corporate Development
(from July 1999 to February 2002), where he was responsible for the development
and implementation of long range growth strategies, including defining global
partnership initiatives; identifying potential acquisition and joint venture
candidates; and directing strategic investment of corporate capital into select
ventures in which the company acquired minority stakes. From 1994 until 1999,
Mr. Cooper served as Virata's Senior Vice President, Worldwide Sales and
Marketing, where he oversaw all aspects of the company's product sales and
marketing, corporate marketing/communications and public relations. During his
tenure, Virata grew its revenues from $8.9 million in 1998, $9.3 million in
1999, and $21.8 million in 2000, to over $120 million in 2001.
Prior to joining Virata, Mr. Cooper served in senior sales and management
positions at Hewlett-Packard, Trammell Crow Company, Rubloff, Inc., Network
Equipment Technologies and Pedcom, Inc. He also has seven pending U.S. patents
for networking method or product. Mr. Cooper also serves on the boards of
directors of Bsafeonline.com, Inc., a distributor of Internet filtering and
security applications, and RolaTube Technology, Ltd., the developer and
patent-holder of a new materials technology called Bi-stable Reeled Composite
(BRC) technology, which is headquartered in the United Kingdom. After earning a
Bachelor of Arts degree from Hamilton College, Mr. Cooper graduated MAGNA CUM
LAUDE from the University of Toledo, where he earned his MBA.
JOHN HOWELL. Mr. Howell has served as a member of our board of directors
since April 2000 and was our Executive Vice President from July 2000 until
October 2002. In October 2002, Mr. Howell was named Executive Vice President of
Kingdom Ventures, Inc., a manufacturer and global distributor of products and
services primarily marketed to the faith-based consumer. Mr. Howell also serves
as a director of Kingdom Ventures, Inc. From January 1998 until October 1998,
Mr. Howell served as Vice President of TeraGLOBAL Communications Corp., a
manufacturer of hardware for the convergence of voice, video and data. From 1997
to 1998, Mr. Howell was Chief Executive Officer of EVERSYS Corporation, a
manufacturer of computer equipment for the local area network. Mr. Howell has a
Bachelor of Science degree in Aerospace Engineering from Oregon State
University.
Mr. C. Rich Wilson III. Mr. Wilson resigned as Vice President, Secretary
and as a member of the Board of Directors effective December 31, 2003. Mr.
Wilson had served as Vice President, Secretary and a member of our Board of
Directors since April 2000.
30
BOARD OF DIRECTORS; ELECTION OF OFFICERS
All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified. Any vacancy occurring
in the Board of Directors may be filled by the shareholders, the Board of
Directors, or if the Directors remaining in office constitute fewer than a
quorum of the Board of Directors, they may fill the vacancy by the affirmative
vote of a majority of the Directors remaining in office. A director elected to
fill a vacancy is elected for the unexpired term of his predecessor in office.
Any directorship filled by reason of an increase in the number of directors
shall expire at the next shareholders' meeting in which directors are elected,
unless the vacancy is filled by the shareholders, in which case the term shall
expire on the later of (i) the next meeting of the shareholders or (ii) the term
designated for the director at the time of creation of the position being
filled.
Our executive officers are elected by and serve at the pleasure of our
Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all compensation for each of the last
three fiscal years awarded to, or earned by, our Chief Executive Officer and to
all other executive officers serving as such at the end of 2003 whose salary and
bonus exceeded $100,000 for the year ended October 31, 2003 or who, as of
October 31, 2003, was being paid a salary at a rate of $100,000 per year.
Summary Compensation Table
Restricted Securities
Name and Principal Other Annual Stock Underlying
Position(s) Year Salary Compensation Award(s) Options
--------------------- ---- ----------- ------------ ---------- ------------
Brad Ketch 2003 $ 268,833(2) $ -- -- 1,500,000
President and 2002 60,000 -- -- 455,000
Chief Executive 2001 -- -- -- --
Officer (1)
Ray Willenberg, Jr. 2003 201,713(4) -- -- --
Chairman of the 2002 258,406(5) -- -- 350,000
Board, Chief 2001 229,167 -- -- 20,000
Executive Officer,
President and
Executive Vice
President (3)
C. Rich Wilson III 2003 156,083 -- -- --
Former Vice 2002 166,329(7) 91,875(8) -- 600,000
President and 2001 149,580 -- -- 20,000
Secretary (6)
Thomas J. Sweeney 2003 129,848 -- -- --
Former Chief 2002 133,455(10) -- -- --
Financial Officer (9) 2001 82,294 -- -- --
Thomas J. Cooper 2003 71,424 -- -- --
Former Chief 2002 129,500(12) -- -- 2,000,000(13)
Executive Officer (11) 2001 -- -- -- --
(1) Mr. Ketch was appointed Chief Executive Office on December 2, 2002.
(2) Includes $43,000 in earned, but deferred payroll unpaid as October 31, 2003.
In December 2003, Mr. Ketch received 40,000 shares of our common stock in lieu
of $10,000 of deferred payroll.
(3) Mr. Willenberg served as our President and Chief Executive Officer until
June 1, 2002, when Mr. Cooper became Chief Executive Officer and Mr. Willenberg
became Executive Vice President.
31
(4) Includes $28,106 in commissions paid Mr. Willenberg per his employment
agreement. Also includes $24,019 in earned, but deferred payroll unpaid as of
October 31, 2003. The Company owed Mr. Willenberg $463,878 in unpaid commissions
as of October 31, 2003. In December 2003, Mr. Willenberg received 400,000 shares
of common Stock in lieu of $100,000 of unpaid commissions.
(5) Includes $14,250 in earned, but deferred payroll unpaid as of October 31,
2002.
(6) Mr. Wilson served as Voce President and Secertary from April 2000 until his
resignation on from all positions with the Company on December 31, 2003.
(7) Includes $29,999 in earned, but deferred payroll unpaid as of October 31,
2002.
(8) Represents the issuance to Mr. Wilson in February 2002 of 250,000 shares of
common stock valued at $0.37 per share.
(9) Mr. Sweeney served as Chief Financial Officer until his resignation on
December 12, 2004. Mr. Sweeney's employment was at will.
(10) Includes $13,514 in earned, but deferred payroll unpaid as of October 31,
2002.
(11) Mr. Cooper served as our Chief Executive Officer from June 1, 2002 until
December 2, 2002.
(12) Includes $62,500 in earned, but deferred payroll unpaid as of October 31,
2002 and $4,500 of consulting fees paid to Mr. Cooper prior to his employment
with us.
(13) Includes 1,500,000 options cancelled pursuant to Mr. Cooper's Severance
Agreement. See "Certain Relationships and Related Transactions - Thomas J.
Cooper."
In accordance with the rules of the SEC, other compensation in the form
of perquisites and other personal benefits has been omitted for the named
executive officers because the aggregate amount of these perquisites and other
personal benefits was less than the lesser of $50,000 or 10% of annual salary
and bonuses for the named executive officers.
OPTION GRANTS IN THE LAST FISCAL YEAR
Percent of Total
Number of Securities Options Granted Exercise or Grant Date
Underlying To Employees In Base Price Expiration Present
Options Granted (#) Fiscal Year ($/Share) Date Value (1)
-------------------- ----------------- ------------ ---------- ----------
Brad Ketch 1,500,000 100% $ 0.64 12/03/2012 $ 697,332
(1) In accordance with SEC rules, the Black-Scholes option pricing model was
chosen to estimate the grant date present value of the options set forth in this
table. Our use of this model should not be construed as an endorsement of its
accuracy at valuing options. All stock option valuation models, including the
Black-Scholes model, require a prediction about the future movement of the stock
price. The following assumptions were made for purposes of calculating the grant
date present value for the options granted: expected life of this option of five
years, volatility at 72.32% dividend yield of 0.0% and discount rate of 1.5%.
32
AGGREGATE OPTIONS EXERCISED IN 2003 AND 2003 YEAR END OPTION VALUES
The named executive officers did not exercise any stock options during
the year ended October 31, 2003. The following table sets forth information as
of October 31, 2003 concerning options held by the named executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at Fiscal Year End Options at Fiscal Year End
--------------------------- ---------------------------
Shares
Acquired on
Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ ----------- ------------- ----------- -------------
Brad Ketch -- -- 605,000 1,350,000 $ -- $ --
Ray Willenberg, Jr. -- -- 1,117,500 2,500 -- --
C. Rich Wilson III -- -- 742,500 2,500 -- --
James W.
Cruckshank -- -- -- -- -- --
Thomas J. Sweeney -- -- -- -- -- --
(1) Based upon the difference between the exercise price of such options
and the closing price of the Common Stock ($0.33) on October 31, 2003, as
reported on the Over-The-Counter Market.
COMPENSATION OF DIRECTORS
It is our policy to pay each outside director $2,000 for each meeting of
our Board of Directors attended and for each committee meeting attended. During
the year ended October 31, 2003, the directors waived their board meeting and
committee meeting fees until the Company's financial condition improves. In
addition, we have granted stock and stock options to the directors to compensate
them for their services. Our directors are eligible to receive stock option
grants under our 2000 Omnibus Securities Plan. During 2002, we granted Bruce
Brown and Ivan Berkowitz, our non-employee directors, options to purchase
150,000 and 250,000 shares of our common stock, respectively at an exercise
price of $0.42 per share. The options were all granted under our 2000 Omnibus
Securities Plan and vested quarterly on April 30, 2002, July 31, 2002, October
31, 2002 and January 31, 2003. We reimburse our directors for reasonable
expenses incurred in traveling to and from board or committee meetings.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
BRAD KETCH. On December 2, 2002, we entered into an employment agreement
with Brad Ketch pursuant to which Mr. Ketch was retained as our Chief Executive
Officer. The agreement entered into with Mr. Ketch in December 2002 replaced the
agreements previously entered into with Mr. Ketch (and discussed below) pursuant
to which he was retained in various other capacities. Mr. Ketch's current
agreement with us began on December 2, 2002 for a three-year term and provided
for Mr. Ketch to receive an initial base salary of $250,000, with an annual
bonus to be paid at the discretion of the Board of Directors in either cash or
stock. In addition, the agreement provides for Mr. Ketch to receive an option to
purchase 1,500,000 shares of our Common Stock at a per share exercise price of
$0.64. The options vest in 12 quarterly installments of 125,000, beginning March
1, 2003.
Mr. Ketch's agreement provided that he may be terminated for "cause," as
defined in his employment agreement. If Mr. Ketch is terminated without "cause"
or left New Visual for "good reason," each as defined in the agreement, he will
receive a severance payment equal to two years of his base salary on the date of
his termination. If Mr. Ketch is terminated without cause or with good reason
within one year after a "change of control," as defined in the agreement, he
will receive a severance payment equal to two years of his base salary and an
amount equal to two times the amount of his last bonus received.
Prior to our entering into the agreement with Mr. Ketch retaining his as
our Chief Executive Officer, we entered into several agreements with him during
fiscal year 2002. In March 2002, we entered into a one-year consulting
arrangement with Mr. Ketch, in which we retained Mr. Ketch to provide consulting
and advisory services with respect to our technology for transmitting high speed
data over extended ranges of copper telephone wire. Pursuant to this consulting
agreement, we agreed to pay Mr. Ketch $15,000 per month and granted him an
option to purchase 50,000 shares of our common stock at an exercise price of
$1.02 per share. The option was exercisable upon grant.
33
In July 2002, we entered into an employment agreement and a second stock
option agreement with Mr. Ketch whereby he become our Chief Marketing Officer.
This employment agreement, which was for a three year term, began on July 1,
2002, and provided for a base salary of $15,000 per month, an annual bonus to be
paid at the discretion of the Board of directors in either cash or stock, and a
stock option grant of 405,000 shares, of which 105,000 vested on the date of
grant. The remaining options vest quarterly, beginning on May 31, 2003, in equal
amounts of 37,500 shares. These options have an exercise price of $1.09 per
share.
RAY WILLENBERG, JR. On February 11, 2000, we entered into an employment
agreement with Ray Willenberg, Jr., our Chief Executive Officer during part of
the 2002 fiscal year. The agreement began on April 1, 2000 for a three year term
and provided for Mr. Willenberg to receive an initial base salary of $250,000,
with annual increases of $50,000 each April. Mr. Willenberg agreed to forego
this increase in both 2001 and 2002. On March 22, 2002, in connection with the
hiring of Thomas J. Cooper as our Chief Executive Officer, we entered into a new
employment agreement with Mr. Willenberg. Pursuant to this new agreement, Mr.
Willenberg agreed to continue to serve as our Chief Executive Officer until June
1, 2002 and to serve as an Executive Vice President thereafter. Under the terms
of the new agreement, Mr. Willenberg will continue to serve as our Chairman of
the Board and as the President of our wholly-owned subsidiary, NV Entertainment,
Inc. Mr. Willenberg is entitled to receive a base salary of $175,000 per year.
He is also entitled to an annual bonus based upon the annual revenues we receive
in connection with our feature film production, STEP INTO LIQUID, and the gross
proceeds we receive from sales of our equity or debt securities obtained as a
result of Mr. Willenberg's personal efforts.
Mr. Willenberg may be terminated for "cause," as defined in his
employment agreement. If Mr. Willenberg is terminated without "cause" or leaves
New Visual for "good reason," each as defined in the agreement, he will receive
a severance payment equal to two years of his base salary on the date of his
termination. If Mr. Willenberg is terminated without cause or with good reason
within one year after a "change of control," as defined in the agreement, he
will receive a severance payment equal to two years of his base salary and an
amount equal to two times the amount of his last bonus received.
C. RICH WILSON III. On February 25, 2002, we entered into an employment
agreement with C. Rich Wilson III to serve as our Vice President and Secretary.
Mr. Wilson's agreement commenced March 1, 2002 and was for a one-year term,
which provided for automatically renewals for successive one-year terms unless
earlier terminated pursuant to the terms of the agreement or with 60 days notice
prior to the end of its term. Under the agreement, Mr. Wilson's base salary was
$160,000 per year. Mr. Wilson was also entitled to an annual bonus, payable in
cash or stock, in the discretion of the Board, and an annual bonus based upon
the annual revenues we receive in connection with the Film.
Mr. Wilson agreement provided that he could be terminated for "cause" as
defined in his employment agreement. If Mr. Wilson were terminated without
"cause" or left the Company for "good reason," each as defined in the agreement,
the agreement provided for him to receive a severance payment equal to the
longer of that period of time remaining in his employment agreement or nine
months. If Mr. Wilson were terminated without cause or with good reason within
one year after a "change of control," as defined in the agreement, he was to
receive a severance payment equal to two years of his base salary plus an amount
equal to two times the amount of his last bonus received.
Mr. Wilson resigned as Vice President, Secretary and as a member of the
Board of Directors effective December 31, 2003. Upon his resignation Mr. Wilson
received compensation through February 25, 2004, a stock grant of 333,333, 1% of
the gross received by the Company from Top Secret Entertainment, LLC and he was
allowed to retain his options until their scheduled expiration dates.
THOMAS J. COOPER. On March 22, 2002, we entered into an employment
agreement with Thomas J. Cooper to serve as our Chief Executive Officer
commencing June 1, 2002. Mr. Cooper's agreement, which was for a three-year
term, began on March 22, 2002 and was terminated on December 2, 2002. The
agreement provided for Mr. Cooper to receive an annual base salary of $250,000
per year, commencing June 1, 2002. Prior to that date, the agreement provided
for Mr. Cooper to receive a base salary of $125,000 per year. The agreement also
entitled Mr. Cooper to an annual bonus, payable in cash or stock, in the
discretion of the Board. In addition, the agreement provided for Mr. Cooper to
receive an option to purchase 1,500,000 shares of our common stock. This option
was terminated pursuant to our Separation Agreement with Mr. Cooper, which is
described below under the heading "Certain Relationships and Related
Transactions."
34
Mr. Cooper's agreement provided that he could be terminated for "cause,"
as defined in his employment agreement. If Mr. Cooper were terminated without
"cause" or left New Visual for "good reason," each as defined in the agreement,
the agreement provided for him to receive a severance payment equal to two years
of his base salary on the date of his termination. If Mr. Cooper were terminated
without cause or with good reason within one year after a "change of control,"
as defined in the agreement, he was to receive a severance payment equal to two
years of his base salary and an amount equal to two times the amount of his last
bonus received.
Mr. Cooper resigned as Chief Executive Officer for personal reasons
effective December 2, 2002. The foregoing termination and severance provisions
were not implicated by Mr. Cooper's resignation. In connection with his
resignation, we entered into a Separation Agreement with Mr. Cooper. See
"Certain Relationships and Related Transactions - Thomas J. Cooper." The Board
and Compensation Committee believe the terms of the Separation Agreement were
fair to both parties and in the best interests of the Company and its
shareholders.
BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS, DIRECTORS AND EXECUTIVE
OFFICERS
The following table sets forth information as of February 9, 2004,
concerning all persons known by us to own beneficially more than 5% of our
Common Stock and concerning shares beneficially owned by each director and named
executive officer and by all directors and executive officers as a group. Unless
expressly indicated otherwise, each shareholder exercises sole voting and
investment power with respect to the shares beneficially owned. The address for
each of our executive officers and directors is 5920 Friars Road, Suite 104, San
Diego, CA 92108.
In accordance with the rules of the SEC, the table gives effect to the
shares of common stock that could be issued upon the exercise of outstanding
options and common stock purchase warrants within 60 days of February 9, 2004.
Unless otherwise noted in the footnotes to the table and subject to community
property laws where applicable, the following individuals have sole voting and
investment control with respect to the shares beneficially owned by them. The
address of each executive officer and director is c/o New Visual Corporation,
5920 Friars Road, Suite 104, San Diego, California 92108. We have calculated the
percentages of shares beneficially owned based on 76,948,866 shares of common
stock outstanding at February 9, 2004.
SHARES BENEFICIALLY OWNED
-----------------------------------
PERSON OR GROUP Number Percent (1)
----------------------------------------------------------------- ----------------- --------------
Brad Ketch 807,500 (2) 1.04%
Ray Willenberg, Jr. 2,929,375 (3) 3.67%
C. Rich Wilson III 1,424,875 (4) 1.82%
Thomas J. Cooper 532,258 (5) *
John Howell 375,000 (6) *
Bruce Brown 174,000 (7) *
Ivan Berkowitz 1,331,875 (8) 1.70%
James W. Cruckshank 50,000 *
All executive officers and directors as a group (8 persons) 7,624,833 (9) 9.61%
Charles R. Cono 3,904,500 (10) 4.83%
Zaiq Technologies, Inc. 8,184,615 (11) 9.61%
* Less than 1%.
(1) Percentage of beneficial ownership as to any person as of a particular date
is calculated by dividing the number of shares beneficially owned by such person
by the sum of the number of shares outstanding as of such date and the number of
unissued shares as to which such person has the right to acquire voting and/or
investment power within 60 days.
(2) Comprised of (i) 40,000 shares of Common Stock and (ii) 767,500 shares of
Common Stock issuable upon exercise of options. Does not include 1,187,500
shares of Common Stock issuable upon exercise of options which are scheduled to
vest over the next 22 months.
(3) Includes options to purchase 1,120,000 shares of Common Stock.
(4) Includes options to purchase 745,000 of Common Stock.
35
(5) Includes options to purchase 500,000 shares of Common Stock.
(6) Includes options to purchase 14,000 shares of Common Stock.
(7) Includes options to purchase 160,000 shares of Common Stock.
(8) Includes options to purchase 785,000 shares of Common Stock.
(9) Includes options to purchase an aggregate 5,405,000 shares of Common Stock.
(10) Includes 3,904,500 shares of Common Stock held by the Charles R. Cono
Trust, of which Mr. Cono is the trustee. Mr. Cono's address is 550 Baltimore
Drive, La Mesa, California 91942-1176.
(11) reflects Common Stock issuable on conversion of 3,192 shares of Series B
Preferred Stock at an assumed conversion price of $0.00039 on February 21, 2003.
The address of Zaiq Technologies, Inc. is 78 Dragon Court, Woburn, MA 01801.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BRAD KETCH. On December 30, 2003 our Board of Directors authorized the
issuance of 333,333 shares of our Common Stock to Mr. Ketch as a bonus for the
time spent in connection with the December 2003 Securities Purchase Agreement.
These shares have not yet been issued to Mr. Ketch.
RAY WILLENBERG. On December 30, 2003 our Board of Directors authorized
the issuance of 333,333 shares of our Common Stock to Mr. Willenberg as a bonus
for the time spent in connection with the December 2003 Securities Purchase
Agreement. These shares have not yet been issued to Mr. Willenberg.
JAMES W. CRUCKSHANK. On December 8, 2003, we entered into an employment
agreement with Mr. Cruckshank to serve as our Chief Financial Officer. Under the
Agreement, Mr. Cruckshank received 50,000 shares of Common Stock and is paid,
with respect to each day actually worked, $700 in cash and is issued Common
Stock with a market value (at the time of grant) of $480. Mr. Cruckshank is also
eligible for quarterly stock grants based upon completion of certain agreed upon
objectives. The agreement is cancelable by the Company immediately for "cause,"
with 15 days notice without "cause," and with 30 days notice if he leaves the
Company for "good reason," each as defined in the agreement. In the event
cancellation is without "cause" or for "good reason," after April 8, 2004 until
December 8, 2004 Mr. Cruckshank will receive two months severance based upon
base pay and from December 8, 2004 and thereafter six months severance based on
base pay.
THOMAS J. COOPER. On December 2, 2002, we entered into a Separation
Agreement with Mr. Cooper relating to his resignation as our Chief Executive
Officer. Mr. Cooper remains a director of the Company. Under the agreement, we
reimbursed Mr. Cooper for expenses of $10,000 incurred during his employment and
paid him deferred salary of $57,692.30 (the "Salary Payment") on or before March
31, 2003. The Salary Payment is payable in two installments, the first of which,
totaling $10,000 was due and paid on or before February 15, 2003. The remainder
of $47,692.30 is due on March 31, 2003. If we fail to make the remaining payment
pursuant to this schedule, we must pay Mr. Cooper interest at a rate of 24% per
year on any unpaid amounts. We also agreed to continue Mr. Cooper's health
insurance benefits for up to six months. Pursuant to the terms of the Separation
Agreement, the 1,500,000 stock options granted to Mr. Cooper in connection with
his role as Chief Executive Officer were terminated. Mr. Cooper retained other
options previously granted to him and remains a director of the Company.
CHARLES R. CONO. In July 2002, we borrowed $500,000 from the Charles R.
Cono Trust, a significant shareholder. The note reflecting this loan was due and
payable with 10% interest on or before November 1, 2002 (the "July Note"). Also
in July 2002, we entered into a consulting agreement with Mr. Cono in which we
agreed to pay Mr. Cono $250,000 in exchange for his consulting services upon our
receipt of gross revenues of at least $2,250,000 from our motion picture, STEP
INTO LIQUID. On November 13, 2002, and effective as of October 31, 2002, we
entered into a promissory note with the Charles R. Cono Trust in the amount of
$514,520.55 that amended, restated and replaced in all respects the July Note.
This promissory note, which bears interest at 10% per year, is due and payable
upon three days demand by Mr. Cono, which could not be made prior to December
16, 2002. This note is currently outstanding.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of
January 1, 2004, by the selling stockholders prior to the offering contemplated
by this Prospectus, the number of shares each selling stockholder is offering by
this Prospectus and the number of shares which each would own beneficially if
all such offered shares are sold. The selling stockholders acquired their
beneficial interests in the shares being offered hereby in private placements in
which each such selling stockholder advised us that it purchased the relevant
securities solely for investment and not with a view to or for resale or
distribution of such securities.
Except for selling stockholders with an asterisk (*) next to their names,
the selling stockholders acquired their beneficial interests in the shares being
offered hereby in private placements described in this Prospectus under the
caption "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE DEBENTURE HOLDERS."
36
Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities. However,
except for the selling stockholder with the pound sign (#) next to its name,
each of the selling stockholders is subject to certain limitations on the
conversion of their convertible debentures and the exercise of their warrants,
if any. The most significant of these limitations is that such selling
stockholder may not convert its debentures or exercise its warrants, if such
conversion or exercise would cause such holder's beneficial ownership of our
Common Stock (excluding shares underlying any of their unconverted debentures or
unexercised warrants) to exceed 4.99% of the outstanding shares of Common Stock.
Also, the table below also includes the number of shares which might be issuable
on the occurrence of certain events which have not yet occurred and may not
occur. Therefore, although they are included in the table below, the number of
shares of Common Stock for some listed persons may include shares that are not
subject to purchase during the 60-day period.
Common Stock to be
Beneficially Owned if
All shares offered
Number of Shares Offered Hereunder are sold
Shares Owned Pursuant to this ---------------------
Selling Stockholder Before Offering Prospectus shares Percent
------------------- --------------- ---------------- ------ -------
Bristol Investment Fund, Ltd. (1) 4,420,000 4,420,000 0 0
Alpha Capital AG (2) 2,946,667 2,946,667 0 0
Wayne Saker (3) 1,473,334 1,473,334 0 0
Blumfield Investments, Inc. (3) 1,473,334 1,473,334 0 0
Notzer Chesed (3) 1,473,334 1,473,334 0 0
Yokim Asset Management
Inc. (3) 1,473,334 1,473,334 0 0
Quines Financial S.A. (3) 1,473,334 1,473,334 0 0
Gamma Opportunity Capital
Partners, LP (3) 1,473,334 1,473,334 0 0
First Mirage, Inc. (3) 1,473,334 1,473,334 0 0
Generation Capital
Associates (3) 1,473,334 1,473,334 0 0
Professional Traders Funding
LLC (3) 1,473,334 1,473,334 0 0
David Klugmann Associates, Inc.
Plan (3) 1,473,334 1,473,334 0 0
Inglewood Holdings Ltd. (3) 1,473,334 1,473,334 0 0
Gersh Korsinsky (3) 1,473,334 1,473,334 0 0
Vertical Ventures, LLC (3) 1,473,334 1,473,334 0 0
Gross Foundation, Inc. (3) 1,473,334 1,473,334 0 0
Tuva Financial Ltd. (4) 2,473,334 2,473,334 0 0
*Clearview International
Investments Limited (5) 1,333,334 1,333,334 0 0
*Melton Management Ltd. (6) 600,0000 600,000 0 0
* Aboudi & Brounstein (7) 100,000 100,000 0 0
37
(1) Represents (i) 2,000,000 shares of Common Stock issuable upon
conversion of $300,000 in aggregate principal amount of our Convertible
Debentures, based on a conversion price of $0.15, together with 420,000 shares
of Common Stock issuable in respect of interest thereon accrued through the
maturity date on the third anniversary of issuance, and (ii) 2,000,000 shares
issuable upon the exercise of Warrants issued in connection with the Debentures.
We are registering 150% of this number of shares for the selling stockholder to
include other shares of our Common Stock which might be issuable to the selling
stockholder as contemplated by terms of agreements between us and the selling
stockholder. The selling stockholder advised us that it purchased the debentures
and warrants solely for investment and not with a view to or for resale or
distribution of such securities. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS."
(2) Represents (i) 1,333,333 shares of Common Stock issuable upon
conversion of $200,000 in aggregate principal amount of our Convertible
Debentures, based on a conversion price of $0.15, together with 280,000 shares
of Common Stock issuable in respect of interest thereon accrued through the
maturity date on the third anniversary of issuance, and (ii) 1,333,334 shares
issuable upon the exercise of Warrants issued in connection with the Debentures.
We are registering 150% of this number of shares for the selling stockholder to
include other shares of our Common Stock which might be issuable to the selling
stockholder as contemplated by terms of agreements between us and the selling
stockholder. The selling stockholder advised us that it purchased the debentures
and warrants solely for investment and not with a view to or for resale or
distribution of such securities. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS."
(3) Represents (i) 666,667 shares of Common Stock issuable upon
conversion of 100,000 in aggregate principal amount of Convertible Debentures,
based on a conversion price of $0.15, together with 140,000 shares of Common
Stock issuable in respect of interest thereon accrued through the maturity date
on the third anniversary of issuance, and (ii) 666,667 shares issuable upon the
exercise of Warrants issued in connection with the Debentures. We are
registering 150% of this number of shares for the selling stockholder to include
other shares of our Common Stock which might be issuable to the selling
stockholder as contemplated by terms of agreements between us and the selling
stockholder. The selling stockholder advised us that it purchased the debentures
and warrants solely for investment and not with a view to or for resale or
distribution of such securities. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS."
(4) Represents (i) 666,667 shares of Common Stock issuable upon
conversion of 100,000 in aggregate principal amount of Convertible Debentures,
based on a conversion price of $0.15, together with 140,000 shares of Common
Stock issuable in respect of interest thereon accrued through the maturity date
on the third anniversary of issuance, and (ii) 666,667 shares issuable upon the
exercise of Warrants issued in connection with the Debentures. We are
registering 150% of this number of shares for the selling stockholder to include
other shares of our Common Stock which might be issuable to the selling
stockholder as contemplated by terms of agreements between us and the selling
stockholder. The selling stockholder advised us that it purchased the debentures
and warrants solely for investment and not with a view to or for resale or
distribution of such securities. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE
DEBENTURE HOLDERS." Also includes 1,000,000 shares of Common Stock acquired
through a non-market purchase from a third party.
(5) Represents shares of Common Stock issuable upon exercise of five-year
warrants issued as a placement fee in connection with the investments referred
to in footnotes 1-4 above.
(6) Represents shares of Common Stock issuable upon exercise of
three-year warrants issued in connection with a private placement loan in the
principal amount of $300,000 advanced to us in October 2003 by such Selling
Stockholder and repaid in January 2004. The selling stockholder advised us that
it purchased the warrants solely for investment and not with a view to or for
resale or distribution of such securities.
(7) Represents shares of Common Stock issuable upon exercise of
three-year warrants issued in November 2003. This selling stockholder provides
legal services to us. See "INTEREST OF NAMED EXPERTS AND COUNSEL."
38
DESCRIPTION OF SECURITIES
The following description of our capital stock summarizes the material
terms and provisions of the indicated securities. For the complete terms of our
Common Stock and preferred stock please refer to our certificate of
incorporation and by-laws that we have filed with the SEC.
We are authorized to issue 500,000,000 shares of Common Stock, of which
76,948,866 shares are issued and outstanding as of February 9, 2004. We are
authorized to issue 15,000,000 shares of preferred stock, $0.001 par value per
share, with following series designated: (A) 200,000 shares of Series A
Preferred Stock, of which none are outstanding as of the date hereof, (B) 4,000
shares of Series B Preferred Stock, of which none are outstanding as of the date
hereof, (C) 57,894.201 shares of Series C Preferred Stock, of which none are
outstanding as of the date hereof, (D) 9,090.909 shares of Series D Preferred
Stock, of which none are outstanding as of the date hereof, (E) 25,000 shares of
Series E Preferred Stock, none of which are outstanding as of February 9, 2004,
(F) 10,297.118 shares of Series F Preferred Stock, none of which are outstanding
as of February 9, 2004 and (G) 10,297.118 shares of Series G Preferred Stock,
none of which are outstanding as of February 9, 2004.
COMMON STOCK
A significant portion of our Common Stock is held in either nominee name
or street name brokerage accounts. Holders of shares of our Common Stock are
entitled to one vote for each share held of record on all matters to be voted on
by stockholders. The holders of shares of the Common Stock do not have
cumulative voting rights for the election of directors and, accordingly, the
holders of more than 50% of the shares of Common Stock are able to elect all
directors. Holders of shares of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors from funds legally available
therefore, subject to the rights of preferred shareholders, if any. Upon our
liquidation, dissolution or winding up, the holders of our Common Stock are
entitled to receive, pro-rata, that portion of our assets which are legally
available for distribution to shareholders, subject to the rights of preferred
shareholders, if any.
PREFERRED STOCK
The preferred stock shall be issuable in series, and in connection with
the issuance of any series of preferred stock and to the extent now or hereafter
permitted by law, the board of directors is authorized to fix by resolution the
designation of each series, the stated value of the shares of each series, the
dividend rate or rates of each series and the date or dates and other provisions
respecting the payment of dividends, the provisions, if any, respecting the
redemption of the shares of each series and, subject to requirements of law, the
voting rights, the terms, if any, upon which the shares of each series shall be
convertible into or exchangeable for any other shares of stock of the Company
and any other relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, of the shares of each
series.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK AND RIGHTS DIVIDEND
The Company adopted a stockholder rights plan, in which one right was
distributed on August 21, 2000 as a dividend on each outstanding share of Common
Stock to stockholders of record on that date. Each right entitles the holder to
purchase 1/1000th of a share of a new series of junior participating preferred
stock 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 our Common Stock. After any such acquisition or
announcement, the Company's stockholders, other than the acquirer, could then
exercise each right they hold to purchase Common Stock at a 50% discount from
the market price. In addition, if, after another person becomes an acquiring
person, we are involved in a merger or other business combination in which we
are 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 our
Common Stock, at the option of the Board of Directors, the rights are redeemable
for $0.001 per right.
The rights are scheduled to expire on August 21, 2004.
39
The rights plan contains provisions that are designed to protect our
stockholders in the event of an unsolicited attempt to acquire our company,
including a gradual accumulation of shares in the open market, a partial or
two-tiered tender offer that does not treat all stockholders equally and other
takeover tactics that the board of directors believes may be abusive and not in
the best interests of our stockholders. The rights plan gives the board of
directors an opportunity to evaluate an offer and exercise good faith business
judgment and, if necessary, take appropriate steps to protect and advance
stockholder interests by negotiating with the bidder, auctioning the company,
implementing a recapitalization or restructuring designed as an alternative to
the offer or taking other action.
The rights plan may have the effect of discouraging tender offers or
other attempts to obtain control of our company and thereby make the removal of
incumbent management more difficult. The rights plan, however, does not inhibit
stockholders from utilizing the proxy mechanism to promote a change in the
management or direction of our company.
In July 2000, the Company created a series of preferred stock, designated
as "Series A Junior Participating Preferred Stock"("Series A"). 200,000 shares
of the Series A 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 with respect to dividends, the
holders of shares of Series A, 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, 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 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, unless the
holders of shares of Series A 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 are not be redeemable.
The are no Series A outstanding.
REDEEMABLE SERIES B PREFERRED STOCK
In April 2002, we designated 4,000 of our authorized preferred stock as a
Series B Preferred Stock ("Series B"), with a liquidation preference of $1,000
per share. We may redeem any or all of the shares of Series B at any time or
from time to time at a per share redemption price equal to the preference
amount. The Series B are mandatorily redeemable at the liquidation preference as
follows:
(i) Closing of financing transaction with proceeds 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 we complete a financing, which is at least $3 million
but less than $15 million, we must partially redeem the Series B
based on a fraction, the numerator of which is the net cash
proceeds received by us, as a result of the financing transaction,
and the denominator of which is $15 million;
(iv) We are obligated to redeem any outstanding Series B at its
liquidation preference, in eight equal quarterly payments,
commencing on March 31, 2005 and ending on December 31, 2006.
Holders of Series B are entitled to receive dividends if, as and when
declared by our board of directors in preference to the holders of Common Stock
and of any other stock ranking junior to the Series B with respect to dividends.
40
We 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. Holders of
Series B 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 our preferred stock. The Series B does not have voting rights,
except as required by law. Each share of the Series B is convertible into shares
of Common Stock by dividing $1,000 by the conversion price. The conversion price
is the fair market value of the Common Stock at the time of conversion, but not
to be less than $0.34 per share, subject to adjustment, and not to exceed $4.00
per share, subject to adjustment. Holders of the Series B were granted
piggy-back registration rights to register Common Stock reserved for such
conversion.
In April 2002, we issued 3,192 shares of its Series B, with redemption
and liquidation preference of $3,192,000, in connection with a development and
license agreement.
SERIES C CONVERTIBLE PREFERRED STOCK
In February 2003 we designated 100,000 shares of our authorized preferred
stock as Series C Preferred Stock ("Series C"). In May 2003, we amended this
designation and fixed the number of shares designated as Series C Preferred
Stock as 57,894.201.
Series C was originally issued as collateral for a proposed loan. As of
January 31, 2004 none of the Series C was outstanding. However, 15,152 shares of
Series C have been reserved for issuance as collateral for a proposed $2 million
loan. Series C is not entitled to receive dividends or to vote, except as
required by Utah law, and is not subject to mandatory redemption. The aggregate
liquidation preference of Series C is equal to the unpaid balance of principal
and interest on the proposed loan to be collateralized by the shares of such the
series. In the event of a default under such proposed loan, Series C can be
converted into Common Stock to liquidate the unpaid balance of the loan and
related interest.
SERIES D CONVERTIBLE PREFERRED STOCK; SERIES E CONVERTIBLE PREFERRED STOCK;
SERIES F CONVERTIBLE PREFERRED STOCK; SERIES G CONVERTIBLE PREFERRED STOCK
In June 2003, we designated 9,090.909 shares of our authorized preferred
stock as Series D Preferred Stock ("Series D"), 25,000 shares of our authorized
preferred stock as Series E Preferred Stock ("Series E"), 10,297.118 shares of
our authorized preferred stock as Series F Preferred Stock ("Series F") and
10,297.118 shares of our authorized preferred stock as Series G Preferred Stock
("Series G").
Series D, Series E, Series F and Series G were each originally issued as
collateral for a proposed loan. As of January 31, 2004 none of the Series D
Series E, Series F and Series G was outstanding. Each of Series D Series E,
Series F and Series G is not entitled to receive dividends or to vote, except as
required by Utah law, and is not subject to mandatory redemption. The aggregate
liquidation preference of each of Series D Series E, Series F and Series G is
equal to the unpaid balance of principal and interest on the proposed loan to be
collateralized by the shares of such the series. In the event of a default under
such proposed loan, any of Series D Series E, Series F and Series G can be
converted into Common Stock to liquidate the unpaid balance of the loan and
related interest.
None of these Series C, D, E, F and G are classified as outstanding as of
October, 31, 2003 as such shares are issuable only upon the funding of the
loans, if any.
PLAN OF DISTRIBUTION
As used in this Prospectus, stockholders selling our shares pursuant to
this prospectus include donees and pledgees selling shares received after the
date of this prospectus from a selling stockholder named in this prospectus.
We have agreed, subject to certain limits, to bear all costs, expenses
and fees of registration of the shares of Common Stock offered by the selling
stockholders for resale. However, any brokerage commissions, discounts,
concessions or other fees, if any, payable to broker-dealers in connection with
any sale of the shares of Common Stock will be borne by the selling stockholders
selling those shares or by the purchasers of such shares.
41
Upon our being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
o The name of each such selling stockholder and of the participating
broker-dealer(s);
o The number of securities involved;
o The price at which such securities were sold;
o The commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o That such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
o Other facts material to the transaction.
The selling stockholders may use any one or more of the following methods
when selling shares:
o directly as principals;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this Prospectus.
Any sales of the shares may be effected through the OTC Bulletin Board,
in private transactions or otherwise, and the shares may be sold at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. We
believe that the selling stockholders have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their shares other than ordinary course brokerage arrangements, nor
is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. If the selling stockholders effect
sales through underwriters, brokers, dealers or agents, such firms may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or the purchasers of the shares for whom they may act as
agent, principal or both in amounts to be negotiated. Those persons who act as
broker-dealers or underwriters in connection with the sale of the shares may be
selected by the selling stockholders and may have other business relationships
with, and perform services for, us. The selling stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
Any selling stockholder, underwriter or broker-dealer who participates in
the sale of the shares may be deemed to be an "underwriter" within the meaning
of Section 2(11) of the Securities Act. Any commissions received by any
underwriter or broker-dealer and any profit on any sale of the shares as
principal may be deemed to be underwriting discounts and commissions under the
Securities Act.
42
The anti-manipulation provisions of Rules 101 through 104 under the
Exchange Act may apply to purchases and sales of shares of common stock by the
selling stockholders. In addition, there are restrictions on market-making
activities by persons engaged in the distribution of the common stock.
Under the securities laws of certain states, the shares may be sold in
such states only through registered or licensed brokers or dealers. In addition,
in certain states the shares may not be able to be sold unless the Common Stock
has been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We are required to pay expenses incident to the registration, offering
and sale of the shares pursuant to this offering. We estimate that our expenses
will be approximately $90,000 in the aggregate. We have agreed to indemnify
certain selling stockholders and certain other persons against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments to which such selling stockholders or their respective pledgees,
donees, transferees or other successors in interest may be required to make in
respect thereof. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons,
we have been advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
We are a Utah corporation. Section 16-10a-902 of the Utah Revised
Business Corporation Act (the "Revised Act") provides that a corporation may
indemnify any individual who was, is or is threatened to be made a named
defendant or respondent (a "Party") in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (a "Proceeding"), because he or she
is or was a director of the corporation or, while a director of the corporation,
is or was serving at its request as a director, officer, partner, trustee,
employee, fiduciary or agent of another corporation or other person or of an
employee benefit plan (an "Indemnifiable Director"), against any obligation
incurred with respect to a Proceeding, including any judgment, settlement,
penalty, fine or reasonable expenses (including attorneys' fees), incurred in
the Proceeding if: (i) his or her conduct was in good faith; (ii) he or she
reasonably believed that his or her conduct was in, or not opposed to, the best
interests of the corporation and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe such conduct was unlawful; provided, however,
that pursuant to Subsection 902(4): (i) indemnification under Section 902 in
connection with a Proceeding by or in the right of the corporation is limited to
payment of reasonable expenses (including attorneys' fees) incurred in
connection with the Proceeding and (ii) the corporation may not indemnify an
Indemnifiable Director in connection with a Proceeding by or in the right of the
corporation in which the Indemnifiable Director was adjudged liable to the
corporation, or in connection with any other Proceeding charging that the
Indemnifiable Director derived an improper personal benefit, whether or not
involving action in his or her official capacity, in which Proceeding he or she
was adjudged liable on the basis that he or she derived an improper personal
benefit.
Section 16-10a-903 of the Revised Act provides that, unless limited by
its articles of incorporation, a corporation shall indemnify an Indemnifiable
Director who was successful, on the merits or otherwise, in the defense of any
Proceeding, or in the defense of any claim, issue or matter in the Proceeding,
to which he or she was a Party because he or she is or was an Indemnifiable
Director of the corporation, for reasonable expenses (including attorneys' fees)
incurred in connection with the Proceeding or claim with respect to which he or
she has been successful.
Section 16-10a-904 of the Revised Act provides that a corporation may pay
for or reimburse the reasonable expenses (including attorneys' fees) incurred by
an Indemnifiable Director who is a Party to a Proceeding in advance of the final
disposition of the Proceeding upon the satisfaction of certain conditions.
In addition to the indemnification provided by Sections 902 and 903,
Section 16-10a-905 of the Revised Act provides that, unless otherwise limited by
a corporation's articles of incorporation, an Indemnifiable Director may apply
for indemnification to the court conducting the Proceeding or to another court
of competent jurisdiction.
43
Section 16-10a-907 of the Revised Act provides that, unless a
corporation's articles of incorporation provide otherwise, (i) an officer of the
corporation is entitled to mandatory indemnification under Section 903 and is
entitled to apply for court-ordered indemnification under Section 905, in each
case to the same extent as an Indemnifiable Director; (ii) the corporation may
indemnify and advance expenses to an officer, employee, fiduciary or agent of
the corporation to the same extent as an Indemnifiable Director and (iii) a
corporation may also indemnify and advance expenses to an officer, employee,
fiduciary or agent who is not an Indemnifiable Director to a greater extent than
the right of indemnification granted to an Indemnifiable Director, if not
inconsistent with public policy, and if provided for by its articles of
incorporation, bylaws, general or specific action of its board of directors or
contract.
Section 16-10a-908 of the Revised Act authorizes a corporation to
purchase and maintain liability insurance for a director, officer, employee,
fiduciary or agent of the corporation.
Our Bylaws (the "Bylaws") provide that subject to the limitations and
conditions as provided below and in Section 9 of the Revised Act, a Party in a
Proceeding or an appeal, inquiry or investigation that could lead to a
Proceeding, by reason of the fact that he or she, is or was an Indemnifiable
Director shall be indemnified by us against judgments, fines, settlements and
reasonable expenses (including, attorneys' fees) actually incurred by them in
connection with such Proceeding, if it is determined that such person: (i)
conducted himself or herself in good faith; (ii) reasonably believed that his or
her conduct was in, or not opposed to, our best interest and (iii) in the case
of any criminal proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Reasonableness of expenses shall be determined by the
directors, a committee, by special legal counsel or by a vote of the
shareholders. However, if a person is found liable to us or is found liable on
the basis that personal benefit was improperly received by such person,
indemnification is limited to reasonable expenses actually incurred by such
person in connection with the Proceeding and will not be made in respect of any
Proceeding in which such person shall have been found liable for willful or
intentional misconduct in the performance of his or her duty to us.
Indemnification may involve indemnification for negligence or under theories of
strict liability.
Our Bylaws further provide that indemnification rights granted are
contract rights, and no amendment of the Bylaws will limit or deny any such
rights with respect to actions taken or Proceedings arising prior to any
amendment. Indemnification rights may include the right to be paid the
reasonable expenses incurred by an Indemnifiable Director who was, is or is
threatened to be made a named defendant or respondent in a Proceeding in advance
of the final disposition of the Proceeding and without any determination as to
the person's ultimate entitlement to indemnification; provided, however, that
the payment of such expenses will be made only (i) upon delivery to us of a
written affirmation by such director or officer of his or her good faith belief
that he or she has met the standard of conduct necessary for indemnification;
(ii) delivery of a written undertaking, by or on behalf of such person, to repay
all amounts so advanced if it shall ultimately be determined that such
indemnified person is not entitled to be indemnified pursuant to the Bylaws or
otherwise and (iii) a determination that the facts then known to those making
the determination would not preclude indemnification. We, by adoption of a
resolution of the directors, may indemnify and advance expenses to an officer,
employee, fiduciary or agent to the same extent and subject to the same
conditions under which we may indemnify and advance expenses to directors. We
may pay or reimburse expenses incurred by a director or officer in connection
with his or her appearance as a witness or other participation in a Proceeding
at a time when he or she is not a named defendant or respondent in the
Proceeding. We may purchase and maintain liability insurance. If any portion of
the Bylaws relating to indemnification are invalidated we shall nevertheless
indemnify each director, officer or any other person indemnified pursuant to the
Bylaws as to costs to the full extent permitted by any applicable portion of the
Bylaws that have not been invalidated and to the fullest extent permitted by
law.
Insofar as indemnification of liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
44
INTEREST OF NAMED EXPERTS AND COUNSEL
Aboudi & Brounstein, Law Offices received in November 2003 a three year
warrant to purchase up to 100,000 shares of our Common Stock at a per share
exercise price of $0.15, in connection with legal services rendered by them. The
legal services included the preparation of this Prospectus.
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed on for us by G. David Gordon, Esq. Certain other matters will be passed
upon by our special counsel Aboudi & Brounstein.
EXPERTS
The financial statements as of October 31, 2003 and 2002 included in this
Prospectus and elsewhere in the Registration Statement of which this Prospectus
forms a part have been audited by Marcum & Kliegman, LLP, independent auditors,
as stated in their reports appearing herein and elsewhere in the registration
statement (which reports express an unqualified opinion and includes an
explanatory paragraph related to the Company's ability to continue as a going
concern)) and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission ("Commission"). You may
read and copy any reports, statements or other information on file at the
Commission's public reference room in Washington, D.C. You can request copies of
those documents, upon payment of a duplicating fee, by writing to the
Commission.
We have filed with the SEC under the Securities Act a Registration
Statement on Form SB-2 (the "Registration Statement"), of which this prospectus
is a part, with respect to the shares offered hereby. This prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules as permitted by the rules and regulations of
the Securities and Exchange Commission. Statements made in this prospectus as to
the contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each contract, agreement or other
document filed as an exhibit to the Registration Statement or in a filing
incorporated by reference herein or otherwise, reference is made to the exhibit
for a more complete description of the matters involved, and each statement
shall be deemed qualified in its entirety by this reference.
We are subject to the informational requirements of the Exchange Act and
file periodic reports, proxy statements and other information with the SEC.
Reports and other information filed by us may be inspected and copied at the
public reference facilities maintained by the SEC at:
Judiciary Plaza
450 Fifth Street, N. W.
Room 1024
Washington, D.C. 20549
Copies of such material may be obtained by mail from the Public Reference
Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the SEC maintains a Web site at HTTP://WWW.SEC.GOV
containing reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including us. The
SEC's telephone number is 1-800-SEC-0330.
45
INDEX TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report F-1
Consolidated Balance Sheets
At October 31, 2003 and 2002 F-2
Consolidated Statements of Operations
for the Years Ended October 31, 2003, 2002 and 2001 F-3
Consolidated Statements of Stockholders' Equity
for the Years Ended October 31, 2003, 2002 and 2001 F-4 to F-9
Consolidated Statements of Cash Flows
for the Years Ended October 31, 2003, 2002 and 2001 F-10
Notes to Consolidated Financial Statements F-11 to F-35
46
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
New Visual Corporation
We have audited the accompanying consolidated balance sheets of New Visual
Corporation and Subsidiaries (the "Company") as of October 31, 2003 and 2002 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended October 31, 2003, 2002 and 2001. 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 audit 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 at October 31, 2003 and 2002 and the results of
their operations and their cash flows for each of the years ended October 31,
2003, 2002 and 2001 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 $3,316,500, $9,467,123
and $11,875,915 during the years ended October 31, 2003, 2002 and 2001,
respectively. As of October 31, 2003, the Company had a working capital
deficiency of approximately $3,658,000. 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, 2004
F-1
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At October 31,
-------------------------------------
2003 2002
---------------- ----------------
ASSETS
------
Current Assets:
Cash $ 319,786 $ 311,577
Receivable from officers -- 10,032
Other current assets 5,015 1,650
---------------- ----------------
Total Current Assets 324,801 323,259
Property and equipment - net 41,301 64,533
Technology license and capitalized software development fee 5,751,000 5,751,000
Film In Distribution - net 2,142,212 --
Projects in Development -- 2,178,831
Other assets 13,036 14,576
---------------- ----------------
Total Assets $ 8,272,350 $ 8,332,199
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable $ 1,103,000 $ 954,500
Convertible debentures 300,000 --
Notes payable 740,311 971,407
Accounts payable and accrued expenses 1,744,883 2,247,595
License and development fees payable 95,000 734,000
---------------- ----------------
Total Current Liabilities 3,983,194 4,907,502
Redeemable Series B preferred stock 3,192,000 --
---------------- ----------------
Total Liabilities 7,175,194 4,907,502
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; 500,000,000 shares
Authorized (100,000,000 as of October 31, 2002); 70,676,682
and 49,787,069 shares issued and outstanding at
October 31, 2003 and 2002, respectively 70,677 49,787
Additional paid-in capital 51,131,622 47,097,830
Unearned financing fees (15,674) (214,952)
Unearned compensation (404,582) (331,581)
Accumulated deficit (49,684,887) (46,368,387)
---------------- ----------------
Total Stockholders' Equity 1,097,156 232,697
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 8,272,350 $ 8,332,199
================ =================
The accompanying notes are an integral part of these consolidated financial statements.
F-2
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31,
----------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
REVENUES $ 379,980 $ -- $ --
---------------- ---------------- ----------------
OPERATING EXPENSES:
Cost of sales 192,889
Projects written off 56,864
Research and development 117,901 1,298,560 839,402
Compensatory element of stock issuances for selling,
general and administrative expenses 2,062,081 2,459,158 3,558,887
Selling, general and administrative expenses 2,127,267 3,555,754 4,086,795
Litigation settlement 6,500 -- 1,000,000
Loss on disposal of equipment -- -- 7,500
---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 4,563,502 7,313,472 9,492,584
---------------- ---------------- ----------------
OPERATING LOSS (4,183,522) (7,313,472) (9,492,584)
---------------- ---------------- ----------------
OTHER (INCOME) EXPENSES:
Interest expense 270,587 1,036,434 337,378
Non Cash Gain - Litigation Settlement (1,474,000) -- --
Amortization of unearned financing costs 336,391 1,117,217 2,045,953
---------------- ---------------- ----------------
TOTAL OTHER (INCOME) EXPENSES (867,022) 2,153,651 2,383,331
---------------- ---------------- ----------------
NET LOSS $ (3,316,500) $ (9,467,123) $ (11,875,915)
================ ================ ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.05) $ (.23) $ (.46)
================ ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 60,643,489 41,861,295 25,988,990
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Common Stock Additional
----------------------------------- Paid-In
Shares Amount Capital
-------------- ---------------- ---------------
Balance - November 1, 2002 49,787,069 $ 49,787 $ 47,097,830
Issuance of common stock for cash ($.13 to $.30
per share) 17,112,611 17,113 2,919,580
Issuance of common stock for conversion of promissory
notes and interest ($.15 to $1.00 per share) 1,225,941 1,226 376,524
Issuance of common stock for deferred payroll 88,710 89 54,912
Issuance of common stock under consulting agreements
($.32 to $.64 per share) 3,621,875 3,622 1,535,628
Cancellation of shares under legal settlement (2,200,000) (2,200) (1,471,800)
Cashless exercise of warrants 40,476 40 (40)
Exercise of warrants 1,000,000 1,000 59,000
Stock offering costs (172,957)
Value assigned to beneficial conversion 137,113
Value assigned to warrants issued to consultants 588,232
Value assigned to options issued to consultants 7,600
Amortization of unearned compensation expense
Amortization of unearned financing costs
Net loss
-------------- ---------------- ---------------
Balance - October 31, 2003 70,676,682 $ 70,677 $ 51,131,622
============== ================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Total
Unearned Unearned Accumulated Stockholders'
Financing Costs Compensation Deficit Equity
---------------- --------------- --------------- ---------------
Balance - November 1, 2002 $ (214,952) $ (331,581) $ (46,368,387) $ 232,697
Issuance of common stock for cash ($.13 to $.30 per
share) 2,936,693
Issuance of common stock for conversion of promissory
notes and interest ($.15 to $1.00 per share) 377,750
Issuance of common stock for deferred payroll 55,001
Issuance of common stock under consulting agreements
($.32 to $.64 per share) (1,539,250) --
Cancellation of shares under legal settlement (1,474,000)
Cashless exercise of warrants
Exercise of warrants 60,000
Stock offering costs (172,957)
Value assigned to beneficial conversion (137,113) --
Value assigned to warrants issued to consultants (588,232) --
Value assigned to options issued to consultants (7,600) --
Amortization of unearned compensation expense 2,062,081 2,062,081
Amortization of unearned financing costs 336,391 336,391
Net loss (3,316,500) (3,316,500)
---------------- --------------- --------------- ---------------
Balance - October 31, 2003 $ (15,674) $ (404,582) $ (49,684,887) $ 1,097,156
================ =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Common Stock Additional
----------------------------------- Paid-In Subscriptions
Shares Amount Capital Receivable
-------------- --------------- --------------- -------------
Balance - November 1, 2001 30,003,681 $ 30,003 $ 38,478,279 $ (103,500)
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 $1.00 per
share) 6,448,675 6,449 2,114,476
Cash received for subscription receivable 103,500
Issuance of common stock in connection with the exercise
of warrants ($.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-6
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Total
Unearned Unearned Accumulated Stockholders'
Financing Costs Compensation Deficit Equity
--------------- --------------- --------------- ---------------
Balance - November 1, 2001 $ (537,380) $ (481,751) $ (36,901,264) $ 484,387
Issuance of common stock under consulting agreements
($.40 to $1.24 per share) (344,280) 814,600
Issuance of common stock for cash ($.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 (100,000) 333,238
Issuance of common stock for financing fee (141,000) --
Stock offering costs (246,993)
Value assigned to beneficial conversion (653,789) --
Value assigned to warrants issued to consultants (467,370) 66,000
Value assigned to options issued to consultants (183,500) --
Amortization of unearned compensation expense 1,245,320 1,245,320
Amortization of unearned financing costs 1,117,217 1,117,217
Net loss (9,467,123) (9,467,123)
--------------- --------------- --------------- ---------------
Balance - October 31, 2002 $ (214,952) $ (331,581) $ (46,368,387) $ 232,697
=============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Common Stock Additional
----------------------------------- Paid-In Subscriptions
Shares Amount Capital Receivable
-------------- --------------- --------------- -------------
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 (3,500)
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 (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 30 540,000
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 $ (103,500)
============== =============== =============== =============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
Total
Unearned Unearned Accumulated Stockholders'
Financing Costs Compensation Deficit Equity
--------------- --------------- --------------- ---------------
Balance - November 1, 2000 $ (2,583,333) $ $ (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 152,000
January 31)
($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 (540,000) --
Value assigned to warrants issued to consultants at
quarter ended October 31 380,000
Value assigned to options issued to advisory board (151,194)
members at quarter ended October 31 (30,001)
Cancellation of common stock issued for cash --
Amortization of unearned financing costs 2,045,953 2,045,953
Amortization of unearned compensation expenses 209,443 209,443
Net loss (11,875,915) (11,875,915)
--------------- --------------- --------------- ---------------
Balance - October 31, 2001 $ (537,380) $ (481,751) $ (36,901,264) $ 484,387
=============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-9
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31,
-------------------------------------------------------------
2003 2002 2001
------------------ ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,316,500) $ (9,467,123) $ (11,875,915)
Adjustments to reconcile net loss to net cash used in
operating activities:
Consulting fees and other compensatory elements of
stock issuances 2,062,081 2,429,659 3,558,887
Stock issued for litigation settlement -- -- 1,000,000
Unusual item - gain on Litigation settlement (1,474,000) -- --
Loss on disposal of equipment -- -- 7,500
Projects written-off 56,864 -- --
Amortization of unearned financing costs 336,391 1,117,217 2,045,953
Amortization of film in production costs 192,889 -- --
Depreciation 23,232 77,260 118,693
Change in Assets (increase) decrease:
Other current assets (3,365) 92,766 (106,809)
Due from related parties 10,033 160,859 (100,708)
Other assets 1,540 18,963 83,558
Change in Liabilities increase (decrease):
Accounts payable and accrued expenses (172,462) 1,584,573 988,103
------------------ ---------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (2,283,297) (3,985,826) (4,280,738)
------------------ ---------------- -----------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment -- (2,513) (17,302)
Proceeds from sale of equipment -- 145,616 --
Projects under development (213,134) (266,181) (1,237,999)
Acquisition of license (639,000) (1,075,000) --
------------------ ---------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (852,134) (1,198,078) (1,255,301)
------------------ ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 2,936,693 2,224,422 5,426,607
Offering costs related to stock issuances (172,957) (246,993) --
Proceeds from convertible debentures 300,000 -- --
Proceeds from convertible notes payable 287,000 1,795,250 615,000
Proceeds from notes payable -- 700,000 --
Repayments of notes payable (231,096) -- (500,000)
Repayments of convertible notes payable (36,000) -- --
Proceeds from exercise of options and warrants 60,000 728,000 100,000
------------------ ---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,143,640 5,200,679 5,641,607
------------------ ---------------- -----------------
INCREASE IN CASH 8,209 16,775 105,568
CASH - BEGINNING OF YEAR 311,577 294,802 189,234
------------------ ---------------- -----------------
CASH - ENDING OF YEAR $ 319,786 $ 311,577 $ 294,802
================== ================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ -- $ --
================== ================ =================
Income taxes $ -- $ -- $ --
================== ================ =================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Compensation satisfied by issuance of common stock $ 55,001 $ 29,500 $ --
================== ================ =================
Notes and interest satisfied by issuance of common
stock $ 377,750 $ 2,183,626 $ --
================== ================ =================
Accrued interest added to convertible notes payable $ 156,000 $ -- $ --
================== ================ =================
Common stock issued for acquisition of license $ -- $ 750,000 $ --
================== ================ =================
Redeemable Series B Preferred Stock issued for
acquisition of license $ -- $ 3,192,000 $ --
================== ================ =================
The accompanying notes are an integral part of these consolidated financial statements.
F-10
NEW VISUAL CORPORATION AND SUBSIDIARIES
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 ("New Visual") and its wholly owned operating subsidiaries, NV
Entertainment, Inc. ("NV Entertainment") (including its 50% owned subsidiary Top
Secret Productions, LLC), 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. The Company consolidates its 50% owned subsidiary Top Secret
Productions, LLC due to the Company's control of management, board of directors
and financial matters.
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, a development
stage-company. As a result of the change in business focus, the Company became a
development stage entity commencing November 1, 1999. With the completion of the
film "Step Into Liquid" and its revenue generation during the fourth quarter of
fiscal 2003 the Company was no longer considered a development stage entity. The
Company's Telecommunication Segment has generated no revenues to date.
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, 2003, 2002 and 2001, the Company
incurred net losses of approximately $3,317,000, $9,467,000 and $11,876,000,
respectively, and as of October 31, 2003, had a working capital deficiency of
approximately $3,658,000. As of December 31, 2003, the Company raised $1 million
from the sale of its three-year 7% Convertible Debentures and, upon the
effectiveness of a registration statement relating to the shares of Common Stock
underlying such debentures, which the Company expects to file shortly, the
Company expects to sell an additional $1 million of such debentures.
Notwithstanding the amounts raised, 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 on
commercially acceptable terms 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. Except as noted above the Company has no commitment for such
financing.
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 Segment is dependent on future revenues from the
Company's film "Step Into Liquid." The success of the Telecommunications Segment
is dependent on the Company's ability to successfully commercialize its
developed technology.
Through its subsidiary NV Entertainment the Company has operating revenues for
its Entertainment Segment, but may continue to report operating losses for this
segment. The Telecommunications Segment will have no operating revenues until
successful commercialization of its developed technology, but will continue to
incur substantial operating expenses, capitalized costs and operating losses.
F-11
The Company funded its operations during 2003, 2002 and 2001 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
$3,411,000, $5,201,000 and $6,142,000, respectively. The Company is exploring
other financing alternatives, including private placements and other offerings.
Subsequent to October 31, 2003, the Company placed $1,000,000 of convertible
debentures (see Note 17).
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.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
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,
accounts payable, accrued expenses 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line method over the estimated useful lives of the assets, which
generally range from five to seven years. Maintenance and repair expenses are
charged to operations as incurred.
Film In Distribution
Statement of Positions 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-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). The Company makes certain estimates and judgments
of its future gross revenue to be received for each film based on information
received by its distributors, historical results and management's knowledge of
the industry. Revenue and cost forecasts are continually reviewed by management
and revised when warranted by changing conditions. A change to the estimate of
gross revenues for an individual film may result in an increase or decrease to
the percentage of amortization of capitalized film costs relative to a previous
period.
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
F-12
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.
The Company commences amortization of capitalized film costs and accrues
(expenses) participation costs when a film is released and it begins to
recognize revenue from the film. The Company had amortization costs of $192,889,
$0 and $0 for the years ended October 31, 2003, 2002 and 2001, respectively.
Project In Development
During the year ended October 31, 2003, 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, 2003
were $56,864.
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 in operations in the period that includes the
enactment date.
Revenue Recognition
The Company recognizes film revenue from the distribution of its feature film
and related products when earned and reasonably estimable in accordance with SOP
00-2. The following conditions must be met in order to recognize revenue in
accordance with SOP 00-2:
o persuasive evidence of a sale or licensing arrangement with a customer
exists;
o the film is complete and, in accordance with the terms of the
arrangement, has been delivered or is available for immediate and
unconditional delivery;
o the license period of the arrangement has begun and the customer can
begin its exploitation, exhibition or sale;
o the arrangement fee is fixed or determinable; and
o collection of the arrangement fee is reasonably assured.
Under a rights Agreement with Artisan Entertainment ("Artisan") the Company's
domestic distributor for its feature length film entitled "Step Into Liquid",
the Company shares with Artisan in the profits of STEP INTO LIQUID after Artisan
recovers its marketing, distribution and other predefined costs and fees. The
agreement provides for the payment of minimum guaranteed license fees, usually
payable on delivery of the respective completed film, that are subject to
further increase based on the actual distribution results in the respective
territory. Minimum guaranteed license fees totaled $200,000 during the year
ended October 31, 2003 and was recorded as revenue.
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.
Capitalized Software Development Costs
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
F-13
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 judgment 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, 2003,
2002 and 2001 for its capitalized software development costs.
Advertising
Advertising costs are charged to operations when incurred. Advertising expense
was $0, $0 and $942 for the years ended October 31, 2003, 2002 and 2001,
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 21,387,483, 18,910,000 and 9,828,000
for the years ended October 31, 2003, 2002 and 2001, respectively.
Stock-Based Compensation
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 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, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure -
an Amendment of FASB Statement No. 123". This statement amends SFAS No. 123 to
F-14
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. The Company has adopted the increased disclosure
requirements of SFAS No. 148 during the year ended October 31, 2003.
For the year ended October 31,
-----------------------------------------------------------
2003 2002 2001
---------------- ---------------- -----------------
Net loss, as reported $ (3,316,500) $ (9,467,123) $ (11,875,915)
Add: Stock-based employee compensation expense
included in reported net loss -- -- --
Less: Total stock-based employee compensation expense
determined under the fair value-based method for all
awards (676,396) (2,626,550) (1,962,835)
---------------- ---------------- -----------------
Proforma net loss $ (3,992,896) $ (12,093,673) $ (13,838,750)
================ ================ =================
Basic and Diluted Net Loss:
As reported $ (.05) $ (.23) $ (.46)
================ ================ =================
Proforma $ (.07) $ (.29) $ (.53)
================ ================ =================
Impairment of Long-Lived Assets
Pursuant to 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 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 adoption of
FIN 45 had no significant impact on its consolidated financial position or
results of operations.
In January 2003, the FASB issued 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
F-15
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 ending after December 31, 2004. The Company does not expect the
adoption of FIN 46 will have a significant impact on its consolidated financial
position or results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities, or other securities that do not
yet exist, should be applied to existing contracts as well as new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 had no
significant impact on its consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS. No 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. As a result of implementing SFAS
No. 150 the Company has changed the classification of its Series B Convertible
Preferred Stock to a long term liability from previously being classified
between the liability and equity sections.
Comprehensive Income
The Company has no material components of other comprehensive income and,
accordingly, net loss approximates comprehensive loss for all periods
presented.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 3 - ACQUISITIONS
NV Technology, Inc.
In February 2000, the Company completed the acquisition of 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. The Company now uses New Wheel 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. Accordingly, the
$6,000,000 was charged to operations during the year ended October 31, 2000. See
Note 15 for discussion of a settlement agreement with the former owners of New
Wheel.
F-16
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,
----------------------------
2003 2002
------------ ------------
Furniture and fixtures $ 54,097 $ 54,097
Camera equipment 298,109 298,109
Office equipment 109,515 109,515
------------ ------------
461,721 461,721
Less: Accumulated depreciation 420,420 397,188
------------ ------------
Total $ 41,301 $ 64,533
============ ============
For the years ended October 31, 2003, 2002 and 2001, depreciation expense was
$23,232, $77,260 and $118,693, 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, 2003, $95,000 of this development fee was
outstanding.
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.
F-17
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 - FILM IN DISTRIBUTION
In April 2000, the Company entered into a joint venture production
agreement to produce a feature length film ("Step Into Liquid") for theatrical
distribution. The Company agreed to provide 100% of 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. As of
October 31, 2003 the Company has funded a net of $2,335,101 for completion of
the film. The film is currently in distribution. The Company has recognized
revenues of $379,980 for the year ended October 31, 2003. The Company's
management believes revenues from the film will be more than adequate to cover
the capitalized production costs. The Company had amortization costs of
$192,889, $0 and $0 for the years ended October 31, 2003, 2002 and 2001,
respectively, for the film. The total film production costs and related amounts
capitalized are as follows:
October 31,
--------------------------------
2003 2002
-------------- -------------
Released films $ 2,335,101 $ --
Less cumulative amortization of film production costs 192,889 --
-------------- -------------
Total film production costs capitalized for released films 2,142,212 --
Films in production -- 2,121,967
Films in development or pre-production (1) -- 56,864
-------------- -------------
Total film production costs capitalized, net $ 2,142,212 $ 2,178,831
============== =============
(1) In the fourth quarter of fiscal 2003 the Company wrote-off $56,864
in costs capitalized for future film projects, which the Company
determined would not be put into production.
NOTE 8 - CONVERTIBLE NOTES PAYABLE
During fiscal 2003, 2002 and 2001, the Company entered into several convertible
promissory note agreements with various trusts and individuals. 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 $.33 to $1.00. These
and the Company's other notes are summarized in the table below:
F-18
October 31,
-------------------------------
2003 2002
------------- -------------
Note payable (1) $ 250,000 $ 250,000
Notes payable (ten notes) (2) 483,000 704,500
Note payable, 9% interest (3) 10,000 --
Notes payable (four notes), 12% interest (4) 360,000 --
------------- -------------
Total $ 1,103,000 $ 954,500
============= =============
(1) Due when receipts received by the Company from the joint venture exceed
$375,000.
(2) Due when receipts received by the Company from the joint venture exceed
$2,250,000.
(3) Due when receipts received by the Company from the joint venture exceed
$750,000.
(4) Notes had an original due date of November 21, 2003. The note holders
extended the due date until January 7, 2004 in exchange for 160,000
shares of common stock. In January 2004 the Company paid $180,000 of
principal payments and further extended the notes until the next round
of financing is completed.
During the year ended October 31, 2003, holders of convertible notes converted
principal of $258,500 and accrued interest of $119,250 into 1,225,941 shares of
the Company's common stock
Several of the above convertible note agreements that were entered into during
the fiscal year ended October 31, 2003 and 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 $137,113
and $653,789, respectively and such amount was charged to financing costs during
the fiscal year ended October 31, 2003 and 2002.
NOTE 9 - CONVERTIBLE DEBENTURES
On October 31, 2003, the Company entered into a 7% convertible debenture
agreement in the amount of $300,000. The debentures are convertible to common
stock at $.26 per share and are due April 30, 2004. The Company also issued
warrants to the debenture holder at a strike price of $.15 per share. The
warrants were convertible into common stock at a conversion rate lower than the
market price at the issuance of the warrants, subject to the holders cashless
exercise rights. The value of such beneficial conversion features was $133,852.
NOTE 10 - NOTES PAYABLE
The Company has the following notes payable outstanding at October 31:
2003 2002
------------- --------------
Note Payable (five individual notes with identical terms),
unsecured, 6% interest, due June 29, 2004 $ 256,886 $ 256,886
Note payable, 10% interest, unsecured, due on demand with
three days notice 483,425 514,521
Note payable, unsecured, 10% interest, due April 29, 2003 -- 200,000
------------- --------------
Total $ 740,311 $ 971,407
============= ==============
F-19
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consist of the following:
At October 31,
------------------------------
2003 2002
------------- -------------
Accrued Officers Compensation, bonuses
and payroll $ 494,248 $ 515,903
Professional fees 471,213 623,044
Interest payable 478,289 541,350
Consulting fees 45,251 62,018
Miscellaneous 255,882 505,280
------------- -------------
$ 1,744,883 $ 2,247,595
============= =============
NOTE 12 - PREFERRED STOCK
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, with a liquidation preference of $1,000 per share.
The Company may redeem any or all of the shares of Series B Preferred Stock at
any time or from time to time at a per share redemption price equal to the
preference amount.
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.
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
F-20
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 the
development and license agreement discussed in Note 6. As of October 31, 2003
and 2002, there were 4,000 authorized shares Series B Preferred Stock and 3,192
shares issued and outstanding. Based on the Company's evaluation relating to
SFAS No. 150, the Series B Preferred Stock was reclassified to liabilities
during the fourth quarter ended October 31, 2003.
SERIES C, SERIES D, SERIES E, SERIES F AND SERIES G CONVERTIBLE PREFERRED STOCK
On February 24, 2003 the Company amended its Articles of Incorporation and
designated 100,000 shares of its authorized preferred stock as Series C
Preferred Stock. On May 16, 2003, the Company amended this designation and fixed
the number of shares designated as Series C Preferred Stock as 57,894.201. On
June 13, 2003 and June 27, 2003, the Company amended its Articles of
Incorporation and designated 9,090.909 shares of its authorized preferred stock
as Series D Preferred Stock and 25,000 shares of its authorized preferred stock
as Series E Preferred Stock. All of the designated Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock were issued in May and
June 2003, to collateralize proposed loans to the Company of approximately
$1,500,000, $400,000 and $500,000.
The shares are returnable to the Company upon demand in the event the proposed
loans are not completed. The Company has not received any monies from the
proposed loans.
The 57,894.201 shares of Series C preferred were returned to the Company. In
November 2003 the Company issued 15,152 shares of Series C preferred, to
collateralize a proposed loan to the Company of $2,000,000. The shares are
returnable to the Company upon demand in the event the proposed loan is not
completed.
On August 7, 2003 the Company amended its Articles of Incorporation and
designated 10,297.118 shares of its authorized preferred stock as Series F
Preferred Stock and 10,297.118 shares of its authorized preferred stock as
Series G Preferred Stock. All of the designated Series F Preferred Stock and
Series G Preferred Stock were issued in August 2003, to collateralize proposed
loans to the Company of approximately $1,000,000. All Series F and Series G
Preferred Stock have been returned to the Company.
None of these Series C, D, E, F and G are classified as outstanding as of
October, 31, 2003 as such shares are issuable upon the funding of the loans. If
the loans are not funded by January 31, 2004, all such shares are to be returned
to the Company.
The terms of the Series C, Series D, Series E, Series F and Series G Preferred
Stock are substantially the same. None of the series is entitled to receive
dividends or to vote, except as required by Utah law, and none of the series is
subject to mandatory redemption. The aggregate liquidation preference of each
series is equal to the unpaid balance of principal and interest on the proposed
loan to be collateralized by the shares of such series. In the event of a
default under such proposed loan, the Series C, Series D, Series E, Series F or
Series G Preferred Stock, as applicable, can be converted into common stock of
the Company to liquidate the unpaid balance of the loan and related interest.
NOTE 13 - 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 stockholder rights plan, in which one right was
distributed on August 21, 2000 as a dividend on each outstanding share of common
stock to stockholders of record on that date. Each right will entitle the
F-21
stockholders 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 stockholders, 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.
On July 27, 2000, the Company created a series of preferred stock, 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, 2003, 2002 and 2000, respectively.
Common Stock
Effective November 12, 2003, the Company amended its Articles of Incorporation
and increased the authorized number of common stock from 100,000,000 to
500,000,000.
Common Stock Issuances During the Year Ended October 31, 2003:
In December 2002, 2.2 million shares of the Company's common stock previously
issued to the former owners of New Wheel and former officers of the Company were
returned to the Company, resulting in a non-cash gain of $1,474,000.
During the quarter ended January 31, 2003, the Company issued 88,710 shares of
common stock to two officers of the Company in satisfaction of $55,001 in
accrued compensation.
During the year ended October 31, 2003, the Company sold 17,112,611 shares of
common stock to investors for cash proceeds of $2,936,693, as indicated below.
During the quarter ended January 31, 2003, the Company sold 4,328,587
shares of common stock for $908,406.
During the quarter ended April 30, 2003, the Company sold 6,668,339
shares of common stock for $1,116,299.
During the quarter ended July 31, 2003, the Company sold 4,256,485
shares of common stock for $633,108.
During the quarter ended October 31, 2003, the Company sold 1,859,200
shares of common stock for $278,880.
F-22
During the year ended October 31, 2003, principal and accrued interest of
several convertible promissory notes, totaling $377,750, were converted into
1,225,941 shares of the Company's common stock (Note 8).
During the quarter ended January 31, 2003, the Company issued 421,875 shares of
its common stock valued at $245,250, in connection with various consulting
agreements and services.
During the quarter ended April 30, 2003, the Company issued 3,200,000 shares of
its common stock valued at $1,294,000, in connection with various consulting
agreements and services.
During the quarter ended October 31, 2003, warrants to purchase 1,000,000 share
of common stock were exercised at $.06 per share, resulting in proceeds to the
Company totaling $60,000.
During the quarter ended April 30, 2003, the Company issued 40,476 shares of its
common stock due to a cashless exercise of warrants to purchase 100,000 shares
of 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.
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 totaled $178,738 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.
F-23
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 $188,202.
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 $2,183,626, was converted into
4,497,967 shares of the Company's common stock.
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).
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 draw downs 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
expired 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.
F-24
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.
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.
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.
F-25
In January 2003, the Board of Directors of the Company approved the 2003
Consultant Stock Plan and authorizes the issuance of up to 6,000,000
non-qualified stock options or stock awards to consultants to the Company.
Directors, officers and employees are not eligible to participate in the
Consultant Plan. A total of 3,200,000 shares of common stock have been issued
under the Consultant Plan to four consultants. As of October 31, 2003 no options
have been awarded under the 2003 Plan.
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 to 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.
On April 30, 2003, the Company granted one of its 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 $.31 per share. The options vest in
annual installments of 13,334, 13,333 and 13,334 commencing April 30, 2004. The
fair value of stock options estimated on the date of grant using the
Black-Scholes option pricing model was $.19 per share, or $7,600.
Options Outside of the Plan:
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.
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.
F-26
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.
On December 3, 2002, the Company granted the Company's Chief Executive Officer
options outside the Company's stock option plans to purchase 1,500,000 shares of
its common stock at $.64. The options vest 125,000 each quarter commencing March
1, 2003.
A summary of the Company's stock option activity and related information
follows:
Under the Weighted Average Outside the Weighted Average
Plans Exercise Price Plans Exercise Price
--------------- -------------------- --------------- --------------------
Balance at October 31, 2000 -- $ -- 1,563,750 $ 4.10
Options granted:
2000 Plan 516,000 3.92 -- --
2001 Plan 750,000 .27 -- --
Outside the option plans -- -- 375,000 3.37
Options expired/cancelled:
2000 Plan (3,750) 3.92 -- --
Options exercised:
2001 Plan (750,000) .27 -- --
--------------- -------------------- --------------- --------------------
Balance at October 31, 2001 512,250 3.92 1,938,750 3.96
Options granted:
In the Plans 1,707,500 .58 -- --
Outside the option plans -- -- 2,425,000 .83
Options expired/cancelled:
In the Plans (51,000) 3.74 -- --
Outside the option plans -- -- (171,250) 3.55
Options exercised in the plans -- -- -- --
--------------- -------------------- --------------- --------------------
Balance at October 31, 2002 2,168,750 1.29 4,192,500 2.16
Options granted:
In the Plans 40,000 .31 --
Outside the option plans 1,500,000 .64
Options expired/cancelled:
In the Plans (20,000) 3.92 --
Outside the option plans (1,500,000) 1.02
Options exercised in the plans
--------------- -------------------- --------------- --------------------
Balance at October 31, 2003 2,188,750 $ 1.25 4,192,500 $ 2.03
=============== ==================== =============== ====================
Exercisable at October 31, 2003 1,823,438 $ 1.15 3,059,166 $ 2.54
=============== ==================== =============== ====================
Exercisable at October 31, 2004 2,087,084 $ 1.27 3,567,500 $ 2.27
=============== ==================== =============== ====================
Exercisable at October 31, 2005 2,175,417 $ 1.26 4,067,500 $ 2.04
=============== ==================== =============== ====================
Exercisable at October 31, 2006 2,188,750 $ 1.25 4,192,500 $ 2.03
=============== ==================== =============== ====================
The exercise price for options outstanding as of October 31, 2003 ranged from
$0.31 to $4.40.
At October 31, 2003, 311,250 options are available under the 2000 Plan, 0
options are available under the 2001 Plan and 2,800,000 options or stock awards
are available under the 2003 Plan.
The weighted average fair value at date of grant for options granted during 2003
and 2002 was $0.44 and $0.72 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:
F-27
2003 2002 2001
------------------- ------------------- -------------------
Risk-free interest rates 1.00% to 1.50% 5.00% to 5.50% 5.00% to 5.50%
Expected option life in years 5 5 5
Expected stock price volatility 72.32% to 228.70% 51.65% to 53.89% 47.25% to 96.25%
Expected dividend yield 0% 0% 0%
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 warrant 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.
On February 12, 2003, the Company granted a warrants to purchase 500,000 shares
of its common stock at an exercise price of $.40 in connection with the sale of
500,000 shares of its common stock. The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes option pricing model is
approximately $.14 per share or $173,919.
On November 21, 2002, the Company granted warrants to purchase 100,000 shares of
its common stock at an exercise price of $.25. The warrants vested immediately
and expire on November 21, 2007. The fair value of the stock warrants estimated
on the date of grant using the Black-Scholes option pricing model is $.37 per
share, or $36,952.
On April 29, 2003, the Company granted a consulting firm a warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.06. The warrants
vested immediately and expire on May 3, 2006. In exchange for the issuance, the
Company cancelled warrants to purchase 1,000,000 shares of its common stock,
which were issued on July 30, 2002 at an exercise price of $0.75. The fair value
of stock warrants estimated on the date of the grant using the Black-Scholes
option pricing model is $.02 per share or $243,461.
On October 31, 2003 the Company granted a warrant to purchase 600,000 shares of
its common stock at an exercise price of $.15 in connection with the placement
of $300,000 of convertible debentures. The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes option pricing model is
$.22 per share or $133,900.
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.
During the year ended October 31, 2003, warrants to purchase 1,000,000 shares of
common stock were exercised at $.06 per share, resulting in proceeds totaling
$60,000.
F-28
During February 2003, warrants to purchase 100,000 shares of common stock were
exercised on a cashless basis, for which the Company issued 40,476 shares of
common stock.
At October 31, 2003, the Company had outstanding warrants to purchase shares of
common stock as follows:
Number Exercise Expiration
Grant Date of Shares Price Date
--------------------------- ------------- -------------------- ----------------------
November 17, 2000 1,000,000 $ 6.00 November 17, 2003
November 17, 2000 88,000 (1) November 17, 2003
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 30, 2006
June 14, 2001 25,000 5.00 June 30, 2006
June 14, 2001 25,000 10.00 June 30, 2006
November 5, 2001 200,000 0.51 November 5, 2005
February 11, 2002 50,000 0.75 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
February 12, 2003 500,000 0.40 February 12, 2005
October 31, 2003 600,000 0.15 September 30, 2006 (2)
------------- --------------------
Exercisable at November 17, 2003 to
October 31, 2003 2,942,943 $0.15 to $10.00 September 30, 2006
============= ====================
(1) Lesser of $6.00 or 50% of market ($0.17 at 10/31/03).
(2) Under certain conditions the Company may accelerate the expiration
date.
Net Loss Per Share
Securities that could potentially dilute basic earnings per share ("EPS"), in
the future, that were not included in the computation of diluted EPS because to
do so would have been anti-dilutive for the periods presented, consist of the
following:
Warrants to purchase common stock 2,942,943
Options to purchase common stock 6,381,250
Convertible notes payable and accrued interest 2,675,055
Series B Preferred stock (based on a floor
conversion price of $.34 at October 31, 2003) 9,388,235
--------------
Total as of October 31, 2003 21,387,483
==============
Substantial issuances after October 31, 2003
through January 23, 2004:
Common stock issuable upon conversion of
$1 million convertible note and warrants issued in
conjunction with new financing 14,666,667
==============
Common stock issued in connection with
consulting agreements 3,800,000
==============
Convertible notes payable and accrued interest 106,668
==============
Sale of common stock for cash 1,264,501
==============
Common stock issued for deferred salaries
and for past services 838,333
==============
Common stock issuable to officers as bonuses
For time spent in connection with December 2003
Securities Purchase Agreement 666,666
==============
F-29
NOTE 14 - INCOME TAXES
At October 31, 2003, the Company had approximately $39,555,000 of net operating
loss carry forwards 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 10,229,000
2023 2,597,000
-----------------
$ 39,555,000
=================
At October 31, 2003 and 2002, the Company has a deferred tax asset of
approximately $19,716,000 and $18,826,000, 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 $890,000 (2003),
$4,550,000 (2002) and $4,204,000 (2001). The Company's ability to utilize its
carry forwards may be subject to any annual limitation in future periods,
pursuant to Section 382 of the Internal Revenue Code of 1986, as amended.
NOTE 15 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Employment Agreements
On February 25, 2002, the Company entered into a one-year employment agreement
with its Vice President and Secretary, C. Rich Wilson III. 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. If Mr. Willenberg is terminated without
"cause" or leaves New Visual for "good reason," he will receive a severance
payment equal to two years of his base salary on the date of his termination. If
Mr. Willenberg is terminated without cause or with good reason within one year
after a "change of control,", he will receive a severance payment equal to two
years of his base salary and an amount equal to two times the amount of his last
bonus received.
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.
F-30
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. If
Mr. Ketch is terminated without "cause" or left New Visual for "good reason," he
will receive a severance payment equal to two years of his base salary on the
date of his termination. If Mr. Ketch is terminated without cause or with good
reason within one year after a "change of control," he will receive a severance
payment equal to two years of his base salary and an amount equal to two times
the amount of his last bonus received.
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.
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. Subsequent to October 31, 2003, the Company decided to
move its corporate headquarters to Portland, Oregon. The remaining lease cost
(net of projected sublease income) estimated to be $75,530 will be recognized as
a liability in the first fiscal quarter of 2004.
In anticipation of moving its corporate headquarters to Portland, Oregon, the
Company has leased space on a month-to-month basis in Portland.
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 March 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. 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:
------------------------
2004 $ 103,285
2005 15,834
--------------
$ 119,119
==============
Rent expense for the years ended October 31, 2003, 2002 and 2001 was $177,462,
$115,500 and $136,000, 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, 2003 and 2002, uninsured cash balances were approximately $0 and
$212,000, respectively. The Company believes it is not exposed to any
significant credit risk for cash.
F-31
Settled Legal Proceedings
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 returned to the Company in December
2002, 2.2 million shares of the Company's common stock previously issued to them
in connection with the acquisition of New Wheel (Note 3). During the quarter
ended January 31, 2003, the Company recorded a gain from this settlement
agreement of $1,474,000.
NOTE 16 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Telecommunication Entertainment
Business Business Unallocable Totals
-------------------- ------------------- ---------------- -----------------
For the Year Ended October 31, 2003:
Net Sales $ -- $ 379,980 $ -- $ 379,980
Operating Loss $ (334,746) $ (211,681) $ (3,637,096) $ (4,183,522)
Depreciation $ 8,212 $ 13,686 $ 1,334 $ 23,232
Total Identifiable Assets $ 5,761,429 $ 2,181,161 $ 328,760 $ 8,272,350
For the Year Ended October 31, 2002:
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 $ 321,985 $ 8,332,199
For the Year Ended October 31, 2001:
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
NOTE 17 - SUBSEQUENT EVENTS
Common Stock
In January 2004, the Company:
o issued 1,000,000 shares of common stock to one individual in exchange
for consulting services valued at $240,000; and
o issued to its board chair and senior vice president 400,000 shares of
common stock in lieu of $100,000 in commissions;
o issued to its chief executive officer and president 40,000 shares of
common stock in lieu of $10,000 in deferred compensation;
o issued to its chief financial officer 50,000 shares of common stock as
part of his employment agreement;
F-32
o issued to its former vice president and secretary and board member
333,333 shares of common stock as part of his severance agreement;
o sold an aggregate 100,000 shares of common stock to one investor for
total proceeds of $17,500.
In December 2003, the Company:
o issued an aggregate of $1,000,000 in convertible promissory notes to
sixteen investors, which may be converted into shares of common stock
at an exercise price of $.15 (see Securities Purchase Agreement below);
o issued as part of the above transaction warrants to purchase 6,666,667
shares of common stock at an exercise price of $.25(see Securities
Purchase Agreement below);
o issued 2,800,000 shares of common stock to two companies in exchange
for consulting services valued at $700,000;
o sold an aggregate of 931,667 shares of common stock to six investors
for total proceeds of $177,500;
o issued 106,668 shares of common stock as part of an extension of past
due convertible debentures;
o issued 15,000 shares of common stock to one company in exchange for
past services valued at $2,250; and
o cancelled 28,000 shares.
o On December 30, 2003 our Board of Directors authorized the issuance of
333,333 shares of our common stock to Mr. Ketch as a bonus for his time
spent in connection with the December 31, 2003 Securities Purchase
Agreement. These shares have not yet been issued to Mr. Ketch.
o On December 30, 2003 our Board of Directors authorized the issuance of
333,333 shares of our common stock to Mr. Willenberg as a bonus for his
time spent in connection with the December 31, 2003 Securities Purchase
Agreement. These shares have not yet been issued to Mr. Willenberg.
In November 2003, the Company:
o sold aggregate of 232,834 shares of common stock to six investors for
total proceeds of $40,300.
Consulting Agreements
On December 31, 2003 the Company entered into a two month agreement with a
consultant for an investor relations program. On December 2, 2003 the Company
renewed consulting contracts with two investor relation firms.
Securities Purchase Agreement
Under a Securities Purchase Agreement, dated as of December 31, 2003 (in
each case a "Securities Purchase Agreement"), between the Company and each of
the holders of the Convertible Debentures those holders committed to advance the
Company an aggregate of $2,000,000, repayment of which is represented by
Convertible Debentures. The funding is to be made in two equal installments. The
first installment was paid to the Company on December 31, 2003, at which time
$1,000,000 in principal amount of Convertible Debentures were released to such
holders. The second installment is due within five days after the effective date
of the Registration Statement. If, however, for any reason, the effective date
does not happen by the close of business on June 28, 2004, the holders'
obligations to fund the second installment and the Company's obligations to
issue the Convertible Debentures relating thereto and related warrants will be
canceled.
The Convertible Debentures are convertible into shares of the Company's
Common's Stock at a conversion rate equal to $0.15 per share at any time on or
after the earlier of the (i) sixty-fifth (65th) day following the issue date or
(ii) effective date of the Registration Statement. This conversion price is
subject to adjustment if there are certain capital adjustments or similar
transactions, such as a stock split or merger. Interest at 7% per annum is due
on the earlier to occur of the conversion of such debenture or the maturity
date. On conversion or at maturity, the Company has the option to pay accrued
interest in cash or shares of Common Stock valued at the conversion price in
effect at that time. The option to pay interest in shares of the Company's
Common Stock, however, is subject to the following conditions: the Registration
Statement covering the resale of such shares must be in effect at the time of
issuance and the issuance of such shares of Common Stock to the holder of a
debenture cannot result in such holder and its affiliates beneficially owning
more than 4.99% of the then outstanding shares of the Company's Common Stock.
F-33
The terms of the Convertible Debentures provide that under certain
conditions (primarily relating to the effectiveness of the Registration
Statement and the closing bid price of the Company's Common Stock exceeding
$1.00 for each of 20 consecutive trading days), the Company can require a
mandatory conversion of the Convertible Debentures. If not converted earlier and
provided that certain conditions (primarily relating to the effectiveness of the
Registration Statement and the closing bid price of the Company's Common Stock
exceeding the conversion price for each of the 10 trading days immediately
before the maturity date), on the scheduled maturity date the Convertible
Debentures will automatically convert into shares of Common Stock at the
conversion price. If all of the relevant conditions do no exist on the maturity
date, the Company may be obligated to pay the balance of the Convertible
Debentures and accrued interest in cash. In addition, after one year from their
issuance, the Company would have the right to prepay the principal (and accrued
interest thereon) on the Convertible Debentures if certain conditions are met.
In connection with the issuance of each installment of the Convertible
Debentures, the Company issued or will issue to the holders thereof Warrants to
purchase shares of its Common Stock in an amount equal to one (1) share of
Common Stock for each one (1) share of Common Stock issuable upon (and assuming)
conversion of the Convertible Debentures at the conversion price on the date of
issuance. The Warrants are exercisable at any time on or after the earlier of
the (i) sixty-fifth (65th) day following their issue date or (ii) effective date
of the Registration Statement, at a per share exercise price equal to $0.25.
This exercise price is also subject to adjustment if there are certain capital
adjustments or similar transactions, such as a stock split or merger. The
Warrants provide for cashless exercise. The Warrants expire approximately five
years after issuance, provided, that, under certain conditions (primarily
relating to the effectiveness of the registration statement and the closing
price of the Company's Common Stock being more than $1.00 for each of 20
consecutive trading days), the Company will have the option to accelerate the
expiration date to a date at least 60 days from the last day of that 20
consecutive trading day period.
The terms of the Convertible Debentures and Warrants specify that the
beneficial owner can convert such debenture or exercise such warrant by giving
notice to the Company. Each conversion or warrant exercise is subject
limitations
Pursuant to the Securities Purchase Agreement and a Registration Rights
Agreement executed and delivered at the same time, the Company is obligated
initially to register under the Act 150% of the number of shares issuable on
conversion of the full aggregate principal amount of the Convertible Debentures
(from both installments) plus interest thereon accrued through the maturity date
thereof and 150% of the number of shares of Common Stock issuable upon exercise
of the Warrants issued in connection with such Convertible Debentures. The
Company is also obligated to keep the Registration Statement of which this
Prospectus forms a part effective until the earliest of the date on which the
holders may sell without restriction all shares registered on their behalf under
this Prospectus under Rule 144 promulgated under the Act, or the date on which
such holders no longer own any of those shares.
Under the Registration Rights Agreement, the Company will be obligated to
pay liquidated damages to the holders of the Convertible Debentures if the
Registration Statement is not declared effective by March 30, 2004 or if, the
effectiveness of the Registration Statement is subsequently suspended for more
than certain permitted periods. The amount that we must pay to the debenture
holders in respect of the liquidated damages associated with the delays in the
effective date or after a Restricted Sale Date will be (A) 2% of the principal
amount of all the Convertible Debentures during the first 30-day period, and (B)
3% of the principal amount of all Convertible Debentures for each subsequent
30-day period (or part). After the effective date, the principal amount of the
Convertible Debentures used in determining the liquidated damages will be
adjusted to equal the sum of (X) the principal amount of all debentures not yet
converted and (Y) the principal amount of the Convertible Debenture converted
within the preceding 30 days but not yet sold. Notwithstanding the foregoing, no
such liquidated damages will be due for the delay in the effective date if the
effective date of this Prospectus actually occurs by April 29, 2004. The
Convertible Debentures holders have the right to have these liquidated damages
paid in shares of Common Stock (valued at the conversion price). We may make
that election also if the effective date has occurred by May 29, 2004, provided
the Registration Statement is then currently effective.
New Employment Agreement
In December 2003, the Company entered into an employment agreement with
Mr. Cruckshank to serve as its Chief Financial Officer. Under the Agreement, Mr.
Cruckshank received a 50,000 share stock grant upon employment and will receive
$700 in cash and $480 per day in common stock for actual days worked. Mr.
Cruckshank is also eligible for quarter stock grants based upon completion of
certain agreed upon objectives. This agreement commenced December 8, 2003 and is
cancelable immediately for "cause," with 15 days notice without "cause," and
with 30 days notice if he leaves the Company for "good reason," each as defined
in the agreement. In the event cancellation is without "cause" or for "good
reason," after April 8, 2004 until December 8, 2004, Mr. Cruckshank will receive
two months severance based upon base pay and from December 8, 2004 and
thereafter six months severance based on base pay.
F-34
Vice President and Corporate Secretary resigned
Mr. Wilson resigned as Vice President and Secretary and from the
Company's board of directors effective December 31, 2003. Upon his resignation
Mr. Wilson received the following compensation based upon his termination clause
in his employment contract, a stock grant of 333,333, 1% of the gross received
by the Company and he was allowed to retain his options until their scheduled
expiration dates.
NOTE 18 - QUARTERLY RESULTS (UNAUDITED)
Quarter Ended
-----------------------------------------------------------------------------
January 31 April 30 July 31 October 31 Total
----------------- ---------------- ---------------- ---------------- -----------------
2003
Revenues $ -- $ -- $ -- $ 379,980 $ 379,980
Net Income (Loss) $ 175,234 $ (1,430,042) $ (1,022,387) $ (1,039,305) $ (3,316,500)
Income (Loss) per share -
Basic and Diluted (a) $ -- $ (0.02) $ (0.02) $ (0.02) $ (.05)
2002
Revenues $ -- $ -- $ -- $ -- $ --
Net Loss $ (1,941,584) $ (3,182,061) $ (2,282,532) $ (2,060,946) $ (9,467,123)
Loss per share -
Basic and Diluted (a) $ (0.06) $ (0.08) $ (0.05) $ (0.04) $ (0.23)
(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.
F-35
Prospective Investors may rely on the information contained in this Prospectus.
Neither we nor the selling stockholders have authorized anyone to provide
prospectus investors with information different from that contained in this
Prospectus. The information in this Prospectus is correct only as of the date of
this Prospectus, regardless of the time delivery of this Prospectus or any sale
of these securities.
NEW VISUAL CORPORATION
up to 47,233,348 shares of Common Stock
PROSPECTUS
_________, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are a Utah corporation. Section 16-10a-902 of the Utah Revised
Business Corporation Act (the "Revised Act") provides that a corporation may
indemnify any individual who was, is or is threatened to be made a named
defendant or respondent (a "Party") in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (a "Proceeding"), because he or she
is or was a director of the corporation or, while a director of the corporation,
is or was serving at its request as a director, officer, partner, trustee,
employee, fiduciary or agent of another corporation or other person or of an
employee benefit plan (an "Indemnifiable Director"), against any obligation
incurred with respect to a Proceeding, including any judgment, settlement,
penalty, fine or reasonable expenses (including attorneys' fees), incurred in
the Proceeding if: (i) his or her conduct was in good faith; (ii) he or she
reasonably believed that his or her conduct was in, or not opposed to, the best
interests of the corporation and (iii) in the case of any criminal proceeding,
had no reasonable cause to believe such conduct was unlawful; provided, however,
that pursuant to Subsection 902(4): (i) indemnification under Section 902 in
connection with a Proceeding by or in the right of the corporation is limited to
payment of reasonable expenses (including attorneys' fees) incurred in
connection with the Proceeding and (ii) the corporation may not indemnify an
Indemnifiable Director in connection with a Proceeding by or in the right of the
corporation in which the Indemnifiable Director was adjudged liable to the
corporation, or in connection with any other Proceeding charging that the
Indemnifiable Director derived an improper personal benefit, whether or not
involving action in his or her official capacity, in which Proceeding he or she
was adjudged liable on the basis that he or she derived an improper personal
benefit.
Section 16-10a-903 of the Revised Act provides that, unless limited by
its articles of incorporation, a corporation shall indemnify an Indemnifiable
Director who was successful, on the merits or otherwise, in the defense of any
Proceeding, or in the defense of any claim, issue or matter in the Proceeding,
to which he or she was a Party because he or she is or was an Indemnifiable
Director of the corporation, for reasonable expenses (including attorneys' fees)
incurred in connection with the Proceeding or claim with respect to which he or
she has been successful.
Section 16-10a-904 of the Revised Act provides that a corporation may pay
for or reimburse the reasonable expenses (including attorneys' fees) incurred by
an Indemnifiable Director who is a Party to a Proceeding in advance of the final
disposition of the Proceeding upon the satisfaction of certain conditions.
In addition to the indemnification provided by Sections 902 and 903,
Section 16-10a-905 of the Revised Act provides that, unless otherwise limited by
a corporation's articles of incorporation, an Indemnifiable Director may apply
for indemnification to the court conducting the Proceeding or to another court
of competent jurisdiction.
Section 16-10a-907 of the Revised Act provides that, unless a
corporation's articles of incorporation provide otherwise, (i) an officer of the
corporation is entitled to mandatory indemnification under Section 903 and is
entitled to apply for court-ordered indemnification under Section 905, in each
case to the same extent as an Indemnifiable Director; (ii) the corporation may
indemnify and advance expenses to an officer, employee, fiduciary or agent of
the corporation to the same extent as an Indemnifiable Director and (iii) a
corporation may also indemnify and advance expenses to an officer, employee,
fiduciary or agent who is not an Indemnifiable Director to a greater extent than
the right of indemnification granted to an Indemnifiable Director, if not
inconsistent with public policy, and if provided for by its articles of
incorporation, bylaws, general or specific action of its board of directors or
contract.
Section 16-10a-908 of the Revised Act authorizes a corporation to
purchase and maintain liability insurance for a director, officer, employee,
fiduciary or agent of the corporation.
II-1
Our Bylaws (the "Bylaws") provide that subject to the limitations and
conditions as provided below and in Section 9 of the Revised Act, a Party in a
Proceeding or an appeal, inquiry or investigation that could lead to a
Proceeding, by reason of the fact that he or she, is or was an Indemnifiable
Director shall be indemnified by us against judgments, fines, settlements and
reasonable expenses (including, attorneys' fees) actually incurred by them in
connection with such Proceeding, if it is determined that such person: (i)
conducted himself or herself in good faith; (ii) reasonably believed that his or
her conduct was in, or not opposed to, our best interest and (iii) in the case
of any criminal proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Reasonableness of expenses shall be determined by the
directors, a committee, by special legal counsel or by a vote of the
shareholders. However, if a person is found liable to us or is found liable on
the basis that personal benefit was improperly received by such person,
indemnification is limited to reasonable expenses actually incurred by such
person in connection with the Proceeding and will not be made in respect of any
Proceeding in which such person shall have been found liable for willful or
intentional misconduct in the performance of his or her duty to us.
Indemnification may involve indemnification for negligence or under theories of
strict liability.
Our Bylaws further provide that indemnification rights granted are
contract rights, and no amendment of the Bylaws will limit or deny any such
rights with respect to actions taken or Proceedings arising prior to any
amendment. Indemnification rights may include the right to be paid the
reasonable expenses incurred by an Indemnifiable Director who was, is or is
threatened to be made a named defendant or respondent in a Proceeding in advance
of the final disposition of the Proceeding and without any determination as to
the person's ultimate entitlement to indemnification; provided, however, that
the payment of such expenses will be made only (i) upon delivery to us of a
written affirmation by such director or officer of his or her good faith belief
that he or she has met the standard of conduct necessary for indemnification;
(ii) delivery of a written undertaking, by or on behalf of such person, to repay
all amounts so advanced if it shall ultimately be determined that such
indemnified person is not entitled to be indemnified pursuant to the Bylaws or
otherwise and (iii) a determination that the facts then known to those making
the determination would not preclude indemnification. We, by adoption of a
resolution of the directors, may indemnify and advance expenses to an officer,
employee, fiduciary or agent to the same extent and subject to the same
conditions under which we may indemnify and advance expenses to directors. We
may pay or reimburse expenses incurred by a director or officer in connection
with his or her appearance as a witness or other participation in a Proceeding
at a time when he or she is not a named defendant or respondent in the
Proceeding. We may purchase and maintain liability insurance. If any portion of
the Bylaws relating to indemnification are invalidated we shall nevertheless
indemnify each director, officer or any other person indemnified pursuant to the
Bylaws as to costs to the full extent permitted by any applicable portion of the
Bylaws that have not been invalidated and to the fullest extent permitted by
law.
Insofar as indemnification of liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of us pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than broker
commissions, payable by the Issuer in connection with the sale of the shares
offered hereby. All amounts shown are estimates (except for the SEC filing
fees).
SEC filing fee $1,583.75
Legal fees and expenses $50,000
Blue sky filing fees and expenses
(including counsel fees) $15,000
Accounting fees and expenses $10,000
Printing and engraving expenses $10,000
Miscellaneous expenses $5,000
Total $91,583.75
II-2
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following paragraphs set forth certain information with respect to
all securities sold by us within the past three years without registration under
the Securities Act.
1 (a) In February 2001, we issued 250,000 shares of Common Stock in
connection with the settlement of then outstanding litigation.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
2 (a) In March 2001, we issued 92,300 shares of Common Stock for aggregate
consideration of $300,004 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
3 (a) In March 2001, we issued 46,250 shares of Common Stock with 23,125
three-year warrants with a per share exercise price of $5.10 for aggregate
consideration of $129,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
4 (a) In April 2001, we issued 115,007 shares of Common Stock for aggregate
consideration of $319,996.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
5 (a) In April 2001, we issued 58,321 shares of Common Stock with three
year warrants to purchase 29,161 shares of Common Stock with a per share
exercise price of $5.10 for aggregate consideration of $163,300.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
6 (a) In May 2001, we issued 256,770 shares of Common Stock for aggregate
consideration of $660,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
7 (a) In May 2001, we issued 500,000 shares of Common Stock to our Board of
Director's Vice Chairperson for services rendered, valued at $949,200 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
8 (a) In June 2001, we issued 848,011 shares of Common Stock for aggregate
consideration of $1,488,771.
(b) There are no underwriters with respect to this issuance.
II-3
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
9 (a) In July 2001, we issued 341,574 shares of Common Stock for aggregate
consideration of $594,683 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
10 (a) In the quarter ended July 31, 2001, we issued 50,960 shares of Common
Stock for consulting services, valued at $171,744.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
11 (a) In August 2001, we issued 221,966 shares of Common Stock for
aggregate consideration of $166,475.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
12 (a) In September 2001, we issued 775,000 shares of Common Stock for
consulting services, valued at $372,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
13 (a) In October 2001, we issued 756,384 shares of Common Stock for
aggregate consideration of $207,250.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
14 (a) In October 2001, we issued 400,000 shares of Common Stock for
consulting services, valued at $187,250.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
15 (a) In October 2001, we issued $615,000 in principal amount of our 50%
interest Convertible Promissory Notes, convertible into shares of Common Stock
at a conversion price of $.40 per share, due and payable upon the receipt by us
of certain proceeds from the Film.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
16 (a) In November 2001, we issued 350,000 shares of Common Stock for
consulting services, valued at $231,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
II-4
17 (a) In December 2001, we issued $250,000 in principal amount of our 50%
interest Convertible Promissory Notes, convertible into Common Stock, at a
conversion price of $.40 per share, and are due and payable upon the receipt by
us of certain proceeds from the Film.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
18 (a) In December 2001, we issued 577,963 shares of Common Stock for
consulting services, valued at $253,982.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
19 (a) In December 2001, we issued 250,000 shares of Common Stock for
aggregate consideration of $100,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
20 (a) In January 2002, we issued 22,037 shares of Common Stock for
consulting services, valued at $9,917.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
21 (a) In January 2002, we issued 595,015 shares of Common Stock for
aggregate consideration of $159,501.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
22 (a) In February 2002, we issued 1,912,000 shares of Common Stock for upon
the exercise of warrants for aggregate consideration of $478,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
23 (a) In February 2002, we issued 514,000 shares of Common Stock for
aggregate consideration of $129,400.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
24 (a) In February 2002, we issued 1,261,946 shares of Common Stock pursuant
to an agreement with certain stockholders.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
25 (a) In February 2002, we issued 150,000 shares of Common Stock pursuant
to a consulting agreement, valued at $69,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
26 (a) In March 2002, we issued 4,102,031 shares of Common Stock for
aggregate consideration of $1,204,246.
II-5
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
27 (a) In March 2002, we issued 985,000 shares of Common Stock to two
officers for past services, valued at $403,738.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
28 (a) In March 2002, we issued 156,250 shares of Common Stock for
consulting services, valued at $62,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
29 (a) In March 2002, we issued 736,008 shares of Common Stock upon the
cashless exercise of certain outstanding warrants.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
30 (a) In March 2002, we issued 2,571,875 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$1,128,750.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
31 (a) In April 2002, we issued 107,958 shares of Common Stock for aggregate
consideration of $91,575.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
32 (a) In April 2002, we issued 1,225,447 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$628,125.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
33 (a) In April 2002, we issued 624,480 shares of Common Stock in connection
with the purchase of certain technology, valued at $750,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
34 (a) In May 2002, we issued 84,347 shares of Common Stock for aggregate
consideration of $70,000.
(b) There are no underwriters with respect to this issuance.
II-6
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
35 (a) In May 2002, we issued 234,375 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$93,750.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
36 (a) In May 2002, we issued 1,000,000 shares of Common Stock upon the
exercise of warrants, for aggregate consideration of $250,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
37 (a) In May 2002, we issued 9,500 shares of Common Stock for consulting
services, valued at $11,780.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
38 (a) In June 2002, we issued 150,000 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$150,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
39 (a) In July 2002, we issued 125,324 shares of Common Stock for aggregate
consideration of $75,200.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
40 (a) In July 2002, we issued 60,000 shares of Common Stock for the
conversion of convertible promissory notes and accrued interest, valued at
$39,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
41 (a) In July 2002, we issued 500,000 shares of Common Stock for consulting
services, valued at $428,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
42 (a) In August 2002, we issued 75,000 shares of Common Stock for aggregate
consideration of $45,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
II-7
43 (a) In September 2002, we issued 239,000 shares of Common Stock for
aggregate consideration of $157,003.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
44 (a) In September 2002, we issued 104,484 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$69,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
45 (a) In September 2002, we issued 150,000 shares of Common Stock for
consulting services, valued at $68,998.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
46 (a) In September 2002, we issued to an employee 50,000 shares of Common
Stock in lieu of deferred compensation of approximately $29,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
47 (a) In September 2002, we issued to an employee 300,000 shares of Common
Stock for a finders fee, valued at $141,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
48 (a) In October 2002, we issued 356,000 shares of Common Stock for
aggregate consideration of $89,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
49 (a) In October 2002, we issued 151,786 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$75,001.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
50 (a) In October 2002, we issued to 51,562 shares of Common Stock in
settlement of litigation, valued at 23,203.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
II-8
51 (a) In November 2002, we issued 349,846 shares of Common Stock for
aggregate consideration of $69,664.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
52 (a) In November 2002, we issued 96,612 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$48,000 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
54 (a) In November 2004, we issued to an employees 32,258 shares of Common
Stock in lieu of deferred compensation of approximately $20,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
55 (a) In December 2002, we issued 1,547,589 shares of Common Stock for
aggregate consideration of $279,778.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
56 (a) In December 2002, we issued 379,121 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest valued at
$150,000 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
57 (a) In December 2002, we issued 375,000 shares of Common Stock for
consulting services, valued at $215,250.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
58 (a) In December 2002, we issued to an employee 56,452 shares of Common
Stock in lieu of deferred compensation of approximately $35,001.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
59 (a) In January 2003, we issued 2,431,152 shares of Common Stock for
aggregate consideration of $558,964 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
60 (a) In January 2003, we issued to an employee 46,875 shares of Common
Stock in lieu of deferred compensation of approximately $30,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
61 (a) In February 2003, we issued 2,788,188 shares of Common Stock for
aggregate consideration of $473,988.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
62 (a) In February 2003, we issued 65,000 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$38,250 .
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
63 (a) In February 2003, we issued 3,000,000 shares of Common Stock for
consulting services, valued at $1,230,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
64 (a) In March 2003, we issued 1,744,014 shares of Common Stock for
aggregate consideration of $246,523.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
65 (a) In March 2003, we issued 133,333 shares of Common Stock upon the
conversion of convertible promissory notes and accrued interest, valued at
$20,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
66 (a) In March 2003, we issued 40,476 shares of Common Stock upon the
cashless exercise of warrants.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
67 (a) In April 2003, we issued 2,136,137 shares of Common Stock for
aggregate consideration of $395,788.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
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68 (a) In April 2003, we issued 200,000 shares of Common Stock for
consulting services, valued at $64,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
69 (a) In May 2003, we issued 1,249,189 shares of Common Stock for aggregate
consideration of $186,014.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
70 (a) In May 2003, we issued 31,250 shares of Common Stock for the
conversion of convertible promissory notes and accrued interest, valued at
$10,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
71 (a) In June 2003, we issued 1,559,896 shares of Common Stock for
aggregate consideration of $229,984.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
72 (a) In June 2003, we issued 15,625 shares of Common Stock for the
conversion of convertible promissory notes and accrued interest, valued at
$5,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
73 (a) In July 2003, we issued 1,447,400 shares of Common Stock for
aggregate consideration of $217,110.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
74 (a) In July 2003, we issued 55,000 shares of Common Stock for the
conversion of convertible promissory notes and accrued interest, valued at
$16,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
75 (a) In August 2003, we issued 300,000 shares of Common Stock upon the
exercise of outstanding warrants at a per share exercise price of $0.06.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
76 (a) In August 2003, we issued 450,100 shares of Common Stock for
aggregate consideration of $67,515.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
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77 (a) In September 2003, we issued 700,000 shares of Common Stock upon the
exercise of outstanding warrants at a per share exercise price of $0.06.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
78 (a) In September 2003, we issued 593,667 shares of Common Stock for
aggregate consideration of $89,050.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
79 (a) In October 2003, we issued a total of 450,000 shares of Common Stock
upon conversion of promissory notes in the principal amount of $90,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
80 (a) In October 2003, we issued 815,433 shares of Common Stock for
aggregate consideration of $122,315.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
81 (a) In November 2003, we issued 232,834 shares of Common Stock for
aggregate consideration of $40,300.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
82 (a) In November 2003, we issued to a provider of legal services three
year warrants to purchase up to 100,000 shares of our Common Stock in exchange
for $100,000 worth of legal services. If the price of our publicly traded common
stock closes at or above $1.00 for a consecutive 20 day period, then the
exercise period may, at our option, be reduced to 60 days following the end of
such period.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption form registration
provided by Section 4(2) of the Securities Act.
83 (a) In November 2003, we issued $300,000 in principal amount of our 7%
Convertible Debentures due March 31, 2004 and five-year warrants to purchase up
to 800,000 shares of our Common Stock, at a per share exercise price of $0.15,
provided, that, under certain conditions (including where the price of our
publicly traded common stock closes at or above $1.00 for a consecutive 20 day
period) then, at our option, we may reduce the exercise period of the warrant to
60 days following the end of such period.
(b) We paid a commission to placement agents of $30,000.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption form registration
provided by Section 4(2) of the Securities Act.
84 (a) In connection with the private placements referred to in the
immediately preceding paragraph, we issued, as a placement fee, warrants to
purchase up to an aggregate of 600,000 shares of Common Stock, at an exercise
price per share $0.15, provided, that, under certain conditions (including where
the price of our publicly traded Common Stock closes at or above $1.00 for a
consecutive 20 day period) then, at our option, we may reduce the exercise
period of the warrant to 60 days following the end of such period.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
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85 (a) In December 2003, we issued 2.8 million shares of Common Stock to a
providers of consulting services.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
86 (a) In December 2003, we issued 931,667 shares of Common Stock for
aggregate consideration of $177,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
87 (a) In December 2003, we issued 106,668 shares of Common Stock in
connection with the extension of past due convertible notes.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
88 (a) In December 2003, we issued 15,000 shares of Common Stock in respect
of services rendered and valued at $2,250.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
89 (a) As of December 2003, we entered into agreements with private
investors pursuant to which we issued to them, and they purchased, $1 million in
principal amount of our three-year 7% Convertible Debentures and undertook to
purchase within five days following the effectiveness of this Prospectus, an
additional $1 million in principal amount of our three-year 7% Convertible
Debentures. We also undertook to issue or have issued, in connection with these
debenture, five-year warrants to purchase up to 13,333,333 shares of our Common
Stock, at a per share exercise price of $0.25, subject to cashless exercise
rights, provided, that under certain conditions (including where the price of
our publicly traded common stock closes at or above $1.00 for a consecutive 20
day period) then, at our option, we may reduce the exercise period to 60 days
following the end of such period.
(b) We anticipate paying commissions to placement agents of approximately
$200,000 in respect of the placement of the debentures and warrants.
(c) We believe that these securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
90 (a) In connection with the private placements referred to in the
immediately preceding paragraph, we have or will issue, as a placement fee, five
year warrants to purchase up to an aggregate of 1,333,333 shares of Common
Stock, at exercise price per share of $0.15, subject to cashless exercise
rights.
(b) There are no underwriters with respect to this issuance.
(c) We believe that these securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
91 (a) In January 2004, we issued a to a service provider 1 million shares
of our Common Stock, subject to cashless exercise rights.
(b) There are no underwriters with respect to this issuance.
(c) We believe that these securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
92 (a) In January 2004, we issued to two employees an aggregate of 440,000
shares of Common Stock in lieu of amounts owed, including deferred compensation,
of approximately $110,000.
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(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
93 (a) In January 2004, we issued to one employee an aggregate of 50,000
shares of Common Stock as a signing bonus, of approximately $11,000.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
94 (a) In January 2004, we issued 100,000 shares of Common Stock for
aggregate consideration of $17,500.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
95 a) In January 2004, we issued to our former Vice President and Secretary
aggregate of 333,333 shares of Common Stock as part of his severance package,
valued at approximately $76,667.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
96 (a) In January 2004, we issued 173,335 shares of Common Stock in
connection with the extension of past due convertible notes.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
97 (a) In February 2004, we issued to two employees an aggregate of 87,892
shares of Common Stock as compensation, of approximately $20,540.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
98 (a) In February 2004, we issued 29,455 shares of Common Stock for
professional fees, valued at $7,618.
(b) There are no underwriters with respect to this issuance.
(c) We believe that the securities were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
ITEM 27. 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")).
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).
4.3 Warrant, dated as of October 31, 2003 issued in favor of Melton
Management Limited (1)
4.4 Form of Three Year New Visual Corporation 7% Convertible Debenture *
4.5 Form of Three Year Warrant issued to the Holders of the 7% Convertible
Debentures *
5.1 Opinion of G. David Gordon * *
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).
II-13
10.6 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).
10.7 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). *
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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). *
10.13 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). *
10.14 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). *
10.15 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). *
10.16 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). *
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
II-14
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 Regulation S Purchase Agreement dated September 23, 2002 between New
Visual Corporation and Starz Investments Limited. (1)
10.27 Promissory Note dated October 29, 2002 in favor of Robert E Casey, Jr.
(incorporated by reference to Exhibit 10.57 of the Annual Report for
the year ended 2002).
10.28 Severance Agreement and Release dated December 2, 2002, by and between
New Visual Corporation and Thomas J. Cooper. (incorporated by
reference to Exhibit 10.58 of the Annual Report for the year ended
2002).
10.29 Employment Agreement dated December 2, 2002, by and between New Visual
Corporation and Brad Ketch. (incorporated by reference to Exhibit
10.59 of the Annual Report for the year ended 2002). *
10.30 Stock Option Agreement dated December 2, 2002, by and between New
Visual Corporation and Brad Ketch. (incorporated by reference to
Exhibit 10.60 of the Annual Report for the year ended 2002). *
10.31 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).
10.32 Securities Purchase Agreement dated as of October 31, 2003 by and
between New Visual and Melton Management Limited (incorporated by
reference to Exhibit 10.62 of the Company's Annual Report on Form 10-K
for the year ended October 31, 2003)
10.33 Employment Agreement dated November 21, 2003, by and between New
Visual Corporation and James W. Cruckshank (incorporated by reference
to Exhibit 10.63 of the Company's Annual Report on Form 10-K for the
year ended October 31, 2003)
10.34 Letter agreement between ARTISAN PICTURES INC. and New Visual
Corporation (incorporated by reference to Exhibit 10.64 of the
Company's Annual Report on Form 10-K for the year ended October 31,
2003)
10.35 Form of Securities Purchase Agreement dated as of December 31, 2003
between New Visual Corporation and Holders of the three year 7%
Convertible Debentures *
10.36 Form of Registration Rights Agreement dated as of December 31, 2003
between New Visual Corporation and the Holders of the 7% Convertible
Debentures *
10.37 Form of Principal's Agreement
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 of the Annual Report for the year ended 2002)
23.1 Consent of G. David Gordon (included in Exhibit 5.1) *
23.2 Consent of Marcum & Kliegman LLP, Independent Auditors *
* Filed Herewith
** To Filed by Amendment
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ITEM 28. UNDERTAKINGS.
New Visual Corporation hereby undertakes the following:
(a)(1) To file, during any period in which it offers or sells securities,
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Act, to treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c)(1) For determining any liability under the Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in San Diego,
California, on the 9th day of February, 2004.
NEW VISUAL CORPORATION
BY: /S/ BRAD KETCH
-------------------------------------------------
BRAD KETCH, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND OFFICER DULY AUTHORIZED TO SIGN ON BEHALF OF
REGISTRANT)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Brad Ketch as his true and
lawful attorneys-in-fact and agent, with full powers of substitution and
resubstitution, for him and in his name, place and stead, to sign in any and all
capacities any and all amendments (including post-effective amendments) to this
Registration Statement on Form SB-2 and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLES DATE
--------- ------ ----
/S/ BRAD KETCH PRESIDENT AND CHIEF FEBRUARY 9, 2004
---------------------------- EXECUTIVE OFFICER AND
BRAD KETCH DIRECTOR
/S/ RAY WILLENBERG, JR CHAIRMAN OF THE BOARD FEBRUARY 9, 2004
---------------------------- AND EXECUTIVE VICE PRESIDENT
RAY WILLENBERG
/S/ IVAN BERKOWITZ DIRECTOR FEBRUARY 9, 2004
----------------------------
IVAN BERKOWITZ
/S/ BRUCE BROWN DIRECTOR FEBRUARY 9, 2004
----------------------------
BRUCE BROWN
/S/ THOMAS J. COOPER DIRECTOR FEBRUARY 9, 2004
----------------------------
THOMAS J. COOPER
/S/ JOHN HOWEL DIRECTOR FEBRUARY 9, 2004
----------------------------
JOHN HOWEL
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