AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 2005
REGISTRATION NO. 333-126488
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW VISUAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 95-4545704
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
305 NE 102ND AVENUE, SUITE 105
PORTLAND, OREGON 97220
(503) 257-6700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRAD KETCH
C/O NEW VISUAL CORPORATION
305 NE 102ND AVENUE, SUITE 105
PORTLAND, OREGON 97220
(503) 257-6700
(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:
LAWRENCE KALLAUR,ESQ. DAVID ABOUDI, ESQ.
C/O NEW VISUAL CORPORATION ABOUDI & BROUNSTEIN
305 NE 102ND AVENUE, SUITE 105 3 GAVISH STREET
PORTLAND, OREGON 97220 KFAR SABA, 44641, ISRAEL
(503) 257-6700 972-9-764-4833
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [X]
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 securities price aggregate Amount of
to be registered Amount to be per offering registration
registered (1) share price fee
--------------------------------------------------------------------------------
Common Stock 116,906,746(2) $0.10(10) $11,690,675 $ 1,376
33,082,738(3) $0.065(11) $2,150,378 253
11,312,220(4) $0.1547(12) $1,750,000 206
22,624,430(5) $0.3094(12) $6,999,999 824
2,333,333(6) $0.25(12) $583,333 69
233,334(7) $0.25(12) $58,333 7
4,977,375(8) $0.3094(12) $1,540,000 181
1,244,344(9) $0.1547(12) $192,500 23
TOTAL 192,714,520 $24,965,218 $ 2,939(13)
(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 solely upon conversion of the Series
05-01 Convertible Debentures and exercise of the Warrants (as defined below)
solely to prevent dilution resulting from stock splits, stock dividends or
similar transactions (and not as a result of adjustments resulting from any
variation in the market price of our securities).
(2) Represents (a) 150% of (i) the 51,546,392 shares of Registrant's common
stock, par value $0.001 (the "Common Stock"), issuable upon conversion of $3.5
million in aggregate principal amount of the Registrant's 7% Senior Secured
Convertible Debentures Series 05-01 (the "Series 05-01 Convertible Debentures")
at the price at which the Series 05-01 Convertible Debentures would be
2
convertible as of July 6, 2005 (the "Registration Conversion Price") and (ii)
the 10,824,739 shares of Common Stock issuable in payment of interest accruing
on the Series 05-01 Convertible Debentures through the third anniversary of the
issuance thereof at the Registration Conversion Price; (b) 12,749,339 shares of
Common Stock representing the Registrant's current good faith estimate of
additional shares that it might be required to issue to the selling stockholders
(i) upon adjustments to the conversion price of the unconverted Series 05-01
Convertible Debentures and/or to the number of shares issuable upon exercise of
unexercised Class A Warrants and Class B Warrants (as defined below) in the
event that, on or prior to the date on which aggregate outstanding principal
amount of the Series 05-01 Convertible Debentures is first equal to or less than
$1,166,667, the Registrant offers or issues securities at a purchase price or
conversion price lower than the Conversion Price in effect as of the date on
which any selling stockholder converts Series 05-01 Convertible Debentures or
warrants having an exercise price below the exercise price of the Class A
Warrants and Class B Warrants and (ii) as liquidated damages through the
projected effective date of this Registration Statement; (c) up to 2,333,333
shares of Common Stock issuable upon conversion of $350,000 in aggregate
principal amount of the Registrant's 7% Convertible Debentures Series 03-2 (the
"Series 03-2 Convertible Debentures") at a per share conversion price of $0.15;
(d) up to 490,000 shares of Common Stock issuable in payment of interest accrued
on the Series 03-2 Convertible Debentures through the maturity thereof on the
third anniversary of issuance; (e) 1,096,667 shares of Common Stock representing
additional shares issuable to the holders of the Series 03-2 Convertible
Debentures as liquidated damages through the projected effective date of this
registration statement as contemplated by our agreements with these holders; (f)
4,680,710 shares of Common Stock issued pursuant to the exchange agreement dated
as of April 2, 2005 between the Registrant and Zaiq Technologies, Inc and (g)
2,000,000 additional shares of Common Stock.
(3) Represents (a) 150% of (i) the additional 16,546,993 shares of Common Stock
issuable upon conversion of $3.5 million in aggregate principal amount of Series
05-01 Convertible Debentures at the price at which the Series 05-01 Convertible
Debentures would be convertible as of July 19, 2005 (the "Amended Registration
Conversion Price") and (ii) the additional 3,474,868 shares of Common Stock
issuable in payment of interest accruing on the Series 05-01 Convertible
Debentures through the third anniversary of the issuance thereof at the Amended
Registration Conversion Price; (b) 3,003,280 shares of Common Stock representing
the Registrant's current good faith estimate of additional shares that it might
be required to issue to the selling stockholders (i) upon adjustments to the
conversion price of the unconverted Series 05-01 Convertible Debentures and/or
to the number of shares issuable upon exercise of unexercised Class A Warrants
and Class B Warrants in the event that, on or prior to the date on which
aggregate outstanding principal amount of the Series 05-01 Convertible
Debentures is first equal to or less than $1,166,667, the Registrant offers or
issues securities at a purchase price or conversion price lower than the
Conversion Price in effect as of the date on which any selling stockholder
converts Series 05-01 Convertible Debentures or warrants having an exercise
price below the exercise price of the Class A Warrants and Class B Warrants and
(ii) as liquidated damages through the projected effective date of this
Registration Statement; and (c) 46,666 shares of Common Stock representing
additional shares issuable to the holders of the Series 03-2 Convertible
Debentures as liquidated damages through the projected effective date of this
registration statement as contemplated by our agreements with these holders.
(4) Represents shares of Common Stock issuable upon exercise of warrants ("Class
A Warrants") issued to the holders of the Series 05-01 Convertible Debentures in
connection with the issuance of such debentures.
(5) Represents shares of Common Stock issuable upon exercise of warrants ("Class
B Warrants") issued to the holders of the Series 05-01 Convertible Debentures in
connection with the issuance of such debentures.
(6) Represents shares of Common Stock issuable upon exercise of warrants issued
to the holders of the Series 03-2 Convertible Debentures in connection with the
issuance of such debentures.
(7) Represents shares of Common Stock issuable upon exercise of warrants issued
to a placement agent in connection with the issuance of the Series 03-2
Convertible Debentures.
(8) Represents 4,524,886 shares of Common Stock issuable upon exercise of
warrants issued to a finder in connection with the issuance of the Series 05-01
Convertible Debentures. We are also registering an additional 452,489 shares of
Common Stock representing our current good faith estimate of additional shares
that we might be required to issue to the finders upon adjustments to the number
of shares issuable upon exercise thereof.
(9) Represents 1,131,222 shares of Common Stock issuable upon exercise of
warrants issued to a finder in connection with the issuance of the Series 05-01
Convertible Debentures. We are also registering an additional 113,122 shares of
Common Stock representing our current good faith estimate of additional shares
that we might be required to issue to the finders upon adjustments to the number
of shares issuable upon exercise thereof.
(10) 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 Bulletin Board on July 6, 2005.
(11) 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 Bulletin Board on July 18, 2005.
(12) Pursuant to Rule 457(c) and (g), the proposed maximum offering price per
share is based on the exercise price therefor on the date hereof.
(13) A registration fee in the amount of $2,686 was previously paid.
Pursuant to Rule 429 under the Securities Act, in addition to our shares of
Common Stock included in this Registration Statement, the combined prospectus
also includes 18,166,668 shares of Common Stock being carried forward from the
Registrant's Registration Statement on Form SB-2 (Registration No. 333-112643).
This Registration Statement also constitutes Post Effective Amendment No. 1 to
Registration Statement on Form SB-2 Registration No. 333-112643. This post
effective amendment shall become effective concurrently with the effectiveness
of this Registration Statement in accordance with section 8(c) of the securities
act as amended.
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 Act or
until the Registration Statement shall become effective on such date as the
Securities and Exchange Commission (the "SEC"), acting pursuant to said Section
8(a), may determine.
3
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 JULY 22, 2005
PROSPECTUS
NEW VISUAL CORPORATION
210,881,188 shares of Common Stock
This Prospectus relates to the sale by the selling stockholders of up to
210,881,188 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 Bulletin Board under the trading symbol
"NVEI". The last reported sales price per share of our Common Stock as quoted by
the OTC Bulletin Board on July 19, 2005, was $0.07.
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 9.
Neither the Securities Exchange and 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 _________, 2005
PRINCIPAL EXECUTIVE OFFICE:
New Visual Corporation
305 NE 102nd Avenue, Suite 105
Portland, Oregon 97220
(503) 257-6700
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TABLE OF CONTENTS
Page
Prospectus Summary........................................................ 6
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 18
Description of the Agreements with the Selling Stockholders .............. 18
Market for Registrant's Common Equity and Related Stockholder Matters..... 25
Dividend Policy............................................................ 25
Management's Discussion and Analysis....................................... 26
Business................................................................... 32
Description of Properties.................................................. 38
Legal Proceedings.......................................................... 38
Management................................................................. 39
Executive Compensation..................................................... 41
Selling Stockholders...................................................... 45
Plan of Distribution...................................................... 52
Description of Capital Stock.............................................. 54
Disclosure of SEC Position of Indemnification for Securities
Act Liabilities........................................................... 56
Interest of Named Expert and Counsel...................................... 57
Legal Matters............................................................. 57
Experts................................................................... 57
Where You can find more Information....................................... 57
We have not authorized anyone to provide you with information different from
that contained or incorporated by reference in this Prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of our
Common Stock only in jurisdictions where offers and sales are permitted. The
information contained in this Prospectus is accurate only as of the date of this
Prospectus, regardless of the time of delivery of this Prospectus or of any sale
of Common Stock.
5
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.
NEW VISUAL CORPORATION
New Visual Corporation is developing advanced transmission technology to enable
data to be transmitted across copper telephone wire at speeds and over distances
that exceed those offered by leading digital subscriber line (DSL) technology
providers. We intend to market this novel technology to leading equipment makers
in the telecommunications industry. Our technology is being designed to
substantially increase the capacity of existing copper telephone networks,
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 system-level products that use existing broadband technologies, such as
DSL, by providing faster transmission speed capability and by increasing the
transmission distance capability. We are currently in the process of completing
the development of a commercial beta version of the chipset containing our
Semiconductor Technologies for use and evaluation by prospective customers.
Through our wholly owned subsidiary, NV Entertainment, we have recognized
revenues of approximately $684,000 from the hit feature-length documentary, STEP
INTO LIQUID (the "Film") from its release through April 30. 2005. According to
its distributor, the Film has grossed $3.7 million in box office receipts since
its domestic theatrical release in August 2003. Since April 2004 it has been,
and now remains, in wide DVD release domestically, grossing approximately $14
million in sales and rentals. The Film is currently in theatrical distribution
internationally.
We recorded revenues of $287,570 and $16,198 for, respectively, the year ended
October 31, 2004 and the six months ended April 30, 2005, representing
guaranteed and license payments and foreign distribution fees from our film.
We incurred net losses of $5,506,287 and $2,162,569 for, respectively, the year
ended October 31, 2004 and the six months ended April 30, 2005. We have a
history of operating losses and have incurred net losses in each fiscal quarter
since our inception. As of April 30, 2005, we had an accumulated deficit of
approximately $57.4 million. Our independent registered public accountants have
included an explanatory paragraph about our ability to continue as a going
concern in their audit reports on our audited 2004 and 2003 financial
statements, which may make it difficult for us to raise capital. Our financial
statements do not include any adjustment that might result from the outcome of
such uncertainty.
RECENT DEVELOPMENTS
In May 2005 we completed a private placement to certain individual and
institutional investors of $3.5 million in aggregate principal amount of our
three-year 7% Senior Secured Convertible Debentures Series 05-01 (the "Series
05-01 Convertible Debentures"). We received net proceeds of approximately $3.11
million from the sale of the Series 05-01 Convertible Debentures after payment
of offering related fees and expenses. As of July 19, 2005, we have used a
portion of those funds to repay the principal and accrued interest on five notes
payable and two convertible notes payable aggregating $1,135,251 in principal.
We intend to use the remaining proceeds of the financing for general corporate
purposes, including working capital and the funding of operating losses. The
Series 05-01 Convertible Debentures are convertible into shares of our Common
Stock on or after the earlier of the (i) 65th day following issuance or (ii) the
effective date of the registration statement of which this Prospectus forms a
part (the "Registration Statement") at an initial conversion rate of 70% of the
volume weighted average price of the Common Stock for the five trading days
6
ending on the trading day immediately prior to date of conversion (subject to
adjustment if there are certain capital adjustments or if we enter into certain
specified types of transactions, as further discussed in this Prospectus).
Interest on the Series 05-01 Convertible Debentures accrues at the rate of 7%
per annum and is payable on a bi-annual basis, beginning on December 31, 2005,
or on conversion and may be paid, at our option, either in cash or in shares of
Common Stock. We may prepay the amounts outstanding on the Series 05-01
Convertible Debentures on at least ten days' advance notice by paying an amount
equal to 120% of the sum of (x) the principal amount of the Series 05-01
Convertible Debentures being prepaid plus (y) the interest accrued thereon. The
total number of shares of Common Stock issuable upon conversion of the $3.5
million in principal amount of Series 05-01 Convertible Debentures at the
conversion price at which such debentures would be convertible as of July 19,
2005 is 68,093,385.
To secure our obligations under the Series 05-01 Convertible Debentures, we
granted a security interest in all of our assets (including, without limitation,
our intellectual property) to the holders of the Series 05-01 Convertible
Debentures pursuant to a Security Interest Agreement dated as of the date of the
Series 05-01 Convertible Debentures. This security interest terminates upon the
earlier of (i) the date on which less $1,166,667 in principal amount of the
Series 05-01 Convertible Debentures remain outstanding or (ii) payment or
satisfaction of all of our obligations relating to the Series 05-01 Convertible
Debentures.
At the closing of the private placement, purchasers of the Series 05-01
Convertible Debentures were also issued (i) warrants to purchase an aggregate of
11,312,220 shares of shares of Common Stock at a per share exercise price of
$0.1547 (subject to adjustment if there are certain capital adjustments or if we
enter into certain specified types of transactions, as further discussed in this
Prospectus) ("Class A Warrants") and (ii) warrants to purchase an aggregate of
22,624,430 shares of shares of Common Stock at a per share exercise price of
$0.3094 (subject to adjustment if there are certain capital adjustments or if we
enter into certain specified types of transactions, as further discussed in this
Prospectus) ("Class B Warrants").
In connection with this transaction, we also issued to a finder (i) warrants to
purchase 4,524,886 shares of Common Stock at an exercise price of $0.3094 per
share and (ii) warrants to purchase 1,131,222 shares of Common Stock at an
exercise price of $0.1547 per share. A more complete description of this
financing is included elsewhere in this Prospectus under the caption
"DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
CORPORATE INFORMATION
Our principal offices are located at 305 NE 102nd Avenue, Suite 105, Portland,
Oregon 97220 and our telephone number is (503) 257-6700. We maintain a website
at www.newvisual.com. Information contained on our website is not part of this
Prospectus.
All references to "we," "our," or "us" in this filing refer to New Visual
Corporation, a Utah corporation, and our subsidiaries.
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 9
of this Prospectus in deciding whether to purchase the Common Stock offered
under this Prospectus.
THE OFFERING
Securities Offered by the 210,881,188 shares of Common Stock. (1)
Selling Stockholders
Shares Outstanding Before the 114,348,190 shares of Common Stock. (2)
Offering
Use of Proceeds We will not receive any
proceeds from the Sale of the Common Stock
by the selling stockholders.
7
(1) Represents (a) 150% of (i) the 68,093,385 shares of our Common Stock
issuable upon conversion of $3.5 million in aggregate principal amount of Series
05-01 Convertible Debentures at the conversion price at which such debentures
would be convertible as of July 19, 2005 (the "Registration Conversion Price")
and (ii) the 14,299,607 shares of Common Stock issuable in payment of interest
accruing on the Series 05-01 Convertible Debentures through the third
anniversary of the issuance thereof at the Registration Conversion Price ; (b)
11,312,220 shares of shares of Common Stock issuable upon exercise of Class A
Warrants and 22,624,430 shares of shares of Common Stock issuable upon exercise
of Class B Warrants (c) an additional 15,752,619 shares of Common Stock
representing our current good faith estimate of additional shares that we might
be required to issue to the selling stockholders (i) upon adjustments to the
conversion price of the unconverted Series 05-01 Convertible Debentures and/or
to the number of shares issuable upon exercise of unexercised Class A Warrants
and Class B Warrants in the event that, on or prior to the date on which
aggregate outstanding principal amount of the Series 05-01 Convertible
Debentures is first equal to or less than $1,166,667, we offer or issue
securities at a purchase price or conversion price lower than the conversion
price in effect as of the date on which any selling stockholder converts Series
05-01 Convertible Debentures or warrants having an exercise price below the
exercise prices of the Class A Warrants and Class B Warrants and (ii) as
liquidated damages through the projected effective date of the Registration
Statement of which this Prospectus forms a part; (d) 5,656,108 shares of Common
Stock issuable upon exercise of warrants issued to a finder in connection with
the issuance of the Series 05-01 Convertible Debentures; (e) an additional
565,611 shares of Common Stock, representing our current good faith estimate of
additional shares that we might be required to issue to the finder (i) based on
adjustments to the number of shares covered by their unexercised warrants in the
event that, on or prior to the date on which aggregate outstanding principal
amount of the Series 05-01 Convertible Debentures is first equal to or less than
$1,166,667, we offer or issue securities at a purchase price or exercise price
lower than the exercise prices of their warrants and (ii) as liquidated damages
through the projected effective date of the Registration Statement of which this
Prospectus forms a part, in each case as contemplated by terms of agreements
between us and the finder; (f) up to 9,000,000 shares of Common Stock issuable
upon conversion of $1,350,000 in aggregate principal amount of the Registrant's
7% Convertible Debentures Series 03-2 (the "Series 03-2 Convertible Debentures")
at a per share conversion price of $0.15; (g) up to 1,890,000 shares of Common
Stock issuable in payment of interest accrued on the Series 03-2 Convertible
Debentures through the maturity thereof on the third anniversary of issuance;
(h) 9,000,000 shares of Common Stock issuable upon exercise of warrants issued
in connection with the Series 03-2 Convertible Debentures (the "Series 03-2
Warrants"); (i) 2,210,001 shares of Common Stock representing additional shares
issuable to the holders of the Series 03-2 Convertible Debentures or the Series
03-2 Warrants in payment of liquidated damages as contemplated by our agreement
with the holders of the Series 03-2 Convertible Debentures; (j) 900,000 shares
of Common Stock issuable upon exercise of warrants issued as a placement fee in
connection with the issuance of the Series 03-2 Convertible Debentures; (k)
4,680,710 shares of Common Stock issued pursuant to the exchange agreement dated
as of April 2, 2005 between us and Zaiq Technologies, Inc.; (l) 700,000 shares
of Common Stock issuable upon exercise of certain other warrants; and (m) an
additional 3,000,000 shares of Common Stock. For a description of the agreement
between us and the holders of the Series 05-01 Convertible Debentures, the
holders of the Series 03-2 Convertible Debentures and Zaiq Technologies, Inc.,
see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(2) As of July 19, 2005. Does not include (a) up to an aggregate of 2,178,750
shares of Common Stock issuable upon exercise of options granted under our 2000
Omnibus Securities Plan, our 2001 Stock Incentive Plan or our 2003 Consultant
Stock Plan, (b) any of the shares described clauses (a) through (l) in note (1)
above and (c) 8,524,585 shares of Common Stock issuable upon exercise of certain
other outstanding options and warrants.
8
RISK 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. 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.
RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE FOR
THE FORESEEABLE FUTURE.
Since inception, we have incurred significant operating losses. As of April 30,
2005, we had an accumulated deficit of $57,353,743. We expect to continue to
incur net losses for the foreseeable future as we continue to further develop
and commercialize our 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. 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 any substantial
revenues from the commercialization of the Semiconductor Technologies or sales
of products and will result in future operating losses
IF WE DO NOT RECEIVE ADDITIONAL CAPITAL WHEN AND IN THE AMOUNTS NEEDED IN THE
NEAR FUTURE, OUR ABILITY TO CONTINUE AS A GOING CONCERN IS IN SUBSTANTIAL DOUBT.
We believe that our existing cash resources will be sufficient to maintain
operations in accordance with our business plans and meet our obligations as
they come due through the second quarter of fiscal 2006.
We anticipate incurring substantial sales and marketing, product development and
research and general operating expenses in the course of fiscal 2005 and
thereafter that will require substantial amounts of additional capital on an
ongoing basis. We will most likely have to obtain such capital from sales of our
equity, convertible equity and/or debt securities, unless we generate
significant revenues.
However, 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.
Under the terms of our agreements with the holders of our Series 05-01
Convertible Debentures, we agreed that, without their prior consent, we would
not enter into certain types financing transactions for specified periods of
time and we granted them a first priority lien on all of our current and future
assets (including, without limitation, our intellectual property). These
provisions of our agreements with the holders of our Series 05-01 Convertible
Debentures may impair our ability to obtain equity or debt financing from third
parties on terms satisfactory to us or at all.
9
Our independent registered public accountants have included in their audit
report on our 2004 financial statements a "going concern" paragraph, which
raises substantial doubt about our 'ability to continue as a going concern.
Additionally, the going concern paragraph may make it more difficult for us to
raise funds than if we did not have a "going concern" paragraph.
THE HOLDERS OF OUR SERIES 05-01 CONVERTIBLE DEBENTURES HAVE A LIEN ON ALL OF OUR
CURRENT AND FUTURE ASSETS (INCLUDING, WITHOUT LIMITATION, OUR INTELLECTUAL
PROPERTY) AND COULD FORECLOSE IN THE EVENT THAT WE DEFAULT UNDER THOSE
DEBENTURES.
Under the terms of the Security Interest Agreement between us and the holders of
our Series 05-01 Convertible Debentures, we granted a first priority lien to the
holders of Series 05-1 Convertible Debentures on all of our current and future
assets (including, without limitation, our intellectual property). If we default
under the Series 05-01 Convertible Debentures or any of our agreements with the
holders of our Series 05-01 Convertible Debentures, the holders of the Series
05-01 Convertible Debentures would be entitled, among other things, to foreclose
on our assets in order to satisfy our obligations under those debentures. A
foreclosure on our assets would have a material and adverse effect on our
business, financial condition and results of operations.
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 IN THE TELECOMMUNICATIONS INDUSTRY AND,
CONSEQUENTLY, THERE IS LIMITED HISTORICAL FINANCIAL DATA UPON WHICH AN
EVALUATION OF OUR BUSINESS PROSPECTS COULD BE MADE.
We have only been engaged in the semiconductor business 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.
OUR SUCCESS IS CONTINGENT UPON THE INCORPORATION OF THE SEMICONDUCTOR
TECHNOLOGIES INTO SUCCESSFUL PRODUCTS OFFERED BY LEADING EQUIPMENT MANUFACTURERS
AND THE NON-INCORPORATION OF OUR SEMICONDUCTOR TECHNOLOGIES INTO SUCH PRODUCTS
COULD ADVERSELY AFFECT OUR BUSINESS PROSPECTS.
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
10
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.
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 COMPLETING THE DEVELOPMENT OF COMMERCIALLY
DEPLOYABLE VERSION OF THE SEMICONDUCTOR TECHNOLOGIES BEFORE WE EARN ASSOCIATED
NET REVENUES AND MAY NOT ULTIMATELY SELL A LARGE VOLUME OF OUR PRODUCTS.
We are currently working on completing a beta version of the Semiconductor
Technologies and we anticipate that we will incur substantial development
expenditures prior to generating associated net revenues from a commercially
deployable version (if any). We estimate that we will complete by the end of the
second quarter of fiscal 2006 a beta version of the chipset for evaluation by
our potential customers and prospective industry partners. We anticipate
receiving 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.
11
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.
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 affect 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 market for high-speed telecommunications products is highly competitive, and
we expect that it will become increasingly competitive in the future. Our
competitors, including Broadcom, Centillium, Conexant, Ikanos Communications,
Infineon Technologies, Metalink, ST Micro, Texas Instruments and others, have
developed and are currently marketing technologies that also address the
existing technical impediments of using existing copper networks as broadband
options or are otherwise substantially similar to our Semiconductor
Technologies. Our competitors include some of the largest, most successful
domestic and international telecommunications companies and other companies with
well-established reputations in the broadband telecommunications industry.
Certain of our competitors, operating 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. 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 wire based solutions that are
functionally similar to the Semiconductor Technologies. 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.
12
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 time frames 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.
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.
GOVERNMENTAL REGULATION CONCERNING THE TECHNICAL SPECIFICATIONS OF SEMICONDUCTOR
TECHNOLOGIES THAT ARE DEPLOYED IN THE TELEPHONE NETWORKS COULD ADVERSELY AFFECT
THE MARKET ACCEPTANCE OF OUR SEMICONDUCTORS.
The jurisdiction of the Federal Communication Commission ("FCC") extends to the
entire communications industry, including potential customers for our
semiconductors. Future FCC regulations affecting the broadband access industry
may adversely affect our business. For example, FCC regulatory policies
affecting the availability of data and Internet services may impede the
13
penetration of our semiconductors into certain markets or affect the prices that
may be charged in such markets. In addition, international regulatory bodies are
beginning to adopt standards and regulations for the broadband access industry.
These domestic and foreign standards, laws and regulations address various
aspects of Internet, telephony and broadband use, including issues relating to
liability for information retrieved from or transmitted over the Internet,
online context regulation, user privacy, taxation, consumer protection, security
of data, access by law enforcement, tariffs, as well as intellectual property
ownership, obscenity and libel. Changes in laws, standards and/or regulations,
or judgments in favor of plaintiffs in lawsuits against service providers,
e-commerce and other Internet companies, could adversely affect the development
of e-commerce and other uses of the Internet. This, in turn, could directly or
indirectly materially adversely impact the broadband telecommunications and data
industry in which our customers operate. To the extent our customers are
adversely affected by laws or regulations regarding their business, products or
service offerings, this could result in a material and adverse effect on our
business, financial condition and results of operations.
In addition, highly complex products such as the semiconductors that we expect
to offer are subject to rules, limitations and requirements as set forth by
international standards bodies such as the International Organization for
Standardization (ISO), and as adopted by the governments of each of the
countries that we intend to market in. There are some FCC regulations in the
United States pertaining to the use of the available bandwidth spectrum that at
present have been interpreted by some of our target customers as discouraging to
the technical innovations that we are bringing to market. 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.
WE HAVE NO AGREEMENT RELATING TO REVENUE GENERATING ACTIVITIES NO ASSURANCE CAN
BE PROVIDED THAT WE WILL SUCCESSFULLY CONCLUDE ANY SUCH AGREEMENT.
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 AND THE FAILURE TO ATTRACT
OR RETAIN NEEDED PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
We are highly dependent on the principal members of our management and
technology staff. The loss of their services might significantly delay or
prevent the achievement of development or strategic objectives. Our success
depends on our ability to retain certain key employees and to attract additional
qualified employees. We cannot assure you that we will be able to retain
existing personnel or attract and retain highly qualified employees in the
future.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404
OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS OPERATIONS.
Beginning in fiscal 2006, we must perform an annual evaluation and testing of
our internal controls over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of
those internal controls, as required by Section 404 of the Sarbanes-Oxley Act of
2002 and the rules adopted by the SEC. Our testing, or the subsequent testing by
our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. If we
are not able to comply with the requirements of Section 404 in a timely manner,
or if we or our independent registered public accounting firm identifies
deficiencies in our internal controls over financial reporting that are deemed
to be material weaknesses, the market price of our Common Stock could decline,
and we could be subject to sanctions or investigations by the SEC or other
regulatory authorities, which would require additional financial and management
resources.
OUR FILM IN DISTRIBUTION MAY NOT PRODUCE THE FINANCIAL RESULTS WE ANTICIPATE.
14
Our Film has completed its domestic theatrical run. We recognized revenues of
$683,748 as measured from its release through April 30, 2005 as a result of the
consolidation of the joint venture that produced the Film (of which we are 50%
owners). The expected future Film revenues will, we believe, be comprised of
licensing and foreign distribution guarantee fees, television rights and DVD
sales. Based on updated information provided to us by the Film's distributor, we
wrote down the carrying value assigned to the Film at October 31, 2004 to
$1,021,722 and will write down the carrying value assigned to the Film at July
31, 2005 to $0. Nonetheless, the Film may not produce the adjusted financial
results we anticipate 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 rentals or
sales of DVD's.
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.
RISKS CONCERNING THIS OFFERING AND CAPITAL STRUCTURE
THIS OFFERING MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR COMMON
STOCK.
This Prospectus relates to the sale or distribution of up to 210,881,188 shares
of Common Stock by the selling security holders. We will not receive any
proceeds from these sales and have prepared this Prospectus principally in order
to meet our contractual obligations to some of the selling security holders. The
sale of this block of stock, or even the possibility of its sale, may adversely
affect the trading market for our Common Stock and reduce the price available in
that market.
OUR STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION UPON THE CONVERSION OF OUR
SERIES 05-01 CONVERTIBLE DEBENTURES BECAUSE THESE DEBENTURES CONVERT AT A
DISCOUNT TO THE MARKET PRICE OF OUR COMMON STOCK AT THE TIME OF CONVERSION.
At any time and from time to time after the earlier of July 30, 2005 or the
effective date of the Registration Statement of which this Prospectus forms a
part, all or any portion of the principal amount of Series 05-01 Convertible
Debentures then outstanding may, at the option of the holders of the debentures,
be converted into shares of Common Stock at the conversion price then in effect
Additionally, all accrued but unpaid interest on Series 05-01 Convertible
Debentures is payable upon conversion, at our option, in shares of Common Stock
at the conversion price then in effect. The number of shares issuable upon any
conversion will be equal the outstanding principal amount of convertible
debenture to be converted, divided by the conversion price on the conversion
date, plus (if we have elected to pay such amount in shares of Common Stock) the
amount of any accrued but unpaid interest on the convertible debenture through
the conversion date, divided by the conversion price on the conversion date. The
conversion price of the Series 05-01 Convertible Debentures is equal to the
lower of (i) 70% of volume weighted average closing price per share of our
Common Stock for the five trading days immediately preceding the conversion date
and (ii) the lowest purchase price or conversion price of any shares of Common
Stock or securities convertible into shares of Common Stock that we subsequently
offer or issue on or prior to the date on which aggregate outstanding principal
amount of the Series 05-01 Convertible Debentures is first equal to or less than
$1,166,667. Due to the conversion mechanics of the convertible debentures,
decreases in the conversion price result in an increase in the total number of
shares issuable upon conversion.
The number of shares to be acquired by each of the holders of the Series 05-01
Convertible Debentures upon conversion cannot exceed the number of shares that,
when combined with all other shares of Common Stock and securities then owned by
each holder and its affiliates, would result in any one of them owning more than
4.99% of our then outstanding Common Stock.
There is an inverse relationship between our stock price and the number of
shares issuable upon conversion of our Series 05-01 Convertible Debentures. That
is, as our market price of our Common Stock declines, we would be required to
issue a greater number of shares of Common Stock upon conversion of these
debentures. This inverse relationship is demonstrated by the table set forth
below, which shows the number of shares into the which the Series 05-01
Convertible Debentures would be convertible at the conversion price in effect as
of July 19, 2005 and 25%, 50% and 75% discounts to that recent price.
15
VOLUME WEIGHTED AVERAGE CLOSING SHARES OF COMMON STOCK ISSUED PER
PRICE OF COMMON STOCK FOR FIVE $1000 DOLLARS OF DEBENTURE
PRECEDING TRADING DAYS CONVERSION PRICE PRINCIPAL CONVERTED
$0.0734 $0.0514 19,455
$0.0551 $0.0386 25,907
$0.0367 $0.0257 38,911
$0.0184 $0.0129 77,519
FUTURE SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT
PREVAILING MARKET PRICES FOR OUR COMMON STOCK.
As of July 19, 2005, we are authorized to issue 500,000,000 shares of Common
Stock, of which 114,348,190 shares were issued and outstanding. Our board of
directors has the authority, without further action or vote of our stockholders,
to issue all or a part of any authorized but unissued shares of our Common
Stock. Such stock issuances may be made at a price which reflects a discount
from the then-current trading price of our Common Stock. In addition, in order
to raise capital that we need at today's stock prices, we would likely need to
issue securities which are convertible into or exercisable for a significant
number of shares of our Common Stock. These issuances would dilute your
percentage ownership interest, which will have the effect of reducing your
influence on matters on which our stockholders vote, and might dilute the book
value of our Common Stock. You may incur additional dilution of net tangible
book value if holders of stock options or warrants, whether currently
outstanding or subsequently granted, exercise their options or warrants to
purchase shares of our Common Stock.
As of July 19, 2005, an additional 10,703,335 shares of Common Stock were
reserved for issuance upon the exercise of outstanding options and warrants
(other than those warrants for which the shares of Common Stock issuable upon
the exercise thereof are covered under this Prospectus) and upon conversion of
outstanding promissory notes. The exercise prices of those options and warrants
(other than warrants and the conversion prices of those promissory notes range
from $0.15 to $10.00 per share. Those options, warrants and promissory notes
also contain provisions which require the issuance of increased numbers of
shares of Common Stock upon exercise or conversion in the event of stock splits,
redemptions, mergers or other transactions. The occurrence of any such event or
the exercise or conversion of any of the options, warrants, other rights or
shares of preferred stock described above would dilute the interest in the
Company represented by each share of Common Stock and may adversely affect the
prevailing market price of our Common Stock.
OUR BOARD OF DIRECTORS' RIGHT TO AUTHORIZE THE ISSUANCE OF SHARES OF PREFERRED
STOCK COULD ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR COMMON STOCK.
Our board of directors currently has the right to designate and authorize the
issuance up to 15,000,000 shares of our preferred stock, in one or more series,
with such voting, dividend and other rights as our directors may determine. The
board of directors can designate new series of preferred stock without the
approval of the holders of our Common Stock. The rights of holders of our Common
Stock may be adversely affected by the rights of any holders of shares of
preferred stock that may be issued in the future, including without limitation
dilution of the equity ownership percentage of our holders of Common Stock and
their voting power if we issue preferred stock with voting rights. Additionally,
the issuance of preferred stock could make it more difficult for a third party
to acquire a majority of our outstanding voting 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;
16
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 Common 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 affect the market price of our Common Stock.
WE MAY HAVE VIOLATED SECTION 5 OF THE SECURITIES ACT OF 1933, AS AMENDED, IN
CONNECTION WITH SALES OF OUR SECURITIES AND COULD SUFFER SUBSTANTIAL LOSSES IF
PURCHASERS OF OUR SECURITIES DEMAND TO RESCIND PREVIOUS SALES.
We have raised substantial amounts of capital in private placements of our
securities 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 of these 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. Investors who purchased Series 03-2 Convertible Debentures
in April and May 2004, in the aggregate principal amount of $350,000 may have
the right to rescind their purchases because of our failure to comply with
certain requirements of an exemption from applicable registration requirements
in connection with these sales. If the purchasers of the Series 03-2 Convertible
Debenture issued in April and May 2004 demand that we rescind these sales, we
may be required to remit to these purchasers an aggregate amount of $350,000,
not including these purchasers' cost of collection, interest and other related
charges that these purchasers may then demand. Unless we raise additional
capital, we may be unable to satisfy a rescission demand by these purchasers. We
have no commitments for any additional capital and no assurance can be given
that we will be successful in raising any additional capital on commercially
acceptable terms or on any terms.
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.
ADDITIONAL BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE "PENNY
STOCK" RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON STOCK
The SEC 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
Common Stock continues to trade at a market price less than $5.00 per share, and
does not qualify for any exemption from the penny stock regulations, our Common
Stock 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.
17
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 relating to the design,
development, implementation and marketing of our proposed
products;
o statements regarding the plans and objectives of our management
for future operations 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 access solutions and
opportunities therein, our competition or regulations that may
affect us;
o statements regarding our ability to compete with third parties;
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 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 for which the underlying shares of Common Stock
that are covered by this Prospectus are exercised for cash, we will receive
approximately $13.0 million in cash proceeds (before deducting fees and
commission). However, the holders of those warrants have cashless exercise
provisions that become effective under certain conditions and if these warrants
are exercised by the cashless exercise provision, we will not receive any cash
proceeds from the exercise of those warrants.
DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS
We are registering the shares offered hereby in order to satisfy our obligations
to the holders of our Series 03-2 Convertible Debentures, holders of our Series
05-01 Convertible Debentures and Zaiq Technologies, Inc.
18
7% CONVERTIBLE DEBENTURES SERIES 03-2
Under a Securities Purchase Agreement dated as of December 31, 2003 between us
and each holder of our Series 03-2 Convertible Debentures (the "2003 Securities
Purchase Agreement") those holders committed to advance us an aggregate of
$2,000,000, repayment of which is represented by our Series 03-2 Convertible
Debentures. The funding was 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 Series 03-2 Convertible Debentures were issued to such
holders. It was a condition to the closing of the second installment that a
registration statement covering the resale of the shares of Common Stock
issuable upon conversion of the Series 03-2 Convertible Debentures be declared
effective by June 28, 2004 (the "Registration Effectiveness Condition"). The
closing of the second installment was to be held within five days after
satisfaction of the Registration Statement Effectiveness Condition. In April and
May 2004, certain of the holders of Series 03-2 Convertible Debentures waived
the Registration Statement Effectiveness Condition and purchased $350,000 in
aggregate principal amount of Series 03-2 Convertible Debentures, thereby
satisfying their obligation under the 2003 Securities Purchase Agreement. The
Registration Statement Effectiveness Condition was not timely satisfied and we
did not place the remaining $650,000 in principal amount of Series 03-2
Convertible Debentures.
The Series 03-2 Convertible Debentures are convertible at any time into shares
of our Common Stock at a current conversion price of $0.15 per share. This
conversion price is subject to adjustment if there are certain capital
adjustments or similar transactions, such as a stock split or merger. Interest
on the Convertible Debentures accrues at the rate of 7% per annum and is payable
on the earlier of the conversion or maturity of the Series 03-2 Convertible
Debentures. 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
then in effect. The option to pay interest in shares of our Common Stock,
however, is subject to the condition that 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.
The terms of the Series 03-2 Convertible Debentures provide that under certain
conditions (primarily relating to the effectiveness of the 2004 Registration
Statement (as defined below) and the closing bid price of our Common Stock
exceeding $1.00 for each of 20 consecutive trading days), we can require a
mandatory conversion of the Series 03-2 Convertible Debentures. If not converted
earlier and under certain conditions (primarily relating to the effectiveness of
the 2004 Registration Statement and the closing bid price of our Common Stock
exceeding the conversion price for each of the ten trading days immediately
before the maturity date), on the scheduled maturity date the Series 03-2
Convertible Debentures will automatically convert into shares of our Common
Stock at the conversion price then in effect. If all of the relevant conditions
have not been satisfied on the maturity date, we may be obligated to pay the
principal amount of the Series 03-2 Convertible Debentures then outstanding and
accrued interest in cash. In addition, we have the right to prepay the principal
amount of and interest accrued on the Series 03-2 Convertible Debentures if
certain conditions are met.
In connection with the issuance of the Series 03-2 Convertible Debentures, we
issued to the holders thereof Series 03-2 Warrants to purchase shares of our
Common Stock in an amount equal to one share of Common Stock for each one share
of Common Stock issuable upon (and assuming) conversion of the Series 03-2
Convertible Debentures at the conversion price in effect on the date of
issuance. The Series 03-2 Warrants are exercisable at any time 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 Series 03-2 Warrants expire approximately five years
after issuance, provided, that, under certain conditions (primarily relating to
the effectiveness of the 2004 Registration Statement and the closing price of
our Common Stock being more than $1.00 for each of 20 consecutive trading days),
we 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 Series 03-2
Warrants provide that in lieu of paying the exercise price, the holder is
entitled, at its option, to elect to make a "cashless exercise". If the holder
elects this option, it will receive, instead of the full number of shares for
which the warrant is then being exercised, a lesser number of shares and we will
not receive any cash proceeds from that exercise. The number of shares which the
holder will receive is based on a formula which takes into account the closing
sale price of our Common Stock on the trading day immediately before the warrant
exercise. That closing price is multiplied by the full number of shares for
which the warrant is then being exercised. The result is reduced by the total
exercise price for those shares which the holder would have paid if it had not
elected a cashless exercise. The number of shares actually issued upon the
cashless exercise is equal to the balance amount divided by that closing price.
19
The terms of the Series 03-2 Convertible Debentures and Series 03-2 Warrants
specify that the beneficial owner can convert such debenture or exercise such
warrant by giving notice to us; provided, however, that the holder may not
convert the Series 03-2 Convertible Debentures or exercise its Series 03-2
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 debentures or exercise
its warrants. Similarly, we cannot require the holder to convert the Series 03-2
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 2003 Securities Purchase Agreement, at the closing of the
private placement we entered into a registration rights agreement with each
purchaser of Series 03-2 Convertible Debentures (the "2003 Registration Rights
Agreement"). Pursuant to the 2003 Registration Rights Agreement, on August 16,
2004, we filed a Registration Statement on Form SB-2 (File No. 333-112643) (the
"2004 Registration Statement") registering under the Act the resale of the
shares of Common Stock issuable on conversion of the $1,000,000 in aggregate
principal amount of the Series 03-2 Convertible Debentures issued in December
2003 plus interest thereon accrued through the maturity date thereof and the
number of shares of Common Stock issuable upon exercise of the Series 03-2
Warrants. We also registered for resale an additional 1,143,333 shares of Common
Stock, representing our good faith estimate of additional shares issuable to the
holders of the Series 03-2 Convertible Debentures in payment of liquidated
damages as contemplated by the 2004 Registration Rights Agreement. We are
obligated to keep the 2004 Registration Statement effective until the earlier of
the date on which the holders may sell under Rule 144 promulgated under the Act
without restriction all shares of Common Stock registered on their behalf under
the 2004 Registration Statement or the date on which the 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 Series 03-2 Convertible Debentures and Series 03-2
Warrants are entitled exceeds 80% of the number of shares of Common Stock
actually included or registered under the 2004 Registration Statement, then we
are required to amend the 2004 Registration Statement or file a new registration
statement covering additional shares of our Common Stock in an amount equal to
(i) the number of shares theretofore issued on conversion of the Series 03-2
Convertible Debentures (including any shares issued in payment of interest
accrued thereon) and the exercise of the Series 03-2 Warrants plus (ii) the
number of shares issuable (x) upon conversion of the full aggregate principal
amount of the then unconverted Series 03-2 Convertible Debentures , plus
interest accrued thereon through the maturity date thereof, (y) upon exercise of
the then unexercised Series 03-2 Warrants and (z) as liquidated damages or as an
adjustment to the Series 03-2 Convertible Debentures and Series 03-2 Warrants.
Under the Registration Rights Agreement, we will be obligated to pay liquidated
damages to the holders of the Series 03-2 Convertible Debentures if the 2004
Registration Statement is subsequently suspended for more than certain permitted
periods. The permitted suspension periods are up to two periods during any
consecutive 12-month period, but each period shall not exceed more than 15 days
in length 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 after a
Restricted Sale Date will be (A) 2% of the sum of (X) the principal amount of
all debentures not yet converted and (Y) the principal amount of the Series 03-2
Convertible Debentures converted within the preceding 30 days but not yet sold
during the first 30-day period, and (B) 3% of the sum of (X) the principal
amount of all debentures not yet converted and (Y) the principal amount of the
Series 03-2 Convertible Debentures converted within the preceding 30 days but
not yet sold for each subsequent 30-day period (or any part thereof). The Series
03-2 Convertible Debentures holders have the right to have these liquidated
damages paid in shares of Common Stock (valued at the conversion price then in
effect).
Reference is made to the forms of Series 03-2 Convertible Debentures, the Series
03-2 Warrants, the 2003 Securities Purchase Agreement and the 2003 Registration
Rights Agreement that are filed as exhibits to the 2004 Registration Statement
for more complete description of the complex provisions that are summarized
under this caption.
20
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or under Regulation D thereunder.
The recipients of securities in each such transaction represented to us that
they were acquiring the securities for investment only and not with a view to or
for sale in connection with any distribution thereof. In each case, we believe
the recipients were all "accredited investors" within the meaning of Rule 501(a)
of Regulation D under the Securities Act or had such knowledge and experience in
financial and business matters as to be able to evaluate the merits and risks of
an investment in our Common Stock. All recipients had adequate access to
information about our company. None of the transactions described above involved
general solicitation or advertising
7% SENIOR SECURED CONVERTIBLE DEBENTURES SERIES 05-01
Under a Securities Purchase Agreement dated as of May 26, 2005 (the "Securities
Purchase Agreement") between us and each of the holders of the Series 05-01
Convertible Debentures those holders purchased an aggregate of $3.5 million in
principal amount of our Series 05-01 Convertible Debentures. The Series 05-01
Convertible Debentures are convertible into shares of our Common Stock at any
time on or after the earlier of (i) July 30, 2005 or (ii) the effective date of
the Registration Statement of which this Prospectus forms a part. The Series
05-01 Convertible Debentures are convertible at a conversion price equal to the
lower of (i) 70% of the volume weighted average price of the Common Stock for
the five trading days ending on the trading day immediately prior to date of
conversion and (ii) the lowest purchase price or conversion price of any shares
of Common Stock or securities convertible into shares of Common Stock that we
subsequently offer or issue on or prior to the date on which aggregate
outstanding principal amount of the Series 05-01 Convertible Debentures is first
equal to or less than $1,166,667. This conversion price is subject to adjustment
if there are certain capital adjustments or similar transactions, such as a
stock split or merger. Interest on the Series 05-01 Convertible Debentures
accrues at the rate of 7% per annum and is payable on a bi-annual basis,
beginning on December 31, 2005, or on conversion and may be paid, at our option,
either in cash or in shares of Common Stock at the rate equal to the conversion
price then in effect. The option to pay interest in shares of our Common Stock,
however, is subject to the condition that the issuance of such shares of Common
Stock to the holder of a Convertible 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.
The Series 05-01 Convertible Debentures have a term of three years. We may
prepay the amounts outstanding on the Series 05-01 Convertible Debentures, at
any time, in whole or in part, on at least ten days' advance notice by paying an
amount equal to 120% of the sum of (x) the principal being prepaid plus (y) the
interest accrued thereon. All payments of the principal amount of the Series
05-01 Convertible Debentures (whether at maturity or in prepayment) must be paid
in cash.
To secure our obligations under the Series 05-01 Convertible Debentures, we
granted a security interest in all of our assets (including, without limitation,
our intellectual property) to the holders of the Series 05-01 Convertible
Debentures pursuant to a Security Interest Agreement dated as of the date of the
Series 05-01 Convertible Debentures. This security interest terminates upon the
earlier of (i) the date on which less than $1,166,667 in principal amount of the
Series 05-01 Convertible Debentures remains outstanding or (ii) payment or
satisfaction of all of our obligations relating to the Series 05-01 Convertible
Debentures.
In connection with the issuance of the Series 05-01 Convertible Debentures, we
issued to the holders thereof Class A Warrants to purchase 11,312,220 shares of
our Common Stock at a per share exercise price of $0.1547 and Class B Warrants
to purchase 22,624,430 shares of Common Stock at a per share exercise price of
$0.3094. The Investor Warrants are exercisable at any time on or after the
earlier of (i) July 30, 2005 or (ii) effective date of the Registration
Statement of which this Prospectus forms a part. In the event that, at any time
on or prior to the date on which aggregate outstanding principal amount of the
Series 05-01 Convertible Debentures is first equal to or less than $1,166,667,
we offer or issue warrants or other securities exercisable for Common Stock have
an exercise price lower than the exercise prices of the Class A Warrants or
Class B Warrants then in effect, then the exercise price of the Class A Warrants
or Class B Warrants, as the case may be, shall be reduced to that lower price.
The exercise prices of the Class A Warrants or Class B Warrants are also subject
to adjustment if there are certain capital adjustments or similar transactions,
such as a stock split or merger. The Class A Warrants are exercisable through
the last day of the month in which the first anniversary of the effective date
of the Registration Statement of which this Prospectus forms a part occurs. The
Class B Warrants are exercisable through the last day of the month in which the
third anniversary of the effective date of the Registration Statement of which
this Prospectus forms a part occurs. The Class A Warrants or Class B Warrants
provide that, at any time after the first anniversary of the issuance thereof,
21
in lieu of paying the exercise price thereof, the holder is entitled, at its
option, to elect to make a "cashless exercise" if the Registration Statement of
which this Prospectus forms a part is not then effective. If the holder elects
this option, it will receive, instead of the full number of shares for which a
warrant is then being exercised, a lesser number of shares and we will not
receive any cash proceeds from that exercise. The number of shares which the
holder will receive is based on a formula which takes into account the closing
sale price of our stock on the trading day immediately before the warrant
exercise. That closing price is multiplied by the full number of shares for
which the warrant is then being exercised. The result is reduced by the total
exercise price for those shares which the holder would have paid if it had not
elected a cashless exercise. The number of shares actually issued for the
cashless exercise is equal to the balance amount divided by that closing price.
The terms of the Series 05-01 Convertible Debentures and Class A Warrants and
Class B Warrants specify that the beneficial owner can convert such debenture or
exercise such warrant by giving notice to us; provided, however, that the holder
may not convert the Series 05-01 Convertible Debentures or exercise its Class A
Warrants or Class B Warrants 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 Common Stock (after taking into account the shares
of our Common Stock issuable upon such conversion or exercise). If the holder
then disposes of some or all of its holdings, it can again convert its
debentures or exercise its warrants. Similarly, we cannot pay interest on the
Series 05-01 Convertible Debentures in shares of Common Stock to any debenture
holder if such payment would result in that holder exceeding the limit noted
above.
Pursuant to the Securities Purchase Agreement, at the closing of the private
placement we entered into a registration rights agreement with each purchaser of
Series 05-01 Convertible Debentures (collectively, the "Registration Rights
Agreement"). Under the Registration Rights Agreement, we are obligated initially
to register under the Act (i) 150% of (a) the number of shares of our Common
Stock issuable upon conversion of the Series 05-01 Convertible Debentures at the
conversion price in effect as of the date of the filing of the Registration
Statement of which this Prospectus forms a part and (b) the shares of Common
Stock issuable in payment of interest accruing on the Series 05-01 Convertible
Debentures through the third anniversary of the issuance thereof at the
conversion price in effect as of the date of the filing of the Registration
Statement which this Prospectus forms a part and (ii) 11,312,220 shares of
shares of Common Stock issuable upon exercise of the Class A Warrants and
22,624,430 shares of shares of Common Stock issuable upon exercise of the Class
B Warrants. We are also registering for resale an additional 15,752,619 shares
of Common Stock, representing our current good faith estimate of additional
shares issuable to the holders of the Series 05-01 Convertible Debentures (a)
upon adjustments to the conversion price of the unconverted Series 05-01
Convertible Debentures and/or to the number of shares issuable upon exercise of
unexercised Class A Warrants and Class B Warrants in the event that, on or prior
to the date on which aggregate outstanding principal amount of the Series 05-01
Convertible Debentures is first equal to or less than $1,166,667, we offer or
issue securities at a purchase price or conversion price lower than the
Conversion Price in effect as of the date on which any selling stockholder
converts Series 05-01 Convertible Debentures or warrants having an exercise
price below the exercise price of the Class A Warrants and Class B Warrants and
(b) as liquidated damages through the projected effective date of the
Registration Statement. We are also obligated to keep the Registration Statement
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 Series 05-01 Convertible Debentures and Investor
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 Series 05-01
Convertible Debentures (including any shares issued in respect of accrued
interest) and the exercise of the Investor Warrants plus the sum of (ii)150% of
the number of shares issuable on conversion of the full aggregate principal
amount of the then unconverted Series 05-01 Convertible Debentures, plus
interest thereon accrued through the maturity date thereof, (y) the number of
shares issuable upon exercise of the then unexercised Investor Warrants and (z)
the number of shares payable as liquidated damages through the date of such
amendment or filing as contemplated by the Registration Rights Agreement and our
good faith estimate of the number of shares to be issued in payment of
liquidated damages or as an adjustment to the Series 05-01 Convertible
Debentures or the Investor Warrants.
22
Pursuant to an agreement with the finder for the Series 05-01 Convertible
Debenture transaction, we are also registering (a) 5,656,108 shares of Common
Stock issuable upon exercise of warrants issued to the finder, of which (i)
2,262,443 shares are issuable at a per share exercise price of $0.3094 through
the last day of the month in which the third anniversary of the closing of the
Series 05-01 Convertible Debenture placement occurs (ii) 2,262,443 shares are
issuable at a per share exercise price of $0.3094 through the last day of the
month in which the third anniversary of the effective date of the Registration
Statement occurs and (iii) 1,131,222 are issuable at a per share exercise price
of $0.1547 through the last day of the month in which the first anniversary of
the effective date of the Registration Statement occurs and (b) 2,000,000 shares
of Common Stock. These warrants and shares were issued as compensation in
connection with the placement of $3.5 million in aggregate principal amount of
our Series 05-01 Convertible Debentures. These warrants are otherwise
exercisable on substantially the same terms and conditions as the Class A
Warrants and Class B Warrants. We are also registering an additional 565,611
shares of Common Stock representing our current good faith estimate of
additional shares that we might be required to issue in respect of these
warrants based on adjustments to the number of shares covered thereby in the
event that, on or prior to the date on which aggregate outstanding principal
amount of the Series 05-01 Convertible Debentures is first equal to or less than
$1,166,667, we offer or issue warrants or other securities exercisable for
Common Stock have an exercise price lower than the conversion price of the
finder's warrants.
In the Securities Purchase Agreement, we have agreed that, without the prior
consent of a majority in interest of the holders of our Series 05-01 Convertible
Debentures, we will not (x) enter into any offer or sale of our Common Stock or
securities convertible into or exercisable for Common Stock with any third party
(a "New Transaction") at any time prior to the effective date of the
Registration Statement, (y) at any time prior to the date on which the which
aggregate outstanding principal amount of the Series 05-01 Convertible
Debentures is first equal to or less than $1,166,667, enter into a New
Transaction in which the securities offered or sold provide for a variable
conversion price or a variable exercise price or (z) at any time from the
effective date of the Registration Statement to the sixth month anniversary
thereof, enter into a New Transaction in which any investor is granted
registration rights. These limitations, however, do not prohibit issuances of
Common Stock or options or warrants to purchase Common Stock (i) upon the
exercise or conversion of options, warrants or convertible securities
outstanding on May 26, 2005 or in respect of any other financing agreements as
in effect on such date (provided the same is not amended after such date) or
disclosed in our filings with the SEC (provided the same are not amended after
May 26, 2005), (ii) pursuant to any employee stock option plan approved by the
our shareholders, (iii) pursuant to a non-employee director stock option plan,
(iv) pursuant to a consultants' stock option plan, as in effect on May 26, 2005,
(v) upon the exercise of any options or warrants referred to in the preceding
clauses of this paragraph (provided the same are not amended after May 26,
2005), (vi) to our employees, officers or directors, provided that all such
shares are or are made subject to a Principal's Agreement (as defined below)
simultaneously with such issuance, or (vii) to a strategic partner.
If we actually consummate a New Transaction 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 Series 05-01 Convertible Debentures, (b) the
inclusion of any terms more beneficial to the holder of such instrument than the
corresponding terms of the Convertible Debenture, (c) the issuance of warrants
at an exercise price lower than that provided in the Class A Warrants or Class B
Warrants, (d) the issuance of warrants in an amount greater than the ratio used
in connection with the Class A Warrants or Class B Warrants, or (e) the
inclusion of any terms more beneficial to the holder of such instrument than the
corresponding terms of the Class A Warrants or Class B Warrants, then the terms
of any unissued or unconverted Series 05-01 Convertible Debentures or any
unissued or unexercised Class A Warrants or Class B Warrants shall be modified
to adjust the relevant conversion price in such Convertible 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 Series 05-01 Convertible Debentures previously converted, based on
the adjusted conversion price.
Under the Registration Rights Agreement, we will be obligated to pay liquidated
damages to the holders of the Series 05-01 Convertible Debentures if the
Registration Statement is not filed by July 15, 2005 or not declared effective
by August 24, 2005 or if the effectiveness of the Registration Statement is
subsequently suspended for more than certain permitted periods. The permitted
suspension periods are up to two periods during any consecutive 12-month period,
but each period shall exceed more than 15 days in length 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 filing date or
23
effective date or after a Restricted Sale Date will be 2% of the principal
amount of all the Series 05-01 Convertible Debentures during the each 30-day
period (or any part thereof). After the effective date, the principal amount of
the Series 05-01 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. These
liquidated damages may be paid in shares of Common Stock (valued at the
conversion price) at the option of the holders of the Series 05-01 Convertible
Debentures or at our option if Registration Statement is declared effective
before February 20, 2006 and is effective as of the date of such payment.
Notwithstanding the foregoing, if the Registration Statement is declared
effective on or before September 23, 2005, we will not be required to pay any of
the liquidated damages payable as a result of the untimely filing or
effectiveness of the Registration Statement.
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 Series
05-01 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 Series 05-01 Convertible Debentures, the Class
A Warrants and Class B Warrants , the Securities Purchase Agreement, the
Registration Rights Agreement, the Security Interest Agreement and the
Principal's Agreement that are filed as exhibits to our Current Report on Form
8-K filed on June 1, 2005 for more complete description of the complex
provisions that are summarized under this caption.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or under Regulation D thereunder.
The recipients of securities in each such transaction represented to us that
they were acquiring the securities for investment only and not with a view to or
for sale in connection with any distribution thereof. In each case, we believe
the recipients were all "accredited investors" within the meaning of Rule 501(a)
of Regulation D under the Securities Act or had such knowledge and experience in
financial and business matters as to be able to evaluate the merits and risks of
an investment in our Common Stock. All recipients had adequate access to
information about our company. None of the transactions described above involved
general solicitation or advertising.
SERIES B PREFERRED STOCK EXCHANGE AGREEMENT
In April 2005, we entered into an Exchange Agreement (the "Exchange Agreement")
with Zaiq Technologies, Inc., ("Zaiq"), pursuant to which we issued 4,651,163
shares of Common Stock (the "New Common Shares") and a promissory note in the
principal amount of $2,392,000 in exchange for the surrender by Zaiq of 3,192
shares of our Series B Convertible Preferred Stock, par value $0.01 per share
("Series B Preferred Stock"). We issued the Series B Preferred Stock to Zaiq
pursuant to a Receivables Purchase and Stock Transfer Restriction Agreement
dated as of April 17, 2002. These shares had an aggregate liquidation preference
of $3,192,000, constituted all of the Series B Preferred Stock issued and
outstanding as of the date of the Exchange Agreement, and were cancelled upon
the closing of the Exchange Agreement.
The Exchange Agreement provides that, subject to certain exceptions, if we, at
any time prior to the payment in full of the amount due under the promissory
note, issue Common Stock or securities convertible into or exercisable for
shares of Common Stock at a price below the fair market value of the Common
Stock or such securities (a "Below Market Issuance"), then we will issue to Zaiq
additional shares of Common Stock ("Additional Common Shares") in an amount that
is determined in accordance with a formula that takes into consideration both
the number of shares of Common Stock or other securities issued and the total
consideration received by us in the Below Market Issuance. As of July 19, 2005,
we have issued to Zaiq 29,547 Additional Common Shares.
24
Under the Exchange Agreement, if we propose to file a registration statement
registering the sale of our securities under the Act, then Zaiq is entitled to
have us include in such registration statement any New Common Shares and
Additional Common Shares then held by Zaiq and not permitted to be sold under
Rule 144 under Act without volume or other restrictions or limits.
The Exchange Agreement provides that, notwithstanding any registration thereof,
Zaiq will not sell any New Common Shares before the first anniversary of the
date of the Exchange Agreement and thereafter will sell in any quarter no more
than the sum of one third of the New Common Shares (subject to adjustment) and
one third of any Additional Common Shares issued as of the date of such sale.
Under the terms of the agreements with Zaiq, a portion of the proceeds of any
new financing that we consummate through the first anniversary of the Exchange
Agreement are to be applied to the prepayment of the promissory note. As of July
19, 2005, we have paid Zaiq $392,780 in prepayment of the promissory note.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or under Regulation D thereunder.
The recipients of securities in each such transaction represented to us that
they were acquiring the securities for investment only and not with a view to or
for sale in connection with any distribution thereof. In each case, we believe
the recipients were all "accredited investors" within the meaning of Rule 501(a)
of Regulation D under the Securities Act or had such knowledge and experience in
financial and business matters as to be able to evaluate the merits and risks of
an investment in our Common Stock. All recipients had adequate access to
information about our company. None of the transactions described above involved
general solicitation or advertising.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the OTC 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.
The following table shows the quarterly high and low bid prices for our Common
Stock over the last two completed fiscal years and the first and second quarters
of the current fiscal year, 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 July 19, 2005 was $0.07 per share.
NOVEMBER 2004 THROUGH APRIL 2005
First Quarter $ .19 $ .10
Second Quarter .20 .14
NOVEMBER 2003 THROUGH OCTOBER 2004
First Quarter $ .34 $ .16
Second Quarter .36 .17
Third Quarter .22 .09
Fourth Quarter .18 .07
NOVEMBER 2002 THROUGH OCTOBER 2003
First Quarter $ .75 $ .36
Second Quarter .45 .27
Third Quarter .42 .30
Fourth Quarter .41 .23
DIVIDENDS
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.
25
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
RISKS ASSOCIATED WITH OUR BUSINESS SECTION OF THIS PROSPECTUS.
OVERVIEW
The Semiconductor Technologies are in the development and testing stage. Our
objective over the next twelve months is to complete the development and testing
of a beta version of our Semiconductor Technologies. Through our subsidiary, NV
Entertainment, we began to recognize revenues commencing in fiscal 2003.
FILM. The Film has completed its domestic theater run grossing approximately
$3.7 million in box office revenues, according to the Film's distributor. We
recognized revenues of $287,570 during the fiscal year ended October 31, 2004
and $16,198 for the six months ended April 30, 2005 and, from its release
through April 30, 2005, have recognized total revenues of $683,748. The Film is
currently being distributed to foreign markets. The DVD was released
domestically in April 2004 and the cable TV release occurred in October 2004.
The broadcast television release is presently scheduled for summer 2005. The
Film's foreign theatrical run began in Australia and New Zealand in January 2004
and will continue throughout 2005 in Japan, Brazil, Norway and Sweden. 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 continue to work on a beta version of our
Semiconductor Technologies. We estimate that we will complete by the end of the
second quarter of fiscal 2006 a beta version of the chipset for evaluation by
our potential customers and prospective industry partners. No assurance can
however be provided that we will in fact complete the beta version within the
estimated time-frame. Currently, we estimate that our existing cash resources
will be sufficient to complete the design and testing and begin the
commercialization of our Semiconductor Technologies.
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 revenue from the distribution of our 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;
26
(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 Film, 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.
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 film 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. Based on updated information that we received in January 2005
relating to the fourth quarter of fiscal 2004 from the Film's distributor as to
the Film's actual distribution and related expenses and DVD unit retail prices,
we determined that the fair value of the Film was less than the unamortized film
costs and, accordingly, we wrote down the carrying value assigned to Film In
Distribution in the fourth quarter to $1,021,722. This resulted in an impairment
of $977,799 that is included in consolidated statement of operations for the
year ended October 31, 2004. Based upon information received from the Film's
distributor in July 2005, during the three months ending July 31, 2005 we will
record an impairment charge of $1,009,777 and reduce the carrying value assigned
to Film In Distribution to $0. The impairment charge was due to higher than
expected distribution costs and lower than expected sales and average retail
seller price for the DVD.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high-risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs require
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.
27
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. No assurance can be given that such technology will receive market
acceptance. Accordingly we may determine in the near future that the carrying
amount of the technology license will need to be reduced materially.
The Company has no amortization expense for the year ended October 31, 2004 for
its capitalized software development costs as the technology was not available
for commercialization.
STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-Based
Payment." SFAS 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB 25, which was permitted under SFAS No. 123, as originally issued.
The revised statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
SFAS No. 123(R) is effective for small business issuers financial statements for
the first interim or annual reporting period that begins after December 15,
2005.
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 generally consist of salaries, related
expenses for engineering personnel and third-party development costs related to
the design and development of a beta version of the Semiconductor Technologies.
We outsource to independent third parties all design and development activities
relating to completing the beta version of 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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 2005 AND THE THREE
MONTHS AND SIX MONTHS ENDED APRIL 30, 2004
28
REVENUES. Revenues for the quarter and six months ended April 30, 2005 were
$7,397 and $16,198, respectively, and were attributable to our Entertainment
Business. Revenues for the corresponding periods in 2004 were $30,200 and
$170,843, respectively, from our Entertainment Business were attributable to
guarantee fees from foreign distribution of the Film.
COST OF SALES. Cost of sales for the quarter and six months ended April 30, 2005
were $5,320 and $11,945, respectively, and represent the amortization of film
cost for our Film in distribution. Cost of sales for the corresponding periods
in 2004 were $14,820 and $86,214, respectively. The decrease for the quarter and
six months ended April 30, 2005 when compared with corresponding periods in 2004
were a result of lower revenues generated from the film.
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, the costs of
settlement of litigation, and the impairment of film in distribution. Total
operating expenses increased by 13% to $979,708 for the quarter ended April 30,
2005 from $868,910 for the quarter ended April 30, 2004. Selling, general and
administrative expenses decreased 32% or $172,518 during the same period
primarily as a result of a reduction in staffing, including the elimination of
executive level positions, and lower professional fees. Compensatory element of
stock issuances increased by 92% from $316,565 for the quarter ended April 30,
2004 to $609,381 for the quarter ended April 30, 2005 as we continue to use
stock for compensation purposes to attract and retain qualified, directors,
officers, and employees. Total operating expenses decreased by 30% to $1,590,332
for the six months ended April 30, 2005 from $2,284,471 for the same period
ended April 30, 2004. Selling, general and administrative expenses decreased 39%
or $439,707 during the same period primarily due to a decrease in headcount in
administrative personnel, including the elimination of executive level
positions, and lower professional fees. Compensatory element of stock issuances
decreased by 17% from $1,066,146 for the six months ended April 30, 2004 to
$888,930 for the six months ended April 30, 2005 as we continue to effectively
manage the use of stock for compensation purposes.
OTHER (INCOME) EXPENSES. Other income for the quarter and the six months ended
April 30, 2005 were attributable to the gain on sale of property and equipment
and gain on exchange, including conversion of our liabilities into Common Stock.
Other expenses included interest expense and amortization of deferred financing
costs. Interest expense increased 159% and 208% for the quarter and the six
months ended April 30, 2005 when compared with the same period in 2004 primarily
as a result of the issuance of an additional $350,000 in principal amount of
convertible debentures in April and May 2004 and additional short-term financing
obtained during the fiscal year 2004, which remained outstanding during 2005.
Increase in amortization of deferred financing costs of $28,490 and $53,109 for
the quarter and six months ended April 30, 2005 when compared with the same
period in 2004 was a result of higher amortization of financing costs from the
convertible debentures.
NET LOSS. For the quarter ended April 30, 2005, the net loss increased $274,765
or 28% from $982,580 to $1,257,345 primarily due to lower gross profit generated
on the film ($13,303), higher operating expenses ($110,798), and higher interest
costs, including amortization expenses ($244,579). For the six months ended
April 30, 2005, the net loss decreased $252,138 or 10% from $2,414,707 to
$2,162,569 primarily due to reduced operating expenses ($694,139), and other
income ($109,328) that offset high interest and amortization costs.
COMPARISON OF THE YEAR ENDED OCTOBER 31, 2004 (THE "2004 PERIOD") AND THE YEAR
ENDED OCTOBER 31, 2003 (THE "2003 PERIOD")
REVENUES. Revenues for the 2004 period of $287,570 were attributable to our
Entertainment Business of which $94,788 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 for the 2004 and
2003 periods. Revenues for fiscal 2003 were $379,980, of which $295,000 were in
the form of guarantees and license payments and the remainder was foreign
distribution fees.
COST OF SALES. Cost of sales for 2004 and 2003 of $142,691 and $192,889,
respectively 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, the costs of
settlement of litigation, and the impairment of film in distribution. Total
operating expenses increased 4.0% to $4,746,677 for the 2004 period from
29
$4,563,502 for the 2003 period or a $183,175 increase. Selling, general and
administrative expenses decreased 2.2% or $45,962 primarily as a result of a
reduction in staffing, including the elimination of executive level positions,
lower professional fees and lower travel and entertainment expenses. In the 2003
period, we also settled certain outstanding litigation, resulting in reduced
legal fees. Compensatory element of stock issuances decreased 29.6% from
$2,062,081 in fiscal 2003 to $1,452,382 in fiscal 2004 as we better managed the
use of stock for compensation purposes. In April 2002, we entered into a
development and license agreement with Adaptive Networks, Inc. ("Adaptive"),
under which we outsource to Adaptive all of the principal research and
development activities with respect to the Semiconductor Technologies.
($1,559,000 and $4,192,000 remitted to Adaptive under the development and
license agreement in fiscal 2003 was capitalized and not included in research
and development expenses.) In March of 2004, we and HelloSoft, Inc. (the
"Strategic Partner") entered into an agreement (the "Original Agreement") which
was amended effective as of October 11, 2004 (the "Amendment"), pursuant to
which the Strategic Partner will provide development services relating to our
Semiconductor Technologies. In consideration for the services being rendered
under the Amendment, we agreed to pay to the Strategic Partner $185,000, half of
which will be paid in shares of Common Stock, at a 25% discount from the per
share closing price of the Common Stock on the day of the commencement of
services. The other half will be remitted in cash, periodically, upon completion
by the Strategic Partner of specified milestones and our acceptance thereof. The
Strategic Partner has assigned to us the rights to any improvements,
developments, discoveries or other inventions that may be generated by the
Strategic Partner in its performance of the services to be provided under the
Amendment. As a result of this agreement, in fiscal 2004, we incurred $92,500 of
research and development costs. This represented a decrease of $25,401 from
$117,901 in fiscal 2003. Additionally, in fiscal 2003 we wrote-off projects
totaling $57,000 as we determined that we would not pursue several projects that
we deemed not essential. In October 2004, we performed a review to determine if
the fair value of the Film was less than its unamortized film costs. As a result
of this review, we wrote-down our Film In Distribution to $1,021,722. This
resulted in a charge of $977,799 which is included in consolidated statement of
operations for the year ended October 31, 2004.
OTHER EXPENSES. Other expenses included interest expense, amortization of
deferred financing costs and a non-cash gain on the settlement of a lawsuit.
Interest expense increased $613,005 primarily as a result of issuing $1,350,000
in principal amount of convertible debentures. Amortization of unearned
financing costs decreased to $85,161 from $336,391 as a result of lower
financing costs incurred by us. In the 2003 period, we recorded a non-cash gain
of $1,474,000 on the settlement of a law suit with two former officers and
stockholders. The gain was the result of the former officers returning 2,200,000
shares of Common Stock.
NET LOSS. During the 2004 period the net loss increased $2,189,787 or 40% from
3,316,500 to $5,506,287 as the result of gross profit generated on the film
($50,000), higher operating expenses ($183,175), higher interest costs
($613,005), lower amortization of un earned financing costs ($251,230), higher
amortization of deferred financing costs ($78,427) and the non-cash gain
recorded as a result of the law suit settlement in the 2003 period ($1,474,000).
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $352,391 as of April 30, 2005 compared to $127,811 at
October 31, 2004. As discussed below, in May 2005, we raised net proceeds of
approximately $3.11 million from the private placement of our Series 05-01
Convertible Debentures.
Net cash used in operating activities was $816,866 for the six months ended
April 30, 2005 compared to $1,036,843 for the same period in 2004. The decrease
in cash used by operations is primarily attributable to lower net loss during
the six months ended April 30, 2005 as compared to the six months ended April
30, 2004.
Net cash used in investing activities for the six months ended April 30, 2005
was $0 compared to $95,000 for the six months ended April 30, 2004. Net cash
used in investing activities was primarily the result of acquisition of license
of $95,000 in 2004.
Net cash provided by financing activities was $1,041,446 for the six-months
ended April 30, 2005. This compares to $834,925 for the six months ended April
30, 2004. Cash provided by financing activities during the first six months of
2005 and 2004 primarily consisted of proceeds from issuance of Common Stock,
proceeds from issuance of notes payable, convertible notes payable, and
convertible debentures.
30
Since inception, we have funded our operations primarily through the sale of our
Common Stock and debt securities. Our recent financings are discussed below.
In May 2005, we sold $3,500,000 aggregate principal amount of our Series 05-01
Convertible Debentures and Class A Warrants and Class B Warrants, receiving net
proceeds of approximately $3.11 million after the payment of offering related
fees and expenses. We used a portion of those funds to repay the principal and
accrued interest on five notes payable and two convertible notes payable
aggregating $1,135,251 in principal. See "DESCRIPTION OF THE AGREEMENTS WITH THE
SELLING STOCKHOLDERS - 7% SENIOR SECURED CONVERTIBLE DEBENTURES SERIES 05-01".
The Series 05-01 Convertible Debentures are, among other things, convertible
into shares of our Common Stock at a beneficial conversion rate. The combined
value allocated to the beneficial conversion feature and warrants issued to the
purchasers of the Series 05-01 Convertible Debentures will approximate $3.5
million. Accordingly, we will record a debt discount of $3.5 million in our
quarter ended July 31, 2005 and such amount will be charged to interest expense
over the term of the debentures.
In September 2004, we entered into a loan agreement with an institutional
investor/stockholder pursuant to which we borrowed $250,000, receiving net
proceeds of $220,000 after payment of transaction related fees and expenses. The
principal amount of the loan and any accrued and unpaid interest was originally
due and payable on March 24, 2005 and was subsequently extended to May 31, 2005.
The outstanding principal and accrued interest on this loan was repaid in May
from the proceeds of the sale of our Series 05-01 Convertible Debentures.
In December 2004, we entered into a loan agreement with an institutional
investor pursuant to which we borrowed $300,000, receiving net proceeds of
$267,000 after payment of transaction related fees and expenses. The outstanding
principal and accrued interest on this loan was repaid in May from the proceeds
of the sale of our Series 05-01 Convertible Debentures.
In December 2003 and in April and May 2004, we raised net proceeds of
approximately $888,650 from the private placement to certain private and
institutional investors of our Series 03-2 Convertible Debentures.
In April 2005, we entered into the Exchange Agreement with Zaiq,, pursuant to
which we issued to Zaiq 4,651,163 shares of Common Stock and a promissory note
in the principal amount of $2,392,000 in exchange for the surrender by Zaiq of
3,192 shares of our Series B Preferred Stock. We issued the Series B Preferred
Stock to Zaiq pursuant to a Receivables Purchase and Stock Transfer Restriction
Agreement dated as of April 17, 2002. These shares had an aggregate liquidation
preference of $3,192,000, constituted all of the Series B Preferred Stock issued
and outstanding as of the date of the Exchange Agreement, and were cancelled
upon the closing of the Exchange Agreement. The fair value of the Common Stock
and promissory note on the closing date was determined to be less than the
aggregate liquidation preference of the Series B Preferred Stock and accordingly
a gain of $55,814 was recognized during the three months ended April 30, 2005.
See "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS - SERIES B
PREFERRED STOCK EXCHANGE AGREEMENT".
The Exchange Agreement provides that, subject to certain exceptions, in the
event of any Below Market Issuance, we will issue to Zaiq additional shares of
Common Stock in an amount that is determined in accordance with a formula that
takes into consideration both the number of shares of common stock or other
securities issued and the total consideration received by us in the Below Market
Issuance. During the three months ended April 30, 2005, a Below Market Issuance
occurred and we issued to Zaiq Additional Common Shares having a fair value of
approximately $5,000. See "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS - SERIES B PREFERRED STOCK EXCHANGE AGREEMENT".
We believe that following the closing of private placement of our Series 05-01
Convertible Debentures, our existing cash resources will be sufficient to meet
our obligations as they come due through the second fiscal quarter of 2006.
However, such resources may not be sufficient to support new product development
or unforeseen contingencies. At the present time, we have no commitments for any
additional financing, and there can be no assurance that, if needed, additional
capital will be available to us on commercially acceptable terms or at all. Our
auditors have included a "going concern" qualification in their auditors' report
for the year ended October 31, 2004. Such a "going concern" modification may
make it more difficult for us to raise funds when needed.
31
Additional equity financings may be dilutive to holders of our Common Stock and
debt financing, if available, may involve significant payment obligations and
covenants that restrict how we operate our business.
From May 1, 2005 to July 19, 2005, the we issued 1,646,611 shares of Common
Stock for converted debentures and interest valued at $246,992.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2005, the Securities and Exchange Commission issued release number
33-8568, REGARDING THE COMPLIANCE
DATE FOR STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004),
SHARE BASED PAYMENT. This release delays the date for compliance with Statement
of Financial Accounting Standards No. 123 (Revised 2004), SHARE BASED PAYMENT
("Statement 123R") to the registrant's first interim or annual reporting period
beginning on or after December 15, 2005. Statement 123R requires public entities
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, and no
longer allows companies to apply the intrinsic value based method of accounting
for stock compensation described in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In accordance with this amendment, the
Company will adopt SFAS No. 123R as of the beginning of the Company's interim
reporting period that begins on November 1, 2005. The transitional provisions of
SFAS 123R is not expected to have a material effect on the Company's
consolidated financial position or results of operations as substantially all
outstanding equity instruments are expected to vest on or prior to January 31,
2006. The Company will utilize the fair value method for any future instruments
after the implementation date.
In June 2005, the Financial Accounting Standards Board published Statement of
Financial Accounting Standards No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS. SFAS 154 establishes new standards on accounting for changes in
accounting principles. Pursuant to the new rules, all such changes must be
accounted for by retrospective application to the financial statements of prior
periods unless it is impracticable to do so. SFAS 154 completely replaces
Accounting Principles Bulletin No. 20 and SFAS 3, though it carries forward the
guidance in those pronouncements with respect to accounting for changes in
estimates, changes in the reporting entity, and the correction of errors. The
requirements in SFAS 154 are effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company will apply these
requirements to any accounting changes after the implementation date.
BUSINESS.
GENERAL
New Visual Corporation is developing advanced transmission technology to enable
data to be transmitted across copper telephone wire at speeds and over distances
that exceeds those offered by leading DSL technology providers. We intend to
market this novel technology to leading equipment makers in the
telecommunications industry. Our Semiconductor Technologies are being designed
to substantially increase the capacity of existing copper telephone networks,
allowing telephone companies to provide enhanced video, data and voice services
over the existing copper telecommunications infrastructure.
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 system-level products that use existing broadband technologies, such as
DSL, by providing faster transmission speed capability and by increasing the
transmission distance capability. We are currently in the process of completing
the development of a commercial beta version of the chipset containing our
Semiconductor Technologies for use and evaluation by prospective customers.
Through our wholly owned subsidiary, NV Entertainment, in the year ended October
31, 2003 we began recognizing revenues from the hit feature-length documentary,
STEP INTO LIQUID (the "Film"). According to its distributor, the Film has
grossed $3.7 million in box office receipts since its domestic theatrical
release in August 2003. Since April 2004 it has been, and now remains, in wide
DVD release domestically, grossing approximately $14 million in sales and
rentals. The Film is currently in theatrical distribution internationally.
32
We recorded revenues of $287,570 and $16,198 for, respectively, the year ended
October 31, 2004 and the six months ended April 30, 2005 and, from its release
through April 30, 2005, have recorded total revenues of $683,748, representing
guaranteed and license payments and foreign distribution fees from our Film. We
incurred net losses of $5,506,287 and $2,162,569 for, respectively, the year
ended October 31, 2004 and the six months ended April 30, 2005.
OUR TELECOMMUNICATIONS BUSINESS
THE BROADBAND BOTTLENECK
In recent years, demand has increased significantly for high-speed access to
multimedia information and entertainment content. Telephone companies satisfy
this demand by offering a mix of voice, video and data services to homes and
small businesses. Both consumers and businesses are increasingly seeking
high-speed broadband access in order to take advantage of the dramatic growth of
the Internet and increased use of the World Wide Web for communicating and
accessing information, e-commerce, and bandwidth-intensive applications such as
video-conferencing, gaming, data-mining, image processing, distance learning,
streaming audio/video, multimedia broadcasting and telecommuting and networking
between branch offices. Rapid growth in the number of Internet users and the
amount of bandwidth that each user requires has created bottlenecks on existing
communications networks, especially over the "last mile" of the legacy
communications infrastructure. The "last mile" generally refers to the
connection between the edge of the high-capacity telephone network and the
device or premises of the end user. Generally speaking, the "last mile
challenge" refers to the bottleneck that occurs where the high-speed capability
of the fiber optic network meets the low-speed capacity of the local
copper-based network.
As the volume of traffic has increased, consumers have become increasingly
frustrated with the performance of telephone dial-up connections that are
typically limited to data rates of 28.8 kilobits per second ("kbps") to 56 kbps.
At the same time, network providers and content developers are offering more and
more data-intensive applications, driving demand for bandwidth. Businesses also
are seeking faster access to broadband content as the convergence of voice,
video and data, and increasing volumes of electronic traffic, have placed new
demands on existing technologies and infrastructures.
In response to the challenge to provide high-speed access for both consumers and
businesses, telephone companies and other telecommunications service providers
have been upgrading their networks so as to significantly increase data
transmission speeds beyond the 56 kbps capacity. Nonetheless, given the nature
of the copper based networks, the increased data transmission speeds do not
approach those needed to address the burgeoning demand. Our Semiconductor
Technologies are designed to increase data transmission speeds on the existing
telephone network system to satisfy this demand.
BROADBAND OPPORTUNITIES OVER METALLIC MEDIA
We believe the value of the existing telephone wire network is directly related
to the amount of bandwidth at its disposal. We also believe there are
substantial business opportunities for companies that can develop technologies
that increase the bandwidth of this 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 to end users most of the world's telephone traffic and much
of its broadband access. Virtually every home and business in the United States
is served with an existing copper wire connection.
But the existing copper wire connections were not engineered by telephone
companies to support high speed data. Originally buried in the ground or strung
on aerial cables to only carry voice calls, these wires are ill-suited to
carrying high speed data. This lack of suitability has been the largest driving
force behind the telephone companies' recent capital investments in new fiber
optic and wireless "last mile" networks. We believe that the existing worldwide
copper wire base offers significant advantages over these alternative networks
as a medium for providing broadband access, and that when telephone companies
adopt our technologies they will enjoy these benefits:
33
LOW COST DEPLOYMENT. First, these solutions enable the service provider to
leverage a huge existing infrastructure, avoiding the high costs associated with
replacing the local loop with fiber, laying new cable or upgrading existing
cable connections, or deploying relatively new wireless or satellite
communications technologies. Because our technologies use the existing local
loop, they can be less expensive to deploy than other high-speed data
transmission technologies.
LIMITED SERVICE DEGRADATION AND IMPROVED SECURITY OVER ALTERNATIVE TECHNOLOGIES.
In contrast to cable delivery systems, our technology is a point-to-point
technology that connects the end user to the service provider's central office
or to an intermediate hub over copper telephone wire. Our technology therefore
does not encounter service degradation as other subscribers are added to the
system, and also allows a higher level of security. Alternative technologies,
such as cable, are shared systems and may suffer degradation and increased
security risk as the number of end users on the system increases.
RAPID DEPLOYMENT. Because virtually every home and business in the United
States, and many throughout the world, have installed copper telephone wire
connections, copper wire-based broadband solutions can be rapidly deployed to a
large number of potential end users.
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.
THE TECHNOLOGY UNDERLYING OUR PROPOSED SOLUTION
In April 2002, we entered into a development and license agreement with Adaptive
Networks, Inc. ("Adaptive") to acquire a worldwide, perpetual license to
Adaptive's Powerstream (TM) technology, intellectual property, and patent
portfolio for use in products relating to all applications in the field of the
copper telephone wire telecommunications network. Adaptive is engaged in the
research, development and sales of silicon embedded networking technology of use
in wiring environments. Powerstream(TM) technology refers to technologies that
enable data transmission across wiring infrastructures inside buildings. Under
our agreement with Adaptive, we have rights to 11 patents pertaining to
methodologies for modifying data in order to transmit it more efficiently on
metallic media. The licensed technology provides the core technology for our
Semiconductor Technologies.
In addition to the licensed technology, NV Technology and Adaptive have also
jointly developed technology and intellectual property that enhances the
licensed technology. Under our agreement with Adaptive, we co-own two patents
pertaining to these enhancements. Together, the licensed and co-developed
technologies and intellectual property form our Semiconductor Technologies.
In consideration of the granting of these licenses and other intellectual
property rights and the services provided to us to date, we remitted to Adaptive
aggregate consideration of $5,571,000. This amount represents all payments for
development that we are required to make to Adaptive. For both the licensed and
the co-owned technologies and intellectual property, Adaptive was entitled to a
percentage of any net sales of products sold by us and any license revenue we
receive, less the first $5 million that would otherwise be payable to them under
this royalty arrangement.
In March 2004, we entered into an agreement with HelloSoft, Inc. ("HelloSoft")
pursuant to which HelloSoft agreed to provide services to us from time to time
at our request on terms to be mutually agreed upon.
In October 2004, we amended our agreement with HelloSoft. Under the amendment,
which represented our first request for HelloSoft to provide services pursuant
to the March 2004 agreement. HelloSoft agreed to provide development services
relating to our Semiconductor Technologies. In consideration for those services,
we agreed to pay to HelloSoft $185,000, half of which is to be paid in shares of
Common Stock, at a 25% discount from the per share closing price of the Common
34
Stock on the day of the commencement of services and the other half of which is
to be paid in cash, periodically, upon completion by HelloSoft of specified
milestones and our acceptance thereof. HelloSoft has assigned to us the rights
to any improvements, developments, discoveries or other inventions that may be
generated by HelloSoft in its performance of the services to be provided under
the amendment.
In November 2004 we amended and restated our agreement with Adaptive. Under the
amended and restated agreement, we accepted from Adaptive final delivery of the
source code, the intellectual property rights related thereto and other
materials related to the technologies that were to be developed by Adaptive. The
amended agreement provides that we and Adaptive will jointly own the rights to
any improvements, developments, discoveries or other inventions that are
developed under our agreement with HelloSoft and that the first $5 million of
royalties payable by us to Adaptive from proceeds of the sale or license of the
Semiconductor Technologies are to be offset by a credit in the same amount.
STATUS OF OUR PROPOSED SOLUTION
In December 2002, we completed the demonstration of the Semiconductor
Technologies with a leading telephone company and a select target customer. In
the demonstration, equipment enhanced by our Semiconductor Technologies achieved
data speeds of 100 megabits per second. We believe that these results
demonstrate the viability of delivering data intensive applications over
existing telephone copper wiring infrastructure enhanced by our Semiconductor
Technologies with limited significant service degradation and improved security
and at a substantial savings from broadband solutions currently commercially
available. No assurance can be provided that the results achieved in this
demonstration can be reproduced or surpassed in the beta or commercial versions
of our chipset or that, even if such results are reproduced or surpassed, that
telephone equipment providers will include our chipset in their product
offerings or ultimately deploy any product containing our chipset. See "RISKS
ASSOCIATED WITH OUR BUSINESS"
At the present time, we are working to complete a commercially deployable
version of the chipset containing the Semiconductor Technologies. This process
involves several steps. Initially, we will need to complete a beta version of
the chipset of the Semiconductor Technologies for evaluation by potential
customers and industry partners. We plan to present this beta version to a
select base of potential customers and equipment providers for use in limited
deployments. Once this stage is completed, we intend to complete a version that
can be commercially deployed. We believe that the process of commercialization
will entail extensive field testing and pilot deployments with selected
telecommunications equipment providers to arrive at a commercially deployable
version. We believe that our existing cash resources will be sufficient to
complete the design and testing and begin the commercialization of our
Semiconductor Technologies. However, the complexity of the Semiconductor
Technologies could result in unforeseen delays or expenses in the
commercialization process resulting in the need for us to raise additional
funds. We presently do not have any commitments for any additional funds. No
assurance can be provided that we will be able to raise any needed funds on
financially acceptable terms or at all. Moreover, even if we are able to raise
any additional necessary funds, there can be no assurance that we will be able
to successfully commercialize the Semiconductor Technologies. We also presently
have no agreements for any of the pilot deployment or extensive field testing
that we anticipate will precede the completion of a commercially deployable
version of the Semiconductor Technologies. See "RISKS ASSOCIATED WITH OUR
BUSINESS."
COMPETITION
The market for high-speed telecommunications products is highly competitive, and
we expect that it will become increasingly competitive in the future. Our
competitors, including Broadcom, Centillium, Conexant, Ikanos Communications,
Infineon Technologies, Metalink, ST Micro, Texas Instruments and others, have
developed and are currently marketing technologies that also address the
existing technical impediments of using existing copper networks as broadband
options or are otherwise substantially similar to our Semiconductor
Technologies. Our competitors include some of the largest, most successful
domestic and international telecommunications companies and other companies with
well-established reputations in the broadband telecommunications industry. Our
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
35
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. 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 wire based solutions that are functionally similar to our
Semiconductor Technologies.
We believe we will be able to compete with these companies because our
Semiconductor Technologies are designed to increase the data transfer rates of
broadband transmission over copper telephone wire at rates not yet achieved by
competing wire based technologies.
Although we believe we will be able to compete based on the special features of
our 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 our Semiconductor
Technologies.
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.
PROPRIETARY RIGHTS
We currently rely on a combination of trade secret, patent, copyright and
trademark law, as well as non-disclosure agreements and invention-assignment
agreements, to protect the technologies used in the Semiconductor Technologies
and other proprietary information. However, such methods may not afford complete
protection and there can be no assurance that other competitors will not
independently develop such processes, concepts, ideas and documentation. We have
filed a provisional patent application in the United States ("U.S.") with
respect to the different applications on how data is transmitted and received on
metallic transmission media. In addition, certain of the technologies included
in the Semiconductor Technologies were invented or are owned by Adaptive. New
Visual Corporation is the licensee of the technologies under patents held by
Adaptive, through licenses that generally remain in effect for the life of the
applicable patent. Adaptive generally maintains, at its expense, U.S. and
foreign patent rights with respect to both the licensed technology and its own
technology and files and/or prosecutes the relevant patent applications in the
U.S. and foreign countries. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop our
competitive position. Our policy is to protect our technology by, among other
things, filing, or requiring the applicable licensor to file, patent
applications for technology that we consider important to the development of our
business. We intend to file additional patent applications, when appropriate,
relating to our technology, improvements to its technology, and to specific
products we develop.
Our policy is to require our employees, consultants, other advisors, as well as
software design collaborators, to execute confidentiality agreements upon the
commencement of employment, consulting or advisory relationships. These
agreements generally provide that all confidential information developed or made
known to the individual by us during the course of the individual's relationship
with us is to be kept confidential and not to be disclosed to third parties
except in specific circumstances. In the case of employees and consultants, the
agreements provide that all inventions conceived by the individual in the course
of their employment or consulting relationship shall be our exclusive property.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for trade secrets in the event of
unauthorized use or disclosure of such information.
MANUFACTURING AND SUPPLIERS
We intend to contract with third party manufacturers to produce products
utilizing our 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.
36
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 each
country and in the US by federal and state agencies, including the Federal
Communications Commission (the "FCC"), and various state public utility and
service commissions. There are some regulations pertaining to the use of the
available bandwidth spectrum 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, we entered into a joint venture production agreement to produce a
feature length surfing documentary for theatrical distribution marketed under
the name STEP INTO LIQUID. We are a fifty-percent owner of Top Secret
Productions, LLC, and producer of the Film. Artisan Pictures, which has now been
acquired by Lions Gate Entertainment ("LGE") 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. 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 distributable proceeds 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.
The Film opened its theatrical run 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 domestic theatrical run. According to the Film's distributor, the gross
per theater average for the opening weekend was more than $27,000, which ranked
the Film among the best performing independent films of 2003 in terms of opening
weekend gross per theater average (as reported on boxofficemojo.com). According
to the Film's distributor, the estimated cumulative total box office revenues
for the Film's domestic theatrical run, generated by widening the release to
more theaters, amounted to approximately $3,681,000.
The Film opened its DVD distribution domestically in April 2004. According to
LGE, in excess of 200,000 units, net of returns, have been sold. Based on the
suggested retail price and also on the rental revenues (as reported on
boxofficemojo.com), the DVD has grossed over $14 million. The film was shown on
Showtime cable channel as a pay-per-view offering. The combined domestic
theatrical, pay-per-view and DVD gross revenues are in excess of $17 million.
Additional international guarantee fees received as of October 31, 2004 amounted
to approximately $165,000.
We recorded revenues of $287,570 in respect of the Film in the fiscal year ended
October 31, 2004 and, from its release through April 30, 2005, we have
recognized total revenues of $683,748 in respect of the Film.. In January 2005,
the Film's distributor informed us that the actual expenses it had incurred in
connection with the
37
Film's distribution were higher than originally estimated and the actual
revenues from the sale and rental of DVDs was lower than originally estimated.
Based on this updated information', we determined that our projected cash flows
were not sufficient to recover our remaining investment of $2,056,000 in the
Film " and therefore recorded an impairment charge of $977,779 during the
quarter ended October 31, 2004 and reduced the carrying value of the Film in
distribution to $1,021,722. Based upon information received from the Film's
distributor in July 2005, during the three months ending July 31, 2005 we will
record an impairment charge of $1,009,777 and reduce the carrying value assigned
to Film In Distribution to $0. The impairment charge was due to higher than
expected distribution costs and lower than expected sales and average retail
seller price for the DVD. Our belief as to the recoverability in the future of
our remaining investment in the Film is based on information primarily provided
by the Film's distributors. This includes estimates of the Film's future DVD
sales, and also estimates from the various distributors in each country that the
Film is in release. The DVD was released domestically in April 2004 and the
cable TV release occurred in October 2004. Foreign theatrical distribution began
in Australia and New Zealand in January 2004 and will continue throughout 2005
in Japan, Brazil, Norway and Sweden. While management believes that the
assumptions underlying its beliefs are reasonable, no assurance can be given
that in fact these beliefs will prove correct. See "RISKS ASSOCIATED WITH OUR
BUSINESS".
RESEARCH & DEVELOPMENT
The Company out-sources all of its development activities with respect to our
Semiconductor Technologies to independent third party developers. During fiscal
years 2004 and 2003 we expended $92,500 and $117,901, respectively, on research
and development with respect to the work on the beta version of our
Semiconductor Technologies.
OUR EMPLOYEES
We currently have three full-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 305
NE 102nd Ave, Portland Oregon. The premises are occupied under a three-year
lease that commenced on April 1, 2005. The current monthly rental under the
lease is $1,725.
LEGAL PROCEEDINGS
We have been served with the following three summonses and complaints, each
filed on July 26, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New Visual
Corporation, Top Secret Surf Productions, LLC and Does 1 through 100; Gerald
Handler, Trustee of the Handler Children Trust v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr., Trustee
of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top Secret
Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by us in December 2001 and payable, according
to its terms, out of film distributions that we receive. Each complaint alleges,
among other things: that we have failed to pay the amount due and owing under
the convertible promissory note issued to the plaintiff despite demands for
payment; that our management has acted to forestall payments to our creditors,
38
including the plaintiff; and that we fraudulently induced the plaintiff to enter
into the convertible promissory note. The plaintiffs are seeking: money damages
in the aggregate amount of $375,000, plus interest; an accounting; an order
compelling the conveyance of monies to the plaintiffs and punitive damages.
The three complaints filed on July 26th were dismissed without prejudice on
August 11, 2004.
We have been served with the following additional summons and complaint, filed
on July 30, 2004 in the Superior Court of California (San Diego County): Gerald
Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of the
Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
We filed an answer to the complaints filed on July 30, 2004, denying all
allegations. Additionally, we were successful in our opposition to the
plaintiffs' attempt to seek attachment.
In July 2005, the complaints were dismissed with prejudice upon the issuance in
favor of the plaintiffs of an irrevocable letter of credit in the maximum amount
of $300,000 by a non-related third party. The Company has no reimbursement
obligation with respect to the letter of credit.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of our directors, executive officers and key
employees are as follows:
NAME AGE POSITION
---- --- --------
Brad Ketch 42 President, Chief Executive Officer,
Principal Financial Officer and Director
Ray Willenberg, Jr. 53 Chairman of the Board and Executive Vice
President
Bruce Brown 65 Director
Thomas J. Cooper 55 Director
Jack L. Peckham 63 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
39
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.
BRUCE BROWN. Mr. Brown has served as a director of the Company 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 "STEP INTO LIQUID,"
a new surfing adventure film for mainstream theatrical release. 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. Mr. Cooper is
currently the Senior Vice President of Sales and Marketing of Artimi, Inc. a
fabless semiconductor firm based in Santa Clara, California serving new markets
with Ultra Wideband wireless technology and products. From 1994 to 2002, Mr.
Cooper served in various high-ranking positions at Conexant (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.
JACK L. PECKHAM. Mr. Peckham has served as a director of the Company since March
2005. Mr. Peckham is a founder and director of Heritage Commerce Corp in San
Jose, California and serves on its audit and compensation committees. He is
currently the Chairman and Chief Executive Officer of Broadband Graphics, a
company which owns and licenses intellectual property in the areas of video and
desktop computing. From 1985 to 1998, Mr. Peckham held various positions at
Atmel Corporation, retiring as its General Manager. Mr. Peckham received a
Master of Arts and a Bachelor of Arts in finance and marketing from Burdette
College in Boston.
BOARD OF DIRECTORS; ELECTION OF OFFICERS
All directors hold office until the next annual meeting of shareholders and
until their successors is 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 less than a quorum
of the Board of Directors, they may fill the vacancy by the affirmative vote of
40
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 2004 whose salary and
bonus exceeded $100,000 for the year ended October 31, 2004 or who, as of
October 31, 2004, 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 2004 $ 204,620(2) $ -- 86,667(3) --
President and 2003 225,833(4) -- -- 1,500,000
Chief Executive 2002 60,000 -- -- 455,000
Officer(and Principal
Financial Officer) (1)
Ray Willenberg, Jr. 2004 157,417(6) -- 176,667(7) --
Chairman of the Board 2003 177,694(8) -- -- --
Executive Vice President 2002 258,406(9) -- -- 350,000
and former Chief
Executive Officer(5)
C. Rich Wilson III 2004 45,215 -- 76,667 --
Former Vice 2003 156,083 -- -- --
President and 2002 166,329(11) 91,875(12) -- 600,000
Secretary (10)
Thomas J. Sweeney 2004 16,674 -- -- --
Former Chief 2003 129,848 -- -- --
Financial Officer (13) 2002 133,455(14) -- -- --
(1) Mr. Ketch was appointed Chief Executive Office on December 2, 2002.
(2) Does not include $45,380 in earned, but deferred payroll unpaid as October
31, 2004.
(3) In December 2003, Mr. Ketch received 40,000 shares of our Common Stock in
lieu of $10,000 of deferred payroll. In March 2004, Mr. Ketch received 333,333
shares of our Common Stock valued at $76,333 as a performance bonus.
(4) Does not include $43,000 in earned, but deferred payroll unpaid as October
31, 2003.
(5) Mr. Willenberg served as our President and Chief Executive Officer until
June 1, 2002, whereupon he resigned from such position and became our Executive
Vice President.
(6) Includes $12,375 in bonuses paid Mr. Willenberg per his employment
agreement. Does not include $29,958 in earned, but deferred payroll unpaid as of
October 31, 2004. The Company owed Mr. Willenberg $353,318 in unpaid commissions
as of October 31, 2004.
(7) In December 2003, Mr. Willenberg received 400,000 shares of Common Stock in
lieu of $100,000 of unpaid bonuses. In March 2004, Mr. Willenberg received
333,333 shares of our Common Stock valued at $76,333 as a performance bonus.
(8) Includes $28,106 in bonuses paid Mr. Willenberg per his employment
agreement. Does not include $24,019 in earned, but deferred payroll unpaid as of
October 31, 2003. The Company owed Mr. Willenberg $463,878 in unpaid bonuses as
of October 31, 2003. (In December 2003, Mr. Willenberg received 400,000 shares
of Common Stock in lieu of $100,000 of unpaid bonuses.)
41
(9) Includes $14,250 in earned, but deferred payroll unpaid as of October 31,
2002.
(10) Mr. Wilson served as Vice President and Secretary from April 2000 until his
resignation on from all positions with the Company on December 31, 2003.
(11) Includes $29,999 in earned, but deferred payroll unpaid as of October 31,
2002.
(12) Represents the issuance to Mr. Wilson in February 2002 of 250,000 shares of
Common Stock valued at $0.37 per share.
(13) Mr. Sweeney served as Chief Financial Officer until his resignation on
December 12, 2003.
(14) Includes $13,514 in earned, but deferred payroll unpaid as of October 31,
2002.
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 $50,000 or 10% of annual salary and bonuses
for the named executive officers.
OPTION GRANTS IN THE LAST FISCAL YEAR
No stock options were granted to the named executive officers during the year
ended October 31, 2004
AGGREGATE OPTIONS EXERCISED IN 2004 AND 2004 YEAR END OPTION VALUES
The named executive officers did not exercise any stock options during the year
ended October 31, 2004. The following table sets forth information as of October
31, 2004 concerning options held by the named executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at Fiscal Year End Options at Fiscal Year End (1)
--------------------------- ---------------------------
Shares
Acquired on
Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ------------ ----------- ------------- ----------- -------------
Brad Ketch -- -- 1,255,000 700,000 $ -- $ --
Ray Willenberg, Jr. -- -- 1,120,000 -- -- --
C. Rich Wilson III (2) -- -- 745,000 -- -- --
(1) Based upon the difference between the exercise price of such options and the
closing price of the Common Stock $0.10 on October 31, 2004, as reported on the
Over-The-Counter Market, no options were in-the-money.
(2) Mr. Wilson resigned from our employ on December 31, 2003.
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, pursuant to the agreement Mr. Ketch was issued an option to
purchase 1,500,000 shares of our Common Stock at a per share exercise price of
$0.64 vesting in 12 quarterly installments of 125,000, beginning March 1, 2003.
This option was cancelled in April 2005. See "Certain Relationships and Related
Transactions - Brad Ketch".
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.
42
Prior to our entering into the agreement with Mr. Ketch retaining him 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, exercisable upon grant. This option was cancelled in April
2005. See "Certain Relationships and Related Transactions - Brad Ketch".
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 and an annual bonus to be
paid at the discretion of the Board of directors in either cash or stock.
Pursuant to this employment agreement, we issued Mr. Ketch an option to purchase
405,000 shares of Common Stock, of which 105,000 vested on the date of grant and
the remainder vested quarterly, beginning on May 31, 2003, in equal amounts of
37,500 shares, at an exercise price of $1.09 per share. This option was
cancelled in April 2005. See "Certain Relationships and Related Transactions -
Brad Ketch".
RAY WILLENBERG, JR. On March 3, 2005, we entered into an employment agreement
with Mr. Willenberg pursuant to which he continues to serve as our Executive
Vice President for a term of three years commencing on March 23, 2005, subject
to the earlier (i) the death or Disability (as defined in the employment
agreement) of Mr. Willenberg; (ii) the termination of the agreement by either
party without cause upon written notice; or (iii) termination of the agreement
by us for Cause (as defined in the employment agreement).
Under this employment agreement, Mr. Willenberg is entitled to receive a
commission on any equity or long-term debt financing we may obtain during the
term of the agreement or the twelve month period after the termination thereof
from any source introduced to us by Mr. Willenberg or as a result of Mr.
Willenberg's personal efforts. Mr. Willenberg's commission will equal 6% of the
aggregate annual proceeds of such financings up to $2 million; 5% of the
aggregate annual proceeds of such financings in excess of $2 million and up to
$5 million; and 4% of the aggregate annual proceeds of such financings in excess
of $5 million. Mr. Willenberg is also entitled to be paid a bonus equal to the
amount, if any, paid as a bonus to our Chief Executive Officer in connection
with the successful commercialization of our technologies. Mr. Willenberg will
not be paid a fixed salary for his service under the employment agreement.
Under this employment agreement, we granted Mr. Willenberg the right of first
refusal to purchase our equity interest in Top Secret Productions, LLC in case
of a bona fide third-party offer to purchase that interest or our determination
to offer that interest for sale at a specified price.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BRAD KETCH. In April 2005, we issued to Mr. Ketch 1,000,0000 shares of Common
Stock and an option to purchase 7,000,000 shares of Common Stock at an exercise
price of $0.17 per share, which is equal to the closing price of the Common
Stock on the Over the Counter Bulletin Board on the date of grant. 1,000,000 of
the shares for which the option may be exercised vest upon our consummation of a
capital financing from which we receive gross proceeds of at least $3.5 million
and 6,000,000 of the shares for which the option may be exercised vest upon our
release of a beta version of our Semiconductor Technologies. We consummated a
capital financing from which we received gross proceeds of $3.5 million in May
2005. In consideration of this issuance of shares and options, options issued to
Mr. Ketch in March, July and December 2002 to purchase an aggregate of 1,955,000
shares of Common Stock were cancelled.
RAY WILLENBERG, JR. In March 2005, we issued in favor of Ray Willenberg, Jr.,
our Executive Vice President, a convertible promissory note in the principal
amount of $383,910 (the "Convertible Promissory Note"). The Convertible
Promissory Note was issued in evidence of our obligation to Mr. Willenberg for
deferred compensation. The Convertible Promissory Note is payable in monthly
installments, on the first day of each month, beginning on April 1, 2005. Each
43
month, we shall pay to Mr. Willenberg an amount not less than the monthly base
salary paid to our Chief Executive Officer; provided, however, that if we
determine in our sole discretion that we have the financial resources available
therefor we shall pay Mr. Willenberg up to $20,833 per month. The Convertible
Promissory Note does not bear interest. The Convertible Promissory Note is
convertible, at the option of the holder, at any time and from time to time,
into shares of Common Stock at a conversion price per share equal to the closing
price of the Common Stock on the Over-the-Counter Bulletin Board on the date of
conversion. Mr. Willenberg is entitled to require us to use our best efforts to
include any shares of Common Stock issued upon conversion of the Convertible
Promissory Note in any registration statement covering the sale of Common Stock
that we may file, subject to certain limitations. Mr. Willenberg may, at his
discretion, consider the Convertible Promissory Note immediately due and payable
and may immediately enforce any and all of his rights under the Convertible
Promissory Note or any other rights or remedies afforded by law, upon the
occurrence of certain events specified in the Convertible Promissory Note.
On March 3, 2005, we entered into an employment agreement with Mr. Willenberg
pursuant to which he continues to serve as our Executive Vice President for a
term of three years commencing on March 23, 2005, subject to the earlier (i) the
death or Disability (as defined in the employment agreement) of Mr. Willenberg;
(ii) the termination of the agreement by either party without cause upon written
notice; or (iii) termination of the agreement by us for Cause (as defined in the
employment agreement).
Under this employment agreement, Mr. Willenberg is entitled to receive a
commission on any equity or long-term debt financing we may obtain during the
term of the agreement or the twelve month period after the termination thereof
from any source introduced to us by Mr. Willenberg or as a result of Mr.
Willenberg's personal efforts. Mr. Willenberg's commission will equal 6% of the
aggregate annual proceeds of such financings up to $2 million; 5% of the
aggregate annual proceeds of such financings in excess of $2 million and up to
$5 million; and 4% of the aggregate annual proceeds of such financings in excess
of $5 million. Mr. Willenberg is also entitled to be paid a bonus equal to the
amount, if any, paid as a bonus to our Chief Executive Officer in connection
with the successful commercialization of our technologies. Mr. Willenberg will
not be paid a fixed salary for his service under the employment agreement.
Under this employment agreement, we granted Mr. Willenberg the right of first
refusal to purchase our equity interest in Top Secret Productions, LLC in case
of a bona fide third-party offer to purchase that interest or our determination
to offer that interest for sale at a specified price.
In April 2005, we issued to Mr. Willenberg 1,000,000 shares of Common Stock and
an option to purchase 7,000,000 shares of Common Stock at an exercise price of
$0.17 per share, which is equal to the closing price of the Common Stock on the
OTC Bulletin Board on the date of grant. 1,000,000 of the shares for which the
option may be exercised vest upon our consummation of a capital financing from
which we receive gross proceeds of at least $3.5 million and 6,000,000 of the
shares for which the option may be exercised vest upon our release of a beta
version of our Semiconductor Technologies. We consummated a capital financing
from which we received gross proceeds of $3.5 million in May 2005. In
consideration of this issuance of shares and options, options previously issued
to Mr. Willenberg to purchase an aggregate of 370,000 shares of Common Stock
were cancelled.
BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth information as of July 19, 2005, 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 305 NE 102nd Avenue, Suite 105, Portland,
Oregon 97220.
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
warrants and conversion of outstanding convertible securities within 60 days of
July 19, 2005. 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
44
them. The address of each executive officer and director is c/o New Visual
Corporation, 305 NE 102nd Avenue, Suite 105, Portland, Oregon 97220. We have
calculated the percentages of shares beneficially owned based on 114,348,190
shares of Common Stock outstanding as of July 19, 2005.
PERSON OR GROUP Number Percent (1)
------------------------------------------- ---------------- -----------
Brad Ketch 2,373,333(2) 2.06%
Ray Willenberg, Jr. 6,903,446(3) 5.85%
Thomas J. Cooper 700,000(4) *
Bruce Brown 374,000(5) *
Jack L. Peckham 300,000 *
All executive officers and directors
as a group (5 persons) 10,650,779(6) 8.90%
* 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) 1,373,333 shares of Common Stock and (ii) 1,000,000 shares
of Common Stock issuable upon exercise of options. Does not include 6,000,000
shares of Common Stock issuable upon exercise of options which vest upon the
Company's release of a beta version of our Semiconductor Technologies.
(3) Comprised of (i) 3,181,613 shares of Common Stock, (ii) options to purchase
1,000,000 shares of Common Stock, and (iii) 2,721,833 shares of Common Stock
issuable upon conversion of the convertible promissory note issued to
Mr.Willenberg in March 2005. Does not include 6,000,000 shares of Common Stock
issuable upon exercise of options which vest upon the Company's release of a
beta version of our Semiconductor Technologies.
(4) Comprised of (i) 200,000 shares of Common Stock and (ii) 500,000 shares of
Common Stock issuable upon exercise of options.
(5) Comprised of (i) 214,000 shares of Common Stock and (ii) 160,000 shares of
Common Stock issuable upon exercise of options.
(6) Includes (i) 2,660,000 shares of Common Stock issuable upon exercise of
options and (ii) 2,721,837 shares of Common Stock issuable upon conversion of
convertible securities.
SELLING STOCKHOLDERS
The following table sets forth the number of shares that are, to our knowledge,
beneficially owned as of July 19, 2005, 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. For a fuller
description of these transactions, see the discussion in this Prospectus under
the caption "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
Beneficial ownership is determined in accordance with SEC rules and includes
voting or investment power with respect to the securities currently owned or for
which the selling stockholder has the right to acquire within 60 days. However,
except for the selling stockholders with an asterisk (*) next to their names,
each of the selling stockholders is subject to certain limitations on the
conversion of its convertible debentures and the exercise of its warrants. The
first of these limitations is that any Series 05-01 Convertible Debentures,
Class A Warrants or Class B Warrants are first convertible or exercisable, as
the case may be, on the earlier of (i) July 30, 2005 or (ii) effective date of
the Registration Statement of which this Prospectus forms a part. The other
significant limitation is that such selling stockholder may not convert its
convertible 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 immediately after the
45
conversion or exercise. (If the holder subsequently disposes of some or all of
its holdings, it can again convert its debenture or exercise its warrant,
subject to the same limitation). Also, the table below also includes the number
of shares which might be issuable on the occurrence of certain events, such as
the accrual of dividends, 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
------------------- --------------- ---------------- ------ -------
Alpha Capital AG 20,707,879 20,707,879(1) 0 0
Yokim Asset Management Corp. 14,067,056 14,067,056(2) 0 0
Puritan LLC 12,377,055 12,377,055(3) 0 0
Whalehaven Capital Fund Limited 12,377,055 12,377,055(3) 0 0
Clearview International Investment Ltd 13,277,056 13,277,056(4) 0 0
Double U Master Fund, L.P. 11,139,350 11,139,350(5) 0 0
Gross Foundation, Inc. 11,591,647 11,591,647(6) 0 0
Notzer Chesed 8,216,234 8,216,234(7) 0 0
Truk Opportunity Fund, LLC 6,980,659 6,980,659(8) 0 0
First Mirage, Inc. 6,978,530 6,978,530(9) 0 0
Generation Capital Associates 6,978,530 6,978,530(10) 0 0
JM Investors LLC 4,950,821 4,950,821(11) 0 0
Professional Traders Fund, LLC 5,740,822 5,740,822(12) 0 0
Republic Aggressive Growth 4,950,821 4,950,821(11) 0 0
Barucha Pension LLC 4,950,821 4,950,821(13) 0 0
CMS Capital 4,950,821 4,950,821(11) 0 0
Bessie Weiss Family Partnership 4,950,821 4,950,821(11) 0 0
Harborview Master Fund LP 4,950,821 4,950,821(11) 0 0
46
Nite Capital LP 4,950,821 4,950,821(11) 0 0
Cong Sharei Chaim 4,950,821 4,950,821(11) 0 0
Ronald Kimelman 3,713,116 3,713,116(14) 0 0
Quines Financial S.A. 3,265,412 3,265,412(15) 0 0
Alexander Hasenfeld, Inc. 2,475,411 2,475,411(16)
Profit Sharing & Retirement Plan
HSI Partnership 2,475,411 2,475,411(16) 0 0
David Klugmann 2,475,411 2,475,411(16) 0 0
Truk International Fund, LP 445,574 445,574(17) 0 0
Bristol Investment Fund, Ltd. 2,370,000 2,370,000(18) 0 0
Gamma Opportunity Capital
Partners, LP 1,580,001 1,580,001(19) 0 0
Wayne Saker 1,690,001 1,690,001(20) 0 0
Blumfield Investments, Inc. 790,001 790,001(21) 0 0
David Klugmann Associates, Inc.
Plan 1,690,001 1,690,001(22) 0 0
Inglewood Holdings Ltd. 1,690,001 1,690,001(23) 0 0
Gersh Korsinsky 790,001 790,001(24) 0 0
Vertical Ventures, LLC 790,001 790,001(25) 0 0
Tuva Financial Ltd. 1,000,000 1,000,000 0 0
Melton Management Ltd.* 600,000 600,000(26) 0 0
Zaiq Technologies, Inc.* 4,680,710 4,680,710(27) 0 0
Advisor Associates, LLC 8,221,719 8,221,719(28) 0 0
Aboudi & Brounstein* 100,000 100,000(29) 0 0
47
(1) Represents (a) 150% of (i) the number of shares of Common Stock issuable
upon conversion of $350,000 in aggregate principal amount of Series 05-01
Convertible Debentures at the conversion price in effect as of July 19, 2005
("Series 05-01 Conversion Shares") and (ii) the number shares of Common Stock
issuable in payment of interest accruing thereon through the third anniversary
of the issuance thereof at the conversion price in effect as of July 19, 2005
("Series 05-01 Interest Shares"); (b) 2,262,443 shares of shares of Common Stock
issuable upon exercise of Class A Warrants ("Class A Warrant Shares") and
1,131,222 shares of Common Stock issuable upon exercise of Class B Warrants
("Class B Warrant Shares"); (c) and additional 1,575,262 shares of Common Stock
representing our current good faith estimate of additional shares that we might
be required to issue to the selling stockholder (i) upon adjustments to the
conversion price of the unconverted Series 05-01 Convertible Debentures and/or
to the number of shares issuable upon exercise of unexercised Class A Warrants
and Class B Warrants in the event that, on or prior to the date on which
aggregate outstanding principal amount of the Series 05-01 Convertible
Debentures is first equal to or less than $1,166,667, we offer or issue
securities at a purchase price or conversion price lower than the Conversion
Price in effect as of the date on which any selling stockholder converts Series
05-01 Convertible Debentures or warrants having an exercise price below the
exercise price of the Class A Warrants and Class B Warrants and (ii) as
liquidated damages through the projected effective date of the Registration
Statement of which this Prospectus forms a part ("Series 05-01 Adjustment
Shares"); (d) 1,333,334 shares of Common Stock issuable upon conversion of
$200,000 in aggregate principal amount of Series 03-2 Convertible Debentures at
a conversion price of $0.15 ("Series 03-2 Conversion Shares"); (e) 280,000
shares of Common Stock issuable in respect of interest accruing thereon through
the third anniversary of the issuance thereof ("Series 03-2 Interest Shares");
(f) 1,333,334 shares issuable upon the exercise of Series 03-2 Warrants ("Series
03-2 Warrant Shares"); and (g) 433,334 shares of Common Stock representing
additional shares issuable to such selling stockholder as contemplated by terms
of agreements between us and the selling stockholder ("Series 03-2 Adjustment
Shares"). The selling stockholder advised us that it purchased these securities
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 SELLING STOCKHOLDERS."
(2) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $250,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 1,616,031 Class A Warrant Shares and 808,016
Class B Warrant Shares; (c) 1,125,187 Series 05-01 Adjustment Shares; (d)
666,667 Series 03-2 Conversion Shares issuable upon conversion of $100,000 in
aggregate principal amount of Series 03-2 Convertible Debentures; (e) 140,000
Series 03-2 Interest Shares issuable in respect of interest accruing thereon;
(f) 666,667 Series 03-2 Warrant Shares; and (g) 216,667 Series 03-2 Adjustment
Shares. The selling stockholder advised us that it purchased these securities
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 SELLING STOCKHOLDERS."
(3) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $250,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon ; (b) 1,616,031 Class A Warrant Shares and 808,016
Class B Warrant Shares; and (c) 1,125,187 Series 05-01 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(4) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $250,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 1,616,031 Class A Warrant Shares and 808,016
Class B Warrant Shares; (c) 1,125,187 Series 05-01 Adjustment Shares; and (d)
900,001 shares of Common Stock issuable upon exercise of warrants issued as a
placement fee in connection with the placement of Series 03-2 Convertible
Debentures. The selling stockholder advised us that it purchased these
securities 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 SELLING
STOCKHOLDERS."
48
(5) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $225,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 1,454,428 Class A Warrant Shares and 727,214
Class B Warrant Shares; and (c) 1,012,668 Series 05-01 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(6) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $200,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 1,292,825 Class A Warrant Shares and 646,413
Class B Warrant Shares; (c) 900,150 Series 05-01 Adjustment Shares; (d) 666,667
Series 03-2 Conversion Shares issuable upon conversion of $100,000 in aggregate
principal amount of Series 03-2 Convertible Debentures; (e) 140,000 Series 03-2
Interest Shares issuable in respect of interest accruing thereon; (f) 666,667
Series 03-2 Warrant Shares; and (g) 216,667 Series 03-2 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(7) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $150,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 969,619 Class A Warrant Shares and 484,810 Class
B Warrant Shares; (c) 675,112 Series 05-01 Adjustment Shares; (d) 333,334 Series
03-2 Conversion Shares issuable upon conversion of $50,000 in aggregate
principal amount of Series 03-2 Convertible Debentures; (e) 70,000 Series 03-2
Interest Shares issuable in respect of interest accruing thereon; (f) 333,334
Series 03-2 Warrant Shares; and (g) 53,333 Series 03-2 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(8) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $141,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 911,441 Class A Warrant Shares and 455,721Class B
Warrant Shares; and (c) 634,605 Series 05-01 Adjustment Shares. The selling
stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(9) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $125,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 808,016 Class A Warrant Shares and 404,008Class B
Warrant Shares; (c) 562,594 Series 05-01 Adjustment Shares; (d) 333,334 Series
03-2 Conversion Shares issuable upon conversion of $50,000 in aggregate
principal amount of Series 03-2 Convertible Debentures; (e) 70,000 Series 03-2
Interest Shares issuable in respect of interest accruing thereon; (f) 333,334
Series 03-2 Warrant Shares; and (g) 53,333 Series 03-2 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(10) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $125,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 808,016 Class A Warrant Shares and 404,008 Class
B Warrant Shares; (c) 562,594 Series 05-01 Adjustment Shares; (d) 333,334 Series
03-2 Conversion Shares issuable upon conversion of $50,000 in aggregate
principal amount of Series 03-2 Convertible Debentures; (e) 70,000 Series 03-2
Interest Shares issuable in respect of interest accruing thereon; (f) 333,334
Series 03-2 Warrant Shares; and (g) 53,333 Series 03-2 Adjustment Shares. The
49
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(11) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 646,412 Class A Warrant Shares and 323,206 Class
B Warrant Shares; and (c) 450,075 Series 05-01 Adjustment Shares. The selling
stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(12) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 646,412 Class A Warrant Shares and 323,206 Class
B Warrant Shares; (c) 450,075 Series 05-01 Adjustment Shares; (d) 333,334 Series
03-2 Conversion Shares issuable upon conversion of $50,000 in aggregate
principal amount of Series 03-2 Convertible Debentures; (e) 70,000 Series 03-2
Interest Shares issuable in respect of interest accruing thereon; (f) 333,334
Series 03-2 Warrant Shares; and (g) 53,333 Series 03-2 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(13) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 646,412 Class A Warrant Shares and 323,206 Class
B Warrant Shares; and (c) 450,075 Series 05-01 Adjustment Shares. The selling
stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS." The selling
stockholder has advised us that it is an affiliated person of a registered
broker dealer and that at the time the securities were acquired the selling
stockholder did not have any agreements, plans, understandings, directly or
indirectly, with any person to distribute the securities. The selling
stockholder acquired the securities without regard to its status as an affiliate
of a broker-dealer.
(14) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $75,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 484,809 Class A Warrant Shares and 242,405 Class
B Warrant Shares; and (c) 337,556 Series 05-01 Adjustment Shares. The selling
stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(15) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $50,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 323,206 Class A Warrant Shares and 161,603 Class
B Warrant Shares; (c) 225,037 Series 05-01 Adjustment Shares; (d) 333,334 Series
03-2 Conversion Shares issuable upon conversion of $50,000 in aggregate
principal amount of Series 03-2 Convertible Debentures; (e) 70,000 Series 03-2
Interest Shares issuable in respect of interest accruing thereon; (f) 333,334
Series 03-2 Warrant Shares; and (g) 53,333 Series 03-2 Adjustment Shares. The
selling stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(16) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $50,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 323,206 Class A Warrant Shares and 161,603 Class
B Warrant Shares; and (c) 225,037 Series 05-01 Adjustment Shares. The selling
50
stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(17) Represents (a) 150% of (i) the Series 05-01 Conversion Shares issuable upon
conversion of $9,000 in aggregate principal amount of Series 05-01 Convertible
Debentures and (ii) the Series 05-01 Interest Shares issuable in payment of the
interest accruing thereon; (b) 58,177 Class A Warrant Shares and 29,086 Class B
Warrant Shares; and (c) 40,507 Series 05-01 Adjustment Shares. The selling
stockholder advised us that it purchased these securities 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 SELLING STOCKHOLDERS."
(18) Represents (a) 1,000,000 Series 03-2 Conversion Shares issuable upon
conversion of $150,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 210,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 1,000,000 Series 03-2 Warrant Shares; and (d)
160,000 Series 03-2 Adjustment Shares. The selling stockholder advised us that
it purchased these securities 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 SELLING STOCKHOLDERS."
(19) Represents (a) 666,667 Series 03-2 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 140,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 666,667 Series 03-2 Warrant Shares; and (d)
106,667 Series 03-2 Adjustment Shares. The selling stockholder advised us that
it purchased these securities 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 SELLING STOCKHOLDERS."
(20) Represents (a) 666,667 Series 03-2 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 140,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 666,667 Series 03-2 Warrant Shares; and (d)
216,667 Series 03-2 Adjustment Shares. The selling stockholder advised us that
it purchased these securities 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 SELLING STOCKHOLDERS."
(21) Represents (a) 333,334 Series 03-2 Conversion Shares issuable upon
conversion of $50,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 70,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 333,334 Series 03-2 Warrant Shares; and (d)
53,333 Series 03-2 Adjustment Shares. The selling stockholder advised us that it
purchased these securities 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
SELLING STOCKHOLDERS."
(22) Represents (a) 666,667 Series 03-2 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 140,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 666,667 Series 03-2 Warrant Shares; and (d)
216,667 Series 03-2 Adjustment Shares. The selling stockholder advised us that
it purchased these securities 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 SELLING STOCKHOLDERS."
(23) Represents (a) 666,667 Series 03-2 Conversion Shares issuable upon
conversion of $100,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 140,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 666,667 Series 03-2 Warrant Shares; and (d)
216,667 Series 03-2 Adjustment Shares. The selling stockholder advised us that
it purchased these securities 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 SELLING STOCKHOLDERS."
51
(24) Represents (a) 333,334 Series 03-2 Conversion Shares issuable upon
conversion of $50,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 70,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 333,334 Series 03-2 Warrant Shares; and (d)
53,333 Series 03-2 Adjustment Shares. The selling stockholder advised us that it
purchased these securities 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
SELLING STOCKHOLDERS."
(25) Represents (a) 333,334 Series 03-2 Conversion Shares issuable upon
conversion of $50,000 in aggregate principal amount of Series 03-2 Convertible
Debentures; (b) 70,000 Series 03-2 Interest Shares issuable in respect of
interest accruing thereon; (c) 333,334 Series 03-2 Warrant Shares; and (d)
53,333 Series 03-2 Adjustment Shares. The selling stockholder advised us that it
purchased these securities 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
SELLING STOCKHOLDERS."
(26) 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 the selling stockholder and
repaid in January 2004. The selling stockholder advised us that it acquired the
warrants solely for investment and not with a view to or for resale or
distribution of such securities.
(27) Represents shares of Common Stock issued to the selling stockholder in
exchange for 3,192 shares of our Series B Convertible Preferred Stock. The
selling stockholder advised us that it acquired the Common Stock 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 SELLING STOCKHOLDERS."
(28) Represents (a) 5,656,108 shares of Common Stock issuable upon exercise of
warrants issued to the selling stockholder as compensation in connection with
the placement of the Series 05-01 Convertible Debentures, of which (i) a warrant
to purchase 2,262,443 shares of Common Stock is exercisable through the last day
of the month in which the third anniversary of the issuance of the Series 05-01
Convertible Debentures occurs; (ii) a warrant to purchase 2,262,443 shares of
Common Stock is exercisable through the last day of the month in which the third
anniversary of the effective date of the Registration Statement of which this
Prospectus forms a part occurs; and (iii) a warrant to purchase 1,131,222 shares
of Common Stock is exercisable through the last day of the month in which the
first anniversary of the effective date of the Registration Statement of which
this Prospectus forms a part occurs; (b) 565,611 shares of Common Stock
representing our current good faith estimate of additional shares that we might
be required to issue to such selling stockholder (i) based on adjustments to the
number of shares covered by its unexercised warrants in the event that, on or
prior to the date on which aggregate outstanding principal amount of the Series
05-01 Convertible Debentures is first equal to or less than $1,166,667, we offer
or issue securities at a purchase price or warrants having an exercise price
below the exercise price of the warrants and (ii) as liquidated damages through
the projected effective date of the Registration Statement of which this
Prospectus forms a part and (c) 2,000,000 shares of Common Stock. issued to the
selling stockholder in consideration of financial consulting services.
(29) Represents shares of Common Stock issuable upon exercise of three-year
warrants issued in November 2003. The selling stockholder provides legal
services to us. See "INTEREST OF NAMED EXPERTS AND COUNSEL."
RELATIONSHIPS BETWEEN NEW VISUAL AND THE SELLING STOCKHOLDERS
None of the selling shareholders (i) are affiliates or controlled by an
affiliate of our company (ii) are now or were at any time in the past an officer
or director of ours or any of our predecessors or affiliates.
PLAN OF DISTRIBUTION
As used in this Prospectus, stockholders selling our shares pursuant to this
Prospectus include donees, pledgees, assignees, successors in interest and other
tranferees selling shares received after the date of this Prospectus from a
selling stockholder named in this Prospectus.
52
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.
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 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 made in compliance with applicable laws and
regulations;
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 Act if
available, rather than under this Prospectus.
Any sales of the shares may be effected 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.
53
Any selling stockholder 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 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 Act.
The anti-manipulation provisions of Rules 101 through 104 under the Securities
Exchange Act of 1934, as amended the (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 $104,440 in the aggregate. We have agreed to indemnify certain
selling stockholders and certain other persons against certain liabilities,
including liabilities under the 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 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.
DESCRIPTION OF CAPITAL STOCK
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
114,348,190 shares are issued and outstanding as of July 19, 2005. 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 the date hereof,
(F) 10,297.118 shares of Series F Preferred Stock, none of which are outstanding
as of the date hereof and (G) 10,297.118 shares of Series G Preferred Stock,
none of which are outstanding as of the date hereof.
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.
54
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
In July 2000, the Company created a series of preferred stock, designated as
"Series A Junior Participating Preferred Stock"("Series A Preferred Stock").
200,000 shares of the Series A Preferred Stock were reserved for issuance upon
exercise of the rights, which expired in August 2004. 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 Stock, unless the holders of shares of Series A
Preferred Stock shall have received $1,000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon. The shares of Series A
Preferred Stock are not be redeemable.
There are no shares of Series A Preferred Stock outstanding.
SERIES B CONVERTIBLE PREFERRED STOCK
In April 2002, we designated 4,000 of our authorized preferred stock as a Series
B Preferred Stock ("Series B Preferred Stock"), with a liquidation preference of
$1,000 per share, and issued 3,192 shares of its Series B Preferred Stock, with
aggregate liquidation preference of $3,192,000, in connection with a development
and license agreement. In April 2005, all of the then issued and outstanding
Series B Preferred Stock was exchanged for 4,651,163 shares of Common Stock and
a promissory note in the principal amount of $2,392,000.. See "Description of
Agreements with the Selling Stockholders - Series B Preferred Stock Exchange
Agreement").
We may redeem any or all outstanding 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 and such shares 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 Preferred Stock
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) 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 our board of directors in preference to the holders of Common
Stock and of any other stock ranking junior to the Series B Preferred Stock with
respect to dividends.
55
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 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 our 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 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.
There are no shares of Series B Preferred Stock outstanding as of July 19, 2005.
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 Preferred Stock"). 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 Preferred Stock was originally issued as collateral for a proposed
loan. As of July 19, 2005 none of the Series C was outstanding. However, 15,152
shares of Series C Preferred Stock have been reserved for issuance as collateral
for a proposed $2 million loan. Series C Preferred Stock 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
Preferred Stock 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 Preferred Stock 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 Preferred Stock"), 25,000 shares of our
authorized preferred stock as Series E Preferred Stock ("Series E Preferred
Stock"), 10,297.118 shares of our authorized preferred stock as Series F
Preferred Stock ("Series F Preferred Stock") and 10,297.118 shares of our
authorized preferred stock as Series G Preferred Stock ("Series G Preferred
Stock").
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock were each originally issued as collateral for a
proposed loan. As of January 31, 2004 none of the Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
was outstanding. Each of the Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series G Preferred Stock 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 the Series
D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series
G Preferred Stock 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 Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
can be converted into Common Stock to liquidate the unpaid balance of the loan
and related interest.
No shares of the Series D, E, F or G Preferred Stock are classified as
outstanding as of July 19, 2005 as such shares are issuable only upon the
funding of the loans, if any.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Pursuant to our certificate of incorporation and by-laws, our officers and
directors are indemnified by us to the fullest extent allowed under Delaware law
for claims brought against them in their capacities as officers and directors.
Indemnification is not allowed if the officer or director does not act in good
faith and in a manner reasonably believed to be in our best interest, or if the
officer or director had no reasonable cause to believe his conduct was lawful.
Accordingly, indemnification may occur for liabilities arising under the Act.
56
Insofar as indemnification for liabilities arising under the Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions or otherwise, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the and
is, therefore, unenforceable.
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.
LEGAL MATTERS
The validity of the Common Stock offered under this Prospectus will be passed on
for us by Lawrence Kallaur, Esq.
EXPERTS
The financial statements as of October 31, 2004 and 2003 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 registered
public accounting firm, 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 SEC. You may read and copy any reports, statements or other
information on file at the SEC public reference room in Washington, D.C. You can
request copies of those documents, upon payment of a duplicating fee, by writing
to the SEC.
We have filed with the SEC under the Act a Registration Statement on Form SB-2,
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 SEC. You can obtain a copy of the registration
statement from the SEC at the address listed above or from the SEC's website.
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.
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.
57
NEW VISUAL CORPORATION
APRIL 30, 2005
TABLE OF CONTENTS
PART ITEM PAGE
I Financial Information:
1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEET
At April 30, 2005 (Unaudited) 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Six and Three Months Ended April 30, 2005 and 2004 3 - 4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited) For the Six Months Ended April 30, 2005 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended April 30, 2005 and 2004 6 - 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8 - 22
1
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
------
April 30, 2005
------------
Current Assets:
Cash $ 352,391
Other current assets 8,882
------------
TOTAL CURRENT ASSETS 361,273
Property and equipment - net 16,777
Technology license and capitalized software
development fee 5,751,000
Film in distribution - net 1,009,777
Deferred financing costs 167,333
Other assets 10,424
------------
TOTAL ASSETS $ 7,316,584
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible notes payable (net of
debt discount of $21,167) $ 1,126,829
Convertible debentures (net of
debt discount of $101,212) 48,788
Notes payable 2,952,228
Accounts payable and accrued expenses 1,352,499
------------
TOTAL CURRENT LIABILITIES 5,480,344
Long-term portion of convertible notes
payable (net of debt discount of $10,292) 107,998
Long-term portion of convertible debentures (net of
debt discount of $162,203) 137,797
Long-term portion of notes payable 797,333
------------
TOTAL LIABILITIES 6,523,472
------------
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; 110,234,532 issued and outstanding 110,235
Additional paid-in capital 58,311,475
Unearned compensation (274,855)
Accumulated deficit (57,353,743)
------------
TOTAL STOCKHOLDERS' EQUITY 793,112
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,316,584
============
See notes to condensed consolidated financial statements.
2
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Six Months Ended
April 30,
----------------------------
2005 2004
------------ ------------
REVENUES $ 16,198 $ 170,843
------------ ------------
OPERATING EXPENSES:
Cost of sales 11,945 86,214
Research and development 7,053 10,000
Compensatory element of stock issuances
for selling, general and administrative
expenses 888,930 1,066,146
Selling, general and administrative expenses 682,404 1,122,111
------------ ------------
TOTAL OPERATING EXPENSES 1,590,332 2,284,471
------------ ------------
OPERATING LOSS (1,574,134) (2,113,628)
------------ ------------
OTHER (INCOME) EXPENSES:
Interest expense 639,646 207,275
Amortization of unearned financing costs -- 94,709
Amortization of deferred financing costs 53,109 --
Gain on sale of property and equipment (20,000) --
Gain on exchange of redeemable series B
preferred stock into common stock (55,814) --
Other (28,506) (905)
------------ ------------
TOTAL OTHER (INCOME) EXPENSES 588,435 301,079
------------ ------------
NET LOSS $ (2,162,569) $ (2,414,707)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON STOCK $ (.02) $ (.03)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 93,198,867 75,674,954
============ ============
See notes to condensed consolidated financial statements.
3
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
April 30,
----------------------------
2005 2004
------------ ------------
REVENUES $ 7,397 30,200
------------ ------------
OPERATING EXPENSES:
Cost of sales 5,320 14,820
Research and development -- --
Compensatory element of stock issuances
for selling, general and administrative
expenses 609,381 316,565
Selling, general and administrative
expenses 365,007 537,525
------------ ------------
TOTAL OPERATING EXPENSES 979,708 868,910
------------ ------------
OPERATING LOSS (972,311) (838,710)
------------ ------------
OTHER (INCOME) EXPENSES:
Interest expense 360,864 139,550
Amortization of unearned financing costs -- 5,225
Amortization of deferred financing costs 28,490 --
Gain on sale of property and equipment (20,000) --
Gain on exchange of redeemable series B
preferred stock into common stock (55,814) --
Other (28,506) (905)
------------ ------------
TOTAL OTHER EXPENSES 285,034 143,870
------------ ------------
NET LOSS $ (1,257,345) $ (982,580)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON STOCK $ (.01) $ (.01)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 99,061,445 77,803,080
============ ============
See notes to condensed consolidated financial statements.
4
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 2005
(UNAUDITED)
Common Stock Additional Total
----------------------------- paid-in Unearned Accumulated Stockholders'
Shares Amount capital compensation deficit Equity
----------------------------------------------------------------------------------------------------
Balance- November 1,
2004 84,781,959 $ 84,782 $ 55,031,976 $ (164,500) $(55,191,174) $ (238,916)
Issuance of common
stock for cash 9,851,526 9,851 790,249 -- -- 800,100
Issuance of common
stock under consulting
agreements 2,837,500 2,838 339,162 (342,000) -- --
Issuance of common
stock for services 128,571 129 17,871 (18,000) -- --
Issuance of common
stock to key employees
and directors 2,750,000 2,750 449,750 -- -- 452,500
Issuance of common
stock for conversion
of notes payable 4,171,032 4,171 626,305 -- -- 630,476
Issuance of common
stock for liquidated
damages 639,998 640 95,360 -- -- 96,000
Issuance of common
stock in payment of
accounts payable and
accrued expenses 422,783 423 71,488 -- -- 71,911
Issuance of common
stock in exchange for
surrender of Series B
Mandatorily Redeemable
convertible
preferred stock 4,651,163 4,651 739,535 -- -- 744,186
Stock Options issued
for professional
services -- -- 165,869 (165,869) -- --
Accounting effects of
performance based stock
options issued to
employees -- -- 20,915 -- -- 20,915
Stock offering costs -- -- (37,005) -- -- (37,005)
Amortization of
unearned compensation
expense -- -- -- 415,514 -- 415,514
Net loss -- -- -- -- (2,162,569) (2,162,569)
----------------------------------------------------------------------------------------------------
Balance at April 30,
2005 110,234,532 $ 110,235 $ 58,311,475 $ (274,855) $(57,353,743) $ 793,112
====================================================================================================
See notes to condensed consolidated financial statements.
5
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
April 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,162,569) $(2,414,707)
Adjustments to reconcile net loss to net cash used in
operating activities:
Consulting fees and other compensatory elements of
stock issuances 888,930 1,066,146
Amortization of unearned financing costs -- 117,580
Amortization of deferred financing costs 53,109 --
Amortization of film in production costs 11,945 86,214
Amortization on debt discount on notes 520,169 111,112
Depreciation 7,095 8,783
Gain on sale of property and equipment (20,000) --
Gain on exchange of redeemable series B
preferred stock into common stock (55,814) --
Other non cash income (33,514) --
Change in Assets (Increase) Decrease:
Other current assets (898) (1,629)
Other assets (2,990) 398
Change in Liabilities (Decrease):
Accounts payable and accrued expenses (22,329) (10,740)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (816,866) (1,036,843)
----------- -----------
CASH USED IN INVESTING ACTIVITIES
Acquisition of license -- (95,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 800,100 379,500
Offering costs related to stock issuances -- (14,075)
Proceeds from convertible debentures -- 1,100,000
Proceeds from note payable 300,000 12,000
Capitalized financing costs (33,029) (112,500)
Repayments of convertible debentures -- (300,000)
Repayments of notes payable -- --
Repayments of convertible notes payable (25,625) (230,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,041,446 834,925
----------- -----------
INCREASE (DECREASE) IN CASH 224,580 (296,918)
CASH - BEGINNING 127,811 319,786
----------- -----------
CASH - ENDING $ 352,391 $ 22,868
=========== ===========
See notes to condensed consolidated financial statements.
6
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
April 30,
2005 2004
------------ --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,400 $ 3,540
============ ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for notes payable and accrued
interest $ 630,476 $ --
============ ========
Common stock issued for extension of convertible
notes payable $ -- $ 15,992
============ ========
Value assigned to warrants issued to placement
agent $ -- $103,323
============ ========
Accounts payable and accrued expenses satisfied by
issuance of common stock $ 71,911 $130,011
============ ========
Common stock issued for accrued liquidated damages $ 96,000 $ --
============ ========
Accounts payable and accrued expenses converted
to notes payable $ 439,162 $ --
============ ========
Stock offering costs $ 37,005 $ --
============ ========
Value assigned to beneficial conversion in
connection with the 7% convertible debenture $ -- $629,918
============ ========
Value assigned to warrants issued to purchasers
of convertible debentures $ -- $470,082
============ ========
Redeemable series B Mandatorily Redeemable
convertible preferred stock exchanged
into notes payable and common stock $ 2,392,000 $ --
============ ========
Redeemable series B preferred stock exchanged
into common stock $ 800,000 $ --
============ ========
See notes to condensed consolidated financial statements.
7
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
The condensed consolidated financial statements include the accounts of New
Visual Corporation ("New Visual" or the "Company") and its wholly owned
operating subsidiaries, NV Entertainment, Inc. ("NV Entertainment") (including
its 50% owned subsidiary Top Secret Productions, LLC), 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 of
such entity.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
Unites States of America ("US GAAP"). In the opinion of management, the
accompanying unaudited financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. These financial statements should be read
in conjunction with the financial statements and notes related thereto for year
ended October 31, 2004 included in this Prospectus.
These results for the three months and six months ended April 30, 2005 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of the consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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 Semiconductor Technologies. Pursuant to
such plan, in February of 2000, the Company acquired New Wheel. The Company's
technology business has generated no revenues to date.
The Company operates in two business segments, the production of motion
pictures, films and videos (Entertainment Segment) and development of new
semiconductor technologies (Semiconductor Segment). The Company's Entertainment
Segment is dependent on future revenues from the Company's film Step Into
Liquid. The Semiconductor 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 Semiconductor 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.
GOING CONCERN
-------------
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. For the three months and
six months ended April 30, 2005, the Company incurred net losses of
approximately $1,257,000 and $2,163,000, respectively, and as of April 30, 2005
had a working capital deficiency of approximately $5.1 million. In addition,
management believes that the Company will continue to incur net losses and cash
flow deficiencies from operating activities through at least October 31, 2005.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.
8
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED OPERATIONS
(CONTINUED)
The Company's ability to continue operating as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan or secure funding sufficient to provide for the working
capital needs of its business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence. There can be no assurance
that management will be successful in implementing its business plan or that the
successful implementation of such business plan will actually improve the
Company's operating results.
During the six months ended April 30, 2005, the Company raised approximately
$1,067,000 in net proceeds from the sale of its debt and equity securities. More
recently, in May 2005, the Company raised net proceeds of approximately $3.11
million through the private placement to individual and institutional investors
of $3.5 million of the Company's secured convertible debentures. Please see Note
13 for the details of this transaction. The Company's other financing
transactions in April and May 2005 are discussed in further detail in Note 8 and
Note 13.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FILM IN DISTRIBUTION
--------------------
Statement of Position 00-2, "Accounting by Producers or Distributors of Films"
("SOP-00-2") requires that film costs be capitalized and reported as a separate
asset on the balance sheet. Film costs include all direct negative costs
incurred in the production of a film, as well as allocations of production
overhead and capitalized interest. Direct negative costs include cost of
scenario, story, compensation of cast, directors, producers, writers, extras and
staff, cost of set construction, wardrobe, accessories, sound synchronization,
rental of facilities on location and post production costs. SOP-00-2 also
requires that film costs be amortized and participation costs accrued, using the
individual-film-forecast-method-computation method, which amortizes or accrues
such costs in the same ratio that the current period actual revenue (numerator)
bears to the estimated remaining unrecognized ultimate revenue as of the
beginning of the fiscal year (denominator). 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
unamortized capital costs exceeds the film's fair value. During January of 2005,
the Company performed its review, and it was determined that the unamortized
film costs exceeded the Film's fair value. The Company determined that its
previous estimation of the expenses incurred by the Film's distributor was too
low and the estimation of future revenue was too high. As a result of this
review, the Company wrote down the carrying value attributed to its Film In
Distribution to $1,021,722 at October 31, 2004. This resulted in an impairment
of $977,799 which is included in consolidated statement of operations for the
year ended October 31, 2004. See NOTE 13 for a discussion of an impairment
charge to be recorded during the quarter ending July 31, 2005.
The Company commences amortization of capitalized Film costs and accrued
(expensed) participation costs when its film was released and it began to
recognize revenue from the film.
9
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 -- "Accounting by Producers or Distributors of Films." 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 Lions Gate Entertainment ("LGE") the domestic
distributor for its Film entitled Step Into Liquid, the Company shares with LGE
in the profits of the Film after LGE 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.
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
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 require
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.
No assurance can be given that such technology will receive market acceptance.
Accordingly it is possible that the carrying amount of the technology license
may be reduced materially in the near future.
The Company has no amortization expense for the three months and six months
ended April 30, 2005 and 2004 for its capitalized software development costs.
10
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SERIES B REDEEMABLE PREFERRED STOCK
-----------------------------------
Series B Redeemable Preferred Stock, which includes characteristics of both
liabilities and equity, is classified as a long-term liability in accordance
with the provisions of SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." In April 2005,
the Series B Redeemable Preferred Stock was exchanged for common stock and a
promissory note. See NOTE 5 for further discussion.
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. For the three months and six months ended April
30, 2005 and 2004, no effect has been given to outstanding options, warrants or
convertible debentures in the diluted computation, as their effect would be
anti-dilutive.
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
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.
For the Six For the Three
Months Ended Months Ended
April 30, April 30,
-------------------------- --------------------------
2005 2004 2005 2004
Net loss, as reported $(2,162,569) $(2,414,707) $(1,257,345) $ (982,580)
Add: Stock-based employee compensation
expense included in reported net loss 20,915 -- 20,915 --
Less: Total stock-based employee compensation
expense determined under the fair value-based
method of all awards (190,788) (80,000) (190,788) --
----------- ----------- ----------- -----------
Net loss, pro-forma $(2,332,442) $(2,494,707) $(1,427,218) $ (982,580)
=========== =========== =========== ===========
Basic and Diluted Net Loss per Common Stock:
As reported $ (0.02) $ (0.03) $ (0.01) $ (0.01)
=========== =========== =========== ===========
Pro-forma $ (0.03) $ (0.03) $ (0.01) $ (0.01)
=========== =========== =========== ===========
11
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - 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 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 April 30, 2005 the Company has
funded a net of $2,335,101 for completion of the film. The film is currently in
foreign and DVD distribution. The Company recognized revenues of $7,397 and
$16,198 for the three months and six months ended April 30, 2005, respectively.
The Company recognized revenues of $30,200 and $170,843 for the three months and
six months ended April 30, 2004, respectively. Based upon information received
from the Company's film distributor in January 2005, the Company recorded an
impairment charge of $977,799 during the three months ended October 31, 2004
which reduced the carrying value of its film in distribution to $1,021,722. The
impairment charge was due to higher than expected distribution costs and lower
than expected average retail selling price for the DVD.
The Company had amortization expense of $5,320 and $11,945 for the three months
and six months ended April 30, 2005, respectively. The Company had amortization
expense of $14,820 and $86,214 for the three months and six months ended April
30, 2004, respectively.
The total film production costs and related amounts capitalized are as follows:
April 30,
2005
----------
Released films $1,357,302
Less: Cumulative amortization of film production costs 347,525
----------
Total film production costs capitalized for released films 1,009,777
Films in production --
Films in development or pre-production --
----------
Total Film Production Costs Capitalized $1,009,777
==========
Based on anticipated future revenues, amortization of the costs of the film in
distribution are estimated to be:
For the years ending
October 31, Amount
------------------------- ----------
2005 (6 months) $ 12,479
2006 199,537
2007 163,075
2008 163,075
2009 118,742
Thereafter 352,869
-----------
Total $1,009,777
===========
See NOTE 13 for a discussion of an impairment charge to be recorded during
the quarter ending July 31, 2005.
12
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - DEFERRED FINANCING COST
At April 30, 2005, deferred financing cost consists of costs incurred in
connection with the sale of $1,350,000 of 7% convertible debentures and issuance
of note payable.
Deferred financing cost $298,869
Less: Accumulated amortization (131,536)
---------
Deferred Financing Cost, net $167,333
=========
Amortization of deferred financing cost for the three months and six months
ended April 30, 2005 was $28,490 and $53,109, respectively. Amortization of
deferred financing cost for the three months and six months ended April 30, 2004
was $5,718 and $22,872, respectively.
NOTE 5 - EXCHANGE AGREEMENT
In April 2005, the Company entered into an Exchange Agreement (the "Exchange
Agreement") with Zaiq Technologies, Inc., ("Zaiq"), pursuant to which the
Company issued 4,651,163 shares of common stock and a promissory note in the
principal amount of $2,392,000 in exchange for the surrender by Zaiq of 3,192
shares of Series B Redeemable Preferred Stock. The Company issued the Series B
Redeemable Preferred Stock to Zaiq pursuant to a Receivables Purchase and Stock
Transfer Restriction Agreement dated as of April 17, 2002. These shares had an
aggregate liquidation preference of $3,192,000, constituted all of the Series B
Redeemable Preferred Stock issued and outstanding as of the date of the Exchange
Agreement, and were cancelled upon the closing of the Exchange Agreement. The
fair value of the common stock and promissory note on the closing date was
determined to be less than the aggregate liquidation preference of the Series B
Redeemable Preferred Stock and accordingly a gain of $55,814 was recognized
during the three months ended April 30, 2005.
The Exchange Agreement provides that, subject to certain exceptions, if the
Company, at any time prior to the payment in full of the amount due under the
promissory note, issues common stock or securities convertible into or
exercisable for shares of common stock at a price below the fair market value of
the common stock or such securities (a "Below Market Issuance"), then the
Company will issue to Zaiq additional shares of common stock in an amount that
is determined in accordance with a formula that takes into consideration both
the number of shares of common stock or other securities issued and the total
consideration received by the Company in the Below Market Issuance. During the
three months ended April 30, 2005, a Below Market Issuance occurred and the
Company will issue additional shares with a fair value of approximately $5,000.
Under the terms of the agreements with Zaiq, a portion of the proceeds of any
new financing consummated by the Company through the first anniversary of the
agreement are to be applied to the prepayment of the note. See Note 8.
13
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - CONVERTIBLE NOTES PAYABLE
The Company entered into several convertible promissory note agreements with
various trusts and individuals. The Company agreed to repay the principal and an
additional amount equal to 50% of the principal on all notes below except for
nine notes totaling $110,000 which accrue interest at rates of 9% and 12% per
annum. The notes are due when the Company reaches certain milestones from the
distribution of its motion picture. These 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.
In March 2005, the Company issued, in favor of the Company's executive vice
president, a non-interest bearing convertible promissory note in the principal
amount of $383,911. The convertible promissory note was issued in evidence of
the Company's obligation for deferred compensation. In accordance with APB 21,
imputed interest was calculated to arrive at the fair value of the convertible
promissory note. The difference between the face amount and the present value
upon issuance of the convertible promissory note is shown as a discount that is
amortized over the life of the convertible promissory note.
These notes are summarized in the table below:
April 30, 2005
--------------
Note payable(1) $ 130,000
Notes payable (ten notes) (2) 478,000
Note payable, 9% interest(3) 10,000
Notes payable (four notes), 12% interest (4) 180,000
Notes payable (eight notes), 12% interest (5) 100,000
Note payable(6) 368,286
--------------
Total 1,266,286
Less: Debt Discount (31,459)
Less: current portion of convertible notes payable (1,126,829)
--------------
Long term portion of convertible notes payable 107,998
==============
(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 remaining notes until the next round of financing is
completed. Outstanding principal amounting to $180,000 and accrued interest were
paid on June 6, 2005 from the proceeds of the private placement of the Company's
securities further discussed in Note 13.
(5) On September 21, 2004, the Company entered into eight identical loan
agreements totaling $100,000. The loan is evidenced by a promissory note issued
by the Company to the lender. The principal amount of the loan and any accrued
and unpaid interest is due and payable on June 21, 2005. The Company may prepay
the loan in whole or in part at any time without penalty. All unpaid interest
shall be converted into common shares of the Company's stock equal to the
interest on the principal amount divided by the applicable conversion price (40%
of the average market price for the previous 10 trading days before
conversion.).
14
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)
(6) In March 2005, the Company issued in favor of the Company's executive vice
president, a non-interest bearing convertible promissory note in the principal
amount of $383,911. The convertible promissory note is payable in monthly
installments, on the first day of each month, beginning on April 1, 2005. Each
month, the Company must pay to the executive vice president an amount not less
than the monthly base salary paid to the Company's chief executive officer.
However, if the Company determines in its sole discretion that it has the
financial resources available, it may pay up to $20,833 per month. The Company
made payments of $15,625 during the three months ended April 30, 2005. The
convertible promissory note may be converted at the option of the holder, at any
time, in whole or in part, into shares of common stock at a conversion price per
share equal to the closing price of the common stock on the Over-the-Counter
Bulletin Board on the date of conversion.
NOTE 7 - CONVERTIBLE DEBENTURES
During the three months ended January 31, 2005, $199,450 of principal amount of
7% Debentures plus accrued interest of $12,264 were converted into 1,411,428
shares of the Company's common stock. During the three months ended April 30,
2005, $383,050 of principal amount of 7% Debentures plus accrued interest of
$28,212 were converted into 2,741,747 shares of the Company's common stock
leaving a principal balance of $450,000.
Principal Unamortized Net carrying
Amount Debt Discount Value
--------- ------------- ------------
Current portion $150,000 $101,212 $ 48,788
Long term portion $300,000 $162,203 $137,797
-------- -------- --------
Total $450,000 $263,415 $186,585
======== ======== ========
With respect to debentures that were placed in April and May 2004 in an
aggregate principal amount of $350,000, the Company may be required to remit to
these purchasers an aggregate amount of $150,000 upon a demand for rescission by
them as these securities may have been sold in violation of Section 5 of the
Securities Exchange Act of 1933 as amended. As of June 10, 2005, no request
rescission has been made.
NOTE 8 - NOTES PAYABLE
The Company has the following notes payable outstanding at April 30, 2005:
Note payable (five individual notes with identical terms),
unsecured, 6% interest, due on demand with three days notice $ 256,886
Note payable, 10% interest, unsecured, due on demand with
three days notice 483,424
Note payable, unsecured, 15% interest, due May 31, 2005 (1) 250,000
Note payable (2) 12,000
Note payable (3) 300,000
Note payable (4) 55,251
Note payable (5) 2,392,000
-----------
Total $ 3,749,561
Less: current portion of notes payable (2,952,228)
-----------
Long term portion of notes payable 797,333
===========
(1) On September 24, 2004, the Company entered into a loan agreement with a
stockholder pursuant to which the Company borrowed $250,000. The loan was
evidenced by a promissory note issued by the Company to the lender. The
principal amount of the loan and any accrued and unpaid interest was due and
payable on March 24, 2005. On March 21, 2005, the stockholder agreed to extend
payment and any accrued and unpaid interest until May 31, 2005. Interest on the
15
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - NOTES PAYABLE (CONTINUED)
principal amount of the loan outstanding accrued at the annual rate of 15%. The
Company received net proceeds of $220,000 following the payment of transaction
related fees and expenses. Outstanding principal amounting to $250,000 and
accrued interest were paid on May 26, 2005 from the proceeds of the private
placement of the Company's securities further discussed in Note 13.
(2) In March 2004, the Company entered into a loan agreement, pursuant to which
the Company borrowed $12,000 from the lender. The loan is evidenced by an
installment note issued by the Company to such lender. The principal amount of
the loan and any accrued and unpaid interest at a rate of 5% were due and
payable on July 26, 2004. On July 26, 2004, the lender agreed to extend payment
and unpaid accrued interest until November 15, 2004. The lender has agreed to
extend payment and unpaid interest until November 15, 2005.
(3) In December 2004, the Company entered into a loan agreement with an
institutional investor pursuant to which the Company borrowed $300,000. The
principal amount of the loan and any accrued and unpaid interest was due and
payable on June 24, 2005. Interest on the principal amount of the loan
outstanding accrued at the annual rate of 15%. The Company received net proceeds
of $267,000 from this loan following the payment of due diligence fees and
transaction related fees and expenses. Outstanding principal amounting to
$300,000 and accrued interest were paid on May 26, 2005 from the proceeds of the
private placement of the Company's securities further discussed in Note 13.
(4) In December 2004, the Company issued to a former director, in connection
with his resignation, its non-interest bearing promissory note for amounts owed
to him in respect of his service on the Company's board of directors. Under the
terms of the promissory note, the note will become due if the Company enters
into a permanent financing transaction which results in the Company receiving of
at least $5 million or (b) the six-month anniversary of the date of the note. In
June 6, 2005, outstanding principal amounting to $55,251 and accrued interest
were paid from the proceeds of the private placement of the Company's securities
further discussed in Note 13.
(5) In April 2005, the Company issued its promissory note in connection with the
cancellation of the Series B Redeemable Preferred Stock (SEE NOTE 5) which bears
interest at the rate of 7% per annum compounded quarterly. The principal amount
of the promissory note and interest accrued thereon is due and payable in four
equal quarterly installments beginning on the first anniversary of the date of
the promissory note. Unless an event of default has occurred and is continuing,
the principal amount of the promissory note decreases by $797,333 on each of the
six-month and twelve-month anniversaries of the date of the promissory note. The
Company is required to pay to the holder 10% of the proceeds of any new
financing consummated within 90 days of the date of the promissory note and 20%
of the proceeds of any new financing consummated thereafter through the first
anniversary of the promissory note in prepayment of the amount due under the
promissory note. The Company has the right to prepay the outstanding principal
amount of the promissory note and any accrued interest thereon in whole or in
part without penalty or premium at any time. In June 6, 2005, principal
amounting to $350,000 was paid from the proceeds of the private placement of the
Company's securities further discussed in Note 13 to comply with the mandatory
payment provisions of the promissory note.
NOTE 9 - STOCKHOLDERS' EQUITY
COMMON STOCK ISSUANCES DURING THE SIX MONTHS ENDED APRIL 30, 2005:
------------------------------------------------------------------
During the six months ended April 30, 2005, the Company issued:
o 9,851,526 shares Common Stock to various investors for cash proceeds of
$800,100;
o 128,571 shares of Common Stock for various services valued at $18,000;
o 422,783 shares of Common Stock in payment of accounts payable and accrued
expenses of $71,911;
16
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED)
o 2,837,500 shares of Common Stock for consulting services valued at
$342,000;
o 4,171,032 shares of Common Stock related to the conversion of promissory
notes and accrued interest valued at $630,476;
o 639,998 shares of Common Stock as penalty for delayed filing/effectiveness
of a registration statement valued at $96,000;
o 2,750,000 shares of Common Stock to various key employees and directors
valued at $452,500;
o 4,651,163 shares of Common Stock with a value of $744, 186 in exchange for
surrender of Series B Mandatorily Redeemable convertible Preferred Stock
valued at $ $800,000. The Company recognized a gain of $55,814 on the
transactions. (See Note 5).
RESTRICTED STOCK AWARDS AND OPTIONS GRANTED
-------------------------------------------
In April 2005, the Company issued to each of its Chief Executive Officer and
Executive Vice President, 1,000,000 shares of the Company's Common Stock, and
performance based options to purchase 7,000,000 shares of Common Stock at an
exercise price of $0.17, which was equal to the closing price of the common
stock on the Over-the-Counter Bulletin Board on the date of grant. 1,000,000
shares of restricted common stock for which each option may be exercised vest
upon the Company's consummation of a capital financing from which the Company
receives gross proceeds of at least $3.5 million and 6,000,000 of the shares for
which each option may be exercised vest upon the Company's release of a beta
version of its semiconductor technologies.
The Company completed a financing in May of 2005, resulting in gross proceeds of
$3.5 million. Accordingly, 2,000,000 of the performance based options vested at
that time. In addition, the Company believes that it is probable that the
remaining 12,000,000 performance based options will vest by October 31, 2005.
Accordingly, the Company recorded a charge to operations during the quarter
ended April 30, 2005 of $20,915, representing the effects of variable accounting
through April 30, 2005 on the performance based options.
The value of the restricted stock awards of $340,000 was charged to operations
during the quarter ended April 30, 3005.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
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 11,019,999
Options to purchase common stock 16,893,750
Convertible notes payable and accrued interest 4,849,092
7% convertible debenture due December 31, 2006 3,266,579
----------
Total as of April 30, 2005 36,029,420
==========
Substantial issuance after April 30, 2005 through June 10, 2005:
Sale of common stock for cash 437,500
Issuance of common stock for converted promissory notes
and accrued interest 907,611
Common stock issuable in connection with potential conversion
of May 2005 convertible debentures 50,000,000
Warrants to purchase common stock in connection with May 2005
convertible debentures 39,592,758
Common stock issued to financial consultant 2,000,000
17
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL DISPUTES
--------------
During the quarter ended July 30, 2004, the Company was served with the
following three summonses and complaints, each filed on July 26, 2004 in the
Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New Visual
Corporation, Top Secret Surf Productions, LLC and Does 1 through 100; Gerald
Handler, Trustee of the Handler Children Trust v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr., Trustee
of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top Secret
Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by us in December 2001 and payable, according
to its terms, out of film distributions that we receive. Each complaint alleges,
among other things: that we have failed to pay the amount due and owing under
the convertible promissory note issued to the plaintiff despite demands for
payment; that our management has acted to forestall payments to our creditors,
including the plaintiff; and that we fraudulently induced the plaintiff to enter
into the convertible promissory note. The plaintiffs are seeking: money damages
in the aggregate amount of $375,000, plus interest; an accounting; an order
compelling the conveyance of monies to the plaintiffs and punitive damages.
The three complaints filed on July 26th were dismissed on August 11, 2004.
The Company was served with the following additional summons and complaint,
filed on July 30, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of
the Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks:
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
The Company filed an answer to the complaints filed on July 30, 2004, denying
all allegations.
In June 2005, an understanding was reached with the defendants settling the
proceedings. The parties intend to reflect the understanding in a definitive
agreement.See Note 13 (Subsequent Events).
NOTE 11 - AMENDMENT TO DEVELOPMENT AND LICENSING AGREEMENT
The Company and Adaptive Networks, Inc. ("ANI") have, as of November 26, 2004,
amended and restated their Development and License Agreement, dated as of April
17, 2002 (as so amended and restated the "Amended Agreement"). Under the Amended
Agreement, the Company has accepted from ANI final delivery of the source code,
the intellectual property rights related thereto and other materials related to
certain technologies that were to be developed by ANI. Under the original
Development and License Agreement entered into by the Company and ANI as of
April 17, 2002, the Company acquired a worldwide, perpetual license to ANI's
Powerstream technology, which provides the core technology for the Company's
semiconductor technologies. The Company contemplates that HelloSoft, Inc.
("HelloSoft"), an independent software developer based in California, will
provide certain development work necessary to the completion of the
semiconductor chipset. The Company and HelloSoft are parties to a Services
Agreement, dated as of March 31, 2004, under which HelloSoft provides continuing
development services relating to the Company's semiconductor chipset.
Under the Amended Agreement, the Company and ANI's joint ownership rights will
continue with respect to any improvements, developments, discoveries or other
inventions that are developed under the agreement with HelloSoft.
18
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 - AMENDMENT TO DEVELOPMENT AND LICENSING AGREEMENT (CONTINUED)
In addition, under the Amended Agreement, ANI has agreed that the first $5
million of royalties otherwise payable by the Company to ANI thereunder from
proceeds of the sale or license of the semiconductor technologies are to be
offset by a credit in the same amount.
NOTE 12 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
For the six months ended April 30, 2005:
Telecommunications Entertainment
Business Business Unallocable Totals
------------------------------------------------------------------------
Net Sales- domestic $ -- $ 9,898 $ -- $ 9,898
========================================================================
Net Sales - foreign $ -- $ 6,300 $ -- $ 6,300
========================================================================
Operating (Loss) Income $ (1,899) $ (7,317) $ (1,564,918) $ (1,574,134)
========================================================================
Depreciation $ 1,899 $ 5,196 $ -- $ 7,095
========================================================================
Total Identifiable Assets
at April 30, 2005 $ 5,935,110 $ 1,009,777 $ 371,967 $ 7,316,854
========================================================================
For the six months ended April 30, 2004:
Telecommunications Entertainment
Business Business Unallocable Totals
------------------------------------------------------------------------
Net Sales - domestic $ -- $ 75,000 $ -- $ 75,000
========================================================================
Net Sales - foreign $ -- $ 95,843 $ -- $ 95,843
========================================================================
Operating (Loss) Income $ (172,560) $ 4,432 $ (1,945,500) $ (2,113,628)
========================================================================
Depreciation $ 1,994 $ 6,789 $ -- $ 8,783
========================================================================
Total Identifiable Assets
at April 30, 2004 $ 5,952,388 $ 2,090,119 $ 32,907 $ 8,075,414
========================================================================
For the three months ended April 30, 2005:
Telecommunications Entertainment
Business Business Unallocable Totals
------------------------------------------------------------------------
Net Sales - domestic $ -- $ 7,397 $ -- $ 7,397
========================================================================
Net Sales - foreign $ -- $ -- $ -- $ --
========================================================================
Operating Income (Loss) $ (740) $ (3,601) $ (967,970) $ (972,311)
========================================================================
Depreciation $ 740 $ 2,187 $ -- $ 2,927
========================================================================
Total Identifiable Assets $ 5,935,110 $ 1,009,777 $ 371,967 $ 7,316,854
========================================================================
19
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
For the three months ended April 30, 2004:
Telecommunications Entertainment
Business Business Unallocable Totals
------------------------------------------------------------------------
Net Sales - domestic $ -- $ 10,000 $ -- $ 10,000
========================================================================
Net Sales - foreign $ -- $ 20,200 $ -- $ 20,200
========================================================================
Operating Income (Loss) $ (12,080) $ 3,505 $ (830,135) $ (838,710)
========================================================================
Depreciation $ 835 $ 3,500 $ -- $ 4,335
========================================================================
Total Identifiable Assets $ 5,952,388 $ 2,090,119 $ 32,907 $ 8,075,414
========================================================================
NOTE 13 - SUBSEQUENT EVENTS
On May 26, 2005, the Company completed a private placement to certain individual
and institutional investors of $3,500,000 in principal amount of its three-year
7% Senior Secured Convertible Debentures (the "2005 Debentures"). Commencing on
the earlier of the (i) July 30, 2005 or (ii) the effective date of the
Registration Statement (as defined below), the 2005 Debentures are convertible
into shares of Common Stock at a conversion price equal to the lower of (x) 70%
of the 5 day volume weighted average price of the Company's Common Stock
immediately prior to conversion or (y) if the Company entered into certain
financing transactions subsequent to the closing date, the lowest purchase price
or conversion price applicable to that transaction. In connection with the
issuance of the 2005 Debentures, the Company issued to the purchasers thereof
Class A Warrants to purchase 11,312,220 shares of the Company's Common Stock
exercisable through the last day of the month in which the first anniversary of
the effective date of the Registration Statement occurs at a per share exercise
price of $0.1547 and and Class B Warrants to purchase 22,624,430 shares of the
Company's Common Stock through the last day of the month in which the third
anniversary of the effective date of the Registration Statement occurs at a per
share exercise price of $0.3094. The Company received net proceeds of
approximately $3.11 million, following repayment of offering related expenses.
Interest on the 2005 Debentures accrues at the rate of 7% per annum and is
payable on a bi-annual basis, commencing December 31, 2005, or on conversion and
may be paid, at the option of the Company, either in cash or in shares of Common
Stock. The Company may prepay the amounts outstanding on the Debentures by
giving advance notice and paying an amount equal to 120% of the sum of (x) the
principal being prepaid plus (y) the accrued interest thereon.
Holders of the Class A Warrants and Class B Warrants, which first became
exercisable on the earlier of the (i) July 30, 2005 or (ii) the effective date
of the Registration Statement and are entitled to exercise those warrants on a
cashless basis following the first anniversary of issuance if the Registration
Statement is not in effect at the time of exercise.
To secure the Company's obligations under the 2005 Debentures, the Company
granted a security interest in substantially all of its assets, including
without limitation, its intellectual property, in favor of the investors under
the terms and conditions of a Security Interest Agreement dated as of the date
of the 2005 Debentures. The security interest terminates upon the earlier of (i)
the date on which less than one-third of the original principal amount of the
2005 Debentures issued on the closing date are outstanding or (ii) payment or
satisfaction of all of the Company's obligations relating to the 2005
Debentures.
The Company used a portion of those funds to repay the principal and accrued
interest on five notes payable and two convertible notes payable aggregating
$1,135,251 in principal.
20
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
The Company has undertaken to file within 45 days of the closing a registration
statement (the "Registration Statement") covering the Common Stock issuable upon
conversion of the 2005 Debentures, the Class A Warrants and Class B Warrants and
the Compensation Warrants referred to below.
Under the Registration Rights Agreement, the Company is obligated to pay
liquidated damages to the holders of the 2005 Debentures if the Registration
Statement is not filed by July 15, 2005 or not declared effective by August 24,
2005 or if the effectiveness of the Registration Statement is subsequently
suspended for more than certain permitted periods. The permitted suspension
periods are up to two periods during any consecutive 12-month period, but each
period shall exceed more than 15 days in length 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 the Company must pay to the debenture holders in respect of the
liquidated damages associated with the delays in the filing date or effective
date or after a Restricted Sale Date will be 2% of the principal amount of all
the 2005 Debentures during the each 30-day period (or any part thereof). After
the effective date, the principal amount of the 2005 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 debentures converted within the preceding 30 days but
not yet sold. These liquidated damages may be paid in shares of the Company's
Common Stock (valued at the conversion price) at the option of the holders of
the 2005 Debentures or at the Company's option if the Registration Statement is
declared effective before February 20, 2006 and is effective as of the date of
such payment. Notwithstanding the foregoing, if the Registration Statement is
declared effective on or before September 23, 2005, the Company will not be
required to pay any of these liquidated damages.
In the Securities Purchase Agreement, the Company agreed that, without the prior
consent of a majority in interest of the holders of the 2005 Debentures, it will
not (x) enter into any offer or sale of its Common Stock or securities
convertible into or exercisable for its Common Stock with any third party (a
"New Transaction") at any time prior to the effective date of the Registration
Statement, (y) at any time prior to the date on which the which aggregate
outstanding principal amount of the 2005 Debentures is first equal to or less
than $1,166,667, enter into a New Transaction in which the securities offered or
sold provide for a variable conversion price or a variable exercise price or (z)
at any time from the effective date of the Registration Statement to the sixth
month anniversary thereof, enter into a New Transaction in which any investor is
granted registration rights. These limitations, however, do not prohibit
issuances of the Company's Common Stock or options or warrants to purchase
Common Stock (i) upon the exercise or conversion of options, warrants or
convertible securities outstanding on May 26, 2005 or in respect of any other
financing agreements as in effect on such date (provided the same is not amended
after such date) or disclosed in the Company's filings with the SEC (provided
the same are not amended after May 26, 2005), (ii) pursuant to any employee
stock option plan approved by the Company's shareholders, (iii) pursuant to a
non-employee director stock option plan, (iv) pursuant to a consultants' stock
option plan, as in effect on May 26, 2005, (v) upon the exercise of any options
or warrants referred to in the preceding clauses of this paragraph (provided the
same are not amended after May 26, 2005), (vi) to the Company's employees,
officers or directors, provided that all such shares are or are made subject to
a lock-up agreement simultaneously with such issuance, or (vii) to a strategic
partner.
If the Company actually consummate a New Transaction 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 2005 Debentures, (b) the inclusion of any
terms more beneficial to the holder of such instrument than the corresponding
terms of the 2005 Debentures, (c) the issuance of warrants at an exercise price
lower than that provided in the Class A Warrants or Class B Warrants, (d) the
issuance of warrants in an amount greater than the ratio used in connection with
the Class A Warrants or Class B Warrants, or (e) the inclusion of any terms more
beneficial to the holder of such instrument than the corresponding terms of the
Class A Warrants or Class B Warrants, then the terms of any unissued or
unconverted 2005 Debentures or any unissued or unexercised Class A Warrants or
Class B Warrants shall be modified to adjust the relevant conversion price in
such 2005 Debentures, 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. The Company may also be required to issue
additional shares with respect to portions of 2005 Debentures previously
converted, based on the adjusted conversion price.
21
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
In connection with the placement of the 2005 Debentures, the Company issued to a
finder warrants to purchase up to 5,656,108 million shares of Common Stock (the
"Compensation Warrants"), with warrants for 2,262,443 shares being exercisable
through the last day of the month in which the third anniversary of the closing
occurs at a per share exercise price of $0.3094; warrants for 2,262,443 shares
being exercisable through the last day of the month in which the third
anniversary of the effective date of the Registration Statement occurs at a per
share exercise price of $0.3094; and warrants for 1,131,222 shares being
exercisable through the last day of the month in which the first anniversary of
the effective date of the Registration Statement occurs at a per share exercise
price of $0.1547. The Compensation Warrants are otherwise exercisable on
substantially the same terms and conditions as the Investor Warrants and the
Common Stock underlying these warrants will be also included in the Registration
Statement.
As a result of obtaining the 2005 Debentures, 1,000,000 stock options granted to
each of the Company's chief executive officer and executive vice president in
April 2005 became fully vested and non-forfeitable, as discussed in Note 9.
LITIGATION RESOLUTION
In July 2005 the legal proceedings described in Note 10 were dismissed with
prejudice upon the issuance in favor of the plaintiffs of an irrevocable letter
of credit in the maximum amount of $300,000 by a non-related third party. The
Company has no reimbursement obligation with respect to the letter of credit.
STOCK ISSUANCES
From May 1, 2005 to July 19, 2005, the Company issued unregistered securities as
follows:
In May 2005, the Company issued:
(i) 437,500 shares of Common Stock for cash proceeds of $35,000
(ii) 357,444 shares of Common Stock for converted debentures and interest
valued at $53,617.
In June 2005, the Company issued:
(i) 550,167 shares of common stock for converted debentures and interest
valued at $82,525.
(ii) 2,000,000 shares of common stock to a consultant for financial advisory
services
(iii) 29,547 shares of common stock to Zaiq in connection with the anti-dilution
provisions in the Exchange Agreement.
In July, the Company issued:
(i) 739,000 shares of common stock for converted debentures and interest
valued at $110,850.
IMPAIRMENT CHARGE RELATED TO FILM IN DISTRIBUTION
Based upon information received from the Company's film distributor in July
2005,during the three months ending July 31, 2005 the Company will record an
impairment charge of $1,009,777 and reduce the carrying value of it's film in
distribution to $0. The impairment charge was due to higher than expected
distribution costs and lower than expected sales and average retail seller price
for the DVD.
22
INDEX TO AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets
At October 31, 2004 and 2003 F-2
Consolidated Statements of Operations
for the Years Ended October 31, 2004 and 2003 F-3
Consolidated Statements of Stockholders' (Deficiency) Equity
for the Years Ended October 31, 2004 and 2003 F-4 to F-5
Consolidated Statements of Cash Flows
for the Years Ended October 31, 2004 and 2003 F-6 to F-7
Notes to the Consolidated Financial Statements F-8 to F-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003 and
the related consolidated statements of operations, stockholders'
(deficiency)equity, and cash flows for the years ended October 31, 2004 and
2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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, 2004 and 2003 and the results of
their operations and their cash flows for the years ended October 31, 2004 and
2003 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 $5,506,287 and
$3,316,500 during the years ended October 31, 2004 and 2003, respectively. As of
October 31, 2004, the Company had a working capital deficiency of approximately
$3,985,000. 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 28, 2005
F-1
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,
----------------------------
2004 2003
------------ ------------
ASSETS
------
Current Assets:
Cash $ 127,811 $ 319,786
Other current assets 7,984 5,015
------------ ------------
TOTAL CURRENT ASSETS 135,795 324,801
Property and equipment - net 23,873 41,301
Technology license and capitalized software
development fee 5,751,000 5,751,000
Film in distribution - net 1,021,722 2,142,212
Deferred financing costs 187,413 --
Other assets 7,434 13,036
------------ ------------
TOTAL ASSETS $ 7,127,237 $ 8,272,350
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
-------------------------------------------------
Current Liabilities:
Convertible notes payable $ 913,000 $ 1,103,000
Current Convertible debentures (net of
debt discount of $512,778) 197,222 300,000
Notes payable 1,002,310 740,311
Accounts payable and accrued expenses 2,007,871 1,744,883
License and development fees payable -- 95,000
------------ ------------
Total Current Liabilities 4,120,403 3,983,194
Long-term Convertible debentures (net of
debt discount of $268,750) 53,750 --
Redeemable Series B preferred stock 3,192,000 3,192,000
------------ ------------
Total Liabilities 7,366,153 7,175,194
------------ ------------
Commitments, Contingencies and Other Matters
Stockholders' (Deficiency) 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; 84,781,959 and 70,676,682 shares issued and
outstanding at October 31, 2004 and 2003, respectively 84,782 70,677
Additional paid-in capital 55,031,976 51,131,622
Unearned financing fees -- (15,674)
Unearned compensation (164,500) (404,582)
Accumulated deficit (55,191,174) (49,684,887)
------------ ------------
Total Stockholders' (Deficiency) Equity (238,916) 1,097,156
------------ ------------
Total Liabilities and Stockholders' (Deficiency) Equity $ 7,127,237 $ 8,272,350
============ ============
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,
2004 2003
------------ ------------
REVENUES $ 287,570 $ 379,980
------------ ------------
OPERATING EXPENSES:
Cost of sales 142,691 192,889
Projects written off -- 56,864
Impairment of film in distribution 977,799 --
Research and development 92,500 117,901
Compensatory element of stock issuances for selling,
general and administrative expenses 1,359,882 2,062,081
Compensatory element of stock issuances for R&D 92,500 --
Selling, general and administrative expenses 2,081,305 2,127,267
Litigation settlement -- 6,500
------------ ------------
TOTAL OPERATING EXPENSES 4,746,677 4,563,502
------------ ------------
OPERATING LOSS (4,459,107) (4,183,522)
------------ ------------
OTHER EXPENSES (INCOME):
Interest expense 883,592 270,587
Non Cash Gain - Litigation Settlement -- (1,474,000)
Amortization of deferred financing costs 78,427 --
Amortization of unearned financing costs 85,161 336,391
------------ ------------
TOTAL OTHER EXPENSES (INCOME) 1,047,180 (867,022)
------------ ------------
NET LOSS $ (5,506,287) $ (3,316,500)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.07) $ (0.05)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 78,052,498 60,643,489
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFECIENCY) EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
Common Stock Additional Unearned Total
--------------------------- Paid-In Financing Unearned Accumulated Stockholders'
Shares Amount Capital Costs Compensation Deficit Deficiency
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance- November 1, 2003 70,676,682 $ 70,677 $ 51,131,622 $ (15,674) $ (404,582) $(49,684,887) $ 1,097,156
Issuance of common
stock for cash 4,907,085 4,907 589,093 -- -- -- 594,000
Issuance of common stock
for extension of
promissory notes 310,003 310 49,071 (49,381) -- -- --
Issuance of common
stock in payment for
deferred payroll 40,000 40 9,960 -- -- -- 10,000
Issuance of common
stock for compensation 1,003,999 1,004 230,076 -- (230,000) -- 1,080
Issuance of common
stock under consulting
agreements 4,002,227 4,002 976,048 -- (980,050) -- --
Issuance of common
stock for services 468,047 468 109,739 -- (2,250) -- 107,957
Issuance of common
stock for conversion
of convertible debt 2,209,631 2,210 329,235 -- -- -- 331,445
Issuance of common
stock for liquidated
damages 283,333 283 23,717 -- -- -- 24,000
Issuance of common stock
for research and
development services 880,952 881 91,619 -- -- -- 92,500
Stock offering costs -- -- (20,475) -- -- -- (20,475)
Warrants issued with
convertible
debentures -- -- 577,896 -- -- -- 577,896
Value assigned to
beneficial conversions -- -- 772,104 -- -- -- 772,104
Warrants issued to
placement agent -- -- 121,018 -- -- -- 121,018
Value assigned to
warrants issued for
extension of
convertible notes -- -- 20,106 (20,106) -- -- --
Warrants issued for
professional services -- -- 21,147 -- -- -- 21,147
compensation expense -- -- -- -- 1,452,382 -- 1,452,382
Amortization of unearned
financing costs -- -- -- 85,161 -- -- 85,161
Net loss -- -- -- -- -- (5,506,287) (5,506,287)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at October 31, 2004 84,781,959 $ 84,782 $ 55,031,976 $ -- $ (164,500) $(55,191,174) $ (238,916)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFECIENCY) EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
Common Stock Paid-In Unearned Unearned Accumulated Stockholders'
Shares Amount Capital Financing Costs Compensation Deficit Equity
------------------------------------------------------------------------------------------------------
Balance - November 1, 2002 49,787,069 $ 49,787 $ 47,097,830 $ (214,952) $ (331,581) $(46,368,387) $ 232,697
Issuance of common stock
for cash 17,112,611 17,113 2,919,580 -- -- -- 2,936,693
Issuance of common stock
for conversion of
promissory notes and
interest 1,225,941 1,226 376,524 -- -- -- 377,750
Issuance of common stock in
payment of deferred payroll 88,710 89 54,912 -- -- 55,001
Issuance of common
stock under consulting
agreements 3,621,875 3,622 1,535,628 -- (1,539,250) -- --
Cancellation of shares
under legal settlement (2,200,000) (2,200) (1,471,800) -- -- -- (1,474,000)
Cashless exercise of
warrants 40,476 40 (40) -- -- -- --
Exercise of warrants 1,000,000 1,000 59,000 -- -- 60,000
Stock offering costs -- -- (172,957) -- -- -- (172,957)
Value assigned to
beneficial conversion -- -- 137,113 (137,113) -- -- --
Value assigned to warrants
issued to consultants -- -- 588,232 -- (588,232) -- --
Value assigned to options
issued to consultants -- -- 7,600 -- (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 70,676,682 $ 70,677 $ 51,131,622 $ (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 CASH FLOWS
For the Years Ended
October 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,506,287) $(3,316,500)
Adjustments to reconcile net loss to net cash
used in operating activities:
Consulting fees and other compensatory
elements of stock issuances 1,452,382 2,062,081
Unusual item - gain on Litigation Settlement -- (1,474,000)
Projects written-off -- 56,864
Interest paid in stock 13,946 --
Penalties paid in stock 24,000 --
Warrants issued for services 21,147 --
Impairment of film in distribution 977,799 --
Amortization of unearned financing costs 85,161 336,391
Amortization of deferred financing costs 78,427 --
Amortization of film in production costs 142,691 192,889
Amortization on debt discount on notes 568,471 --
Depreciation 17,428 23,232
Change in assets (increase) decrease:
Other current assets (2,969) (3,365)
Due from related parties 10,033
Other assets 5,602 1,540
Change in liabilities increase (decrease):
Accounts payable and accrued expenses 499,196 (172,462)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,647,678) (2,283,297)
CASH USED IN INVESTING ACTIVITIES
Projects under development -- (213,134)
Acquisition of technology license and
development fee (95,000) (639,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (95,000) (852,134)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 594,000 2,936,693
Offering costs related to stock issuances (20,475) (172,957)
Proceeds from convertible debentures 1,350,000 300,000
Proceeds from exercise of options and warrants -- 60,000
Proceeds from notes payable 262,000 --
Proceeds from convertible notes payable 100,000 287,000
Capitalized financing costs (144,822) --
Repayments of convertible debentures (300,000) --
Repayments of notes payable -- (231,096)
Repayments of convertible notes payable (290,000) (36,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,550,703 3,143,640
(DECREASE) INCREASE IN CASH (191,975) 8,209
CASH - BEGINNING OF YEAR 319,786 311,577
----------- -----------
CASH - ENDING OF YEAR $ 127,811 $ 319,786
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NEW VISUAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31,
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 14,565 $ --
============ ============
Income taxes $ -- $ --
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Compensation satisfied by issuance of common stock $ 119,037 $ 55,001
============ ============
Notes and interest satisfied by issuance of common stock $ -- $ 377,750
============ ============
Common stock issued for notes payable and accrued interest $ -- $ 156,000
============ ============
Common stock issued for converion of convertible debt $ 317,500 $ --
============ ============
Common stock issued for research and development services $ 92,500 $ --
============ ============
Value assigned to warrants issued to placement agent $ 121,018 $ --
============ ============
Value assigned to beneficial conversion in connection with the 7%
convertible debenture $ 772,104 $ --
============ ============
Value assigned to warrants issued to purchasers of convertible debentures $ 577,896 $ --
============ ============
Value assigned to warrants issued for extension of convertible notes $ 20,106 $ --
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-7
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), 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 of such entity.
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 Semiconductor Technologies. Pursuant to
such plan, in February of 2000, the Company acquired New Wheel. The Company's
technology business has generated no revenues to date.
The Company operates in two business segments, the production of motion
pictures, films and videos (Entertainment Segment) and development of new
semiconductor technologies (Semiconductor Segment). The Company's Entertainment
Segment is dependent on future revenues from the Company's film Step Into
Liquid. The Semiconductor 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 Semiconductor 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.
GOING CONCERN UNCERTAINTY
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 and
the realization of assets and the satisfaction of liabilities in the normal
course of business.
The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company has suffered significant recurring operating losses, used substantial
funds in its operations, and needs to raise additional funds to accomplish its
objectives. For the years ended October 31, 2004 and 2003 the Company incurred
net losses of approximately $5.5 million and $3.3 million, respectively, and as
of October 31, 2004 had a working capital deficiency of approximately $4.0
million. In addition, management believes that the Company will continue to
incur net losses and cash flow deficiencies from operating activities through at
least October 31, 2005. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
As more fully described in the Notes below, the Company funded its operations
during 2004 and 2003 through sales of its common stock, par value $0.001 per
share (the "Common Stock"), proceeds from notes and convertible notes and the
exercise of options and warrants resulting in approximate net proceeds to the
Company of $2,300,000 and $3,411,000, respectively. In addition, as more fully
described in Note 17, the Company raised in December 2004 approximately $267,000
in net proceeds from the sale of promissory notes. During the period from
November 1, 2004 thru January 25, 2005 the Company sold an aggregate 1,005,000
shares of common stock to several investors for total proceeds of $80,400.
F-8
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's ability to continue to operate as a going concern is dependent on
its ability to generate sufficient cash flows to meet its obligations on a
timely basis, to obtain additional financing and to ultimately attain
profitability. The Company needs to raise substantial funds to maintain its
operations as presently conducted. If the Company is unable to raise sufficient
funds, the Company will not be able to maintain operations as presently
conducted and may cease operating as a going concern.
Management of the Company is continuing its efforts to secure funds through
equity and/or debt instruments for its operations. The Company will require
additional funds for its operations and to pay down its liabilities, defend
legal claims made against it, as well as finance its expansion plans consistent
with its business plan. However, there can be no assurance that the Company will
be able to secure additional funds and that if such funds are available, whether
the terms or conditions would be acceptable to the Company and whether the
Company will be able to turn into a profitable position and generate positive
operating cash flow. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty and these
adjustments may be material.
NOTE 2 - SUMMARY OF SIGNIFICANT 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 Position 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
F-9
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 statements of operations the amount by which
the unamortized film costs exceeds the films fair value. During January of 2005,
the Company performed its review, and it was determined that the unamortized
film costs exceeded the Film's fair value. The Company determined that its
previous estimation of the expenses incurred by the Film's distributor were too
low and the estimation of future revenue were too high. As a result of this
review, the Company wrote-down the carrying value attributed to its Film In
Distribution to $1,021,722 at October 31, 2004. This resulted in an impairment
of $977,799 which is included in consolidated statement of operations for the
year ended October 31, 2004.
The Company commenced amortization of capitalized Film costs and accrued
(expensed) participation costs when its film, was released and it began to
recognize revenue from the film. The Company had amortization costs of $142,961
and $192,889 for the years ended October 31, 2004 and 2003, 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 Lions Gate Entertainment ("LGE") the domestic
distributor for its Film entitled Step Into Liquid, the Company shares with LGE
in the profits of the Film after LGE 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 $95,000 and $200,000 during the years ended October 31, 2004 and
2003, respectively and were recorded as revenue.
F-10
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 require
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, 2004 and
2003 for its capitalized software development costs.
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 anti-dilutive.
The number of potentially dilutive securities excluded from computation of
diluted loss per share was approximately 38,509,190 and 21,387,483, for the
years ended October 31, 2004 and 2003, respectively.
F-11
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
The Company follows Statement of Financial Standards ("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
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 No. 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
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 years ended October 31,
2004 2003
------------ ------------
Net loss, as reported $(5,506,287) $(3,316,500)
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 (333,500) (676,396)
------------ ------------
Proforma net loss $(5,839,287) $(3,992,896)
============ ============
Basic and Diluted Net Loss:
As reported $ (0.07) $ (0.05)
============ ============
Proforma $ (0.07) $ (0.07)
============ ============
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.
F-12
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN 46 also requires
consolidation of a VIE by an enterprise that holds such a controlling interest.
In December 2003, the FASB completed its deliberations regarding the proposed
modification to FIN 46 and issued Interpretation Number 46(R), "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51" ("FIN 46(R)"). The
decisions reached included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46(R) is required in financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public small
business issuers' entities is required in all interim and annual financial
statements for periods ending after December 15, 2004. The adoption of FIN 46(R)
is not expected to have an impact on the Company's consolidated financial
position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-Based
Payment." SFAS 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB 25, , which was permitted under SFAS No. 123, as originally issued.
The revised statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
SFAS No. 123(R) is effective for small business issuers financial statements for
the first interim or annual reporting period that begins after December 15,
2005, with early adoption encouraged.
The Company is currently evaluating the impact that this statement will have on
its financial condition or results of operations.
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,
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. 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. During the quarter ended
January 31, 2003, the Company recorded a gain from this settlement agreement of
$1,474,000.
F-13
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, consists of the following:
At October 31,
--------------
2004 2003
------------ ------------
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 437,848 420,420
------------ ------------
Total $ 23,873 $ 41,301
============ ============
For the years ended October 31, 2004 and 2003, depreciation expense was $17,428
and $23,232, respectively.
NOTE 5 - TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT
On April 17, 2002, the Company entered into a development and license agreement
with Adaptive Networks, Inc. "Adaptive" to acquire a worldwide, perpetual
license to Adaptive's Powerstream (TM) 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 Adaptive
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 paid Adaptive a development fee of $1,559,000 for software
development services and agreed to pay Adaptive a royalty equal to a percentage
of the net sales of products sold by the Company and license revenue received by
the Company.
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. Additional development services and testing, to be performed
principally by HelloSoft, Inc. ("Hellosoft") of San Jose, California, a third
party consultant are necessary to complete the commercialization of the product
development. The success of the Company's Semiconductor Segment is dependent
upon the successful completion of development and testing of its broadband
technology. 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. Accordingly it is reasonably possible that the carrying amount of
the technology license may be reduced materially in the near future.
The agreement with Adaptive was amended November 26, 2004 (see Note 17).
F-14
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - 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, 2004 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 $287,570 and
$379,980 for the years ended October 31, 2004 and 2003, respectively. Based upon
information received from the Company's film distributor in January 2005,during
the quarter ended October 31, 2004 the Company recorded an impairment charge of
$977,779 and reduced the carrying value of its film in distribution to
$1,021,722. The impairment charge was due to higher than expected distribution
costs and lower than expected average retail selling price for the DVD.
The Company had amortization costs of $142,691 and $192,889 for the years ended
October 31, 2004 and 2003, respectively, for the film. The total film production
costs and related amounts capitalized are as follows:
OCTOBER 31,
2004 2003
----------- -----------
Released films $2,335,101 $2,335,101
Less cumulative amortization of film production
costs (1) 1,313,379 192,889
----------- -----------
Total film production costs capitalized for
released films 1,021,722 2,142,212
Films in production -- --
Films in development or pre-production -- --
----------- -----------
Total film production costs capitalized, net $1,021,722 $2,142,212
=========== ===========
(1) In the fourth quarter of fiscal 2004, the Company recorded a fourth quarter
impairment charge to its film in distribution totaling $977,799.
Based on anticipated future revenues, amortization of the costs of the film in
distribution are estimated to be:
2005 $ 83,612
2006 193,918
2007 155,572
2008 155,572
2009 113,328
Thereafter 319,720
------------
$ 1,021,722
============
NOTE 7- DEFERRED FINANCING COST
At October 31, 2004, deferred financing cost consisted of costs incurred in
connection with the sale of $1,350,000 of 7% convertible debentures:
Deferred financing cost $265,840
Less: accumulated amortization 78,427
---------
Deferred financing cost, net $187,413
=========
Amortization of deferred financing cost for the year ended October 31, 2004 was
$78,427..
F-15
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONVERTIBLE NOTES PAYABLE
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 6). 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:
At October 31,
2004 2003
---- ----
Note payable (1) $ 140,000 $ 250,000
Notes payable (ten notes) (2) 483,000 483,000
Note payable, 9% interest (3) 10,000 10,000
Notes payable (four notes), 12% interest (4) 180,000 360,000
Notes payable (eight notes), 12% (5) 100,000 --
-------------------------
TOTAL $ 913,000 $1,103,000
=========================
(1) Due when receipts received by the Company from the joint venture (see note
6) exceed $375,000.
(2) Due when receipts received by the Company from the joint venture (see note
6) exceed $2,250,000.
(3) Due when receipts received by the Company from the joint venture (see note
6) 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 remaining notes until the next round of financing is
completed.
(5) On September 21, 2004, the Company entered into eight identical loan
agreements totaling $100,000. The loan is evidenced by a promissory note dated
September 21, 2004 ("the Promissory Note") issued by the Company to the lender.
The principal amount of the loan and any accrued and unpaid interest is due and
payable on June 21, 2005. The Company may prepay the loan in whole or in part at
any time without penalty. All unpaid interest shall be converted into common
shares of the Company's stock equal to the interest on the principal amount
divided by the applicable conversion price (40% of the average market price for
the previous 10 trading days before conversion).
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 which was charged to financing costs during the
fiscal year ended October 31, 2003.
NOTE 9 - CONVERTIBLE DEBENTURES
In December 2003, the Company completed a private placement to certain private
and institutional investors of $1 million in principal amount of its three year
7% Convertible Debentures (the "Debentures") and signed commitments to place an
additional $1,000,000 of such Debentures (the "Additional Debentures") upon the
effectiveness of the Company's registration statement (the "Registration
Statement") covering the Common Stock underlying the Debentures. The
Registration Statement was originally filed on February 11, 2004. In April and
May 2004, certain holders of the Debentures waived the registration statement
effectiveness condition and purchased an aggregate of $350,000 in principal
amount of Debentures, satisfying their post effectiveness commitments. The
Registration Statement was declared effective by the Securities and Exchange
Commission on August 16, 2004 solely with respect to the Common Stock underlying
the $1 million in principal amount of Debentures and related securities issued
as of December 2003. As the registration statement covering the Common Stock
underlying the Additional Debentures was not declared effective by the specified
date of June 28, 2004, the Company will not be issuing Additional Debentures for
the remaining $650,000 under this transaction.
F-16
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the issuance of the Debentures in December 2003, the Company
issued five-year warrants to purchase up to 6,666,667 shares of the Company's
Common Stock, at a per share exercise price of $0.25, subject to cashless
exercise provisions. In connection with the issuance of the additional
Debentures in April and May 2004, the Company issued five-year warrants to
purchase up to 2,333,332 shares of the Company's Common Stock, at a per share
exercise price of $0.25, subject to cashless exercise provisions.
The holders of the Debentures can convert their debt into shares of the
Company's common stock at $.15 per share subject to certain dilution
adjustments.
Accrued interest under the Debentures may be paid in cash or Common Stock. In
the event of an uncured default, as defined, or a non-permitted sale of
securities, the holders of the Debenture can require the Company to redeem their
Debentures. Providing that the certain conditions are met, the Debentures
automatically convert into common shares on the third anniversary of issuance.
In addition, under certain circumstances, the Company can require the conversion
of the Debentures before such time.
The gross proceeds of the $1,000,000 in December of 2003 were allocated 57.73%
or $577,259 to the Debenture and 42.27% or $422,741 to the warrants. The
conversion price of the debentures was below the market price of the Company's
common stock at December 31, 2003, which resulted in a beneficial conversion
feature relating to the first $1,000,000 of $577,259. In accordance with EITF
00-27 the amount allocated to the beneficial conversion feature was limited to
the net proceeds of the offering less the value allocated to the warrants issued
to the purchasers.
The gross proceeds of the $100,000 in April of 2004 were allocated 52.66% or
$52,659 to the debenture and 47.34% or $47,341 to the warrants. The conversion
price of the debentures was below the market price of the Company's common stock
at April 20, 2004, which resulted in a beneficial conversion feature of $52,659.
In accordance with EITF 00-27 the amount allocated to the beneficial conversion
feature was limited to the net proceeds of the offering less the value allocated
to the warrants issued to the purchasers.
The gross proceeds of the $250,000 in May of 2004 were allocated 56.87% or
$142,186 to the debenture and 43.13% or $107,814 to the warrants. The conversion
price of the debentures was below the market price of the Company's common stock
at May 7, 2004, which resulted in a beneficial conversion feature of $142,186.
In accordance with EITF 00-27 the amount allocated to the beneficial conversion
feature was limited to the net proceeds of the offering less the value allocated
to the warrants issued to the purchasers.
During the year ended October 31, 2004, $317,500 of principal amount of
Debentures plus accrued interest of $13,945 were converted into 2,209,631 shares
of the Company's Common Stock.
In connection with this private placement, the Company issued to the placement
agent warrants to purchase 900,000 shares of the Company's Common Stock valued
at $121,018 and incurred $144,822 of other debt issuance costs. Such amount was
recorded as deferred financing costs and is being charged to interest expense
over the term of the loan. The warrants to purchase 666,667 shares of common
stock expire on December 31, 2008 and the warrants to purchase 66,666 shares of
common stock expire on April 20, 2009 and the warrants to purchase 166,667
shares of Common Stock expire on May 7, 2009. In each case, the warrants are
exercisable at $.15 per share.
The Company paid in full ($300,000 plus $3,540 of accrued interest) the 7%
convertible debenture entered into on October 31, 2003 with a maturity date of
April 30, 2004 out of the proceeds it received from the above December 31, 2003
private placement.
F-17
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With respect to the Debentures that were placed in April and May 2004 in an
aggregate principal amount of $350,000, the Company may be required to remit to
these purchasers an aggregate amount of $350,000 upon a demand for rescission by
them as these securities may have been sold in violation of Section 5 of the
Securities Exchange Act of 1933 as amended. As of the filing of the Company's
annual report on this Form 10-KSB for the year ended October 31, 2004, request
for no such rescission has been made.
Under the agreements with the purchasers of the December 2003 Debentures, the
Company is obligated to pay to the Debenture holders liquidated damages
associated with the late filing of the Registration Statement and the missed
Registration Statement required effective date of March 30, 2004. Liquidated
damages are equal to (x) 2% of the principal amount of all the Debentures during
the first 30-day period following late filing or effectiveness and (y) 3% of the
principal amount of all Debentures for each subsequent 30-day period (or part
thereof). These liquidated damages aggregate to $160,000. At their option, the
Debenture holders are entitled to be paid such amount in cash or shares of
Common Stock at a per share rate equal to the effective conversion price of the
Debentures, which is currently $0.15.
NOTE 10 - NOTES PAYABLE
The Company has the following notes payable outstanding at October 31:
2004 2003
------------- -------------
Note Payable (five individual notes with identical terms),
unsecured, 6% interest, due January 31, 2005 $ 256,886 $ 256,886
Note payable, 10% interest, unsecured, due on demand with
three days notice 483,424 483,425
Note Payable, unsecured, 15% interest, due March 24, 2005 (1) 250,000 --
Note payable(2) 12,000 --
------------- -------------
TOTAL $ 1,002,310 $ 740,311
============= =============
(1) On September 24, 2004, the Company entered into a loan agreement with a
stockholder pursuant to which the Company borrowed $250,000. The loan is
evidenced by a promissory note dated as of September 24, 2004 (the "Promissory
Note") issued by the Company to the lender. The principal amount of the loan and
any accrued and unpaid interest is due and payable on March 24, 2005. The
Company may prepay the loan in whole or in part at any time without penalty.
Interest on the principal amount of the loan outstanding accrues at the annual
rate of 15% and is payable on the earlier of December 24, 2004 or the maturity
of the loan, or upon prepayment of the principal. The Company received net
proceeds of $220,000 following the payment of transaction related fees and
expenses. The Company's obligations under the Promissory Note become immediately
due and payable if: (i) the Company's failure to pay any obligations thereunder
when due continues for more than ten days after demand for payment has been
made; (ii) any representation or warranty made by the Company in the loan
documents are false or misleading in any material respect at the time made;
(iii) the Company becomes insolvent or a bankruptcy or similar proceeding is
initiated by or against the Company; (iv) a liquidator or receiver is appointed
for, or any governmental agency takes control of, the Company or a substantial
portion of its assets or (v) a judgment of $400,000 is entered against the
Company. Also upon the occurrence of any of the foregoing, interest on the loan
accrues at the annual rate of 18% or the maximum amount allowed by law. Interest
owing in December 2004 was repaid from a subsequent loan made to the Company in
December 2004.
(2) On March 26, 2004, the Company entered into a loan agreement, pursuant to
which the Company has borrowed $12,000 from the Lender. The loan is evidenced by
an Installment Note dated as of March 26, 2004 (the" Installment Note") issued
by the Company to such lender. The principal amount of the loan and any accrued
F-18
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and unpaid interest at a rate of 5% were due and payable on July 26, 2004. On
July 26, 2004, the Lender agreed to extend payment and unpaid accrued interest
until November 15, 2004.
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consist of the following at October 31:
2004 2003
----------- -----------
Accrued Officers Compensation, bonuses and payroll $ 495,676 $ 494,248
Professional fees 537,796 471,213
Interest payable 590,390 478,289
Accrued liquidating damages 136,000 --
Consulting fees 184,851 45,251
Miscellaneous 63,158 255,882
----------- -----------
$2,007,871 $1,744,883
=========== ===========
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.
F-19
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each share of the Series B Preferred Stock is convertible into shares of the
Company's Common Stock by dividing $1,000 by the conversion price. The
conversion price is the fair market value of the Company's Common Stock at the
time of conversion, but not to be less than $.34 per share, subject to
adjustment, and not to exceed $4.00 per share, subject to adjustment. Holders of
the Series B Preferred Stock were granted piggy-back registration rights to
register common shares reserved for such conversion.
In April 2002, the Company issued 3,192 shares of its Series B Preferred Stock,
with redemption and liquidation preference of $3,192,000, in connection with the
development and license agreement discussed in Note 6. As of October 31, 2004
and 2003, there were 4,000 authorized shares of 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. 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 C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock were issued between May and August 2003, to
collateralize proposed loans to the Company that never materialized. By their
terms, the share certificates representing these series are returnable to the
Company upon demand in the event the proposed loans are not completed by January
31, 2004. None of the proposed loans were ever concluded. While certain of the
issued certificates have been returned, certain others remain outstanding
despite the Company's request for their return. However, none of the Series C,
D, E, F and G are classified as outstanding as of October, 31, 2004 as such
shares are issuable upon the funding of the loans.
NOTE 13 - STOCKHOLDERS' (DEFICIENCY) EQUITY
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 will entitle the
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 expired on August 21, 2004.
F-20
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004:
During the quarter ended January 31, 2004, the Company issued
(i) 280,003 shares of common stock valued at $44,881 as consideration for the
extension of the due date of certain convertible notes payable;
(ii) 40,000 shares of common stock for deferred compensation of $10,000;
(iii) 1,192,501 shares to various investors for cash proceeds of $224,500;
(iv) 1,000,000 shares of common stock for compensation to three officers and one
employee valued at $230,000;
(v) 3,850,000 shares of common stock for consulting services valued at $946,000;
(vi) 15,000 shares of common stock to a vendor for services valued at $2,250.
(vii) 400,000 shares of common stock for accrued bonus of $100,000.
During the quarter ended April 30, 2004, the Company issued
(i) 4,000 shares of common stock for a performance bonus of $1,080.
(ii) 113,347 shares of common stock to a vendor for consulting services valued
at $26,275.
(iii) 1,033,334 shares to various investors for cash proceeds of $155,000.
During the quarter ended July 31, 2004, the Company issued
(i) 690,258 shares of common stock to convert $100,000 of convertible debentures
plus $3,539 of accrued interest.
During the quarter ended October 31, 2004, the Company issued
(i) 2,681,250 shares of common stock to various investors for cash proceeds of
$214,500.
(ii) 38,879 shares of common stock for consulting services valued at $7,776.
(iii) 53,047 shares of common stock to a vendor for services valued at $7,957.
(iv) 30,000 shares of common stock valued at $4,500 as consideration for the
extension of the due date of certain convertible notes payable.
(v) 1,519,373 shares of common stock to convert $317,500 of convertible
debentures plus $8,179 of accrued interest.
(vi) 880,952 shares of common stock for research and development services valued
at $92,500.
(vii) 283,333 shares of common stock for liquidation damages valued at $24,000.
F-21
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 non-statutory 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.
In January 2003, the Board of Directors of the Company approved the 2003
Consultant Stock Plan ("2003 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 2003 Plan. A total of 3,200,000 shares of common stock have been issued
under the 2003 Plan to four consultants. As of October 31, 2004 no options have
been awarded under the 2003 Plan.
F-22
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 30, 2003, the Company granted one of its advisory board member options
under the 2000 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.
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:
WEIGHTED
WEIGHTED AVERAGE
UNDER THE AVERAGE EXERCISE OUTSIDE EXERCISE
PLANS PRICE THE PLANS PRICE
----------- ------------- ----------- ------------
Balance at November 1, 2002 2,168,750 1.29 4,192,500 2.16
Options granted:
In the Plans 40,000 0.31 -- --
Outside the option plans -- -- 1,500,000 0.64
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
Options granted:
In the Plans -- -- -- --
Outside the option plans -- -- -- --
Options expired/cancelled:
In the Plans (10,000) (2.36) -- --
Outside the option plans -- -- (201,050) (1.59)
Options exercised in the plans -- -- -- --
----------- ------------- ----------- ------------
Balance at October 31, 2004 2,178,750 3,991,250
Exercisable at October 31, 2004 2,077,084 1.27 3,366,250 2.38
Exercisable at October 31, 2005 2,165,417 1.25 2,700,000 1.34
Exercisable at October 31, 2006 2,178,750 1.25 2,825,000 1.31
The exercise price for options outstanding as of October 31, 2004 ranged from
$0.31 to $4.40.
At October 31, 2004, 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.
F-23
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value at date of grant for options granted during 2003
was $0.44 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:
2004 2003 2002
Risk-free interest rates - 1.00% to 1.50% 5.00% to 5.50%
Expected option life in years - 5 5
Expected stock price volatility 72.32% to 228.70% 51.65% to 53.89%
Expected dividend yield - 0% 0%
WARRANTS GRANTED
On February 12, 2003, the Company granted a warrant 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 warrant 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.
On November 1, 2003, the Company granted warrants to purchase 100,000 shares of
its common stock at the exercise price of $.15 in connection with legal services
performed for the Company. The fair value of the stock warrants estimated on the
date of grant using the Black-Scholes option pricing model is $.15 per share or
$21,147.
On December 31, 2003 the Company issued warrants to purchase 6,666,667 shares of
its Common Stock at an exercise price of $.25 in connection with the placement
of $1,000,000 of Debentures (see note 9). The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes option pricing model is
approximately $.08 per share or $577,259.
On December 31, 2003 the Company issued a warrant to purchase 666,667 shares of
its Common Stock at an exercise price of $.15 to the placement agent in
connection with the placement of $1,000,000 of Debentures. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model is $.14 per share or $93,333 (see note 9)
The Company granted to four convertible note holders warrants to purchase
120,003 shares of its Common Stock at an exercise price of $.25 in connection
with the extension of the convertible notes due date. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model is $.13 per share or $15,992.
On April 20, 2004 the Company issued warrants to purchase 666,666 shares of its
Common Stock at an exercise price of $.25 in connection with the $100,000 of
Debenture (see note 9). The fair value of the stock warrants estimated on the
date of grant using the Black-Scholes option pricing model is approximately $.08
per share or $52,659.
F-24
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 20, 2004, the Company granted a warrant to purchase 66,666 shares of
its Common Stock at the exercise price of $.15 to the placement agent in
connection with the placement of $100,000 of Debenture. The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes option
pricing model is $.15 per share or $9,990.
On May 7, 2004 the Company issued warrants to purchase 1,666,666 shares of its
Common Stock at an exercise price of $.25 in connection with the $250,000 of
Debenture (see note 9). The fair value of the stock warrants estimated on the
date of grant using the Black-Scholes option pricing model is approximately $.09
per share or $142,186.
On May 7, 2004, the Company granted a warrant to purchase 166,667 shares of its
Common Stock at the exercise price of $.15 to the placement agent in connection
with the placement of $250,000 of Debenture. The fair value of the stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model is $.15 per share or $17,695.
On October 1, 2004, the Company granted warrants to purchase 120,000 shares of
its Common Stock at the exercise price of $.25 in connection with the extension
of four convertible promissory notes that were originally due 11/21/03 and
extended once to January 7, 2004 and extended once again with the due date left
open. The fair value of the stock warrants estimated on the date of grant using
the Black-Scholes option pricing model is $.25 per share or $4,114.
WARRANTS EXERCISED
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.
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.
WARRANTS EXPIRED
During the year ended October 31, 2004, warrants to purchase 154,943 shares of
common stock expired.
At October 31, 2004, the Company had outstanding warrants to purchase shares of
Common Stock as follows:
NUMBER OF EXERCISE
SHARES PRICE EXPIRATION DATE
---------------------------------------------------------------------
GRANT DATE
June 14, 2001 50,000 $ 2.50 June 14, 2006
June 14, 2001 25,000 5.00 June 14, 2006
June 14, 2001 25,000 10.00 June 14, 2006
November 5, 2001 200,000 0.51 November 5, 2005
February 11, 2002 50,000 0.75 February 11, 2005
February 11, 2002 50,000 1.25 February 11, 2005
February 11, 2002 100,000 1.75 February 11, 2005
February 11, 2002 100,000 2.25 February 11, 2005
February 12, 2003 500,000 0.40 February 12, 2005
October 31, 2003 600,000 0.15 September 30, 2006 (2)
December 31, 2003 7,333,333 .25 December 31, 2008
April 20, 2004 666,666 .25 April 30. 2009 (2)
April 20, 2004 66,667 .15 April 30, 2009 (2)
May 7, 2004 1,666,666 .25 May 31, 2009 (2)
May 7, 2004 166,667 .15 May 31, 2009 (2)
October 1, 2004 120,000 .25 October 1, 2007
January 11, 2004 100,000 .15 January 11, 2005
------------
Exercisable at October 31, 2004 11,819,999 0.15 to 10.00 November 17, 2005 to
============ May 31, 2009
(1) Lesser of $6.00 or 50% of market ($0.14 at 10/31/04). (2) Under certain
conditions the Company may accelerate the expiration date.
F-25
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 11,819,999
Options to purchase common stock 6,170,000
Convertible notes payable and accrued interest 3,910,750
7% convertible debenture and accrued interest 7,220,206
Series B Preferred stock (based on a floor conversion
price of $.34 at October 31, 2004) 9,388,235
------------
Total as of October 31, 2004 38,509,190
============
Substantial issuances after October 31, 2004 through
January 25, 2005
Common stock issuable upon conversion of convertible
debentures and accrued interest 1,115,289
============
Sale of common stock for cash 1,005,000
============
Common stock issued in connection with
consulting agreements 2,928,571
============
Common stock issued for liquidated damages 586,665
============
NOTE 14 - INCOME TAXES
At October 31, 2004, the Company had approximately $44,735,000 of net operating
loss carry forwards for income tax purposes, which expire as follows:
Net Operating
Year Loss
------ -------------
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 10,230,000
2023 4,143,000
2024 3,633,000
--------------
44,735,000
==============
At October 31, 2004 and 2003, the Company has a deferred tax asset of
approximately $22,104,000 and $20,334,000, 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 $1,770,000 (2004) and
$1,508,000 (2003). 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.
F-26
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LINE OF CREDIT
On July 21, 2004, the Company entered into a one-year $100,000 revolving line of
credit with a bank. The line of credit has a floating interest rate of the prime
rate set by the bank plus a margin of .500%. The initial interest rate is
approximately 1.04%. Ray Willenberg, Jr, Chairman of the Company, has guaranteed
the repayment of the line of credit. As of October 31, 2004, no money was
borrowed under the line of credit. The above line expires on August 10, 2005.
RESEARCH AND DEVELOPMENT AGREEMENT
The Company and HelloSoft, Inc. (the "Strategic Partner") entered into an
amendment, effective as of October 11, 2004 (the "Amendment"), to their Services
Agreement dated as of March 31, 2004 (the Original Agreement") pursuant to which
the Strategic Partner will provide development services relating to the
Company's Semiconductor Technologies. The Original Agreement provides that, upon
the Company's request from time to time, the Strategic Partner is to provide
services to be specified pursuant to mutually agreed upon terms. The Amendment
represents the first project that the Strategic Partner is undertaking pursuant
to the Original Agreement.
In consideration for the services being rendered under the Amendment, the
Company has agreed to pay to the Strategic Partner $185,000, half of which paid
in shares of the Company's common stock, , at 25% discount from the per share
closing price of the Company's Common Stock on the day of the commencement of
services. The other half will be remitted in cash, periodically, upon completion
by the Strategic Partner and acceptance by the Company of specified milestones.
The Strategic Partner has assigned to the Company the rights to any
improvements, developments, discoveries or other inventions that may be
generated by the Strategic Partner in its performance of the services to be
provided under the Amendment.
LEASES
The Company's future minimum lease payments are as follows: Years ending October
31:
2005 $15,194
---- -------
Rent expense for the years ended October 31, 2004 and 2003 was $122,506 and
$177,462, 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, 2004 and 2003, uninsured cash balances were approximately $63,744
and $0, respectively. The Company believes it is not exposed to any significant
credit risk for cash.
F-27
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEGAL DISPUTES
The Company has been served with the following three summonses and complaints,
each filed on July 26, 2004 in the Superior Court of California (San Diego
County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust v. New Visual
Corporation, Top Secret Surf Productions, LLC and Does 1 through 100; Gerald
Handler, Trustee of the Handler Children Trust v. New Visual Corporation, Top
Secret Surf Productions, LLC and Does 1 through 100; and Wayne Lill Jr., Trustee
of the Wayne Lill Trust dated 12-22-99 v. New Visual Corporation, Top Secret
Surf Productions, LLC and Does 1 through 100. Each complaint relates to a
convertible promissory note issued by us in December 2001 and payable, according
to its terms, out of film distributions that we receive. Each complaint alleges,
among other things: that we have failed to pay the amount due and owing under
the convertible promissory note issued to the plaintiff despite demands for
payment; that our management has acted to forestall payments to our creditors,
including the plaintiff; and that we fraudulently induced the plaintiff to enter
into the convertible promissory note. The plaintiffs are seeking: money damages
in the aggregate amount of $375,000, plus interest; an accounting; an order
compelling the conveyance of monies to the plaintiffs and punitive damages.
The three complaints filed on July 26th were dismissed without prejudice on
August 11, 2004.
The Company has been served with the following additional summons and complaint,
filed on July 30, 2004 in the Superior Court of California (San Diego County):
Gerald Handler, Trustee of the Gerald and Judith Handler Trust and Trustee of
the Handler Children Trust, and Wayne Lill Jr., Trustee of the Wayne Lill Trust
dated 12-22-99 v. New Visual Corporation, New Visual Entertainment, Inc., Top
Secret Productions, LLC and Does 1 through 20. The complaint makes substantially
the same allegations as set forth in the complaints described above and seeks:
money damages in the aggregate of amount of $375,000, plus interest; an order
avoiding alleged fraudulent transfers; an injunction against disposition of
allegedly fraudulently transferred monies; the appointment of a receiver; a writ
of attachment and imposition of a constructive trust.
According to their terms, each of the convertible promissory notes underlying
these claims becomes due and payable upon our receipt of a specified amount of
distributions from our Film and is payable out of those distributions that we
have actually received. The convertible promissory notes underlying these claims
were converted by the plaintiffs into shares of our common stock in March 2002.
The Company filed an answer to the complaints filed on July 30, 2004, denying
all allegations. Additionally, we were successful in our opposition of
Plaintiff's attempt to seek a Writ of Attachment.
The Company believes that it has meritorious defenses to these claims and, if
necessary, intend to vigorously defend this matter, although the ultimate
outcome cannot be determined at this time. The litigation is thus in its
preliminary stages and no substantive discovery has been conducted in the case.
Our current limited financial resources will have a material adverse effect on
our ability to adequately defend ourselves against these claims, prosecute any
counterclaims that may be available to us or satisfy any judgment in the event
that any of these claims is determined adversely to us. Accordingly, the Company
has not recorded any liability relating to this lawsuit.
F-28
NEW VISUAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Semiconductor Entertainment
Business Business Unallocable Totals
------------- ------------- -------------- ------------
For the Year Ended October 31, 2004:
Net Sales - Domestic $ -- $ 94,788 $ -- $ 94,788
============= ============= ============== ============
Net Sales - Foreign $ -- $ 191,750 $ -- $ 191,750
============= ============= ============== ============
Operating Loss $ (1,744,882) $ (1,320,490) $ (1,393,735) $(4,459,107)
============= ============= ============== ============
Depreciation $ 3,665 $ 13,763 $ -- $ 17,428
============= ============= ============== ============
Total Identifiable Assets $ 5,940,945 $ 1,043,063 $ 143,328 $ 7,127,236
============= ============= ============== ============
For the Year Ended October 31, 2003:
Net Sales - Domestic $ -- $ 294,750 $ -- $ 294,750
============= ============= ============== ============
Net Sales - Foreign $ -- $ 85,230 $ -- $ 85,230
============= ============= ============== ============
Operating Loss $ (334,746) $ (211,681) $ (3,637,096) $(4,183,523)
============= ============= ============== ============
Depreciation $ 8,212 $ 13,686 $ 1,334 $ 23,232
============= ============= ============== ============
Total Identifiable Assets $ 5,761,429 $ 2,181,161 $ 328,760 $ 8,271,350
============= ============= ============== ============
NOTE 17 - SUBSEQUENT EVENTS-
COMMON STOCK
IN NOVEMBER 2004, THE COMPANY:
o issued 1,115,289 shares of common stock issuable as the result of the
conversion of convertible debentures.
o sold an aggregate 130,000 shares of common stock to two investors for total
proceeds of $10,400.
IN DECEMBER 2004, THE COMPANY:
o issued 586,665 shares of common stock for liquidated damages
o issued 2,928,571 shares of common stock to one company in exchange for past
consulting services valued at $188,400.
o sold an aggregate 350,000 shares of common stock to two investors for total
proceeds of $28,000.
IN JANUARY 2005, THE COMPANY:
o sold an aggregate 525,000 shares of common stock to investors for total
proceeds of $42,000
o issued 296,139 shares of common stock issuable as the result of the conversion
of convertible debentures.
F-29
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.
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
58
(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 $ 2,939
Legal fees and expenses $59,000
Blue sky filing fees and expenses
(including counsel fees) $ 2,500
Accounting fees and expenses $30,000
Printing and engraving expenses $ 5,000
Miscellaneous expenses $ 5,000
Total $104,439
59
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. In June 2002, we issued to
(i) two investors a total of 105,000 shares of Common Stock upon the conversion
of convertible promissory notes, resulting in the cancellation of principal
accrued interest of $105,000 then outstanding and due under these notes; and
(ii) seven investors $138,000 in principal amount of our convertible notes,
which notes are convertible into shares of our Common Stock at a per share
conversions price ranging between $0.90 and $1.00.
2. In July 2002, we issued to
(i) four investors a total of 125,334 shares of Common Stock for aggregate
consideration of $75,200;
(ii) two investors 105,000 shares of Common Stock upon the conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest of $84,000 then outstanding and due under these notes;
(iii) an investor $26,000 in principal amount of our convertible note, which
note is convertible into shares of our Common Stock at a per share conversion
price of $0.65; and
(iv) a consultant 350,000 shares of Common Stock in consideration of services
rendered.
3. In August 2002, we issued to
(i) an investor 75,000 shares of Common Stock for aggregate consideration of
$45,000; and
(ii) four investors an aggregate of $35,000 in principal amount of our
convertible notes, which notes are convertible into shares of our Common Stock
at a per share conversions prices ranging between $0.70 and $0.82.
4. In September 2002, we issued to
(i) two investors a total of 239,000 shares of Common Stock for aggregate
consideration of $157,003;
(ii) two investors a total of 104,484 shares of Common Stock upon the conversion
of convertible promissory notes, resulting in the cancellation of principal and
accrued interest of $69,000 then outstanding and due under these notes;
(iii) a consultant 150,000 shares of Common Stock in consideration of services
rendered;
(iv) a consultant 150,000 shares of Common Stock in consideration of services
rendered;
(v) an executive officer 50,000 shares of Common Stock in lieu of deferred
compensation of approximately $30,000; and
(vi) nine investors an aggregate of $176,000 in principal amount of our
convertible notes, which notes are convertible into shares of our Common Stock
at a per share conversions prices ranging between $0.42 and $0.70.
5. In October 2002, we issued to
(i) an investor 151,786 shares of Common Stock upon the conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest of $75,000 then outstanding and due under these notes; and
60
(ii) four investors $76,500 in principal amount of our convertible notes, which
notes are convertible into shares of our Common Stock at a per share conversion
price of $0.42.
6. In November 2002, we issued to
(i) two investors an aggregate of $85,000 in principal amount of our convertible
notes, which notes are convertible into shares of our Common Stock at a per
share conversion price of $0.39
(ii) five investors a total of 166,667 shares of Common Stock for aggregate
consideration of $42,500;
(iii) a "non-US Person" (as such term is defined in Regulation S of the Act)
183,179 shares of Common Stock for aggregate consideration of $27,164;
(iv) three investors a total of 96,612 shares of Common Stock upon the
conversion of convertible promissory notes, resulting in the cancellation of
principal and accrued interest of $48,000 then outstanding and due under these
notes; and
(v) a consultant 300,000 shares of Common Stock for services rendered; and
(vi) an executive officer 32,258 shares of Common Stock in lieu of deferred
compensation of approximately $20,000.
7. In December 2002, we issued to
(i) 13 investors a total of 367,135 shares of Common Stock for aggregate
consideration of $98,740;
(ii) a "non-US Person" (as such term is defined in Regulation S of the Act)
1,180,454 shares of Common Stock for aggregate consideration of $181,038;
(iii) an investor 379,121 shares of Common Stock upon the conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest of $150,000 then outstanding and due under these notes;
(iv) two consultants a total of 375,000 shares of Common Stock for services
rendered; and
(v) a director and former officer 56,542 shares of Common Stock in lieu of
$35,000 of compensation then owed.
8. In January 2003, we issued to
(i) 13 investors a total of 1,878,528 shares of Common Stock for aggregate
consideration of $471,505, of which $337,535 was received on 2002;
(ii) two "non-US Persons" (as such term is defined in Regulation S of the Act)
638,683 shares of Common Stock for aggregate consideration of $109,573; and
(iii) a director 46,875 shares of Common Stock in lieu of deferred compensation
of approximately $30,000.
9. In February 2003, we issued to
(i) 21 investors a total of 1,220,827 shares of Common Stock for aggregate
consideration of $267,643;
(ii) a "non-US Person" (as such term is defined in Regulation S of the Act)
1,652,361 shares of Common Stock for aggregate consideration of $249,016; and
(iii) an investor $100,000 in principal amount of our convertible notes, which
notes are convertible into shares of our Common Stock at a per share conversion
price of $0.38
10. In March 2003, we issued to
61
(i) 10 investors a total of 954,107 shares of Common Stock for aggregate
consideration of $176,860;
(ii) a "non-US Person" (as such term is defined in Regulation S of the Act)
1,039,848 shares of Common Stock for aggregate consideration of $132,148; and
(iii) an investor 40,476 shares of Common Stock upon the cashless exercise of
outstanding warrants;
(iv) an investor $20,000 in principal amount of our convertible notes, which
notes are convertible into shares of our Common Stock at a per share conversion
price of $0.15 and which were issued in exchange for two promissory notes issued
in June and October 2002 with aggregate principal and accrued interest due and
outstanding at the time of the exchange of $25,500; and
(v) an investor 133,333 shares of Common Stock upon the conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest of $20,000 then outstanding and due under these notes.
11. In April 2003, we issued to
(i) 10 investors a total of 806,473 shares of Common Stock for aggregate
consideration of $121,971; and
(ii) a "non-US Person" (as such term is defined in Regulation S of the Act)
1,349,664 shares of Common Stock for aggregate consideration of $194,673.
12. In May 2003, we issued to
(i) 11 investors a total of 756,166 shares of Common Stock for aggregate
consideration of $113,425;
(ii) a "non-US Person" (as such term is defined in Regulation S of the Act)
473,023 shares of Common Stock for aggregate consideration of $69,588;
(iii) four investors an aggregate of $396,000 in principal amount of our
convertible notes, which notes are convertible into shares of our Common Stock
at a per share conversion price of $1.00 and which were issued in exchange for
four promissory notes issued in May 2002 with aggregate principal and accrued
interest due and outstanding at the time of the exchange of $360,000; and
(iv) an investor 31,250 shares of Common Stock upon the conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest of $10,000 then outstanding and due under these notes.
13. In June 2003, we issued to
(i) 13 investors a total of 1,559,896 shares of Common Stock for aggregate
consideration of $229,985;
(ii) an investor $16,500 in principal amount of our convertible notes, which
notes are convertible into shares of our Common Stock at a per share conversion
price of $0.39 and which were issued in exchange for one promissory note issued
in September 2002 with aggregate principal and accrued interest due and
outstanding at the time of the exchange of $15,000; and
(iii) an investor 15,625 shares of Common Stock upon the conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest then outstanding and due of $5,000 under these notes.
14. In July 2003, we issued to
(i) 15 investors a total of 1,447,400 shares of Common Stock for aggregate
consideration of $217,110;
(ii) an investor 55,000 shares of Common Stock upon the conversion of a
convertible promissory note, resulting in the cancellation of principal and
interest then outstanding and due of $16,500; and
62
(iii) two investors an aggregate of $98,000 in principal amount of our
convertible notes, which notes are convertible into shares of our Common Stock
at a per share conversion prices between $0.33 to $0.60.
15. In August 2003, we issued to
(i) an investor 300,000 shares of Common Stock upon the exercise of outstanding
warrants at a per share exercise price of $0.06; and
(ii) to seven investors a total of 450,100 shares of Common Stock for aggregate
consideration of $67,515.
16. In September 2003, we issued to
(i) an investor 700,000 shares of Common Stock upon the exercise of outstanding
warrants at a per share exercise price of $0.06; and
(ii) to 13 investors a total of 593,667 shares of Common Stock for aggregate
consideration of $89,050.
17. In October 2003, we issued to
(i) seven investors a total of 450,000 shares of Common Stock upon conversion of
convertible promissory notes, resulting in the cancellation of principal and
accrued interest then outstanding and due of $90,000; and
(ii) 12 investors a total of 815,433 shares of Common Stock for aggregate
consideration of $122,315.
18. In November 2003, we issued to
(i) five investors a total of 160,834 shares of Common Stock for aggregate
consideration of $29,500;
(ii) a provider of legal services three year warrants to purchase up to 100,000
shares of our Common Stock. The warrants provide that if the price of the 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; and
(iii) to a "non-US Person (as such term is defined in Regulation S under the
Securities Act) $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 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;
and
(iv) In connection with the private placements referred to in the immediately
preceding paragraph, we issued to an entity, 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 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.
19. In December 2003, we issued to
(i) two consultants a total of 2.8 million shares of Common Stock valued at
$700,000 in consideration of consulting services;
(ii) six investors a total of 931,667 shares of Common Stock for aggregate
consideration of $177,500;
(iii) four note holders a total of 106,668 shares of Common Stock in connection
with the extension of past due convertible notes
(iv) a service provider 15,000 shares of Common Stock in consideration of of
services rendered.
63
20. (a) As of December 2003, we entered into agreements with 16 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
trading day period) then, at our option, we may reduce the exercise period to 60
days following the end of such period.
In connection with the private placements referred to in the immediately
preceding paragraph, we have issued or will issue to one entity, 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. These warrants have other terms similar to those included in the
warrants issued to the investors in the private placement transaction described
in the preceding paragraph.
21. In January 2004, we issued to
(i) a consultant 1 million shares of our Common Stock valued at $240,000 in
consideration of consulting services;
(ii) a director (who is also an executive officer) 400,000 shares of Common
Stock in lieu of amounts owed of approximately $110,000;
(iii) a director (who is also an executive officer) 40,000 shares of Common
Stock in lieu of amounts owed of approximately $10,000;
(iv) a former executive officer 50,000 shares of Common Stock pursuant to his
employment agreement;
(v) an investor 100,000 shares of Common Stock for aggregate proceeds of
$17,500;
(vi) four note-holders a total of 173,335 shares of Common Stock in connection
with the extension of past due convertible notes;
(vii) a resigning executive officer 333,333 shares of Common Stock as part of
his severance package; and
(viii) two officers a total of 666,666 shares of Common Stock.
22. In February 2004, we issued to
(i) an executive officer 83,892 shares of Common Stock valued at $19,460 of
which 63,818 shares were issued as salary valued at $14,040, per his employment
agreement, and 20,074 shares were issued as a performance bonus;
(ii) a non-management employee 4,000 shares of Common Stock valued at $1,080
issued as a performance bonus;
(iii) to a service provider 29,455 shares of Common Stock in consideration of
services rendered; and
(iv) eight investors a total of 1,033,334 shares of Common Stock for aggregate
consideration of $155,000.
23. In April 2004, two of the investors referred to in paragraph 36 above waived
the registration statement effectiveness condition, and we issued to, and they
purchased, $100,000 in principal amount of our three-year 7% Convertible
Debentures.
24. In May 2004, four of the investors referred to in paragraph 36 above waived
the registration statement effectiveness condition, and we issued to, and they
purchased, $250,000 in principal amount of our three-year 7% Convertible
Debentures.
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25. In July 2004, we issued a total of 690,258 shares of Common Stock to two
purchasers of our 7% Convertible Debentures upon the conversion of such
debentures in respect of $100,000 in principal amount of debentures and accrued
interest.
26. In August 2004, we issued
(i) 375,000 shares of Common Stock for cash proceeds of $30,000;
(ii) 38,880 shares of Common Stock for compensation to our former CFO and Tatum
CFO partners valued at $7,776.
27. In September 2004, we issued 575,000 shares of Common Stock for cash
proceeds of $46,000;
28. In October 2004, we issued
(i) 30,000 shares of common stock valued at $4,500 in connection with the
extension of the due date of certain convertible promissory notes;
(ii) 1,600,000 shares of Common Stock for cash proceeds of $128,000;
(iii) 880,952 shares of Common Stock for research and development services
valued at $92,500;
(iv) 53,047 shares of Common Stock to a vendor for services valued at $7,957;
(v) 131,250 shares of Common Stock for cash proceeds of $10,500
29. In November 2004, we issued
(i) 1,115,289 shares of common stock issuable as the result of the
conversion of convertible debentures;
(ii) an aggregate 130,000 shares of common stock to two investors for total
proceeds of $10,400.
30. In December 2004, we issued
(i) 586,665 shares of common stock for liquidated damages;
(ii) 2,928,571 shares of common stock to one company in exchange for past
consulting services valued at $188,400;
(iii) an aggregate 350,000 shares of common stock to two investors for total
proceeds of $28,000.
31. In January, we issued
(i) an aggregate 525,000 shares of common stock to investors for total
proceeds of $42,000;
(ii) 296,139 shares of common stock issuable as the result of the conversion
of convertible debentures.
32. In February 2005, we issued
(i) 830,000 shares of Common Stock for cash proceeds of $66,400;
(ii) 413,341 shares of Common Stock for legal services valued at $70,268.
33. In March 2005, we issued 17,857 shares of Common Stock for the for converted
promissory note and interest valued at $7,500.
34. In April 2005, we issued
(i) 4,651,163 shares of Common Stock with a value of $744,186 in exchange for
surrender of 3,192 shares of Series B Convertible Preferred Stock having an
aggregate liquidation preference of $800,000.
(ii) to each of our Chief Executive Officer and Executive Vice President,
1,000,000 shares of Common Stock, and performance based options to purchase
7,000,000 shares of Common Stock at an exercise price of $0.17, which was equal
to the closing price of the common stock on the OTC Bulletin Board on the date
of grant. 1,000,000 shares of restricted common stock for which each option may
be exercised vest upon the consummation of a capital financing from which we
receive gross proceeds of at least $3.5 million and 6,000,000 of the shares for
which each option may be exercised vest upon release of a beta version of our
Semiconductor Technologies.
35. In May 2005, we issued
(i) to certain individual and institutional investors of $3.5 million in
aggregate principal amount of our three-year 7% Senior Secured Convertible
Debentures Series 05-01 and warrants to purchase 11,312,220 shares of our Common
Stock at a per share exercise price of $0.1547 and warrants to purchase
22,624,430 shares of Common Stock at a per share exercise price of $0.3094.
In connection with the private placement referred to in the immediately
preceding paragraph, we issued to one entity, as a finder's fee, warrants to
purchase 4,524,886 shares of Common Stock at an exercise price of $0.3094 per
share and warrants to purchase 1,131,222 shares of Common Stock at an exercise
price of $0.1547 per share.
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(ii) 437,500 shares of Common Stock to investors for cash proceeds of $35,000;
(iii) 357,444 shares of Common Stock upon conversion of a convertible
debenture and interest thereon valued at $53,617;
(iv) 2,000,000 shares of Common Stock in consideration of financial consulting
services.
36. In June 2005, we issued
(i) 550,167 shares of Common Stock upon conversion of a convertible debenture
and interest valued at $82,525;
(ii) 2,000,000 shares of Common Stock to a consultant for financial advisory
services;
(iii) 29,547 shares of Common Stock to Zaiq in connection with the anti-dilution
provisions in the Exchange Agreement.
37. In July 2005, we issued
(i) 739,000 shares of Common Stock upon conversion of a convertible debenture
and interest thereon valued at $110,850.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or Regulation S under such
Securities Act. Except with respect to securities sold under Regulation S, the
recipients of securities in each such transaction acquired the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
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")).
3.4 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.
4.3 Warrant, dated as of October 31, 2003 issued in favor of Melton Management
Limited (incorporated by reference to the Registration Statement filed on Form
SB-2 on February 11, 2004).
4.4 Form of Three Year New Visual Corporation 7% Convertible Debenture
(incorporated by reference to the Registration Statement filed on Form SB-2 on
February 11, 2004).
4.5 Form of Three Year Warrant issued to the Holders of the 7% Convertible
Debentures (incorporated by reference to the Registration Statement filed on
Form SB-2 on February 11, 2004).
4.6 Form of 7% Three Year Convertible Senior Convertible Debenture issued by New
Visual Corporation. (incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K filed on June 1, 2005 (the "June 1, 2005 8-K")).
4.7 Form of Common Stock Purchase Warrant issued by New Visual Corporation to
certain investors (incorporated by reference to Exhibit 4.2 of the June 1, 2005
8-K).
5.1 Opinion of Lawrence Kallaur.**
66
10.1 Agreement to Produce Film, dated April 9, 2000 between New Visual
Entertainment, Inc., Bruce Brown, Dana Brown and John-Paul Beeghly (incorporated
by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-KSB for
the period ended October 31, 2000 (the "2000 10-KSB"))
10.2 2000 Omnibus Securities Plan of New Visual Entertainment, Inc. incorporated
by reference to Appendix A of the Company's definitive Proxy Statement filed
with the Commission on May 2, 2000).
10.3 Form of Credit Agreement dated June 29, 2000 by the Company and each of the
following trusts: Epics Events Trust, Ltd.; Exodus Systems Trust, Ltd.; Prospect
Development Trust, Ltd.; Pearl Street Investments Trust, Ltd.; and Riviera Bay
Holdings Trust, Ltd. (incorporated by reference to Exhibit 10.3 of the Company's
Report on Form 10-Q for the period ended July 31, 2000 (the "July 2000
10-QSB")).
10.4 Form of Amendment to Credit Agreement dated November 13, 2000 by New Visual
Entertainment Inc. and each of the following trusts: Epics Events Trust, Ltd.;
Exodus Systems Trust, Ltd.; Prospect Development Trust, Ltd.; Pearl Street
Investments Trust, Ltd.; and Riviera Bay Holdings Trust, Ltd. (incorporated by
reference to Exhibit 10.9 of the 2000 10-KSB).
10.5 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).
10.6 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). *
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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). *
10.12 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). *
10.13 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). *
10.14 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). *
10.15 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).
67
10.16 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, Inc. and Certain Shareholders of Adaptive Networks, Inc. (incorporated
by reference to Exhibit 10.16 of the April 2002 10-Q).
10.17 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).
10.18 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).
10.19 Convertible Promissory Note dated May 21, 2002, by New Visual Corporation
in favor of Randy Arnett (incorporated by reference to Exhibit 10.7 of the July
2002 10-Q).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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)
10.26 Form of Securities Purchase Agreement dated as of December 31, 2003
between New Visual Corporation and Holders of the three year 7% Convertible
Debentures (incorporated by reference to the Registration Statement filed on
form SB-2 on February 11, 2004).
10.27 Form of Registration Rights Agreement dated as of December 31, 2003
between New Visual Corporation and the Holders of the 7% Convertible Debentures
(incorporated by reference to the Registration Statement filed on form SB-2 on
February 11, 2004).
10.28 Lease Agreement dated as of March 2, 2005 between New Visual Corporation
and American Property Management (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended January 31,
2005 (the "January 2005 10-QSB").
10.29 Employment Agreement between New Visual Corporation and Ray Willenberg,
Jr. dated as of March 23, 2005 (incorporated by reference to Exhibit 10.1 to
the January 2005 10-QSB.*
10.30 Exchange Agreement between New Visual Corporation and Zaiq Technologies,
Inc. dated as of April 6, 2005 (incorporated by reference to Exhibit 10.2 of
the January 2005 10-QSB).
10.31 Promissory Note issued on April 6, 2005 to Zaiq Technologies, Inc.
(incorporated by reference to Exhibit 4.1 of the January 2005 10-QSB).
10.32 Form of Securities Purchase Agreement dated as of May 26, 2005, among New
Visual Corporation and certain investors (incorporated by reference to Exhibit
10.1 of the June 1, 2005 8-K).
10.33 Form of Registration Rights Agreement dated as of May 26, 2005, among New
Visual Corporation and certain investors (incorporated by reference to Exhibit
10.2 of the June 1, 2005 8-K).
10.34 Security Interest Agreement dated as of May 26, 2005 among the Company,
certain specified investors, as secured parties, and Krieger and Prager, as
agent for the secured parties (incorporated by reference to Exhibit 10.3 of the
June 1, 2005 8-K).
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21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1
of the Annual Report for the year ended 2004)
23.1 Consent of Lawrence Kallaur, Esq. (included in Exhibit 5.1)
23.2 Consent of Marcum & Kliegman, LLP **
* Management Agreement
** Filed Herewith
ITEM 17. 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.
69
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 Portland, Oregon, on
the 22nd day of July, 2005.
NEW VISUAL CORPORATION
BY: /S/ BRAD KETCH
-------------------------------------------------
PRESIDENT, CHIEF EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL AND ACCOUNTING 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, CHIEF EXECUTIVE JULY 22, 2005
---------------------------- OFFICER (AND PRINCIPAL
BRAD KETCH FINANCIAL AND ACCOUNTING
OFFICER) AND DIRECTOR
/S/ RAY WILLENBERG, JR CHAIRMAN OF THE BOARD JULY 22, 2005
---------------------------- AND EXECUTIVE VICE PRESIDENT
RAY WILLENBERG
/S/ BRUCE BROWN DIRECTOR JULY 22, 2005
----------------------------
BRUCE BROWN
/S/ THOMAS J. COOPER DIRECTOR JULY 22, 2005
----------------------------
THOMAS J. COOPER
/S/ JACK L. PECKHAM DIRECTOR JULY 22, 2005
----------------------------
JACK L. PECKHAM
70