<<You are leaving out some very important details.>>
Before you accuse me of this you should read the contracts a bit more closely. Frankly, if you think I am leaving something out, then quote from the agreement what I am leaving out. I am certainly capable of missing something in the documents. But, so are you.
<<According to the 10K, there was only $865,000 financed through convertible notes, not the $1.9 million that you claim.>>
Actually, I did not "claim" $1.9 million. What I said was:
"As I recall, and I would have to look it up again to be certain, there is about $1.9 million in convertible financing so far." I am sure glad I qualified what I said because as it turns put, you are right, I did not recall correctly. It is $865K. But, me recalling incorrectly, when I qualified it as such hardly qualifies as leaving something out or making a claim. In fact, and so they will be easier to find next time someone wonders, it $865K breaks down as follows
From the 10K filed in 2002:
"In October 2001, we issued the following unregistered securities:
an aggregate of $615,000 principal amount of convertible promissory notes to three investors, which notes are convertible into our common stock at a conversion price of $0.40 per share, and are due and payable upon the receipt by us of certain proceeds from our motion picture currently in production."
"In December 2001, we issued an aggregate of $250,000 principal amount of convertible promissory notes to three investors, which notes are convertible into our common stock at a conversion price of $0.40 per share, and are due and payable upon the receipt by us of certain proceeds from our motion picture currently in production."
"10.18 Convertible Promissory Note [$250K] dated October 10, 2001 by New Visual Corporation in favor of Nellie Streeter Crane, Ltd.*
10.19 Convertible Promissory Note [$125K] dated October 15, 2001 by New Visual Corporation in favor of Quail Run Trust Limited.*
10.20 Convertible Promissory Note [$240K] dated October 23, 2001 by New Visual Corporation in favor of Charles R. Cono.*
10.21 Convertible Promissory Note [$62.5K] dated December 14, 2001 by New Visual Corporation in favor of the Gerald and Judith Handler Living Trust.*
10.22 Convertible Promissory Note [$125K] dated December 14, 2001 by New Visual Corporation in favor of W.P. Lill Jr. Trust dated 12/22/99.*
10.23 Convertible Promissory Note [$62.5K] dated December 14, 2001 by New Visual Corporation in favor of the Handler Children Trust.*"
BTW, for what it is worth, the $1.9 million figure was what they had funded on the film through 10-31-01 according to the 10K filed in 2002: "As of October 31, 2001, we had funded approximately $1,913,000 of the production costs towards this project."
Since we now agree on the amount, let's deal with the other issues.
<<The language appears to be identical in each Exhibit except for the amounts and the threshold at which the notes become payable.>>
I agree. Although I did not read every word of each document, I did (or at least think I did) read the relevant parts that we are discussing and seem to disagree about.
<<1) The notes are not convertible until they are payable. See Section 1 of each exhibit. As such, the holders cannot exercise the conversion now. They must wait until the notes are payable. The conditions that make the notes payable vary, but in general, NVEI must have recovered an amount equal to or greater than 150% of the note amount before it becomes payable. In other words, the notes do not become payable until the movie has grossed enough to pay them. Pretty simple really. Note that for Exhibits 10.19 and 10.20 the notes do not become payable until NVEI has $2.25 million in revenue.>>
While I agree that the Notes are not "payable" in cash until the listed events occur, I strongly disagree that the Notes are not convertible until payable. I think that your interpretation is directly contrary to the express language of the documents. Based on your suggestion, let's look at Section 1 and the other sections.
<<NVEI "promises to pay to . . . NELLIE STREETER CRANE, LTD., . . ."PAYEE" . . .$250,000 (the "PRINCIPAL"), plus an amount equal to 50% of the principal sum (the "NOTE OBLIGATION"). All amounts due under this Note shall be payable if and at such time as the condition to payment set forth in Paragraph 1 shall have been met."
"1. PAYMENTS The Principal and the Note Obligation shall become due and payable only if and at such time as Maker shall have received gross revenues in the amount of . . . US$375,000 from . . . "Liquid.""
"4. CONVERSION.
(a) CONVERSION OPTION. This Note shall be convertible at the option of Payee . . . at any time, in whole or in part, in lieu of and in satisfaction of the unpaid Principal and unpaid Note Obligation hereunder. This Note shall be convertible into that number of fully paid and nonassessable shares of Common Stock . . . as is equal to the quotient of the unpaid Principal plus the unpaid Note Obligation divided by the applicable Conversion Price (as defined in Section 5 [$0.40]) in effect from time to time.">>
The Notes expressly provide that they are convertible "at any time." The conversion option applies to "unpaid Principal and unpaid Note Obligation" and not to only that which has become payable or due. I agree that the holders of the notes cannot make NVEI pay (and NVEI has no obligation to pay)
anything in cash until the conditional events occur, but the Notes do not provide that conversion cannot occur until the conditional events occur. If that had been the desired effect, it would have been very easy to have used the same language in section 4 as was used in section 1.
There is NO doubt in my mind based on the clear and unambiguous language of the contract that they are, as they state, convertible "at any time." In fact, you will notice that NVEI charged the 50% interest expense from the Notes in Q4-2001. From the 10K filed in January 2002:
"The additional payment of 50% of the principal, or $307,500, was recorded as interest expense during the quarter ended October 31, 2001."
This amount could not have been accrued based on cash being payable, since the conditional events had not occurred. Thus, the only way that this would and should have accrued and thus been charged in Q4 was if the amount accrued for some other reason. That other reason is that the Notes were and are immediately convertible into stock valued at 150% of the face amounts of the notes at $0.40 a share.
Please quote me what language, if any, there is that says that they are not convertible unless they have become due and payable.
<<2) The shares are not restricted. So, once the note becomes payable, the payee can, at any time, convert the notes to common stock at a strike price of 0.40 and sell them if he sees fit. The total dilution would be (865,000 x 1.5)/0.40 = approximately 3.24 million shares, not the 7.125 million you calculated. Additionally, please remember that the notes are not payable (and hence not convertible) until the revenue goals have been met.>>
I agree with your calculation of the Notes being convertible into ~3.24 million shares As discussed above, however, I disagree with the last sentence -- they are convertible "at any time."
<<You [WTM] also said:
Thus, before stockholders of NVEI get even, NVEI must get 150% of whatever NVEI ultimately invested by way of the convertibles. If they get the full $2.25 million for such notes, they will need $3.375 million in revenue to NVEI before the owners of NVEI are even.
I [Spokeshave] believe this is incorrect. The $2.25 million includes the 50% override as an interest cost. I an quite certain that I saw that in the 10K. I will try to go back and find it. Therefore, the total "nut" is $2.25 million - not $3.375 million.>>
I think we were both incorrect, but for different reasons. First, I have seen nothing indicating that the $2.25 million includes the interest. Indeed, the JV agreement provides that NVEI is obligated to fund $2.25 million to the JV. The interest (~$308K) on the convertibles is not money funded to the JV. If there is something that indicates this, please point it out. I suppose that the $1.9 million funded through 10-31-01 plus the $300K interest charge from the convertible Notes, adds up to $2.2 million, but I strongly suspect that this is only coincidental -- I seriously doubt that NVEI has spent no additional money since 10-31-01. Plus, the $300K interest charge is not a cash item; that is, it is not cash spent by NVEI.
After writing all of the above it dawned on me that the $1.9 million had already been spent through 10-31-01, but that the final $250K of convertible financing did not occur until December. I think it is far more likely (in fact, almost certainly) that the $1.9 million already funded through 10-31-01 plus the $250K received in December (plus another $100K from somewhere) total the $2.25 million.
But, that said, my $3.375 million figure was also wrong, because it assumed 50% of the full $2.25 million -- which does not appear to be the case.
Based on the current 10K, and assuming that only $865K of the total $2.25 million gets funded from convertible Notes at 50% interest, which results in interest charges of ~#308K, and assuming that there is no other financing cost to NVEI for the other $1.385 million funded to the JV (which is doubtful but not quantifiable for purposes of this discussion), NVEI's total cost is $2.56 million.
In order for NVEI to get its $2.56 million from the JV, the JV will have to generate at least $2.86 million. The answer to your question about how I came up with $4.5 million (from $2.25 and 3.375) is also answered here. NVEI's interest cost is not a cost funded to the JV. It is NVEI's cost of money but not a production cost of the JV. Thus, assuming that NVEI gets the first $2.25 million (they will not) of gross to the JV, in order for NVEI to recover its financing cost, the JV will have to generate an additional amount in net profits equal to at least twice that amount. This is so because NVEI only get 50% of the net, not all of it. In order for NVEI to recover its $308K interest cost from the net profit distribution, the JV will have to have generated net profits of twice that much -- or with this example approximately $616K.
Regressing to my original, and admittedly inaccurate numbers, for explanation purposes, if NVEI had incurred 50% "interest" on its entire $2.25 million investment, an interest amount of $1.125 million, the JV would have had to have generated twice that much ($2.25 million) in net profit in order for NVEI to have recovered its $1.125 million. Of course, the additional $2.25 million in net profit would have necessitated at least an additional $2.25 million in revenue (above the initial $2.25 million) and probably much more. This $2.25 million (from net) along with the initial $2.25 million initial JV gross) would have meant a JV gross requirement of at least $4.5 million.
While it does not appear to be easily quantifiable, there are undoubtedly other financing costs associated with NVEI's $2.25 million investment -- or, more accurately, the remaining $1.385 million not generated by the convertible Notes financing. Non cash costs associated with this financing must still be recouped in order for this venture to be truly profitable for NVEI shareholders. Since they are not easily quantifiable, it is not easy to figure how much more "net profit" must be obtained before NVEI simply gets even in the transaction.
<<Upon its release, we will receive all revenues generated by the film until we recover 100% of our initial investment.>>
I understand that this is the language used in the 10K. It is not, however, the language in the JV contract.
<<It is very clear that *all* revenues generated by the film will be received until the investment is recovered. * * * So, the first $2.25 million of movie revenue all goes to paying off the production costs."
This is neither "very clear" nor accurate. The "gross" amounts quoted for movies are typically box office receipts. These are not amounts that the JV grosses. Thus, a movie that "grosses" $10 million, only delivers some fraction of that amount to the production company -- in this case the JV. That fraction depends on lots of things, but it is far from insubstantial. For example, and this is for illustration only and is not meant to imply that these are actual numbers, if this film grosses $6 million, but only $2 million of that makes its way to the JV, then NVEI only gets some portion of (and perhaps a vast majority of) that $2 million. NVEI gets none of the $4 million that was part of the film's gross, but that never made its way back to the JV. Of course, if the film "grosses" $10 million and $5 million of that makes its way to the JV, then NVEI will likely make some money.
NVEI only gets the majority (and perhaps vast majority) of the first $2.25 million in gross revenue of the JV -- not of the film. They are not the same thing.
One other things that no one seems to be considering is that merely because the film's production budget is within the $2.25 million does not mean that the JV will not continue to incur expenses and perhaps substantial expenses as distribution, exploitation, and marketing continues. These expenses have to be paid from somewhere. The answer to where, is found in the JV agreement, and explains why I am so insistent that the first $2.25 million in gross to the JV does not go to NVEI. From the JV agreement:
"16. REVENUE: In consideration of the services provided by the Parties pursuant to this Agreement, the parties shall be paid a percentage of the revenue generated from the distribution, exploitation and marketing of the Property, in accordance with the following priority:
a. TSSF Venture operating expenses, including all expenses incurred by the TSSF Venture in connection with the distribution and exploitation of the Film and the ancillary rights therein and all costs of production of the Film, which have not already been paid."
Thus, before NVEI gets a dime of its $2.25 million, all expenses, including "distribution and exploitation" expenses, which do not appear to be part of the $2.25 million, get paid. This clause was not inserted for no good reason.
As with how much this film may gross, there is no way that you or I can know how much these other "distribution and exploitation" expenses are going to be. But, it is clear, at least to me, that they are not the same as the "production" expenses funded by NVEI and that there are going to be some of them. The JV will not stop incurring expenses just because the film is ready for distribution.
<<I will not get into a heated discussion about potential gross revenues at this point. Neither of us can really speculate with any authority.>>
I agree.
Troy
