<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended First Quarter ended March 31, 1998
Commission File No. 0-17591
KALEIDOSCOPE MEDIA GROUP, INC.
-----------------------------------------------------
(Exact name of registrant as specific in its charter)
Delaware 93-0957030
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
345 Park Avenue South, New York, New York 10010
-----------------------------------------------
(Address of principal executive offices)
(212) 779-6601
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 31, 1998: 30,032,082
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Part I Financial Information
Item 1. Financial Statements (unaudited)......................................................... 1
Consolidated Balance Sheet March 31, 1998 and March 31, 1997 ..................................... 2-3
Consolidated Statements of Income................................................................. 4
Consolidated Statements of Stockholders' Equity (Deficit),
Three months ended March 31, 1998 and March 31, 1997 ............................................. 5
Consolidated Statements of Cash Flows three months ended
March 31, 1998 and March 31, 1997 ................................................................ 6
Notes to Consolidated Financial Statements........................................................ 7-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................................ 16-20
Part II Other Information
Item 1. Legal Proceedings........................................................................ 20
Item 2. Changes in Securities.................................................................... 20
Item 6. Exhibits and Reports on Form 8K.......................................................... 20
Signatures........................................................................................ 22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-1-
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31,
--------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CURRENT ASSETS
Cash $ 181,461 $ 284,150
Accounts receivable, less allowance for doubtful
accounts of $116,539 and $-0- in 1998 and 1997 1,213,122 1,214,297
Expenditures billable to clients - 526,289
Note receivable, less allowance for bad debt of
$50,000 in 1998 - -
Loans receivable--officers and shareholders - 126,098
Program cost inventory - current portion,
net of accumulated amortization 2,537,385 266,104
Deferred income taxes 206,100 907,400
Other current assets 71,812 124,314
------------- -------------
Total Current Assets 4,209,880 3,448,652
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 2,828,404 892,898
DISTRIBUTION RIGHTS (Note 5) - -
LOANS AND ADVANCES RECEIVABLE
--OFFICERS AND SHAREHOLDERS 36,300 -
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 79,579 136,602
INVESTMENT IN JOINT VENTURE 1,376,500 2,144,000
DEFERRED INCOME TAXES 356,600 328,600
GOODWILL, net of accumulated amortization 820,025 3,274,998
OTHER ASSETS 24,116 21,116
------------- -------------
$ 9,731,404 $ 10,246,866
============= =============
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CURRENT LIABILITIES
Cash overdrafts $ 65,536 $ 307,761
Notes payable, current portion 40,000 1,381,690
Accounts payable and accrued liabilities 651,009 1,703,160
Income taxes payable 923,057 197,459
Capitalized lease obligation--current portion - 25,528
Option agreement payable--current portion 150,000 -
Deferred rent--current portion 36,834 39,704
Deferred income and client advances 232,333 1,046,924
------------- -------------
2,098,769 4,702,226
NOTES PAYABLE, less current portion - 50,000
DEFERRED RENT, less current portion 272,104 313,342
------------- -------------
Total Liabilities 2,370,873 5,065,568
------------- -------------
CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 100,000,000
shares authorized and 30,032,082 issued in
1998, and $0.01 par value, 50,000,000
authorized and 25,057,082 shares issued in
1997 30,332 161,731
Preferred stock, $0.001 par value, 15,000,000
shares authorized and none issued in 1998 - -
Additional paid-in-capital 8,028,632 5,429,506
Accumulated deficit (698,133) (409,939)
Stock subscriptions receivable less
allowance for doubtful accounts
of $438,075 in 1998 and 1997 - -
Treasury stock 529,000 shares in 1998 and 1997
at cost - -
------------- -------------
Total Stockholders' Equity 7,360,531 5,181,298
------------- -------------
Total Liabilities and Stockholders' Equity $ 9,731,404 $ 10,246,866
============= =============
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
NET REVENUE $ 1,027,634 $ 1,216,581
DIRECT PROJECT COSTS
Amortization of program costs 392,512 -
Other direct project costs 6,696 321,131
------------- ------------
Total Direct Project Costs 399,208 321,131
------------- ------------
GROSS PROFIT 628,426 895,450
------------- ------------
EXPENSES
Amortization of program costs relating to joint venture - 218,312
Salaries and benefits 261,171 747,953
General and administrative 294,384 342,596
Amortization of goodwill 11,389 42,996
------------- ------------
Total Expenses 566,944 1,351,857
------------- ------------
INCOME (LOSS) BEFORE GAIN ON REDUCTION IN LIABILITIES,
EQUITY IN INCOME OF JOINT VENTURE AND INCOME TAXES 61,482 (456,407)
GAIN ON REDUCTION IN LIABILITIES (Note 8) 282,965 -
EQUITY IN INCOME OF JOINT VENTURE - 867,700
------------- ------------
INCOME BEFORE INCOME TAXES 344,447 411,293
INCOME TAX EXPENSE 151,465 193,200
------------- ------------
NET INCOME $ 192,982 $ 218,093
============= ============
NET EARNINGS PER COMMON SHARE
Basic $ 0.01 $ 0.01
============= ============
Diluted $ 0.01 $ 0.01
============= ============
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1997 (Restated)
Balance--January 1, 1997 23,557,082 $ 146,731 $ 5,207,506 $ (611,021) $ 4,743,216
Issuance of warrants - - 284,451 - 284,451
Issuance of shares and related warrants
for cash consideration 1,940,000 19,400 465,600 - 485,000
Net income - - - 218,093 218,093
---------- ---------- ------------ ---------- -----------
Balance--March 31, 1997 25,057,082 $ 166,131 $ 5,957,557 $ (392,928) $ 5,730,760
========== ========== ============ ========== ===========
Three Months Ended March 31, 1998
Balance--January 1, 1998 26,027,082 $ 26,027 $ 6,197,661 $ (891,115) $ 5,332,573
Issuance of shares and related warrants
for cash consideration 4,005,000 3,805 1,831,171 - 1,834,976
Net income - - - 192,982 192,982
---------- ---------- ------------ ---------- -----------
Balance--March 31, 1998 30,032,082 $ 30,032 $ 8,028,632 $ (698,133) $ 7,360,531
========== ========== ============ ========== ===========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 192,982 $ 201,082
Adjustment to reconcile net income to net
cash provided by used in operating activities:
Amortization and depreciation 409,540 273,341
Equity in income of joint venture - (867,700)
Executive producer's fee retained by joint venture - (141,700)
Deferred income tax expense 59,900 123,000
Deferred rent (10,601) (10,146)
Gain on reduction of liabilities (282,965) -
Change in assets and liabilities:
Accounts receivable (466,441) (237,952)
Expenditures billable to clients - (208,570)
Other current assets (22,528) -
Other assets - (6,316)
Cash overdraft (128,612) 307,761
Accounts payable and accrued liabilities (722,410) (30,504)
Income taxes payable 83,561 30,538
Deferred income and client advances (464,700) 468,418
------------ -----------
Net Cash Used in Operating Activities (1,352,274) (98,748)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to officers and shareholders - (19,067)
Expenditures for program costs (593,434) (454,128)
Acquisition of property and equipment (2,436) (12,227)
------------ -----------
Net Cash Used in Investing Activities (595,870) (485,422)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of warrants - 284,451
Proceeds from notes payable - 73,080
Repayments of notes payable (37,500) (120,000)
Principal payments on capitalized lease obligations - (8,217)
Issuance of common stock and related warrants 1,914,845 485,000
------------ -----------
Net Cash Provided by Financing Activities 1,877,345 714,314
------------ -----------
(DECREASE) INCREASE IN CASH (70,799) 130,144
CASH
Beginning of period 252,260 154,006
------------ -----------
End of period $ 181,461 $ 284,150
============ ===========
</TABLE>
See notes to financial statements.
- 6 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. MAJOR CUSTOMERS
During the three months ended March 31, 1998, $907,100 of the
Company's revenue was derived from the release of new
made-for-television movie "Merlin: The Magic Begins". Licensing, to two
customers, of the rights for the movie in two European territories
accounted for approximately $350,000 and $100,000 of this revenue.
During the three months ended March 31, 1997, approximately 35%
of the Company's revenue was derived from services provided to one U.S.
automobile company. The contracts and relationships with this customer
were part of the assets contributed to the KS&E joint venture which was
eventually sold.
2. SEASONAL INCOME
A substantial portion of the revenue from the production of
episodic television is usually recognized in the first and fourth
quarters of the calendar year because of the nature of the broadcast
schedule. In the quarter ended March 31, 1998 the Company was only
deriving revenue from one relatively minor episodic television product.
Management does anticipate the release of two programs for the fall of
1998 which will begin earning revenue in the fourth, or late third,
quarters.
The Company's principal source of income for the quarter ended
March 31, 1997 and the year ended December 31, 1996 was its investment
in KSE. Because of the production schedule of KSE's only product,
Tarzan: The Epic Adventures, a substantial portion of the revenue to be
earned in 1997 from the first season's production is earned in the first
quarter.
3. RESTATEMENT
The financial statements for the quarter ended March 31, 1997
have been restated to reflect the allocation of certain debt proceeds to
the issuance of related warrants as described in Notes 3 and 14 of the
financial statements for the year ended December 31, 1997. The
restatement also includes the capitalization of the amortization cost
relating to the resulting debt discount, and the capitalization of
amounts that had previously been recorded as interest expense.
- 7 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
4. PROGRAM COST INVENTORY
Program cost inventory at March 31, consists of the following:
1998 1997
---- ----
Released, less accumulated amortization $ 2,471,240 $ 289,867
In-process 2,894,549 869,135
----------- ----------
5,365,789 1,159,002
Less: Current portion (2,537,385) (266,104)
----------- ----------
Noncurrent portion $ 2,828,404 $ 892,898
=========== ==========
5. DISTRIBUTION RIGHTS
The Company has acquired distribution rights in numerous
properties. Under these agreements, the Company distributes the
properties in the allotted territories on behalf of the owners in
exchange for receiving a substantial portion of the gross revenue.
Although these rights have substantial value, the historical cost
methodology required by generally accepted accounting principles does
not permit the recognition of these values in the financial statements
in excess of the costs of acquisition. With the exception of some minor
costs included in program cost inventory, the distribution rights had no
costs and therefore were not recorded in the financial statements.
Instead the Company will recognize revenue as it is earned in accordance
with its stated revenue recognition policy.
The properties for which the Company has distribution rights as
of March 31, 1998 are as follows:
D.R.E.A.M. Team
The Ice Fantasies Collection:
Gershwin On Ice
Superstars On Ice
Fairytales On Ice/Alice Through the Looking Glass
Fairytales On Ice/Sleeping Beauty
Cinderella On Ice
Nutcracker On Ice
World Mysteries
Search for the Titanic
Return to the Titanic
Deadly Fathoms
Expedition to Noah's Ark
Return to Noah's Ark
Pancho Villa's Treasure
China & Tibet Expedition
- 8 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
5. DISTRIBUTION RIGHTS (continued)
The World's Greatest Legends
John Lennon: The Beatles: The Legacy
Elvis: From Prince...to a King The Coronation of Elvis Presley
Marilyn Monroe: Loss of Innocence
Mick Jagger and The Rolling Stones
The Hamptons (mini-series)
Family Tree (mini-series)
Global 2000
Sports Bloopers
World of Collectible Cars
Chronicles of Courage
From the Bitter End
In Conversation With.....
Terrorism: A World in Shadows
Field and Stream Legends
Outdoor Life Series
The Air Shows
Cyberfit
Thrillmasters
Women's Professional Bowling
In addition, the Company has the distribution rights to over 20
made-for-television network movies.
6. INVESTMENT IN JOINT VENTURE
Summarized financial information of KSE as of March 31, 1997 is
as follows:
Assets $ 12,762,000
Liabilities 8,758,000
------------
Members capital $ 4,004,000
============
Revenue $ 5,628,000
Net income $ 1,735,000
Company's equity in net income $ 868,000
There was no material activity in the joint venture during the
quarter ended March 31, 1998.
- 9 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
6. INVESTMENT IN JOINT VENTURE (Continued)
During the quarter ended March 31, 1997, the Company earned
$66,000 of distribution fees (relating to $1,320,000 of KSE advertising
revenues) and $141,700 of executive producer fees from KSE which are
included in revenue in the statement of operations. The receivable from
KSE for the executive producer fee earned is included in the Company's
investment in joint venture.
The production costs for the two part premiere episode along
with certain pre-release marketing costs were funded by STI
Entertainment ("STI") under an agreement by which STI was to fund the
production costs for the entire season's episodes in exchange for
significant gross profit participation. STI refused to supply the
funding for the remaining episodes. As a result, KSE incurred
significant costs in arranging for alternate financing. During 1997, STI
asserted a claim for an accounting contending that they were due monies
for the premiere episode. Management vigorously contests this claim,
contending that STI materially breached its contract with KSE, which
material breach excused any further performance of KSE thereunder, and
also contending that KSE has been damaged in an amount exceeding
$2,800,000. A complaint has been filed by KSE against STI and others
seeking damages for breach of contract and to declare that KSE is
excused from all future performance under the contract. Management and
STI are now engaged in settlement discussions. Despite management's
belief that it has a strong case for the damages claim against STI and
against STI's claim for profit participation, due to the uncertainties
inherent in litigation, it is at least reasonably possible that a
material liability could result, although the amount cannot be
estimated.
7. CAPITAL TRANSACTIONS
During the quarter ended March 31, 1998, the Company issued
4,005,000 shares of common stock, and 500,000 warrants, in exchange for
$1,834,976 cash net of offering costs. 300,000 of the warrants expire in
January 2000 and have exercise prices ranging from $0.75 through $1.10.
200,000 of the warrants expire in December 2002 and have an exercise
price of $0.75.
During the quarter ended March 31, 1997, the Company issued
500,000 shares of common stock and 1,500,000 warrants, to an individual
who became a Director on April 1, 1997, in exchange for $125,000 cash.
Each warrant, which expired unexercised on March 5, 1998, entitled the
holder to purchase one share of common stock. for $0.60.
Also during the quarter ended March 31, 1997 the Company issued
an additional 1,440,000 shares of common stock in exchange for $360,000
cash. Included in these shares were 500,000 issued for $125,000 to a
Corporation of which one of the Company's directors is also a director.
8. GAIN ON REDUCTION OF LIABILITIES
Management has determined that the possibility is now remote
that the Company will have to pay certain liabilities, recorded in
previous periods at their estimated amounts. Consequently these
liabilities, totalling $282,965 have been removed from the balance sheet
and pretax income for the quarter ended March 31, 1998 has been credited
for this amount. The related income tax expense is approximately
$121,700 and is included in income tax expense.
- 10 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
9. INCENTIVE STOCK OPTIONS
During the quarter ended March 31, 1998 3,333 of the employee
stock options outstanding were forfeited. There was no other option
activity. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options, the Company's net income
would have decreased to the amounts indicated below:
Net income:
As reported $192,982
========
Pro Forma $190,139
========
Net earnings per share (basic and diluted):
As reported $ 0.01
=======
Pro Forma $ 0.01
=======
10. CONTINGENCIES
On June 21, 1996, a suit was filed against two of the Company's
subsidiaries and other unrelated parties in the amount of $21,000,000
alleging that they are successors to the alleged liability for a default
judgement entered against a former affiliate of the subsidiaries in
April, 1995 for an alleged action taking place in 1988. The subsidiaries
have vigorously defended themselves in this litigation. Management
believes that the claim against the former affiliate lacks merit and
that, in any case, its subsidiaries have no responsibility for the debts
of the former affiliate. Furthermore, management believes that if any
judgement were to be entered against the subsidiaries it would be able
to obtain indemnification from the prior owner of the former affiliate's
business, a major advertising agency. In a recent decision, the court
dismissed plaintiff's claim against the subsidiaries and at the same
time found that the advertising agency may be liable to the plaintiff
pursuant to aforesaid indemnity agreement. The plaintiff and the
advertising agency have submitted arguments to reargue and the Company
believes they intend to appeal in any event. While management believes,
based on the foregoing, that the litigation will not have a material
effect on the Company's financial position, it is at least reasonably
possible that a material liability could result, although the amount
cannot be estimated.
At the time of the May, 1996 acquisition of KG (see Note 1), KG
had a note payable (jointly and severally with a former affiliate that
is now insolvent) to a former parent company in the amount of $225,000.
KG was contesting its liability under this note because of various
claims against the former parent. In accounting for the acquisition, the
Company valued the liability at $40,000 based on a signed settlement
agreement with the former parent's bankruptcy trustee. Subsequent to the
issuance of the 1996 financial statements, the settlement was rejected
by the creditors of the former parent. No efforts have been made by the
former parent's bankruptcy estate to collect this debt, the Company
still intends to assert its counterclaims if the matter is litigated. No
adjustment has been made to the original $40,000 valuation assigned to
the debt. It is, however, at least reasonably possible that the Company
would be required to pay the full $225,000, resulting in a loss of
$185,000.
- 11 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
10. CONTINGENCIES
In December, 1997, the Company filed an action seeking damages
for breach of contract and fraudulent inducement of contract, among
other claims, arising out of a venture that the Company entered into,
with the defendants in the action to promote a Latin American boxing
tournament. The Company seeks damages of at least $500,000 plus punitive
damages in the action. Two of the defendants have answered the
complaint, asserting various affirmative defenses and two counterclaims
seeking damages of not less than $250,000. A third defendant has not yet
responded to the complaint. It is not possible to make an assessment of
the probable outcome of this litigation but it is at least reasonably
possible that a material gain or loss could result.
Certain former independent contractors, related to each other,
who performed services for the Company, have expressed a belief that
they have valid claims against the Company amounting to up to $500,000.
It is not known whether these former independent contractors will press
their claims. If they do, management intends to contest each case
vigorously and to file substantial counterclaims.
Other contingencies include an action for an alleged unpaid
bonus of $25,000 and claims for approximately $89,000 arising from a
sporting event managed by KG in early 1996. Management believes that the
claims are not valid and no liabilities have been recorded for these
amounts as management believes that no loss is probable. It is, however,
reasonably possible that the Company will have to pay these claims.
11. INCOME TAXES
The provision for income taxes for the three months ended March 31
consists of the following components:
1998 1997
---- ----
Current
Federal $ 93,200 $ -
State - 57,400
---------- ----------
93,200 57,400
---------- ----------
Deferred
Federal 10,000 115,000
State 49,900 8,000
---------- ---------
59,900 123,000
---------- ---------
$ 153,100 $ 180,400
========== =========
- 12 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
11. INCOME TAXES (Continued)
The reconciliation between the actual and expected federal tax
for the three months ended March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal corporate tax rate of 34% applied to pretax
income $ 117,112 $ 129,704
State and local income taxes, net of federal benefit 32,116 43,104
Effect of non-deductible goodwill amortization 3,872 14,619
Changes in estimates and other (1,635) (7,027)
----------- ----------
$ 151,465 $ 180,400
=========== ==========
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments ("SFAS 107") requires entities
to disclose the fair values of financial instruments except when it is
not practicable to do so. Under SFAS 107, it is not practicable to make
this disclosure when the costs of formulating the estimated values
exceed the benefit when considering how meaningful the information would
be to financial statement users.
The Company's financial instruments, and the related amounts
recorded on the balance sheet, to which SFAS 107 would be applied
include the following:
Carrying Amount
-------------------------
March 31,
1998 1997
---- ----
Asset:
Cash $ 181,461 $ 284,150
Notes receivable - -
Loan receivable - officers
and shareholders 36,300 126,098
Liabilities:
Cash overdrafts 65,536 307,761
Notes payable 40,000 1,431,690
As a result of the difficulties presented in the valuation,
because of their related party nature, of the loans receivable from the
officers and shareholders estimating the fair value of these financial
instruments is not considered practicable. The fair values of the cash,
the bank overdrafts and notes payable do not differ materially from
their carrying amounts.
None of the above are derivative financial instruments and none
are held for trading purposes.
- 13 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
13. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Noncash Transactions
During the three-months ended March 31, 1998 the Company
applied $79,869 of offering costs that were prepaid as of
January 1, 1998 against the proceeds of stock issued.
Interest and Income Taxes Paid
Cash payments for the following were:
March 31,
------------------
1998 1997
---- ----
Interest $ - $ 9,267
======= ========
Income taxes $ 8,004 $ 26,862
======= ========
14. SEGMENT INFORMATION
Summarized information by business segment for the three months
ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Direct Interest
Entertainment Sports Marketing and other Total
------------- ------ --------- --------- -----
<S> <C> <C> <C> <C> <C>
Revenue $ 991,908 $ 19,733 $ (378) $ 16,371 $1,027,634
========== ========== ========== ========== ==========
Pretax income (loss) $ 237,279 $ 163,132 $ (10,509) $ (45,455) $ 344,447
========== ========== ========== ========== ==========
Total identifiable assets $4,423,747 $2,112,454 $1,140,833 $ 115,170 $7,792,204
========== ========== ========== ========== ==========
Depreciation and amortization $ 378,915 $ 20,389 $ 10,059 $ 177 $ 409,540
========== ========== ========== ========== ==========
Capital expenditures $ 588,588 $ (2,777) $ 10,059 $ - $ 595,870
========== ========== ========== ========== ==========
</TABLE>
Summarized information by business segment for the three months
ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Interest
Entertainment Sports and other Total
------------- ------ --------- -----
<S> <C> <C> <C> <C>
Revenue $ 221,165 $ 995,416 $ - $ 1,216,581
=========== =========== ========== ===========
Operating income $ (467,305) $ 13,581 $ (32,494) $ (486,218)
Equity in income of KSE 867,700 - - 867,700
----------- ----------- ---------- -----------
Pretax income $ 400,395 $ 13,581 $ (32,494) $ 381,482
=========== =========== ========== ===========
Total identifiable assets $ 1,902,896 $ 4,599,843 $ 247,385 $ 6,105,839
=========== =========== ========== ===========
Depreciation and amortization $ 225,370 $ 47,427 $ 543 $ 273,340
=========== =========== ========== ===========
Capital expenditures $ 465,530 $ 825 $ - $ 466,355
=========== =========== ========== ===========
</TABLE>
- 14 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1998
(UNAUDITED)
15. SUBSEQUENT EVENTS
Subsequent to March 31, 1998 but prior to the issuance of these
financial statements the Company issued 470,010 additional shares of
common stock, primarily in exchange for current or future services.
-15-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The consolidated financial statements provided in this three month
report for the period ended March 31, 1998 include the financial statements of
SeaGull Entertainment for three months, the financial statements of the
Company for three months, and three months of the Tarzan Joint Venture as an
equity investment. These periods of reporting reflect various months of full
ownership or partial ownership in the current fiscal year and are consistent
with the reporting method utilized for the prior fiscal year. The comparative
results reported for the three months ended March 31, 1997 include the
financial statements of SeaGull for three months, the financial statements of
the Company for three months, the combined financial statements of KSG for
three months and three months of the Joint Venture as an equity investment.
Reference is made to Note 2 of the Company's Consolidated Financial
Statements for a discussion of significant accounting policies, including
revenue recognition.
Forward Looking Statements
The following statements and certain other statements contained in
this quarterly report on Form 10-QSB are based on current expectations. Such
statements are forward looking statements that involve a number of risks and
uncertainties. Factors that could cause actual results to differ materially
include the following (i) general economic conditions, (ii) competitive market
influences, (iii) audience appeal and critical reviews of its television
programs, (iv) the ability to identify, acquire the rights to, and to
develop quality properties, and (v) and ability to obtain financing.
Results of Operations
Three Months Ended March 31, 1998 as Compared with Three Months Ended
March 31, 1997.
Net revenues consist of total billings (less any agency fees and
media costs) and accruals for earned fees. Net revenues for the First Quarter of
1998 were $1,027,634 compared with net revenue of $1,216,581 for the First
Quarter of 1997.
Amortization of program costs (costs to produce, market and
distribute a broadcast or film property) was $392,512 in the First Quarter of
1998 compared to no amortization in 1997. This increase was due to the Company's
completing and delivering the movie "Merlin, The Magic Begins" in the First
Quarter of 1998.
-16-
<PAGE>
Other direct project costs include costs necessary to create, market
and manage a sporting event, costs relating to the sale of goods by the Direct
Marketing Division and costs related to film production work on a contract
basis. Direct project costs decreased by $314,435 to $6,696 for the First
Quarter 1998 from $321,131 for the comparable period in 1997. This decrease
was slightly greater than the decrease in net revenues due primarily to lower
margins of the properties that were included in the sale by the Company of its
KS&E division ("KS&E Sale"). Revenues from these properties were included for
the First Quarter of 1997. This decrease would have been greater as a result
of the KS&E Sale if it had not been for the lower margins of the Direct
Marketing Division, which was in its start-up year.
Gross profit decreased by $267,024, to $628,426 for the First Quarter
of 1998 from $895,450 for the First Quarter of 1997.
Salaries and benefits decreased by $486,782 to $261,171 in the First
Quarter of 1998 compared to $747,953 for the First Quarter of 1997. General
and administrative expenses decreased by $48,212 to $294,384 in the First
Quarter of 1998 from $342,596 for the comparable period in 1997. These
decreases are due substantially to the reduction in personnel resulting from
the KS&E Sale.
Amortization of goodwill decreased by $31,607 to $11,389 in the First
Quarter of 1998 from $42,996 for the comparable period in 1997. This decrease
is due to the allocation of a significant portion of goodwill related to the
KS&E Sale.
Income from operations (before equity in income of joint venture
increased by $517,889 from a loss of $456,407 in the First Quarter of 1997 to
a profit of $61,482 for the First Quarter of 1998. This increase was a result
of the completion and delivery of the two hour Movie "Marlin, The Magic
Begins".
The Company did not receive any equity in the income of its joint
ventures in the First Quarter of 1998 as compared with $867,700 of equity in
the income of its joint ventures in the First Quarter of 1997. The Joint
Venture's only revenue producing project to date has been "Tarzan: The Epic
Adventures" which earned most of its revenues in 1996 and 1997. Management's
estimate of the ultimate revenues from "Tarzan: The Epic Adventures" have been
revised downward.
Income before income taxes decreased by $66,486 to $344,447 in the
First Quarter of 1998 from $411,293 in 1997.
The provision for income tax expense was $151,465 in the First
Quarter of 1998 as compared to $193,200 in the First Quarter of 1997. The
income tax expense for 1998 does not bear the expected relationship between
pretax income and the federal corporate tax rate of 34% because of (a) the
effect of state and local income taxes and (b) the amortization of goodwill
and certain other expenses are not deductible for income tax purposes.
-17-
<PAGE>
The Company's net income amounted to $192,982, or $0.01 per share,
for the First Quarter of 1998, as compared to net income of $218,093, or $0.01
per share, for the same quarter in 1997.
Net Operating Loss Carryforwards
At December 31, 1997 net operating losses ("NOLs") of the Company
amounted to approximately $121,000 for federal income tax purposes. The NOLs
are not available for state income tax purposes. The NOLs begin to expire
starting in 2011. The Company's subsidiaries file separate income tax returns
in various states and localities. The losses of one subsidiary cannot be used
to offset the losses of another subsidiary for state purposes. Certain of the
Company's subsidiaries have substantial NOLs available for state and local
income tax purposes. In addition, one of the Company's subsidiaries has
approximately $175,000 of NOLs that can only be used to offset future taxable
income (for federal and certain state purposes) of the specific subsidiary to
which they pertain. These NOLs are further limited by the operation of Section
382 of the Internal Revenue Code. The subsidiary is only allowed to use a
maximum of approximately $27,000 of these carryforwards each year.
Liquidity and Capital Resources
Net cash used in operating activities was $1,352,274 in the First
Quarter of 1998 compared with $98,748 in the First Quarter of 1997. The
increase in cash used operating activities was primarily the result of the
reduction of Accounts Payable and Accrued Liabilities.
Net cash used by investing activities in 1998 was $595,870 compared
to the use of net cash in investing activities of $485,422 in 1997. This
change was primarily due to the increase in expenditures for program costs.
Net cash provided in financing activities amounted to $1,877,345 for
the First Quarter of 1998 as compared to $714,314 provided by financing
activities for the First Quarter of 1997. The increase in cash provided by
financing activities was primarily the result of an increase in the receipt of
cash for equity transactions in 1998.
As of March 31, 1998, the Company had cash of $181,461 compared with
$284,150 as of March 31, 1997. Operating activities used a net cash outflow of
$1,352,274. The principle source of cash during the First Quarter of 1998 was
raised through the sale of equity securities in the amount of $1,914,843.
These amounts were used to substantially reduce the companies liabilities.
During the First Quarter of 1998, the Company received no material
cash from its 50% participation in the Joint Venture that produced and
distributed the first season of "Tarzan: The Epic Adventures." This resulted
principally from the obligations of the Joint Venture to its lender to
subordinate payments to others, including the equity partners of the Joint
Venture, until the loan was repaid in full. Although repayment of the
production loan was completed in the third quarter, the Joint Venture is
completing repayment of obligations to vendors in South Africa where the
episodes were filmed. Additionally, obligations to launch the second season of
"Tarzan",
-18-
<PAGE>
which consists of previous half-hour shows made into one-hour shows resulting
in no additional production costs, required that receipts be reinvested in the
Joint Venture, rather than distributed to the equity partners. Additionally,
the Joint Venture's assets consist principally of (i) accounts receivable, are
generally not currently due, and (ii) capitalized program costs, which are
supported by future anticipated income.
The launch of "Hollywood Discoveries" and "Boxcino" and the
production of "Merlin: The Magic Begins" required significant Company
investments while proceeds from operations were negligible. The "Boxcino"
matches were in Costa Rica, Miami and Baton Rouge and approximately $1,000,000
in costs included the logistics of flying Latin American fighters to a single
location and preparing multiple bouts for broadcast.
Development, production, and broadcast costs of "Hollywood
Discoveries" required a total investment of approximately $1,300,000 through
December 31, 1997. "Hollywood Discoveries" program met with moderate success
in the United States and as a result advertising and direct sale of products
to viewers was below expectations. In addition, the Company had anticipated
the receipt on $500,000 in operating funds from Hollywood Inc. as a joint
venture participant in this project. The Company only received $20,000.
Production of "Merlin: The Magic Begins" has required an investment
of approximately $1,000,000 through December 31, 1997. The two hour movie was
delivered in March 1998, at which point license fees from "Merlin: The Magic
Begins" began to be received. At the same time, a portion of the capitalized
costs will be recognized as expenses.
The Company anticipates that "Hollywood Discoveries," "Boxcino" and
"Merlin: The Magic Begins" will not generate profits until late in 1998 and
1999.
Management believes that as additional entertainment properties are
released to the market, cash flows from these properties will improve the
overall Company cash situation significantly. Although each new project going
into production will require additional financial resources, management
expects that financing from venture partners and funding from sponsorships and
pre-sales of programming will provide a significant portion of these needs
At March 31, 1998, the Company had working capital of $2,111,111 as
compared to working capital of $1,253,574 at March 31, 1997.
As a result of the operating and programming requirements, management
is continuing to explore initiatives to ensure adequate interim cash
resources. The Company is seeking to obtain necessary funding from (a) equity
financing; (b) arrangements for profit participation in individual projects
and (c) marketing or advertising tie-ins to programs and is exploring other
joint venture relationships that will share the burden of program investment.
Inflation
The Company believes that the relatively moderate rates of inflation
in recent years have not
-19-
<PAGE>
had a significant impact on its net revenues or its profitability.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is in the process of filing a complaint in the Southern
District of New York to commence suit against All American Communications,
Inc. ("All American") for tortious interference with pre-contract
negotiations. The suit alleges that the Company had an agreement, subject to
execution of a definitive contract, to acquire a minority interest in
production fees and profit participation derived by the producers of the
syndicated television series, "Baywatch". The suit further alleges that when
All American learned of the proposed transaction, it threatened to commence
litigation against the producers if it consummated the agreement with the
Company. As a result, the producers of Baywatch declined to complete the
transaction. The suit will seek recovery of actual damages of $100 million and
punitive damages of $200 million.
Item 2. Changes in Securities
(a) Recent Sales of Unregistered Securities
The Company issued 3,135,000 shares of common stock pursuant to a
private offering under Rule 506 of Regulation D to foreign investors in
various transaction from January 1998 to March, 1998 at prices ranging from
$.25 to $.75 per share.
In the First Quarter of 1998, the Company issued 115,000 shares of
common stock, in the aggregate, in satisfaction of certain liabilities of the
Company with regard to (i) the payment of compensation and (ii) fees for
services provided.
Between January 1 and March 31, 1998 the Company issued 800,000
shares, pursuant to Regulation S transaction, for consideration of $.25 per
share.
Between December 1, 1997 and March 31, 1998 the Company issued
Warrants to purchase 500,000 shares of common stock at a strike price between
$.75 and $1.10. These Warrants were issued in consideration for services. Of
the 500,000 Warrants, 200,000 were issued to a placement agent in connection
with the placement of a portion of the shares described above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(i) Exhibit 11 - Computation of Earnings Per Share
(ii) Exhibit 27 - Financial Disclosure Schedule
(b) Reports on Form 8-K:
(i) Report on Form 8-K filed by the Company with the
-20-
<PAGE>
Securities and Exchange Commission on February 13, 1998
(ii) Report on From 8-K filed by the Company
with the Securities and Exchange
Commission on March 5, 1998.
-21-
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
therewith duly authorized.
KALEIDOSCOPE MEDIA GROUP, INC.
May 15, 1998: By: /s/ Henry Siegel
--------------------------------------------
Henry Siegel, Chief Executive Officer
May 15, 1998: By: /s/ Irving Greenman
--------------------------------------------
Irving Greenman, Chief Financial Officer
-22-
<PAGE>
EXHIBIT 11
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $ 192,982
===========
BASIC EPS
Weighted average
shares outstanding 27,375,193
------------ ----------
192,982 27,375,193 $ 0.01
=======
DILUTED EPS
Weighted average
shares outstanding 27,375,193
Additional shares assuming
conversion of warrants 4,441,871
------------ ----------
$ 192,982 31,817,064 $ 0.01
============ ========== =======
-23-
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (continued)
For the Three Months Ended March 31, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $ 217,478
==========
BASIC EPS
Weighted average
shares outstanding 24,138,415
------------ ----------
217,478 24,138,415 $ 0.01
=======
DILUTED EPS
Weighted average
shares outstanding 24,138,415
Additional shares assuming
conversion of warrants 3,081,868
------------ ----------
$ 217,478 27,220,283 $ 0.01
============ ========== =======
The contingent shares potentially issuable as a result of the
October, 1996 BNN transaction are considered in the fully diluted
earnings per share calculation. A calculation of earnings per share is
performed as if the necessary earnings levels had been achieved and the
per share price for determination of the number of additional shares to
be issued was the price at period end. For the three months ended March
31, 1997, this calculation determined that the effect would be
anti-dilutive. As a result it was not used in the earnings per share
calculation.
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 181,461 284,150
<SECURITIES> 0 0
<RECEIVABLES> 1,213,122 1,214,297
<ALLOWANCES> 116,539 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,209,880 3,448,652
<PP&E> 79,579 136,602
<DEPRECIATION> 5,639 12,033
<TOTAL-ASSETS> 9,731,404 10,246,866
<CURRENT-LIABILITIES> 2,098,769 4,702,226
<BONDS> 0 0
0 0
0 0
<COMMON> 30,032 161,731
<OTHER-SE> 7,330,499 5,181,298
<TOTAL-LIABILITY-AND-EQUITY> 9,731,404 10,246,866
<SALES> 0 0
<TOTAL-REVENUES> 1,027,634 1,216,581
<CGS> 399,208 321,131
<TOTAL-COSTS> 399,208 321,131
<OTHER-EXPENSES> 566,944 1,351,857
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 344,447 411,293
<INCOME-TAX> 151,465 193,200
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 192,982 218,093
<EPS-PRIMARY> 0.01 0.01
<EPS-DILUTED> 0.01 0.01
</TABLE>
