<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 Third Quarter ended September 30, 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 September 30, 1998: 36,904,456
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 September 30, 1998 and September 30, 1997 ............................. 2-3
Consolidated Statements of Income................................................................. 4
Consolidated Statements of Stockholders' Equity (Deficit),
nine months ended September 30, 1998 and September 30, 1997 ...................................... 5
Consolidated Statements of Cash Flows nine months ended
September 30, 1998 and September 30, 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>
September 30,
--------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CURRENT ASSETS
Cash $ 218 $ 464,581
Accounts receivable, less allowance for doubtful
accounts of $116,539 and $-0- in 1998 and 1997 847,205 781,527
Expenditures billable to clients - 1,505,185
Note receivable, less allowance for bad debt of
$50,000 in 1998 - -
Loans receivable--officers and shareholders - 231,659
Program cost inventory - current portion,
net of accumulated amortization 3,406,442 1,850,532
Deferred income taxes 369,600 907,400
Other current assets 217,430 97,395
------------- -------------
Total Current Assets 4,840,895 5,838,279
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 1,890,471 1,912,051
DISTRIBUTION RIGHTS (Note 5) - -
LOANS AND ADVANCES RECEIVABLE
--OFFICERS AND SHAREHOLDERS - -
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 58,475 124,498
INVESTMENT IN JOINT VENTURE 1,238,110 1,671,210
DEFERRED INCOME TAXES 276,800 328,600
GOODWILL, net of accumulated amortization 797,247 224,667
OTHER ASSETS 23,116 21,116
------------- -------------
$ 9,125,114 $ 10,120,421
============= =============
</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>
September 30,
-------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CURRENT LIABILITIES
Cash overdrafts $ 35,523 $ -
Notes payable 190,000 53,033
Accounts payable and accrued liabilities 1,103,377 1,077,773
Income taxes payable 823,179 2,278,460
Capitalized lease obligation--current portion - 8,848
Option agreement payable--current portion 68,750 -
Deferred rent--current portion 115,805 19,704
Deferred income and client advances 179,898 1,069,126
------------- -------------
2,516,532 4,506,944
DEFERRED RENT, less current portion - 322,974
------------- -------------
Total Liabilities 2,516,532 4,829,918
------------- -------------
CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 100,000,000
shares authorized and 31,882,092 issued in
1998, and $0.01 par value, 50,000,000
authorized and 25,057,082 shares issued in
1997 36,904 158,931
Preferred stock, $0.001 par value, 15,000,000
shares authorized and none issued in 1998 - -
Additional paid-in-capital 9,307,855 5,964,756
Accumulated deficit (1,865,586) (833,184)
Stock subscriptions receivable less
allowance for doubtful accounts
of $438,075 in 1998 and 1997 (770,591) -
Treasury stock 529,000 shares in 1998 and 1997
at cost - -
------------- -------------
Total Stockholders' Equity 6,708,582 5,290,503
------------- -------------
Total Liabilities and Stockholders' Equity $ 9,225,114 $ 10,120,421
============= =============
</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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(Restated) (Restated)
<S> C> <C> <C> <C>
NET REVENUE $ 382,575 $ (197,100) $ 1,517,156 $ 1,732,300
DIRECT PROJECT COSTS
Amortization of program costs 314,226 - 706,738 -
Other direct project costs 19,128 (233,100) 51,359 591,900
------------- ------------ ------------- ------------
Total Direct Project Costs 333,354 (233,100) 758,097 591,900
------------- ------------ ------------- ------------
GROSS PROFIT 49,221 36,000 759,059 1,140,400
------------- ------------ ------------- ------------
EXPENSES
Amortization of program costs relating to joint venture - 9,140 - 343,700
Salaries and benefits 336,769 280,446 879,684 1,317,591
General and administrative 579,854 180,118 1,683,943 883,427
Amortization of goodwill 11,389 (16,704) 34,167 51,809
Interest and local taxes 30,896 (22,794) 30,896 24,036
------------- ------------ ------------- ------------
Total Expenses 958,908 430,206 2,628,690 2,620,563
------------- ------------ ------------- ------------
INCOME (LOSS) BEFORE GAIN ON REDUCTION IN LIABILITIES,
INCOME ON SALE OF ASSETS,
EQUITY IN INCOME OF JOINT VENTURE AND INCOME TAXES (909,687) (394,206) (1,869,631) (1,480,163)
GAIN ON REDUCTION IN LIABILITIES (Note 8) - - 282,965 -
INCOME ON SALE OF ASSETS - 490,359 - 2,894,900
EQUITY IN INCOME (LOSS) OF JOINT VENTURE - 272,900 - 624,600
------------- ------------ ------------- ------------
INCOME BEFORE INCOME TAXES (909,687) 369,053 (1,586,666) 2,039,337
INCOME TAX (BENEFIT) EXPENSE (357,360) 784,100 (612,195) 2,261,400
------------- ------------ ------------- ------------
NET INCOME (LOSS) $ (552,327) $ (415,047) $ (974,471) $ (222,063)
============= ============ ============= ============
NET EARNINGS PER COMMON SHARE
Basic $ (.02) $ (.02) $ (.03) $ (.01)
============= ============ ============= ============
Diluted $ (.02) $ (.02) $ (.03) $ (.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 Stock
Shares Common Paid-in Accumulated Subscription
Issued Stock Capital Deficit Receivable Total
------ ------ ---------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
Six Months Ended September 30, 1997 (Restated)
Balance--January 1, 1997 23,557,082 $ 146,731 $ 4,959,506 $ (611,021) $ 4,495,216
Issuance of warrants 125,000 - 125,000 - 125,000
Issuance of shares and related warrants
for cash consideration 1,500,000 15,000 345,000 - 360,000
Issuance of shares for
Reclassification Act 333,000 (2,800) 2,800 - 532,450
Net income - - 532,450 (222,163) (222,163)
---------- ---------- ------------ ----------- -----------
Balance--September 30, 1997 25,515,082 $ 158,931 $ 5,964,756 $ (833,184) $ 5,290,503
========== ========== ============ =========== ===========
Six Months Ended September 30, 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 10,057,364 10,057 2,813,509 - 2,823,566
Issuance of shares to settle accounts
payable and for services rendered 520,010 520 296,985 - 297,505
Stock subscription receivables - - - - (770,591) (770,591)
Issuance of shares in settlement
of claim 300,000 300 (300) - -
Net loss - - - (974,471) - (974,471)
---------- ---------- ------------ ----------- ---------- -----------
Balance--September 30, 1998 36,904,456 $ 36,904 $ 9,307,855 $(1,865,586) (770,591) $ 6,708,582
========== ========== ============ =========== ========== ===========
</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>
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 974,471 $ (336,051)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Amortization and depreciation 450,057 414,841
Gain on sale of portion -- Sports Division - (2,894,767)
Equity income from joint ventures -- KS&E - (272,992)
Equity in income of joint venture -- Keller/Siegel - (351,600)
Deferred income tax (benefit) expense (23,800) 123,000
Deferred rent (203,734) (20,514)
Gain on reduction of liabilities (282,965) -
Expense paid through the issuance of stock 175,000 -
Change in assets and liabilities:
Expenditures billable to clients - (124,219)
Other current assets (142,146) (19,602)
Cash overdraft (158,625) -
Accounts payable and accrued liabilities (172,539) (655,891)
Income tax payable (16,317) 2,111,539
Deferred income and client advances (517,135) 490,620
Accounts receivable (100,524) 194,818
------------ -----------
Net Cash Provided (Used) in Operating Activities (1,967,197) (1,340,818)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Distribution from joint venture KS&E (100,000) 272,992
Loans to officers and shareholders 36,300 (124,628)
Investments in equity - (185,010)
Expenditures for program costs (524,558) (3,582,456)
Acquisition of property and equipment 929 (48,481)
Proceeds from sale of portion of Sports Division - 6,000,000
------------ -----------
Net Cash Used in Investing Activities (387,329) 2,332,417
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of warrants - 125,000
Proceeds from notes payable 150,000 -
Repayments of notes payable (118,750) (1,141,126)
Principal payments on capitalized lease obligations - (24,897)
Issuance of common stock and related warrants 2,132,844 359,999
------------ -----------
Net Cash Provided by Financing Activities 2,164,094 (681,024)
------------ -----------
INCREASE (DECREASE) IN CASH (252,042) 310,575
CASH
Beginning of period 252,260 154,006
------------ -----------
End of period $ 218 $ 464,581
============ ===========
</TABLE>
See notes to financial statements.
- 6 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. MAJOR CUSTOMERS
During the nine months ended September 30, 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 nine months ended September 30, 1997, approximately 50%
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 nine months ended September 30, 1998 the Company was deriving the
majority of revenue from one episodic television product. Management does
anticipate the release of two programs for the fall of 1998 which will
begin earning revenue in the fourth.
The Company's principal source of income for the quarter ended
September 30, 1997 were (a) the proceeds from the sale of the 51% interest
in Kaleidoscope Sports and Entertainment LLC, and (b) the accrual on an
equity basis, of the retained 49% interest in KS&E. Entertainment
properties, such as Tarzan: The Epic Adventures, typically generate income
in the fourth and first quarters, linked to delivery of programming for
the television broadcast season. The launch of "Hollywood Discoveries" in
June generated losses in the first month of operations that were reported
under the equity method.
3. RESTATEMENT
The financial statements for the nine months ended September 30,
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)
SEPTEMBER 30, 1998
(UNAUDITED)
4. PROGRAM COST INVENTORY
Program cost inventory at September 30, consists of the following:
1998 1997
---- ----
Current portion $ 3,406,442 $1,850,532
Noncurrent portion 1,890,471 1,265,712
----------- ----------
Total Program Cost Inventory $ 5,296,913 $3,116,244
=========== ==========
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 September 30, 1998 are as follows:
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)
SEPTEMBER 30, 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.
- 9 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1998
(UNAUDITED)
6. NOTES PAYABLE
During the second quarter the Company borrowed $150,000 from an
entity affiliated with the Company's chairman and CEO. The entire balance
was still outstanding at September 30, 1998. The note bears interest at
15% per annum and is payable on demand.
7. CONTINGENCY RELATED TO INVESTMENT IN JOINT VENTURE
The production costs for the two part premiere episode of "Tarzan,
The Epic Adventures" 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.
8. CAPITAL TRANSACTIONS
During the nine months ended September 30, 1998, the Company
issued 10,877,374 shares of common stock, and 1,300,000 warrants, in
exchange for $3,163,062 cash (net of offering costs) and receivables, the
settlement of $122,505 of accounts payable and $175,000 of services
rendered. 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, and 800,000 of the
warrants have an exercise price of $0.25.
During the nine months ended September 30, 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 nine months ended September 30, 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.
9. 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 nine months ended September 30, 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)
SEPTEMBER 30, 1998
(UNAUDITED)
10. INCENTIVE STOCK OPTIONS
During the nine months ended September 30, 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 loss:
As reported $(974,471)
=========
Pro Forma $(974,471)
=========
Net loss per share (basic and diluted):
As reported $ (0.03)
========
Pro Forma $ (0.03)
========
11. 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)
SEPTEMBER 30, 1998
(UNAUDITED)
11. CONTINGENCIES (Continued)
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.
Registrant and a wholly owned subsidiary are defendants in an
action commenced by ACC Entertainment Gmbh & Co. verses Kaleidoscope Media
Group and Seagull Entertainment Inc. in the U.S. District Court for the
Central District of California. The complaint alleges breach of contract
in connection with a co-production agreement between the parties. Damages
in the amount of $250,000 and the declaration that the contract is
rescinded are sought.
The Company is a defendant in Sytner versus BNN Corporation which
action is commenced in the Supreme Court of the State of NY in the County
of NY. The plaintiff seeks 1.5 million dollars in damage for the Company's
refusal to deliver its Shares of Common Stock which Mr. Sytner alleges he
was entitled, and a $53,000 reimbursement of business expenses.
The Company is a defendant in an action in which Paul Cioffari
versus Kaleidoscope Media Group et al. Plaintiff seeks one million dollars
in damages in connection with his employment by the Company affiliates and
the Sale of Property to an affiliate of the Company and other various
claims.
The Company believes all of these actions are without merit.
- 12 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1998
(UNAUDITED)
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
-------------------------
September 30,
1998 1997
---- ----
Asset:
Cash $ 218 $ 464,581
Notes receivable - -
Loan receivable - officers
and shareholders - 231,659
Liabilities:
Cash overdrafts 35,523 -
Notes payable 190,000 -
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,
notes receivable, 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)
SEPTEMBER 30, 1998
(UNAUDITED)
13. SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Noncash Transactions
During the nine-months ended September 30, 1998 the Company
applied $79,869 of offering costs that were prepaid as of
January 1, 1998 against the proceeds of stock issued. Common stock
was issued to settle $122,505 of accounts payable and for $175,000
of services rendered.
Interest and Income Taxes Paid
Cash payments for the following were:
September 30,
------------------
1998 1997
---- ----
Interest $ - $ -
======= ========
Income taxes $12,724 $ 26,862
======= ========
During the 3 month period ending September 30, 1998 the
Company issued 5,022,364 shares upon the exceeding of previous
outstanding warrants. The total excessive price was $1,240,571
upon which some cash received and the balance was recorded by the
Company as subscription receivable.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The consolidated financial statements provided in this nine month
report for the period ended September 30, 1998 include the financial statements
of SeaGull Entertainment for nine months, the financial statements of the
Company for nine months, and nine 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 nine months ended September 30, 1998 include the
financial statements of SeaGull for nine months, the financial statements of the
Company for nine months, the combined financial statements of KSG for nine
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
Net revenues consist of total billings (less any agency fees and
media costs) and accruals for earned fees. Net revenues for the Third Quarter
of 1998 were $382,575 compared with net revenue of $197,100 for the Third
Quarter of 1997.
For the Nine Month Period Ended September 30, 1998 Net Revenues were
$1,517,156 compared with $1,732,300 in the comparable period in the prior year.
Amortization of program costs (costs to produce, market and
distribute a broadcast or film property) was $706,738 in the First Nine Months
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 $540,541 to $51,359 for the first nine
months of 1998 from $591,900 for the comparable period in 1997. The decrease
in these costs were due to the sale of KS&E in 1997.
Gross profit increased by $13,221, to $49,221 for the Third Quarter
of 1998 from $36,000 for the Third Quarter of 1997. Gross Profit for the nine
month period decreased $381,341 to $759,059 in 1998 as compared to $1,140,400
in 1997.
Salaries and benefits increased by $56,323 to $336,769 in the Third
Quarter of 1998 compared to $280,446 for the Third Quarter of 1997. Salaries
and Benefits for the nine month period decreased $437,907 to $879,684 in 1998 as
compared to $1,317,591 in 1997. General and administrative expenses increased by
$399,736 to $579,854 in the Third Quarter of 1998 from $180,118 for the
comparable period in 1997. General and administrative expenses for the nine
month period increased $800,516 to $1,683,943 in 1998 as compared to $883,427 in
1997. The decreases in salaries and benefits are due substantially to the
reduction in personnel resulting from the KS&E Sale. The increases in general
and administrative expenses were principally the result of costs related to the
companies efforts to raise additional equity capital.
Amortization of goodwill increased by $28,093 to $11,389 in the Third
Quarter of 1998 from ($16,704) for the comparable period in 1997. Amortization
of Goodwill for the nine month period decreased $17,642 to $34,167 in 1998 as
compared to $51,809 in 1997. These decreases reflect the allocation of a
significant portion of goodwill related to the KS&E Sale in prior periods.
Losses from operations (before equity in income of joint venture
increased by $515,481 from a loss of $394,206 in the Third Quarter of 1997 to a
loss of $909,687 for the Third Quarter of 1998. Losses from operations for
the nine month period increased $389,468 to $1,869,631 in 1998 from $1,480,163
in 1997.
The Company did not receive any equity in the income of its joint
ventures for the first nine months of 1998. It did not receive any equity in the
increase for the nine month period as compared to $444,482 received in 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 $1,278,740 to a loss of
$909,687 in the Third Quarter of 1998 from a profit of $369,053 in 1997.
Income before taxes for the nine month period decreased by $3,626,003 to a loss
of $1,586,666 in 1998 from a profit of $2,039,337 in 1997.
The provision for income tax expense was a credit of $357,300 in the
Third Quarter of 1998 as compared to an expense of $784,100 in the Third
Quarter of 1997. The provision for Income Tax Expense for the nine month period
was a credit of $612,195 for 1998 as compared to a expense of $2,261,400 in
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 loss amounted to $552,327, or .02 per share, for
the Third Quarter of 1998, as compared to net loss of $415,047, or $.02 per
share, for the same quarter in 1997. The Company's Net Loss for the nine months
of 1998 was $974,471 as compared to Net Loss of $222,063 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.
For the nine months ended September 30, 1998 the Company generated
approximatily $1,430,500 in taxable losses which can be used to offset future
taxable income. The benefits of these losses have been recognized in the
financial statements.
Liquidity and Capital Resources
Net cash used in operating activities was $1,967,197 in the Third
Quarter of 1998 compared with $1,340,818 provided by operating activities in the
Third Quarter of 1997. The increase in cash used operating activities was
primarily the result of the reduction of deferred income, Accounts Payable and
Accrued Liabilities.
Net cash used by investing activities in 1998 was $387,329 compared
to the use of net cash in investing activities of $2,332,417. This
change was primarily due to the decrease in expenditures for program costs.
Net cash provided by financing activities amounted to $2,164,096 for
the nine months ended September 30, 1998 as compared to $681,024 provided by
financing activities for the nine months ended September 30, 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, and the lack of the
large note repayments that took place in 1997.
As of September 30, 1998, the Company had cash of $218 compared with
$164,581 as of September 30, 1997. Operating activities used a net cash outflow
of $967,197. The principle source of cash during the First nine months of 1998
was raised through the sale of equity securities in the amount of $2,538,721
These amounts were used to substantially reduce the companies liabilities.
During the First nine months of 1998, the Company received $100,000
cash from its 50% participation in the Joint Venture that produced and
distributed the first season of "Tarzan: The Epic Adventures." The lack of
liquidity of the Company's investment 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.
The Company anticipates that "Hollywood Discoveries," and "Boxcino"
will not generate profits until 1999.
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 have been recognized as expenses.
We have just signed agreements and soon to sign others with Victory
Media, one of Germany's leading financing groups, that will provide us with both
guaranteed revenue and cash flow over the next three years beginning in fourth
quarter. The Shaka Zulu and The Diamond Hunters mini series will be the
foundation of this important and rewarding relationship. These two most
exciting projects are important in the amount of monies (combined budget of
$45,000,000) that Victory has committed to as well as the exposure it is giving
the Company worldwide.
Through our major relationship with the Abrams/Gentile Company, the
Micronauts series is on track for delivery in 1999. The to deal with Italy's
Giochi Preziosi Group as well as the Canadian and French co-production deals
have been signed. We expect to show income beginning the fourth quarter for
this important project.
We have signed a letter of intent to acquire on a joint venture basis a
television station in Palm Springs, California. We are currently awaiting FCC
approval and expect that approval in the fourth quarter.
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 September 30, 1998, the Company had working capital of $2,324,363 as
compared to a working capital of $1,331,335 at September 30, 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. Changes in Securities
(a) Recent Sales of Unregistered Securities
The Company issued 300,000 shares of common stock pursuant to a private
offering under Rule 506 of Regulation D to foreign investors in various
transaction from April 1, 1998 to June 30, 1998 at a price of $.75 per share.
The Company also issued 300,000 shares of common stock in settlement
of a claim.
In the Second Quarter of 1998, the Company issued 590,000 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 April 1, 1998 and September 30, 1998 1,530,000 Warrants were
exercised at prices ranging from $.25 to $.75 per share.
All shares were issued pursuant to exemption from the registration
requirements of the Securities Act of 1933, Section 4(2) thereof. The resale of
all such shares was included in registration statements.
Item 2. 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>
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.
August 14, 1998: By: /s/ Henry Siegel
----------------------------------------
Henry Siegel, Chief Executive Officer
August 14, 1998: By: /s/ Irving Greenman
----------------------------------------
Irving Greenman, Chief Financial Officer
-21-
<PAGE>
EXHIBIT 11
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Nine Months Ended September 30, 1998
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Loss $ (974,471)
===========
BASIC AND DILUTED EPS
Weighted average
shares outstanding 32,755,816
------------ ----------
$ (974,471) 32,755,816 $ (.03)
============ =======
Warrant and Options were anti-dilutive during the nine months ended September
30, 1998, so the diluted earnings per share equals the basic earnings per share.
-22-
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (continued)
For the Nine Months Ended September 30, 1997
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Loss $ (336,051)
==========
BASIC EPS
Weighted average
shares outstanding 24,821,502
------------ ----------
(336,051) 24,821,502 $ (0.02)
=======
DILUTED EPS
Weighted average
shares outstanding 24,821,502
Additional shares assuming
conversion of warrants 3,525,090
------------ ----------
$ (336,051) 28,346,592 $ (0.02)
============ ========== =======
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 six months ended June 30, 1997, this
calculation determined that the effect would be anti-dilutive. As a result
it was not used in the earnings per share calculation.
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 218 464,581
<SECURITIES> 0 0
<RECEIVABLES> 847,305 781,527
<ALLOWANCES> 116,539 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,840,895 5,838,279
<PP&E> 196,158 124,498
<DEPRECIATION> 137,613 0
<TOTAL-ASSETS> 9,125,114 9,474,082
<CURRENT-LIABILITIES> 2,516,532 4,506,944
<BONDS> 0 0
0 0
0 0
<COMMON> 36,904 158,931
<OTHER-SE> 9,307,855 4,644,164
<TOTAL-LIABILITY-AND-EQUITY> 9,225,114 9,474,082
<SALES> 0 0
<TOTAL-REVENUES> 1,517,156 1,722,300
<CGS> 758,097 591,900
<TOTAL-COSTS> 758,097 591,900
<OTHER-EXPENSES> 2,597,794 2,735,451
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,896 137,924
<INCOME-PRETAX> (1,586,666) 1,925,349
<INCOME-TAX> (612,195) 2,261,400
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (974,471) (336,051)
<EPS-PRIMARY> (.03) (.01)
<EPS-DILUTED> (.03) (.01)
</TABLE>
