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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment 1 To
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31,1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________________ to __________________
Commission file number 0-17591
KALEIDOSCOPE MEDIA GROUP, INC.
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(Exact name of small business issuer in its charter)
Delaware 93-0957030
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
244 W. 54th Street, New York, New York 10019
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 757-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1998 are
$1,137,675.
The aggregate market value of the voting and non-voting common stock
held by nonaffiliates of the issuer is $7,028,043 (as of March 31, 1999).
The number of shares outstanding of the issuer's common stock is
40,955,960 (as of March 31, 1999).
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PART I
Item 1. Description of Business
This amendment contains information subsequent to the original filing.
Except as otherwise indicated, information contained herein has not been updated
since the Company's initial filing of the Form 10-K. The financial statements
have been amended in their entirety.
Corporate History
Kaleidoscope Media Group, Inc. (the "Company"), then called BNN
Corporation ("BNN") and a publicly traded corporation without operations,
acquired all of the outstanding shares of Kaleidoscope Media Group, Inc., a
private corporation (now called HSPSMM, Inc. and referred to herein as "HSPS"),
on October 22, 1996. The transaction was effected by issuing shares of common
stock of the Company in an amount that resulted in the original HSPS
shareholders receiving approximately 40.3% of the then outstanding shares of the
Company. For financial reporting purposes, the transaction was recorded as a
recapitalization of HSPS. HSPS is the continuing, surviving entity for
accounting purposes, but the Company is the continuing entity for legal
purposes. On December 3, 1997, the Company, a Nevada corporation, was
reincorporated in the State of Delaware under its present name.
HSPS was formed on May 3, 1996 by the issuance of approximately 59.8%
of its outstanding shares (equivalent to 5,685,688 shares of common stock of the
Company) for approximately 91% of the outstanding shares of SeaGull
Entertainment, Inc., ("SeaGull") and the issuance of approximately 40.2% of its
outstanding shares (equivalent to 3,814,312 shares of common stock of the
Company) for all of the outstanding shares of two affiliated corporations
constituting the Kaleidoscope Sports Group ("KSG")). For financial reporting
purposes, this transaction was recorded as a purchase of HSPS by SeaGull. In
1996, SeaGull acquired as treasury stock, the remaining 9% of its outstanding
shares not then owned by HSPS. In 1997, the Company disposed of substantially
all of its sports related properties of KSG.
Introduction
At the beginning of 1998, The Company was a diversified entertainment,
sports and direct marketing company that operated, under three divisions through
subsidiaries.
In December 1998 the Company determined to curtail all significant
operations of both the sports and direct marketing divisions. While the Company
may market existing content owned by these divisions, for the foreseeable future
it will concentrate its efforts on its entertainment division.
During 1998 the Company incurred significant losses in the
entertainment division as the introduction of programming was either postponed,
or not introduced at all. In addition, sales of programs were less than
anticipated. As a result, the Company took steps to reduce or eliminate costs by
moving offices to less costly quarters, reducing the number of employees and,
most
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important, establishing strategic alliances with production and distribution
companies. The Company determined for the immediate future not to be responsible
for the financing of production costs of its programs unless such financing was
restricted to future distribution of proceeds.
From April 1999 through August 1999 the Company received $962,500 gross
proceeds in consideration of the sale of convertible notes. The investors
subject to certain conditions which have not been met were required to make
additional payments of $1,250,000. The Company is obligated to repay the Notes
with interest in April 2000. The Company however is negotiating with these
noteholders for additional financing and extension the payment of these notes.
The principal executive offices of the Company are located at 244 West
54th Street, New York, New York and its telephone number is (212) 757-0700.
Business Strategy
With respect to its entertainment operations, the Company focuses
primarily on production and distribution of television products. The Company
attempts to use strategic partnerships and pre- sales of distribution rights to
finance production budgets once the Company has identified television properties
to develop and produce. In addition, the Company emphasizes cost-effective
production techniques and the pre-sale of advertising time and foreign
distribution agreements by its television syndication operations to further
attempt to limit or cover the costs of production. This strategy is important in
maximizing the Company's profit from its television production operations and
minimizing the risk of loss of capital. The Company believes that its expertise
in both television production and domestic and foreign syndication is an
important factor in its ability to successfully compete in this area.
The Company's distribution strategy is to become a leader in the
international distribution of television properties in two categories: (i) one
hour action dramas and mini series and; (ii) children's programming. In
furtherance of achieving its strategic goals, the Company is seeking to expand
its television operations through the acquisition of distribution and other
representation rights to entertainment properties.
During 1998 and early 1999 the Company entered into arrangements with
(i) Victory Media of Germany for funding of mini-series like "Shaka Zulu" and
"Diamond Hunters"; (ii) Abrams Gentile Entertainment for production of animated
and live action series and specials and; (iii) BKS Entertainment for the
domestic distribution of the Company's product. The latter venture becomes
effective in second quarter of 1999 and should not only reduce costs
significantly, but also strengthen its relationships in the U.S. domestic
market. One of the first programs that BKS will be handling for KMG is the
domestic distribution of "Digital Cafe 2000". This half-hour weekly series
currently airing in the U.S., focuses on the internet, E-commerce and the impact
of the computer on literally every aspect of our daily lives.
Entertainment Division
The Entertainment Division (principally consisting of SeaGull's
business activities which is now conducted directly by the Company) is primarily
engaged in the business of distributing domestically and internationally
entertainment properties and exploiting the related licensing and merchandising
opportunities. It also provides consulting services in the development of
specialty television programming and is involved in the distribution of
entertainment library properties.
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Programming Produced and Distributed by the Company
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In 1998, the Company released its made-for-television movie "Merlin:
The Magic Begins" based on that legendary character. The production of this
movie was fully financed by the Company. The title role has been cast with Jason
Connery (son of Sean Connery) and Deborah Moore (daughter of Roger Moore). The
movie was distributed for broadcast in 1998.
In 1998, The Company acquired the rights to a new children's television
property and toy line entitled "Micronauts." The Company expects that the
television property to be introduced in 2000 as a weekly television series. The
Company also expects that the toy line will begin limited distribution. The
movie and series are based on the popular 1970's Marvel comic book and toy line
of the same name.
In 1996 SeaGull entered into a joint venture agreement with Keller
Entertainment, Inc. under the name Keller Siegel Entertainment (the "Joint
Venture"). The Joint Venture produced and distributed a two-hour movie pilot and
20 episodes of the "Tarzan: The Epic Adventures" syndicated television series
domestically in 1996 and internationally in 1997. Beginning in the Fall of 1997,
the "Tarzan: The Epic Adventures" series was renewed for another season without
any new production, but previously produced half-hours (made into hours) were
syndicated for the U.S. market only. The Joint Venture continues to maintain the
license from Edgar Rice Burroughs for the "live-action" rights to "Tarzan". The
Tarzan Joint Venture will attempt to distribute these programs to cable and on
domestic syndication in 1999.
In 1998, the Company signed agreements with Victory Media, one of
Germany's leading entertainment financing groups and producer of over 200 hours
of quality programming and 30 interactive CD-ROMS. Two $20 million mini-series
"Shaka Zulu" and the "Diamond Hunters" will be the foundation of this important
relationship. Victory Media has raised through private tax shelters in Germany
millions of dollars that financed production of high budgeted mini-series and
quality children programs. Victory has appointed the Company to be its exclusive
North American distributor as well as for other territories outside the U.S. in
which KMG has important relationships. Furthermore, because all projects are
fully financed before production begins the Company will be able in 1999 to be
paid as soon as signed distribution agreements are obtained by the Company. The
new "Shaka Zulu" four-hour mini-series which has an international cast of stars
including Baywatch's David Hasselhoff and Raiders Of The Lost Ark's Karen Allen,
began production in January 1999. The original Shaka mini-series was produced
over 10 years ago.
During the year the Company abandoned efforts to complete production
and distribution of Team Extreme because of its inability to obtain financing
sufficient for the completion and distribution of this series.
The Television Market
The entertainment industry is an approximately $30 billion per year
industry which is presently undergoing strategic changes as new technologies
proliferate in both the development and production of projects and in the
electronic distribution of entertainment programming. The
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development and growth of the 500 channel cable system, DBS (Direct Broadcast
Satellite), Pay Cable, home video, CD-ROMs and other interactive multimedia are
creating many more opportunities for the distribution of entertainment
programming to the consumer, while at the same time reducing the overall market
share for any one program. Even with these changes, management believes that the
creative content of the programming will continue to drive the market share.
Consequently, management believes there is, and is likely to continue to be, a
growing demand for quality content-based entertainment products that can be
produced more efficiently.
The United States television market is served by network affiliated
stations, independent stations and cable TV operators. During prime time hours
(primarily 8 P.M. to 11 P.M. in the Eastern and Pacific time zones and 7 P.M. to
10 P.M. in the Central and Mountain time zones), network affiliates primarily
broadcast programming produced for the network. In non-prime time, network
affiliates telecast network programming, off-network programming (reruns), first
run programming (programming produced for distribution on a syndicated basis)
and local programming produced by the local stations themselves. Independent
television stations, during both prime and non-prime time, produce their own
programs, telecast off-network programs or acquire first-run programs from
independent producers or "syndicators." A syndicator is generally a company that
sells programming to independent television stations and network affiliates.
Programming acquired by stations on a syndicated basis is generally acquired
either for cash license fees or an exchange commercial advertising time within
the program which is retained by the syndicator for sale ("barter") or for a
combination of cash and barter.
The international television market continues to grow as the continued
growth and development of international television distribution channels
increases the demand for quality programming. International sales of programming
are made to television distributors on a cash basis. An initial cash down
payment is made upon the agreement of the international channel to display the
programming. The balance of the cash licensing fee is generally paid upon the
delivery of the programming. Sales of advertising time are retained by the
international television network.
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Television Distribution
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Barter syndication is the process whereby a syndicator obtains
commitments ("clearances") from television stations to broadcast a program at a
certain time; retains advertising time in the program in lieu of receiving a
cash licensing fee and sells such retained advertising time for its own account
to national advertisers at rates based on projected ratings and viewer
demographics. From time to time, certain stations may require cash consideration
from the Company, in addition to programming, in exchange for advertising time.
By placing the program with televisions stations throughout the United States,
the syndicator creates an "ad hoc" network of stations that have agreed to carry
the program. The creation of the "ad hoc" network of stations, normally
representing a penetration of at least 70% of the total United States television
households (calculated by means of a generally recognized system as measured by
A.C. Nielsen), enables the syndicator to sell the commercial inventory to
sponsors desiring national coverage. The rates charged by a syndicator for
advertising time are generally at a lower cost per thousand viewers than those
which national advertisers are normally charged by the networks for similar
demographics.
Fees paid by national advertisers for barter advertising are
established on the basis of household audience ratings or, more frequently, on
the basis for delivery of a certain demographic category of the viewing
audience, but may vary depending on the conditions in the general market for
television advertising. The desired household rating or demographic delivery, as
the case may be, is negotiated in advance with the advertiser or its
representative. In general, if the television program does not deliver at least
the agreed-upon audience, the distributor is obligated to make available
additional advertising time on the same program or other programs at no
additional cost or to refund that portion of the advertising fee attributable to
the failure to deliver the agreed-upon audience.
Cable Network Licenses
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Television programming can be licensed for telecast by cable networks,
such as the ESPN Lifetime, USA and Arts & Entertainment basic cable networks and
the Disney and HBO pay cable networks. The production and distribution of
programming for initial exhibition on cable networks is similar to that for
broadcast networks, although the license fees paid by cable networks are
typically considerably lower than those paid by the broadcast networks.
International Television Production and Distribution
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Based on industry sources, the Company believes revenues from the
distribution of U.S. television programs industry wide to foreign markets have
increased significantly in recent years. Development in the European television
industry, such as the present trend towards increasing the number of privately
owned channels and greater channel capacity, may cause foreign sales to become a
more important component of the distribution of programs produced by the United
States television industry. There is no assurance that the Company's productions
will reflect such increase.
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New Programming
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In general, the Company earns a fee for distributing programs for
others based on a percentage of the license fees paid by television stations for
the right to broadcast particular programs. In certain domestic cases, all or a
portion of such license fee may be payable in television advertising time. The
advertising time is then sold by the Company to national advertisers.
In addition to United States television broadcast rights, the Company
has in the past acquired, where available on acceptable terms, world-wide
broadcast television and non-standard television distribution rights (such as
cable and videocassette rights) to the programs it distributes. These
acquisitions are typically on a long-term exclusive basis, often between three
and twelve years, in some cases with various renewal options, and may provide
that the Company has the right to undertake production of the program in the
event the producer fails to deliver the contracted programming. As an example,
the Company has retained the rights for the worldwide videocassette distribution
of the "Tarzan: The Epic Adventures".
Entering into arrangements for distribution of new material or
properties for television and new multimedia productions is essential to the
future growth of the Company. The Company may obtain new properties from several
sources: (i) distribution agreement with the owner of a property; (ii)
acquisition of existing properties; (iii) co-development of new properties; and
(iv) development of new properties internally. As long as the Company
experiences capital shortages, it will concentrate on acquiring distribution
rights as opposed to being responsible for financing of a project.
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Revenue Sources
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The Company's television programming business generates two significant
sources of revenue, distribution fees and the sale of advertising time.
Distribution Fees
In most cases, the Company's distribution revenues are based on a
percentage of the net revenues derived from the sale of advertiser sponsorships
or on cash license fees. Generally, the Company advances all distribution costs
of items such as advertising, promotion, tape shipping and tape duplication and
recovers such expenses from the program revenues. In some instances, these
expenses are assumed by the Company as part of its distribution fee. The
Company's fee for distribution is generally between 30% and 40% of net revenues
and its fee for advertiser sales representation is generally between 5% and 10%
of net revenues. However, each fee arrangement is separately negotiated and may
be subject to variation. The sums in excess of the Company's fees and expenses
and profit positions (where applicable) are remitted to the producers of the
programs which in certain cases may also be the Company.
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Sales of Advertising
Fees for advertising time are established on the basis of a certain
assumed level of audience ratings and, in some cases, an assumed demographic
make-up of the viewing audience. While it is in the interest of the Company to
establish as high an assumed rating and as favorable demographic make up as
possible, there can be no assurance in advance that the actual rating or
demographic make-up of a particular program will support the fee initially
charged for advertising time on such program. If the television program does not
achieve the assumed rating or demographic make up (as determined by A.C.
Nielsen or similar ratings services), the Company may be obligated to offer the
advertiser additional time ("make goods") on the same program or on other
programs to fulfill any short fall in the actual rating or demographic
assumptions. Alternatively, the Company may be obligated to refund a portion of
the advertising fee. "Make goods" are the predominant means whereby the Company
satisfies such obligations to advertisers.
Among the sponsors that have in the past purchased participation in the
Company's programs are: General Motors, Proctor & Gamble, Kraft/General Foods,
Hershey and Bristol Meyers. Sales are made through the Company's sales force and
through advertising agencies representing the sponsors. The Company's barter
syndication licenses provide that the Company retains a negotiated amount of
commercial time per program (usually 7 minutes per hour or 50% of the total
commercial time) for sale to national advertisers, with the remaining commercial
time retained by the station for local sale. Generally, the Company's fee for
sales of advertising time is between 5% and 10% of net revenues.
Sports Division
In March 1997, the Company and Sports Marketing, Inc. reached an
agreement to create a joint venture to develop, produce and distribute boxing
tournaments both domestically and internationally. The two companies
collaborated on "Boxcino", a series of round robin boxing matches featuring
fighters from eight Latin American countries. The quarter- and semi-finals aired
on ESPN2 in May and July 1997, respectively, and the finals in each weight class
aired on ESPN in September 1997. The Company expected to continue this franchise
as well as to stage other boxing matches in 1998. While the Company believed
that boxing would be a major source of revenues in the future, the Company's
joint venture was unable to establish boxing matches in 1998. This division is
now dormant.
The Company also has the worldwide distribution rights to two daily
fitness series ("Crunch" and "Cyberfit") currently being broadcast on ESPN2 and
available for distribution in territories outside the United States. The Company
believes that "Crunch" and "Cyberfit" are two of ESPN2's highest rated fitness
series because of their high energy and employment of state of the art fitness
techniques. The Company has derived a small amount of revenue from these
operations.
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Direct Marketing Division
The Direct Marketing Division was initiated in January 1997 when the
Company entered into a joint venture agreement with HSN Direct to form Hollywood
Connection LLC ("HC LLC"). HC LLC produced and distributed "Hollywood
Discoveries," a one-hour daily shopping program, which was broadcast in the
United States by over-the-air broadcasters and cable and satellite systems.
"Hollywood Discoveries" is designed to provide home shopping programming using
stage, screen, television, music and sports personalities to market merchandise
via taped programming in the domestic and international markets. The program met
with limited success in the United States and an operation has been discontinued
in the United States and all costs associated with the division have been
written off. The Company will nevertheless seek to offer, internationally, a
weekly "best of" episode(s) and/or format rights to broadcast entities, with
product fulfillment to be handled by the various international companies
associated with HSN Direct.
Competition
Competition in the production and distribution of television
programming is intense. The Company's is a minor participant in the television
distribution business. The Company's programming competes with other first-run
programming, network reruns and programs produced by local television stations.
The Company competes with many other companies that have been acquiring,
producing and distributing programs for a longer period of time than the
Company, and most of these companies have greater financial resources than those
of the Company. These competitors include large television and film studios such
as Paramount Communications Inc., Columbia Pictures Television, 20th Century Fox
Film Corp., MCA Inc., and Warner Bros. Inc., as well as other television
distribution companies such as King World Productions, Inc., All-American
Television Inc. and Viacom International, Inc. The Company also competes with
other companies for the sale of television advertising time, including Tribune
Broadcasting Co./Entertainment Co., Viacom International, Inc., All-American and
King World.
The Company's success is highly dependent upon such various
unpredictable factors as the viewing preferences of television audiences. Public
taste is unpredictable and a shift in demand could cause the Company's
programming to lose its appeal. Television programming also competes for
audiences with many other forms of entertainment and leisure time activities,
some of which include new areas of technology (e.g., video games and home
video). The impact of these on the Company's operations cannot be predicted.
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Principal Customers
No customers accounted for more than 10% of the Company's net revenues
during the year ended December 31, 1998.
Employees
At December 31, 1998, the Company employed nine (9) persons all of whom
were full-time employees, these 4 were engaged in sales and marketing five (5)
in management, finance and administration. As at October 15, 1999 the Company
had six employees all of whom were full-time employees. The Company has no
collective bargaining agreement with its employees and believes that its
relationship with its employees is good.
Item 2. Description of Property
The Company's principal executive offices are located at 244 West 54th
Street, New York, New York and consist of approximately 2,000 square feet at a
rental of $6,000. The Company occupies this space pursuant to a month to month
sublease that expires in 2002.
The Company leases approximately 1,500 square feet of office space in
Los Angeles under a lease that expires in September 2000. The annual base rent
for such space is approximately $1,600 per month. The company no longer
maintains an office at this address.
Item 3. Legal Proceedings
On June 21, 1996, an action, entitled International Sports Marketing,
Inc. v. Saatchi & Saatchi, et al. was filed in the Wayne County Circuit Court
against two of the Company's inactive subsidiaries and other unrelated parties
seeking to enforce a default judgment of $21,000,000 entered in 1995 for a prior
action in 1988. The subsidiaries have vigorously defended themselves in this
litigation. Furthermore, management believes that if any subsidiary were found
liable for a judgment, its subsidiaries 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 found no liability for 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 no assurance can be
given, based in the foregoing, management believes that the litigation will not
have a material effect on the Company's financial position.
The Company is a defendant in ACC Entertainment GMBH Co. v.
Kaleidoscope Media Group, Inc. commenced October 27, 1998 (United District Court
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for the District of California by AAC Entertainment GMBH Co. ("ACC") for alleged
breach of contract seeking damages of $250,000. The contract provided for
certain rights to the Company's Merlin film to be produced by the Company in
return for an investment of $375,000. ACC claims that the Company failed to
properly deliver the film. The Company has counterclaimed for damages. ACC has
also claimed that the Company executed an additional agreement for Team Extreme.
On October 28, 1998 Paul Cioffari commenced an action against the
Company and its subsidiary claiming failure of the Company to perform its
agreement to pay Mr. Cioffari agreed consideration for entertainment property
allegedly delivered by Mr. Cioffari to the Company. Cioffari vs. BNN Company
(Supreme Court New York County). Defendants seek damages up to $700,000 on a
variety of claims. The Company denies all liability.
On October 1999 the Company settled an action by Jack Woolf commenced
in Supreme Court for the State of California in Los Angeles entitled Jack Woolf
vs. BNN Corporation. Mr. Woolf had alleged a breach of an agreement with the
Company's former subsidiary Celebrity Shopping Network.
On August 5, 1998 Mr. Barry Synter commenced an action against the
Company in the Supreme Court of the State of New York - County of New York.
(Synter vs. BNN Corporation) Mr. Synter seeks damages of up to $1,500,000 for
the Company's alleged failure to permit transfer by Mr. Synter of stock
certificates allegedly owned by him. The Company has alleged Mr. Synter was not
entitled to the certificate.
The Company satisfied a default judgment taken by Tokyo Broadcasting
Systems against the Company for approximately $22,000 for non-payment of a note
in connection with an action commenced in Supreme Court of the State of New York
for New York County.
A default judgment has also been obtained by Darrell N. Griffin against
Paul Siegel, an officer and director of the Company, in the amount of
approximately $166,000 in an action pending in the Supreme Court of the State of
California. The claim arises out of action for salary allegedly payable to a
plaintiff purportedly an employee of the Company's former subsidiary Celebrity
Showcase Network. Judgment was taken after Mr. Siegel's counsel failed to
respond to discovery requests. The court of appeals rejected Mr. Siegel's appeal
of the lower court's decision. Mr. Siegel has commenced an action against his
former attorney for malpractice. The Company is obligated to indemnify Mr.
Siegel in accordance with Delaware law.
An action has also been commenced by Eric Ashenberg a former officer of
Celebrity Showcase Network, its prior subsidiary for damages arising from the
Company's failure to approve the transfer of a certificate allegedly owned by
Mr. Ashenberg. Mr. Ashenberg has also named Henry Siegel and Paul Siegel as
defendants. The Company has agreed to indemnify Messrs. Siegel to the full
extent provided by law. Mr. Ashenberg seeks damages in the amount of $450,000.
The Company denies that Mr. Ashenberg was entitled to his certificates. The
Company and Mr. Ashenberg have in principle agreed to settle this action.
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On December 19, 1997, the Company filed an action in the United States
District Court Southern District of New York entitled Kaleidoscope Media Group,
Inc. v. Entertainment Solutions, Inc., James K. Isenhour, Andrew S. Varni. The
complaint seeks damages for breach of contract and fraudulent inducement of
contract, among other claims, arising out of a venture that the Company entered
into with defendants to promote a sports tournament of Latin American boxing in
1997 called "Boxcino." The Company seeks damages of at least $500,000 plus
punitive damages in the action. Defendants James Isenhour and Entertainment
Solutions, Inc. had answered the complaint, asserting various affirmative
defenses and two counterclaims, for breach of contract and quantum meruit,
seeking damages of not less than $250,000. In September 1999 the Company
obtained a default judgement against all defendants which also dismissed all
counterclaims.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock (the "Common Stock") is quoted on the OTC
Bulletin Board under the symbol "KMGG".
Set forth below are the approximate high and low bids for the Common
Stock on the OTC Bulletin Board as published by the National Quotation Bureau,
Inc. Such quotations reflect interdealer prices without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
Common Stock
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High Low
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1998
----
Fourth Quarter .86 .25
Third Quarter 1.25 .38
Second Quarter 1.75 .71
First Quarter 2.00 .79
1997
----
Fourth Quarter $ .94 $ .42
Third Quarter 1.22 .75
Second Quarter 2.22 .88
First Quarter 2.56 .50
As of December 31, 1998, there were approximately 213 recordholders of
the Common Stock, although the Company believes that there are more than 400
beneficial owners of the Common Stock.
Sales of Securities
- -------------------
The following sets forth information relating to all securities of the
Company sold from October 1, 1998 through December 31, 1998 without registering
the securities under the Securities Act of 1933, as amended (the "Securities
Act"):
From October 1, 1998 to December 31, 1998 the Company issued 1,156,504
shares of its common stock to investors for $1,156,500. The shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof.
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Dividends
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The Company plans to retain any future earnings for use in its business
and, accordingly, the Company does not anticipate paying dividends in the
foreseeable future to the holders of the Common Stock. Payment of dividends is
within the discretion of the Company's Board of Directors (the "Board of
Directors") and will depend, among other factors, upon the Company's earnings,
financial condition and capital requirements.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
annual report on Form 10-KSB 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 and (iv)
the ability to identify, acquire the rights to, and to develop quality
properties.
Results of Operations
Year Ended December 31, 1998 as Compared with Year Ended December 31,
1997
During 1997 the Company disposed of its Kaleidoscope Sports Group
operations in stages and received a total of $6,000,000. In addition, its
operations for such year reflect revenues from such operations for a portion of
1997. During 1998 the Company's revenues were primarily derived from the
distribution of films by its entertainment division. No revenues were derived
from the sports and direct market division which have now suspended operations.
Net revenues consist of total billings (less any agency fees and media
costs) and accruals for earned fees. Net revenues decreased by $1,603,717, or
60%, to $1,137,675 in 1998 from $2,741,392 in 1997. This decrease is due
substantially to the decline in entertainment division revenues resulting from
delays in the introduction of and reduced sales of the Company's programs. In
addition, the sports and direct marketing divisions did not generate any
revenues.
Amortization of program cost and other direct project costs increased
$2,507,896 from $2,063,503 in 1997 to $4,571,399 in 1998. The increases resulted
from the write off of capitalized costs of the sports and direct marketing
division as well as programs of the entertainment division which were either
abandoned or had in a lower value than anticipated. Direct project cost include
costs necessary to create or produce and market a property. During 1997, there
was amortization of program costs relating to "Boxcino," "Hollywood
Discoveries," "Tarzan: The Epic Adventures" and some smaller projects.
Salaries and benefits decreased by $330,223, or 22%, to $1,183,355 in
1998 from $1,513,578 in 1997. This decrease is due substantially to the
reduction in personnel.
General and administrative expenses increased by $261,942, or 18%, to
$1,715,719 in 1998 from $1,453,777 in 1997. This increase is due substantially
to significant fees related to professional
15
<PAGE>
services including the legal fees incurred in defense and prosecution of several
new actions in 1998.
Amortization of goodwill increased by $754,250 to $831,414 in 1998 from
$77,164 in 1997. This increase is due to the acceleration of amortization of
goodwill retained by the Company after sale of its sports division because the
retained operation was suspended.
Interest expense was $41,090 in 1998 due to borrowing including loans
from an officer. The Company capitalized all interest cost in 1997.
Loss from operations increased by $4,735,903 reflecting a loss of
$7,393,960 in 1998 to a loss of $2,658,057 in 1997. The increase was primarily a
result of the amortization of program costs and goodwill as well as other
factors discussed above.
Company's equity in the income of its joint venture decreased $188,658.
As compared to $317,721 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 when it was first released. Management's estimate of the
ultimate revenues from "Tarzan: The Epic Adventures" have been revised downward.
The $1,204,188 decrease was partially offset by the Company's $249,621 equity in
the income of KS&E during the period April 1, 1997 through August 15, 1997 when
the Company had a 49% interest, in this entity, KS&E was engaged in sports
business including the contribution of certain sporting projects, formerly
conducted by the Company's subsidiaries.
In 1997, the Company realized a gain of $3,512,836 from the sale in two
transactions of a significant portion of its Sports Division.
Income before income taxes decreased by $8,561,985 to a loss of
$7,389,485 in 1998 from income of $1,172,500 in 1997. This decrease was a result
of the factors described above.
The Company had no provision for income tax benefit in 1998 as compared
to the Income Tax Expense of $1,452,594 in 1997. The income tax expense for 1997
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 as described below and (b) the amortization of goodwill, the write-off of
goodwill associated with the sale of KS&E in the amount of $2,386,115 as
described below and certain other expenses are not deductible for income tax
purposes.
The goodwill written off in connection with the sale of KS&E had been
originally created, for financial reporting purposes, in the tax free
transaction in which SeaGull had acquired, for accounting purposes, KSG. As a
result of the tax free nature of that transaction, the goodwill was not
recognized for tax purposes. Consequently, the Company will have to report
$5,899,951 ($6,000,000 of proceeds less $101,049 of direct costs) as the gain in
the 1997 income tax returns. For federal income tax purposes, this gain is
offset on the Company's consolidated tax return by net operating loss
carryforwards ("NOLs"), resulting in no federal tax payment due. The Company's
subsidiary, P&P, is required to record the sale for state and local income tax
purposes. However,
16
<PAGE>
P&P can only offset the gain with a limited amount of NOLs and as a result will
have to pay approximately $751,000 in 1997 state and local income taxes. In
addition to the Company's accrual of these tax payments, the Company is required
to record deferred income tax expenses because the utilization of the NOLs in
offsetting a portion of the gain from the sale of KS&E reduces the future income
tax benefits that would otherwise be available.
The Company's net loss amounted to $8,065,915, or $0.27 per share, for
the year ended December 31, 1998, as compared to net loss of $280,094, or $0.01
per share, for the year ended December 31, 1997, respectively.
Net Operating Loss Carryforwards
Because of its losses the Company has written off deferred income
benefit. Nevertheless, at December 31, 1998, NOLs of the Company amounted to
approximately $8,537,500 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, certain of the Company's subsidiaries have approximately
$175,000 of NOLs that can only be used to offset future taxable income (for
federal and certain state purposes) of the specific subsidiaries to which they
pertain. These NOLs are further limited by the operation of Section 382 of the
Internal Revenue Code. The subsidiaries are only allowed to use a maximum of
approximately $27,000 of these carryforwards each year.
Liquidity and Capital Resources
As of December 31, 1998 the Company had a working capital deficit of
$1,361,067 compared to working capital of $651,603 as of December 31, 1997. The
decrease in working capital was primarily due to a reduction in value of program
cost inventory as a result of write offs in 1998 as well as a decrease in net
income. As of December 31, 1998, the Company had cash of $4,865 compared with
$252,260 as of December 31, 1997. Operating activities generated a net cash
outflow of $3,617,953. The principle source of cash during 1998 was from the
sale of shares which generated net cash in the amount of $3,201,231.
The Company has taken steps to reverse the Company's history of losses
which contributed to its liquidity problem. First it has reduced costs
particularly overhead. As a result the Company closed offices, terminated
several employees, reduced the salary of other employees. It also has entered
into an arrangement with an independent third party to perform certain services
for the distribution formerly performed by the Company. The Company is also
seeking additional programs to distribute without incurring increased financing
costs.
The Company historically received funds from the sale of equity
securities and from operations. In addition, in 1997 it received substantial
proceeds from the sale of its KSE division. Subsequent to March 31, 1999, the
Company was able to obtain funds from the sale of convertible Notes in April and
August 1999. Some of these same investors had agreed to fund $1,250,000
principal amount of Notes in two installments if certain conditions were met.
These conditions included the effectiveness of a registration statement by a
date in August 1999. This condition was not fulfilled and investors have no
further obligation to make an additional investment in this Company. Moreover,
if they do not convert their Notes the Company will have to repay an additional
962,000 plus interest in April 2000. The Company is negotiating substitute
financing and an extension with their investors.
The Company presently requires additional capital from equity, loans,
or from operations to continue in business. While the Company has entered into
distribution arrangements which are anticipated to result in revenues, the
Company requires approximately $500,000 to $750,000 in additional working
capital. The Company is attempting to obtain additional capital from private
capital sources including investors of its convertible notes. If it does not
obtain sufficient funds it will not be able to operate.
17
<PAGE>
Net cash used in operating activities was $3,617,953 in 1998 compared
with $984,388 in 1997. The increase in cash used in operating activities was
primarily the result of the $2,633,565 increase in the operating loss described
above offset by noncash charges for deprecation and amortization and the
conservation of cash through the increase of various operating liabilities.
Net cash used by investing activities in 1998 was $7,973 compared to
the net cash provided by investing activities of $1,232,964 in 1997. This change
was due primarily due to proceeds of $6,000,000 from the sale of a portion of
the Sports Division in 1997, offset by the expenditures for programs costs of
$4,907,329.
Net cash provided by financing activities amounted to $3,378,531 for
the year ended December 31, 1998 as compared to $150,322 used by financing
activities for the same period in 1997. The increase in cash provided by
financing activities was primarily the result of the receipt of cash for equity
transactions in 1998.
Inflation
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net revenues or its
profitability.
Year 2000 Compliance
The Company's computer programs are not Y-2K Compliant. The Company has
made arrangements to correct its programs by October 1999.
Item 7. Financial Statements
Reference is made to pages through comprising a portion of
this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in accountants due to disagreements on
accounting and financial disclosure during the 24 months prior to December 31,
1998.
18
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
As March 31, 1999 the directors and executive officers of the Company
were as set forth below. Ray Volpe subsequently resigned as a director.
Name Age Position
---- --- --------
Henry Siegel 58 Chief Executive Officer, Chairman of the Board
Paul Siegel 58 President and Director
Ray Volpe 57 Director
Martin Miller 59 Director
Irving Greenman 63 Vice President, Chief Financial Officer
Henry Siegel has been Chairman of the Board, Chief Executive Officer
and Director of the Company since 1995 and has been an officer of SeaGull, a
subsidiary of the Company, since that company's inception in 1994. Mr. Siegel
began his career at Grey Advertising and in 1974 was placed in charge of its
media operation, managing all areas of media planning, research and execution.
In 1976, Mr. Siegel founded Lexington Broadcasting Services ("LBS"), where he
pioneered the concept of barter syndication (advertiser-supported television).
As Chairman and chief executive officer of LBS, he launched numerous successful
television series, including "Fame" and "Baywatch." In 1988, Mr. Siegel, with
Warburg, Pincus Capital Company, purchased Grey Advertising's interest in LBS.
LBS entered into bankruptcy in 1991 and emerged from bankruptcy in 1993, soon
after merging with All American Communications in 1992. In July 1994, Mr. Siegel
formed SeaGull.
Paul Siegel has been a director of the Company since 1995, the
President of the Company as of January 1, 1997 and an officer of SeaGull since
its inception in 1994. In 1964, Mr. Siegel started work at S&S, a direct
marketing firm which manufactured and distributed toy and craft products. Mr.
Siegel left S&S in 1982 to establish another direct marketing toy and hobby
company known as Creative Crafts. In 1994, Mr. Siegel changed the name of his
company to Creative Discovery and expanded the product line to include
educational software products. Paul Siegel joined his brother Henry Siegel at
LBS in 1986 to serve as Executive Vice President. LBS entered into bankruptcy in
1992 and emerged from bankruptcy in 1993. LBS was merged with AAC in 1992, and
Mr. Siegel served as Executive Vice President of its All-American Television
subdivision of until he left in 1994 to form SeaGull.
19
<PAGE>
Irving Greenman has been Chief Financial Officer and Secretary of the
Company since January 1998. For ten years prior thereto Mr. Greenman was Chief
Financial Officer for Medica Media and Healthcare International, both companies
being in the healthcare field. Mr. Greenman is a New York and Florida Certified
Public Accountant.
Ray Volpe had been a director of the Company since 1995 until his
resignation in July 1999. Mr. Volpe had served as President and co-Chief
Executive Officer of the Company since its inception in 1995 but resigned such
positions in May 1997 to become the Chief Executive Officer of KS&E which
operates certain former businesses conducted by the Sports Division of the
Company. Mr. Volpe, who began his career at Doyle Dane Bernbach in 1964, was the
Executive Vice President of the National Hockey League and the first
commissioner of the Ladies Professional Golf Association. In 1981, Mr. Volpe and
his partner, Don Ohlmeyer formed Ohlmeyer Communications Company, a sports and
entertainment subsidiary of Nabisco Brands Inc., where, from 1981 to 1990, Mr.
Volpe worked as an independent television producer and media consultant,
representing manufacturers, televisions networks, major syndicators and
advertising agencies engaged in entertainment and sports programming. Mr. Volpe
has been the Chief Executive Officer of HSPS since 1990. During the period from
August 1994 through June 1995, while HSPS was owned by Ventura, Mr. Volpe was
President, Co-Chief Executive Officer and a Director of Ventura.
Martin Miller has been a director of the Company since February 1995.
Mr. Miller, for the past five years, has been a manager of corporate finance for
Millport Ltd., presently a Bahamian based investment advisor of foreign
investors. Mr. Miller is a director of Teltran International Group, Ltd. a
publicly traded Company.
Executive officers serve at the discretion of the Board of Directors.
Henry Siegel and Paul Siegel are brothers.
Item 10. Executive Compensation
The following table sets forth information concerning compensation paid
or accrued by the Company or its subsidiaries for services rendered during the
fiscal years ended December 31, 1996, 1997 and 1998 to the Company's Chief
Executive Officer and to each executive officer whose compensation exceeded
$100,000 during its fiscal year ended December 31, 1998:
20
<PAGE>
Summary Compensation Table
Annual
Compensation
Name and ------------
Principal Position Year Salary
- --------------------------- -------- ------------
Henry Siegel 1998 $350,000*
Chief Executive Officer 1997 $350,000
1996 $125,000
Paul Siegel 1998 $275,000*
President 1997 $275,000
1996 $125,000
Irving Greenman 1998 $164,215
Chief Financial Officer
- -------------
* Partial 1998 and 3 months salaries in 1999 were not paid but accrued.
The following table sets forth all grants of stock options to each of the
named executive officers of the Company during the fiscal year ended December
31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Shares Per Cent of Total
of Common Stock Options Granted to
Underlying Options Employees in Fiscal
Name Granted Year Exercise Price Expiration Date
- ---------------- ------------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Henry Siegel 0 --- --- ---
Paul Siegel 0 --- --- ---
</TABLE>
21
<PAGE>
The following table sets forth information as to options exercised by
each of the named executives during the fiscal year ended December 31, 1998 and
the value of in-the-money options held by such executives at December 31, 1998.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of
Shares of
Common
Stock Number of Shares of Common
Acquired on Value Stock Underlying Unexercised Value of In-the-Money Options at
Name Exercise Realized Options at 12/31/98 12/31/98
- ----------- ------------- --------- ----------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry Siegel 0 --- --- --- --- ---
Paul Siegel 0 --- --- --- --- ---
</TABLE>
- ------------
Employment Agreements
The Company entered into employment agreements as of January 1, 1997
with Henry Siegel, Chief Executive Officer of the Company, and Paul Siegel,
President of the Company. Each agreement has a three-year term which renews for
an additional year on each anniversary of the agreement, and provides for an
annual base compensation of $350,000, with annual increases subsequent to the
three year term in an amount to be determined by the Board of Directors.. In
addition, Henry Siegel and Paul Siegel are each entitled to such bonuses as may
be awarded by the Board of Directors in its discretion. Each agreement also
provides for the payment of benefits, including payment of automobile expenses.
In the event of the death or total disability of either executive, the Company
has agreed to pay his estate or the executive the unpaid portion of his annual
base compensation, but in no event less than six months base compensation. The
agreement also contains a non-competition provision covering the term of the
agreement plus two years following termination or expiration of the agreement.
The Company did not pay salary under then agreements from November 1999 to March
31, 1999. From April 1, 1999 to June 30, 1999 each received salary payments at a
reduced rate of $20,000 per month. No salary payments were made subsequent to
that date.
On July 1, 1999 Mr. Paul Siegel ceased to be an employee and became a
consultant. He is receiving fees of $10,000 per month plus an automobile
allowance. His employment agreement has been terminated.
Stock Option Plan
The Company has adopted a 1996 Stock Option Plan (the "1996 Plan") for
officers, employees and consultants of the Company or any of its subsidiaries
and other entities in which the Company has an interest. The 1996 Plan provides
for the granting of options which are intended to qualify either as incentive
stock options (the "Incentive Stock Options") within the meaning of Section 422
of the Internal Revenue Code of 1986 or as options which are not intended to
meet the requirements of such section (the "Nonstatutory Stock Options" and
collectively with the Incentive Stock Options, the "Options"). As of December
31, 1997, Options to purchase 835,000 shares of Common Stock had been granted.
22
<PAGE>
The 1996 is administered by the Board of Directors or a committee of the
Board of Directors (the "Administrator"). The Administrator has discretionary
authority (subject to certain restrictions) to determine, among other things,
the individuals to whom and the times at which the Options will be granted; the
number of shares of Common Stock underlying the Options; and the exercise price
and the vesting periods of the Options.
The Options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the 1996 Plan as the
Administrator may impose. The exercise price of Incentive Stock Options may not
be less than 100% of the fair market value of the Common Stock at the date of
grant (110% in the case of Incentive Stock Options granted to holders of 10% of
the voting power of the Company's capital stock). The aggregate fair market
value of Common Stock (determined at time of option grant) with respect to which
Incentive Stock Options become exercisable for the first time in any year cannot
exceed $100,000. Each Option, unless sooner terminated, shall expire no later
than 10 years from the date of the grant (five years in the case of Incentive
Stock Options granted to holders of 10% of the voting power of the Company's
capital stock), as the Administrator may determine.
The 1996 Plan (but not Options previously granted thereunder) shall
terminate on December 2001. Subject to certain limitations, the 1996 Plan may be
amended or terminated at an earlier date by the Board of Directors or by a
majority of the outstanding shares entitled to vote thereon.
23
<PAGE>
Compensation of Directors
Directors who are not employed by the Company will be paid a fee of $100
for each Board of Directors meeting attended and $100 for each committee meeting
attended. All directors are reimbursed for expenses incurred on behalf of the
Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of December 31, 1998 by (i) each stockholder
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer named in the Summary Compensation Table above and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.
Name and address of Beneficial Number of Shares
Owner Beneficially Owned Percentage of Class
- ------------------------------ ------------------ -------------------
Henry Siegel 3,055,000 8%
244 West 54th Street
New York, New York
Paul Siegel 3,055,000 8%
5777 West Century Boulevard
Suite 725
Los Angeles, California 90045
Ray Volpe 3,055,000 8%
136 Madison Avenue
New York, New York
Martin Miller (1) -- --
57 The Circle
Glen Head, New York
All directors and executive
officers as a group (4 persons) 9,165,000 24%
- ------------
(1) Does not include 90,000 shares owned by Mr. Miller's wife. Mr. Miller
disclaims beneficial ownership of such shares.
(2) Does not options and securities which may have been acquired subsequent to
March 31, 1999.
24
<PAGE>
Item 12. Certain Relationships and Related Transactions
Pursuant to an agreement, dated as of April 1, 1997, between the
Company and By-The-Way Corporation ("BTW"), a corporation wholly-owned by Ray
Volpe, a former director of the Company, BTW granted to the Company in
perpetuity the right at any time to develop, produce, distribute, market,
license or otherwise exploit (the "Exploitation Rights") all entertainment
properties (other than properties licensed to KS&E) in consideration of an
option payment consisting of $112,500 previously advanced and additional
payments to be made by the Company to BTW of $150,000 per year. Such option
payment will be offset against fees or amounts payable by the Company for any
Exploitation Rights granted to the Company by BTW. During the year ended
December 31, 1997, the Company paid BTW $150,000.
Commencing in April 1997, KS&E sublet approximately 42% of the
Company's office space in New York City for a prorata share of the rent. In
addition, KS&E pays the Company 42% of certain overhead that it utilizes in New
York City. During the fiscal year ended December 31, 1998, the Company received
approximately $361,904 from KS&E for such rent and overhead. Ray Volpe, a former
director of the Company, is Chief Executive Officer of KS&E.
During 1998 pension trust for the benefit of Henry Siegel advanced the
Company $150,000.
The Company received loans, represented by 8% one year notes, in the
principle amount of $412,217 and $600,000 during the years ended December 31,
1997 and 1996, respectively, from foreign clients of Millport Ltd. (the
"Millport Clients"), a Bahamian domiciled investment advisor. All of such loans
were repaid as of December 31, 1997. As additional consideration for granting
these loans to the Company, the Millport Clients have received two year warrants
to purchase an aggregate of 4,048,866 shares of Common Stock at $.25 per share.
Millport Clients also have purchased 4,732,220 shares of Common Stock from the
Company for an aggregate of $2,484,415. In addition, some of the Millport
Clients have purchased shares of Common Stock in the open market. Pursuant to a
settlement agreement, the Company and several of these clients issued 5,285,000
warrants to purchase the Company's common stock at $.10 per share. These clients
settled claims against the Company and agreed to pay indebtedness of the Company
upon excess of 2,000,000 warrants. Millport clients have accepted warrants to
purchase Company's common stock. Martin Miller is a director of the Company and
a director of corporate finance of Millport Ltd. The Millport Clients are not
affiliates of Mr. Miller or Millport Ltd.
25
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
2.01 Plan and Agreement of Reorganization, dated as of October 22, 1996,
among the Company and the shareholders of HSPS (1)
3.01(5) Certificate of Incorporation of the Company
3.02(5) By-Laws of the Company
4.01(5) Specimen Certificate representing the Common Stock, per share
10.01* 1996 Stock Option Plan.(2)
10.02*(5) Employment Agreement entered into between the Company and Henry
Siegel
10.03*(5) Employment Agreement entered into between the Company and Paul
Siegel
10.06(5) Joint Venture Agreement, dated as of October 1, 1995, between
SeaGull Entertainment, Inc. and Keller Entertainment Group, Inc.
10.07 Amended and Restated Limited Liability Company Agreement, dated as
of April 30, 1997, among the Company, Interpublic Group of
Companies, Inc., 345 Park Avenue PAS Sports, Inc. and People &
Properties, Inc.(3)
10.08 Agreement dated as of August 20, 1997, among, Interpublic Group of
Companies, Inc., 345 PAS Sports, Inc., and People & Properties,
Inc.(4)
10.9(5) Vendor Agreement, dated December 18, 1996, between the Company and
HSN Direct Int. LTD. and addendum thereto, dated March 31, 1997
10.10(5) Joint Venture Agreement, dated as of June 1995, between the Company
and BV Sports Marketing, Inc.
10.11 Distribution Agreement between Global Entertainment Productions and
Kaleidoscope Media Group Incorporated, dated November 19, 1998.
10.12 Form of Subscription Agreement -- April 1999
10.13 Agreement as of December 23, 1998 between Abrams Gentile
Entertainment, the Company and Glochi Preziosi, Ltd.
21.01 Subsidiaries of the Company
23.1 Consent of Independent Certified Public Accountants
27.01 Financial Data Schedule
- ------------
* Management contract or compensatory plan or arrangement.
(1) Such Exhibit was filed with the Company's Current Report, dated October 22,
1996, and is incorporated herein by reference
(2) Such Exhibit was filed with the Company's Proxy Statement for the Annual
Meeting held on December 2, 1997 and is incorporated herein by reference.
(3) Such Exhibit was filed with the Company's Current Report, dated May 5, 1997,
and is incorporated herein by reference.
(4) Such Exhibit was filed with the Company's Current Report, dated August 20,
1997, and is incorporated herein by reference.
(5) Such Exhibits were filed with Company's Annual Report on 10K, for 1997
and are incorporated herein by reference.
(6) filed herewith
(b) Reports on Form 8-K
None
26
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
FINANCIAL STATEMENTS WITH
INDEPENDENT AUDITORS' REPORT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
CONTENTS
PAGE #
-------
Independent Auditors' Report 1
Financial Statements:
Consolidated Balance Sheets as of December 31,
1998 and 1997. 3 - 4
Consolidated Statements of Operations For the
years ended December 31, 1998 and 1997. 5
Consolidated Statement of Stockholders' Equity
For the years ended December 31, 1998 and 1997. 6
Consolidated Statements of Cash Flows
For the years ended December 31, 1998 and 1997. 7 - 8
Notes to Consolidated Financial Statements 9 - 26
<PAGE>
LIEBMAN GOLDBERG & DROGIN LLP
Certified Public Accountants
591 Stewart Avenue, Suite 450
Garden City, New York 11530
-----------
Tel (516) 228-6600
Fax (516) 228-6664
INDEPENDENT AUDITORS' REPORT
Board of Directors
Kaleidoscope Media Group Inc.
We have audited the accompanying consolidated balance sheets of Kaleidoscope
Media Group, Inc. (formerly BNN Corporation) and Subsidiaries as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of Kaleidoscope Media Group Inc. (formerly BNN Corporation)
at December 31, 1997 was audited by Paneth, Haber & Zimmerman, LLP whose
report dated April 14, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Kaleidoscope Media Group, Inc. (formerly BNN Corporation) and Subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Garden City, New York
April 14, 1999
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
Current Assets: 1998 1997
---------- ----------
<S> <C> <C>
Cash $ 4,865 $ 252,260
Accounts receivable, less allowance for
doubtful accounts of $507,143 and
$116,539 in 1998 and 1997, respectively 323,325 746,681
Program cost inventory - current portion, net
of accumulated amortization 650,929 2,876,975
Deferred income taxes -- 266,000
Other current assets 55,006 129,153
---------- ----------
Total current assets 1,034,125 4,271,069
Program Cost Inventory, less current portion,
net of accumulated amortization 801,006 2,287,892
Loans and Advances Receivable -
Officers and Shareholders 9,000 36,300
Property and Equipment, at cost, less
accumulated depreciation 28,458 82,782
Investment in Joint Venture 989,452 1,376,500
Deferred Income Taxes -- 356,600
Goodwill, net of accumulated amortization -- 831,414
Other Assets 11,592 24,116
---------- ----------
$2,873,633 $9,266,673
========== ==========
</TABLE>
See notes to financial statements.
3
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
Current Liabilities: 1998 1997
------------ ------------
<S> <C> <C>
Cash overdrafts $ 13,051 $ 194,148
Notes payable, current portion 190,000 40,000
Accounts payable and accrued liabilities 1,242,090 1,656,384
Income taxes payable 906,301 839,496
Option agreement payable - current portion 43,750 150,000
Deferred rent - current portion -- 42,405
Deferred income and client advances -- 697,033
------------ ------------
Total current liabilities 2,395,192 3,619,466
Security Deposit Payable 10,552 --
Option Agreement Payable, less current portion -- 37,500
Deferred Rent, less current portion -- 277,134
------------ ------------
Total liabilities 2,405,744 3,934,100
------------ ------------
Stockholders' Equity:
Common stock, $0.001 par value, 100,000,000 shares
authorized; 38,660,960 and 26,027,082 shares issued
and outstanding at December 31, 1998 and 1997,
respectively 38,661 26,027
Preferred stock, $0.001 par value, 15,000,000
shares authorized, none issued and outstanding
in 1998 and 1997 -- --
Additional paid-in capital 9,386,258 6,197,661
Accumulated deficit (8,957,030) (891,115)
Stock subscriptions receivable less allowance for doubtful accounts
of $1,111,542 and $438,075 in 1998 and 1997, respectively -- --
Treasury stock 529,000 shares in 1998 and 1997 at cost -- --
------------ ------------
Total stockholders' equity 467,889 5,332,573
------------ ------------
Total liabilities and stockholders' equity $ 2,873,633 $ 9,266,673
============ ============
</TABLE>
See notes to financial statements.
4
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Net Revenue $ 1,137,675 $ 2,741,392
----------- -----------
Direct Project Costs:
Amortization of program costs and
other direct project costs 4,571,399 2,063,503
----------- -----------
Total direct project costs 4,571,399 2,063,503
----------- -----------
Gross Profit (Loss) (3,433,724) 677,889
----------- -----------
Expenses:
Amortization of program costs relating to joint venture 188,658 291,427
Salaries and benefits 1,183,355 1,513,578
General and administrative 1,715,719 1,453,777
Amortization of goodwill 831,414 77,164
Interest 41,090 --
----------- -----------
Total expenses 3,960,236 3,335,946
----------- -----------
Operating (Loss) (7,393,960) (2,658,057)
Gain on Sale of Assets -- 3,512,836
Gain on Lease Cancellation 193,133 --
----------- -----------
Income (Loss) before Equity in Income of Joint
Ventures and Provison for Income Taxes (7,200,827) 854,779
Income (Loss) of Joint Venture (188,658) 317,721
----------- -----------
Income (Loss) before Provision for Income Taxes (7,389,485) 1,172,500
Provision for Income Taxes 676,430 1,452,594
----------- -----------
Net (Loss) $(8,065,915) $ (280,094)
=========== ===========
Basic (Loss) Per Share $ (0.27) $ (0.01)
=========== ===========
Diluted (Loss) Per Share $ (0.27) $ (0.01)
=========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 23,557,082 $ 146,731 $ 5,207,506 $ (611,021) $ 4,743,216
Issuance of shares 2,470,000 24,700 560,300 -- 585,000
Issuance of warrants (Note 13) -- -- 284,451 -- 284,451
Adjustment of par value upon
reincorporation of KMG -- (145,404) 145,404 -- --
Net loss -- -- -- (280,094) (280,094)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 26,027,082 26,027 6,197,661 (891,115) 5,332,573
Issuance of shares 12,633,878 12,634 3,188,597 -- 3,201,231
Net loss -- -- -- (8,065,915) (8,065,915)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 38,660,960 $ 38,661 $ 9,386,258 $(8,957,030) $ 467,889
=========== =========== =========== =========== ===========
</TABLE>
529,000 shares of treasury stock were recognized in the KMG recapitalization
without a cost assigned. 500,000 of these shares, represent shares issued to
SeaGull Entertainment prior to the recapitalization which are accounted for as
treasury stock in the consolidated financial statements.
See notes to financial statements.
6
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
December 31,
Cash Flows from Operating Activities: 1998 1997
----------- -----------
<S> <C> <C>
Net (loss) $(8,065,915) $ (280,094)
Adjustment to reconcile net (loss) to net cash
(used in) operating activities:
Amortization and depreciation 893,711 1,098,749
Equity in income of joint venture 188,658 (317,721)
Fee income from joint venture recorded as
an increase in the investment -- (186,300)
Deferred income tax expense 622,600 736,400
Deferred rent (319,539) (43,653)
Gain from sale of assets -- (3,512,836)
Change in assets and liabilities:
Accounts receivable 423,356 60,664
Expenditures billable to clients -- 228,071
Other current assets 74,147 68,714
Investment in joint venture 198,390 --
Security deposits payable 10,552 --
Options payable (143,750) --
Other assets 12,524 (3,000)
Cash overdraft (181,097) 194,148
Accounts payable and accrued liabilities (414,294) 12,368
Write-down of program cost inventory 3,712,932 --
Income taxes payable 66,805 672,575
Deferred income and client advances (697,033) 287,527
----------- -----------
Net cash (used in) operating activities (3,617,953) (984,388)
----------- -----------
Cash Flows from Investing Activities:
Distributions from joint venture -- 285,422
Advances and loans to officers and stockholders -- (49,218)
Expenditures for program costs -- (4,907,329)
Acquisition of property and equipment (7,973) (17,547)
Proceeds from sale of property and equipment -- 22,685
Payment of expenses relating to the sale of assets -- (101,049)
Proceeds from sale of assets -- 6,000,000
----------- -----------
Net cash provided by (used in)
investing activities (7,973) 1,232,964
----------- -----------
</TABLE>
See notes to financial statements.
7
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the years ended
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Financing Activities:
Deferred offering costs -- (79,869)
Repayments of loans payable - stockholders 27,300 --
Proceeds from notes payable 150,000 582,766
Repayments of notes payable -- (1,488,925)
Principal payments on capitalized lease obligations -- (33,745)
Issuance of common stock 3,201,231 585,000
Issuance of warrants -- 284,451
----------- -----------
Net cash provided by (used in) financing activities 3,378,531 (150,322)
----------- -----------
Increase (decrease) in cash (247,395) 98,254
Cash - January 1, 252,260 154,006
----------- -----------
Cash - December 31, $ 4,865 $ 252,260
=========== ===========
</TABLE>
See notes to financial statements.
8
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1 - Organization and Description of Business:
On October 22, 1996, Kaleidoscope Media Group, Inc. ("KMG"), which
changed its name from BNN Corporation in December 1997 (upon
reincorporating as a Delaware corporation - it had been a Nevada
corporation) and was a publicly traded corporation without
significant operations, acquired all of the outstanding share of
HSPSMM, Inc. ("HSPS") which changed it name from Kaleidoscope Media
Group, Inc. in November 1997. The transaction was effected by issuing
additional KMG shares in an amount that resulted in the original HSPS
shareholders receiving approximately 40.3% of the outstanding shares
of BNN. The original HSPS shareholders owned additional shares of KMG
from before the October 22, 1996 transaction. After the consummation
of the transaction, they owned approximately 47% of the outstanding
shares, and with the other 53% scattered, had effective control.
For financial reporting purposes, the transaction was recorded as a
recapitalization of HSPS. HSPS is the continuing, surviving, entity
for accounting purposes, but adopted the capital structure of KMG
which is the continuing entity for legal purposes. All references to
shares of common stock have been restated to reflect the equivalent
number of KMG shares.
To clarify the corporate names discussed above, the parent company,
formerly called BNN Corporation, has adopted the name of the former
subsidiary, Kaleidoscope Media Group, Inc. which in turn changed its
name to HSPSMM, Inc. All references in these financial statements to
KMG refer to the "new" KMG; all references to HSPS refer to the "old"
KMG.
HSPS was formed in May of 1996, at which time it issued 5,685,688
common shares to acquire approximately 91% of the outstanding shares
of SeaGull Entertainment, Inc. ("SeaGull") and 3,814,312 common
shares to acquire 100% of the outstanding stock of the Kaleidoscope
Group ("KG"), a marketing and consulting company engaged primarily in
sports and event marketing. Since, as a result of the transaction,
stockholders of SeaGull owned a majority of the common stock of HSPS,
the acquisition of SeaGull by HSPS was accounted for as a
recapitalization of SeaGull. Accordingly, the historical financial
statements are those of SeaGull. The acquisition of KG was accounted
for as a purchase of KG by SeaGull. The shares issued to acquire KG
were assigned a value of $2,900,000, based upon the fair value of
KG's net assets. At the date of acquisition, KG had a stockholders'
deficit of approximately $539,670, resulting in the recording of
goodwill of $3,439,670. The goodwill is being amortized, using the
straight line method over a period of twenty years, and amounted to
$2,608,256 for the years ended December 31, 197. KG's results of
operations are included in the consolidated financial statements.
During 1998, KG discontinued operations of this division. Any
remaining unamortized goodwill related to the acquisition was written
off.
9
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1 - Organization and Description of Business (Continued):
Kaleidoscope Media Group, Inc. and Subsidiaries (the "Company")
operated three divisions:
The Entertainment Division (principally consisting of SeaGull's
business activities) is primarily engaged in the business of the
development, production and domestic and international distribution
of entertainment properties as well as exploiting the related
licensing and merchandising opportunities. It also provides
consulting services in the development of specialty television
programming and is involved in the acquisition and distribution of
entertainment library properties.
The Sports Division (principally consisting of KG's business
activities) was primarily engaged in sports and event marketing and
consulting including event management, sponsor and event
representation, event related sales promotions, event related media
and publicity, advertising and sponsorship sales and specialty
publishing. Most of the Company's projects in these areas were sports
related. The remaining portion of the sports division's properties
and operations that were not sold during 1997, were discontinued in
1998.
The Direct Marketing Division was initiated in January, 1997 and is
engaged in the production of home shopping programming. This division
was discontinued in 1998.
Note 2 - Summary of Significant Accounting Policies:
Principles and Consolidation:
The consolidated financial statements include the accounts and
transactions of KMG and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated. KMG's
investment in its 50% owned joint venture is accounted for on the
equity method. Accordingly, KMG's share of the earnings (loss) of
the joint venture are included in the consolidated statement of
operations.
Program Cost Inventory:
Program cost inventory is stated at the lower of amortized cost or
estimated realizable value. Television productions and participation
costs are amortized based on the ratio of the current period's gross
revenues to estimated total gross revenues from all sources (the
"ultimate" revenue) on an individual production basis. Estimates of
total gross revenues can, and usually do, change significantly due to
the level of market acceptance of television products. In addition,
because of uncertainties inherent in the process of estimating costs,
estimates of the ultimate costs of episodic television programming
can change significantly in the near term. Accordingly, the estimates
of ultimate revenue and costs are reviewed periodically and are
adjusted upward or downward as additional information is learned.
Amortization expense is consequently adjusted. Such adjustments could
have a material effect on results of operations in future period.
In the case of episodic television programming, the Company considers
each season to be a single product for the estimation of ultimate
revenues and costs.
10
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 2 - Summary of Significant Accounting Policies (Continued):
Program Cost Inventory (Continued):
Interest is capitalized as part of program cost inventory when it is
incurred during the same time period as the expenditures for the
program costs. During the years ended December 31, 1998 and 1997,
$-0- and $651,198 of interest cost was capitalized as part of program
cost inventory.
During 1998, $3,712,932 of program cost inventory was written off
because of lowered estimates of revenues or discontinued projects.
Revenue Recognition:
Revenue from the licensing or distribution of a television program is
recognized when the licensee of the program has the legal right to
exhibit or broadcast the program and the program is deliverable to
the licensee.
Revenue from the barter syndications of television programming (the
sale of television programming in exchange for advertising time) is
recognized when the program has been licensed, the licensee has the
legal right to broadcast the program, the program is deliverable to
the licensee, noncancelable contracts have been signed with both the
station and the purchaser of the advertising time and appropriate
allowances can be estimated for rating shortfalls (" make goods").
The estimation process has inherent uncertainties. Accordingly,
management's estimate of the allowance for rating shortfalls may
change in the near term. Such changes could have a material effect on
results of operations in future periods.
Revenue is recognized from Company owned events when the event takes
place. Revenue from consulting and management of events owned by
others if recognized over the period during which the services are
rendered. Revenue from sponsorship sales and representation for a
specific event is recognized when the event occurs. Revenue from
sponsorship sales and representation for organizations or an ongoing
series of events is recognized as the organization or owner of the
events is entitled to bill the sponsor. Television production revenue
is recognized upon completion of the production.
Expenditures Billable to Clients:
Expenditures billable to clients represent direct costs incurred by
the Company, in connection with its various contracts, that are
either specifically billable to the clients under the contracts, or
related to contracts for which the fees have not yet been filled or
earned. Payroll and related costs, including those relating to
specific client work, are expenses as incurred.
Deferred Revenue:
Deferred revenue presents amounts received from or billed to clients
in accordance with certain contracts prior to the Company's
completion of the earning process in accordance with its revenue
recognition policy. Upon completion of the earning process, the
amounts are included in revenue.
11
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 2 - Summary of Significant Accounting Policies (Continued):
Depreciation:
Property and equipment are stated at cost and are depreciated on
straight-line and accelerated methods over the estimated useful lives
indicated in Note 9. Leasehold improvements are amortized over the
term of the lease.
Goodwill:
The excess of the acquisition price of KG over the net value of
specifically identified assets and liabilities at the acquisition
date was recognized as goodwill. At the date of the sale of assets to
IPG (see Note 3), the goodwill was allocated between the properties
sold and the properties retained. The goodwill is being amortized on
a straight-line basis over twenty years. The Company reviews the
recoverability of goodwill on an annual basis primarily on an
analysis of undiscounted projected cash flows from the related
operations.
Cash Overdrafts:
KMG and the various subsidiaries maintain most of their cash balances
in the same bank but in separate accounts owned by the different
corporations. The Company's practice has generally been to view the
group of accounts at the same bank as one balance and to move funds
from one account to another, with the bank's cooperation, as funds
are needed to pay checks as presented. Because there is no legal
right of offset of one subsidiary's positive balance with another's
overdraft balance, generally accepted accounting principles require
that the overdraft balances be shown separately as a liability.
Incentive Stock Option Plan:
Stock based compensation is recognized using the intrinsic value
method under which compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock
at the measurement date over the exercise price. For disclosure
purposes, pro-forma net income and earnings per share are provided as
if the fair value method had been applied.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenues and
expenses during the years then ended. Actual results could differ
from those estimated.
12
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 2 - Summary of Significant Accounting Policies (Continued):
Loss Per Common Share:
Basic loss per common share is based upon the weighted average
number of common shares outstanding during the year. Diluted earnings
(loss) per common share include the effects of potential dilution
that would occur if securities (such as warrants) or other contracts
(such as options) to issue common stock were exercised or converted
into common stock. Such instruments that are convertible into common
stock are excluded from the computation in periods in which they have
an anti-dilutive effect. Inclusion of the contingent shares
potentially issuable as a result of the KMG transaction (see Note 5)
would have an anti-dilutive effect on earnings (loss) per share. As a
result it was not used in the earnings per share calculation. The
weighted average number of common shares used to calculate loss per
common share during 1998 and 1997 was 29,779,026 and 25,393,438,
respectively.
The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 128, "Earnings per Share". The Statement establishes
standards for computing and presenting earnings per share (EPS). It
replaced the presentation of primary EPS with a presentation of basic
EPS and also requires dual presentation of basic and diluted EPS on
the face of the income statement.
Income Taxes:
Income tax expense (benefit) consists of income taxes currently due
or refundable arising from the period's operations as adjusted by the
deferred tax expense (benefit). The deferred tax expense (benefit)
arises from those changes in the Company's deferred tax assets and
liabilities relating to operations. Deferred tax assets and
liabilities result from temporary differences between the amounts of
assets and liabilities recorded on the financial statements and the
amounts recorded for income tax purposes. Deferred tax assets also
result from certain income attributes existing at the balance sheet
date that can provide future income tax benefits including net
operating loss carryforwards which can be used to offset future
taxable income. The deferred tax assets and liabilities are
calculated based on the currently enacted tax rates that apply to the
periods that the temporary differences are expected to reverse or the
tax attributes are expected to be utilized. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management,
it is likely that some portion or all of the deferred tax assets will
not be realized.
The Company files consolidated federal income tax returns, including
all the subsidiaries (i.e., they are taxed as if they were one
company). KMG and each of the subsidiaries files separate state and
local income tax returns in the jurisdictions where they are subject
to tax. Accordingly, when one subsidiary has taxable income, the tax
losses of another subsidiary cannot be used to offset that
subsidiary's taxable income for state and local purposes. State and
local taxes must be paid even though the consolidated entity has a
loss.
13
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 3 - Sale of Assets:
In May, 1997, the Company consummated an agreement, effective April
1, 1997, with the Interpublic Group of Companies ("IPG") for the
formation of a new venture, Kaleidoscope Sports & Entertainment LLC
("KS&E"). Pursuant to the agreement, the Company formed KS&E as a
wholly-owned subsidiary, contributed a substantial portion of its
sports properties and operations to KS&E and then sold a 51% interest
in KS&E to IPG. IPG also acquired an option to buy the remaining 49%
interest. IPG paid $2,400,000 and assumed an obligation to make
certain contingent payments to the Company if income targets were met
by KS&E during the ensuing three years.
In August, 1997, IPG exercised its option to buy the remaining 49%
of KS&E and also obtain a release of its obligation to make
contingent payments pursuant to the original transaction. In the
August transaction, IPG paid an additional $3,600,000 making the
total purchase price for KS&E $6,000,000. The Company's carrying
value of the assets sold was $2,386,115 consisting principally of
goodwill. The Company also incurred $101,049 of expenses directly
relating to the sale, resulting in a net gain of $3,512,836.
After the sale to IPG, the Company intended to retain several of its
sports related properties and become involved in additional sports
projects. However as discussed in Note 1, the remaining portion of
the sports division properties and operations were discontinued.
Note 4 - Major Customers:
During the year ended December 31, 1997, approximately 21% of the
Company's revenue was derived from services provided to one U.S.
automobile company. There were no major customers in 1998. The
revenue from this customer was earned in the sports division
operations acquired in the KG transaction on May 3, 1996. The
contracts and relationships with this customer was part of the assets
contributed to the KS&E joint venture (Note 3) which was eventually
sold and discontinued.
Note 5 - KMG Transaction/Recapitalization:
As described in Note 1, KMG acquired HSPS on October 22, 1996, in a
transaction recorded as a recapitalization of HSPS. The transaction
was recorded as an issuance of 13,528,082 shares (14,057,082 less
529,000 treasury shares) in exchange for the cancellation of
$1,336,018 payable to KMG, that had resulted from cash previously
advanced, and a $588,000 deferred tax asset. The amount recorded as
the capital contribution was reduced by $93,781 of related costs. In
September, 1997 an additional 130,000 shares were issued to settle
the claims of certain individuals who claimed to have rights to
shares of KMG arising from transactions with KMG prior to its legal
acquisition of HSPS. Because this was a contingency existing at the
time of the transaction, no accounting loss was recorded upon the
issuance of the shares.
14
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 5 - KMG Transaction/Recapitalization (Continued):
As part of the acquisition of HSPS, KMG agreed to a "Market Value
Adjustment" under which HSPS will grant additional shares to the
former HSPS shareholders to the extent that the original 9,500,000
shares are worth less than $50,000,000 on the sixteenth (16th)
business day following the filing of the Company's Form 10K for 1997.
The number of additional shares will be the number whose aggregate
market value equals the difference between $50,000,000 and the
aggregate market value of the original 9,500,000 shares. The
adjustment will only apply if certain income targets are met for
1997. There is provision for partial application of the adjustment at
reduced income levels.
Note 6 - Program Cost Inventory:
Program cost inventory consisted of the following:
December 31,
1998 1997
----------- -----------
Released, less accumulated amortization $ 1,451,935 $ 1,730,942
In-process 0 3,433,925
----------- -----------
1,451,935 5,164,867
Less: Current portion (650,929) (2,876,975)
----------- -----------
Noncurrent portion $ 801,006 $ 2,287,892
=========== ===========
Note 7 - By-The-Way Agreement:
Included in program cost inventory at December 31, 1997 is $412,500
consisting of $225,000 of payments made to, and $187,500 of
additional obligations incurred to, By-The-Way Corporation ("BTW"), a
corporation wholly owned by a Ray Volpe, a director of the Company
and owner of approximately 12% of the Company's outstanding common
stock at December 31, 1997. These advances were made pursuant to a
contract between the Company and BTW, dated April 1, 1997, whereby
the Company made payments of $6,250 (semi-monthly) for the period
April 1, 1997 through December 31, 1998 and applied $112,500 of loans
made prior to April 1, 1997. $43,750 is a current liability for the
period ended March 31, 1999. These payments give the Company, in
perpetuity, the right to acquire, and a right of first refusal with
respect to, all entertainment properties licensed or owned by BTW
(other than those properties licensed to KS&E). If the Company should
acquire a property, it can apply the advances made against any
amounts due. The Company had recorded these advances as an asset
because management had estimated that it was probable the advances
made as of December 31, 1997 would be used to acquire some of the
properties and the value of the properties so acquired would equal or
exceed the carrying amount. Due to the inherent uncertainty as to
whether the advances would be used to acquire properties of
sufficient value, it is possible that this estimate will change in
the near term and that some or all of the advances will be
written-off and charged as a reduction of income.
15
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 8 - Loans and Advances Receivable - Officers and Stockholders':
These loans and advances to officers and stockholders' do not bear
interest and have no definite due date.
Note 9 - Property and Equipment:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated Useful
December 31, Life in Years
----------------
1998 1997
-------- --------
<S> <C> <C> <C>
Automobile $ 51,543 $ 51,543 5
Furniture and fixtures 14,855 58,299 7
Computers and office equipment 46,426 78,339 5
-------- --------
112,824 188,181
Less: accumulated depreciation (84,366) (105,399)
-------- -------
$ 28,458 $ 82,782
======== ========
</TABLE>
Depreciation expense was $62,297 and $48,488 for the years ended
December 31, 1998 and 1997, respectively.
Note 10 - Investment in Joint Ventures:
The Company has a 50% ownership interest in Keller-Siegel
Entertainment LLC ("KSE"). KSE produces Tarzan: The Epic Adventures,
an hour long action adventure television series that first aired in
September, 1996. Revenue is derived from both domestic and foreign
sources. Summarized financial information of KSE as of December 31,
and the years then ended are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- -----------
<S> <C> <C>
Assets $ 281,671 $ 5,770,000
Liabilities 281,671 (3,017,000)
Members capital $ - $ 2,753,000
Revenue $ 36,865 $ 5,570,000
Net income $(317,316) $ 136,000
Company's equity in net (loss) income $(188,658) $ 68,000
</TABLE>
The Company is the domestic distributor of Tarzan: The Epic
Adventures. Both the Company and the other 50% owner of KSE provide
production, marketing and administrative services to KSE, the cost of
which exceeds the reimbursements received from KSE. Certain of these
production and marketing costs related to Tarzan: The Epic Adventures
have been capitalized by the Company as program cost inventory. The
amortization of this program cost inventory, as well as the KSE share
of administrative and noncapitalizable marketing costs are recognized
as expenses in the statement of operations.
16
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 10 - Investment in Joint Ventures (Continued):
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.
Kaleidoscope Sports & Entertainment LLC:
From the April 1, 1997 effective date of the sale to IPG (consummated
in May of 1997) through the sale of the remaining interest in August
of 1997, the Company held a 49% interest in KS&E.
Note 11 - Capitalized Lease Obligation:
The Company was obligated under a capitalized lease requiring
payments of $2,919 per month, including interest at 7.2%, through
January 1998. The final payment under this lease was made in December
31, 1997.
Note 12 - Notes Payable:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
<S> <C> <C>
Note payable - due to officer $150,000 $ 0
Note payable to the former parent of KG (see Note 15). 40,000 40,000
-------- --------
$190,000 $ 40,000
======== ========
</TABLE>
17
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 13 - Millport Transactions:
During 1996 and the first quarter of 1997, the Company issued notes
(with face amounts of $600,000 and $412,217, respectively) payable on
demand, bearing interest at 8% per annum, to foreign clients of
Millport Ltd. (the "Millport Clients"), a Bahamian domiciled
investment advisor. As additional consideration for granting the
loans to the Company, the Millport Clients were given two year
warrants to purchase an aggregate of 4,048,866 shares of Common Stock
at $.25 per share. Pursuant to generally accepted accounting
principles, the proceeds received from the Millport Clients, which
equaled the principal amounts on the notes, were allocated between
the warrants and the notes based on their relative estimated fair
values.
Of the $600,000 received in 1996, $248,000 was deemed to be the
proceeds of issuing the warrants and $352,000 the proceeds of the
notes. Of the $412,217 received in the first quarter of 1997,
$284,451 was deemed to be the proceeds of the warrants and $127,766
the proceeds of the notes. The implied discount on the notes payable
was amortized as a cost over the period from the receipt of the
proceeds to the repayment of the notes. Substantially all of the
notes were repaid at face value by May, 1997.
Millport Clients also have purchased a total of 4,732,220 shares of
Common Stock from the Company. In addition, some of the Millport
Clients have purchased shares of Common Stock in the open market.
Martin Miller, a director of the Company is the director of
corporate finance of Millport Ltd. Mr. Miller represents that the
Millport Clients are not affiliates of Mr. Miller or Millport Ltd.
Note 14 - Commitments:
The Company leased the space for its principal office in New York, NY
under an agreement expiring in June 2002. The Company was also
obligated under operating lease agreements for certain office
equipment. The Company is also the lessee of office space, located in
Los Angeles, California, under a lease also expiring in June 2002 and
is the lessee of office space, located in Miami, Florida, under a
lease expiring December 1999. The office leases provide for future
escalation based on certain cost increases.
As of December 31, 1998, the total commitments for future rentals
were as follows:
1999 $ 668,228
2000 605,203
2001 613,378
2002 466,845
----------
$2,353,654
==========
Rent expense was $246,811 and $551,042 for the years ended December
31, 1998 and 1997 respectively. This was partially offset by
sublease income of $194,053 and $434,844, respectively.
18
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 14 - Commitments (Continued):
The Company entered into employment agreements as of January 1, 1997
with Henry Siegel, Chief Executive Officer of the Company, and Paul
Siegel, President of the Company. Each agreement has a three-year
term which renews for an additional year on each anniversary of the
agreement, and provides for an annual base compensation of $350,000,
with annual increases subsequent to the three year term in an amount
to be determined by the Board of Directors. In addition, Henry Siegel
and Paul Siegel are each entitled to such bonuses as may be awarded
by the Board of Directors in its discretion. Each agreement also
provides for the payment of benefits, including an automobile
allowance. In the event of the death or total disability of either
executive, the Company has agreed to pay his estate or the executive
the unpaid portion of his annual base compensation, but in no event
less than six months base compensation. The agreement also contains a
non-competition provision covering the term of the agreement plus two
years following termination or expiration of the agreement.
Note 15 - 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 judgment 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 judgment 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 March, 1998, 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 as 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 statement, 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.
19
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 15 - 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.
During 1998, various claims were filed against the Company alleging
breach of contract, failure to pay in accordance with a contract of
services, alleged failure to permit the transfer of stock
certificates and unpaid salary to a former subsidiary's employee.
These claims are in excess of $2,750,000. The Company denies all
liability and in certain instances has counter-claimed for damages.
It is not possible to assess the probable outcome of these claims,
but it is at least reasonably possible that a material gain or loss
could result.
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.
Going Concern:
As shown in the accompanying financial statements, the Company
incurred a net loss of $8,065,915 during the year ended December 31,
1998, and as of that date, the Company's current liabilities exceeded
its current assets by $1,360,067. Those factors, create an
uncertainty about the Company's ability to continue as a going
concern. However, the Company has recently completed a transaction
whereby they issued convertible debentures for the sum of $750,000.
The investors, subject to certain conditions, which the Company
believes are attainable, have agreed to purchase an additional
$1,250,000 of convertible debentures. The ability of the Company to
continue as a going concern is dependent upon the completion of this
financing. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern.
20
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 16 - Income Taxes:
The tax benefit for the year ended December 31, 1998 and the
provision for income taxes for the year ended December 31, 1997
consist of the following components:
Years Ended December 31,
1998 1997
----------- -----------
Current
Federal $ 0 $ 0
State 53,830 716,194
----------- ----------
53,830 716,194
----------- ----------
Deferred
Federal 334,336 931,800
State 228,264 (195,400)
----------- -----------
$ 622,600 736,400
----------- -----------
$ 676,430 $ 1,452,594
=========== ===========
The income tax expense for the year exclusive of the benefit from the
change in tax status, does not bear the expected relationship between
pretax income and the federal corporate income tax rate of 34%
because of the effect of state and local income taxes and the fact
that the company's amortization of goodwill and certain other
expenses are not deductible for income tax purposes.
The reconciliation between the actual and expected federal tax is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
----------- ------------
<S> <C> <C>
Federal corporate tax rate of 34%
applied to pretax income (loss) $ 164,923 $ 398,650
State and local income taxes, net of federal
Income Tax benefit 142,197 343,724
Effect of non-taxable gain on lease cancellation (65,665) 0
Effect of non-deductible goodwill amortization 282,681 26,180
Effect of other non-deductible expenses 86,888 19,389
Effect of excess of carrying amount of goodwill
sold over the tax basis 0 811,335
Effect of change in previous year's income tax
estimates 65,406 (146,684)
----------- -----------
$ 676,430 $ 1,452,594
=========== ===========
</TABLE>
21
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 16 - Income Taxes (Continued):
Deferred income taxes as reported on the balance sheet consists of:
December 31,
1998 1997
----------- ------------
Deferred tax assets $ 4,730,257 $ 818,600
Deferred tax liabilities 0 (154,900)
Valuation allowance (4,730,257) (41,100)
----------- ------------
$ 0 $ 622,600
=========== ============
Deferred tax asset balances consist principally of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ - $ 491,100
Start-up costs capitalized for income tax
purposes but not on the financial statements - 116,300
Deferred rent - 99,200
Liability assumed in KG acquisition, not yet
recognized as an expense for tax purposes - -
Expenses accrued by subsidiary that is taxed on
cash basis - 65,000
------------ ------------
Other - 5,900
------------ ------------
$ - $ 777,500
============ ============
</TABLE>
Deferred tax liability balances arise principally because of the
following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Revenue earned but not received by the
subsidiary taxed on the cash basis $ - $ 104,900
KG liabilities assumed in the acquisition, recorded at
fair values lower than their tax basis - 50,000
------------ ------------
$ - $ 154,900
------------ ------------
$ - $ 622,600
============ ============
</TABLE>
As of December 31, 1998, the Company had net operating loss ("NOL")
carryforwards of $8,537,514 available to offset future federal
taxable income; the carryforwards are not available for state
income tax purposes. These carryforwards begin to expire in 2011.
The Company has provided a full 100% valuation allowance on the
deferred tax assets as at December 31, 1998 to reduce such deferred
income tax assets to zero as it is managements belief that
realization of such amounts do not meet the criteria required by
generally accepted accounting principles. Management will review the
valuation allowance requirement periodically and make adjustments as
warranted.
22
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 16 - Income Taxes (Continued):
In addition, one of the Company's subsidiaries has approximately
$175,000 of NOL carryforwards that can only be used to offset the
future taxable income (for federal and certain state purposes) of the
specific subsidiaries to which they pertain. These carryforwards 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 $28,000 of these carryforwards each year. Additional
portions of the carryforwards can, however, be used to offset certain
gains on the disposition of assets. Certain of the Company's
subsidiaries also have substantial NOL carryforwards available to
offset state and local taxable income.
Note 17 - Capital Structure:
During 1998, the Company issued 12,633,878 shares of common stock to
various non-related parties. The Company received $3,201,231 in
capital for 11,943,868 shares; the remaining 690,010 shares were for
services rendered.
In addition to the Millport warrants described in Note 13, all of
which were still outstanding at December 31, 1997 and the outstanding
stock options described in Note 18 (below), the Company issued
1,500,000 warrants to one of the Company's directors on March 6,
1997. Each warrant gave the holder the right to buy one share of
common stock at $0.60 at any date through March 5, 1998. These
warrants, were issued in conjunction with 500,000 shares of common
stock sold to the director. The total price paid for the stock and
warrants was $125,000. The warrants were still outstanding at
December 31, 1997 but expired on March 5, 1998.
Note 18 - Stock Options:
In December 1997, the shareholders authorized the implementation of
an Incentive Stock Option plan which granted employees 835,000
options. The options vested one-third each on January 2, 1997, 1998
and 1999. The 1997 options, although vesting retroactively to January
1997, were not effective until the shareholder approval. Each option
entitles the holder to purchase one share of Common Stock at $.62.
Each option can be exercised at any time over a five year period.
Stock option activity was as follows:
December 31,
1998 1997
------- -------
Balance at January 1, 828,333 -
Granted - 835,000
Exercised - -
Forfeited - -
Expired - (6,667)
------- -------
Balance at December 31, 828,333 828,333
======= =======
23
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 18 - Stock Options (Continued):
As described in Note 2, the Company accounted for the granting of
stock options under the intrinsic value method and, accordingly, no
compensation cost has been recognized for stock options in the
financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options, the
company's net loss would have been increased to the pro forma amounts
indicated below:
Net loss:
As reported $(8,065,915)
Pro forma $(8,162,476)
Net loss per share:
As reported $ (0.27)
Pro forma $ (0.27)
Note 19 - 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
----------------------
Years Ended
December 31,
1998 1997
--------- ---------
Assets:
Cash $ 4,865 $ 252,260
Notes receivable - -
Loans and advances receivable
officers and stockholders 9,000 36,300
Liabilities:
Cash overdraft 13,051 194,148
Notes payable 190,000 40,000
As a result of the difficulties presented in the valuation of the
loans receivable and payable from the officers and shareholders
because of their related party nature, estimating the fair value of
these financial instruments is not considered practicable. The fair
value of the cash, notes receivable, cash overdraft 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.
24
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 20 - Supplemental Statement of Cash Flows Disclosure:
Interest and Income Taxes Paid
Cash payments for the following were:
December 31,
1998 1997
----------- -----------
Interest $ 36,568 $ -
=========== ===========
Income taxes $ - $ 43,618
=========== ===========
Non-Cash Financing Transactions
The following assets were contributed to and liabilities assumed by
KS&E in connection with its formation and partial sale in May, 1997:
Assets contributed to KS&E
Accounts receivable $ 169,000
Other current assets 89,648
Liabilities assumed by KS&E
Accounts payable and accrued liabilities 169,000
Deferred income and client advances 89,648
In addition to the assets and liabilities actually contributed to
KS&E, goodwill amounting to $2,409,416 was allocated to the Company's
investment in KS&E. Of this amount $23,301 was amortized as part of
the Company's equity in the income of KS&E and the remaining
$2,386,115 represented the cost basis of the assets sold.
As described in Note 7, $112,500 of advances to Ray Volpe were
applied to program cost inventory in 1997. Also pursuant to the
agreement, an additional $187,500 of capitalized program costs were
incurred by recording the future amounts due under the By-The-Way
agreement.
Note 21 - Subsequent Events:
As discussed in Note 15, the Company issued $750,000 of convertible
debentures and anticipates issuing $1,250,000 of additional
debentures subject to attaining certain conditions. Note 15 discusses
the Company's ability to continue as a going concern.
25
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 22 - Segment Information:
As described in Note 1, the Company's operations have been
classified into two segments, the Entertainment Division and the
Sports Division. Summarized information by business segment for
1998 is as follows:
<TABLE>
<CAPTION>
Direct
Entertainment Sports Marketing Other Total
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 748,249 $ -- $ -- $ 389,426 $ 1,137,675
Operating (loss) $(5,611,304) $(7,221,773) $(1,040,231) $ (19,652) $ (7,393,960)
Gain on lease cancellation -- -- -- 193,133 193,133
Equity in loss on joint ventures (188,658) -- -- -- (188,658)
Pretax income (loss) $(5,799,962) $ (722,773) $(1,040,231) $ 173,481 $ (7,389,485)
Total identifiable assets $ 1,884,181 $ -- $ -- $ -- $ 1,884,181
Depreciation and amortization $ 893,711 $ -- $ -- $ -- $ 893,711
Capital expenditures $ -- $ -- $ -- $ -- $ --
</TABLE>
As described in Note 1, the Company's operations have been
classified into two segments, the Entertainment Division and the
Sports Division. Summarized information by business segment for
1997 is as follows:
<TABLE>
<CAPTION>
Direct
Entertainment Sports Marketing Other Total
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 633,916 $ 1,784,946 $ 311,274 $ 11,256 $ 2,741,392
Operating (loss) $(1,474,012) $ (619,684) $ (379,736) $ (184,625) $(2,658,057)
Gain on lease cancellation -- 3,512,836 -- -- 3,512,836
Equity in income on joint ventures 68,100 249,621 -- -- 317,721
Pretax income (loss) $(1,405,912) $ 3,142,773 $ (379,736) $ (184,625) $ 1,172,500
Total identifiable assets $ 3,549,415 $ 2,403,919 $ 1,142,320 $ 171,919 $ 7,267,573
Depreciation and amortization $ 339,955 $ 438,523 $ 296,798 $ 23,473 $ 1,098,749
Capital expenditures $ 2,759,610 $ 1,203,381 $ 1,263,190 $ 6,144 $ 5,232,325
</TABLE>
26
<PAGE>
SUBSCRIPTION AGREEMENT
Dear Subscriber:
You (the "Subscriber") hereby agree to purchase, and Kaleidoscope Media
Group Inc., a Delaware corporation (the "Company") hereby agrees to issue and to
sell to the Subscriber, 8% Convertible Notes (the "Notes") convertible in
accordance with the terms thereof into shares of the Company's $.001 par value
common stock (the "Company Shares") as set forth on the signature page hereof
for the aggregate consideration as set forth on the signature page hereof
["Purchase Price"]. The form of Convertible Note is annexed hereto as Exhibit A.
(The Company Shares are sometimes referred to herein as the "Shares" or "Common
Stock"). (The Notes, the Company Shares, and Common Stock Purchase Warrants
issuable to the Placement Agents ("Placement Warrants"), identified on Schedule
B hereto, and the Common Stock issuable upon exercise of the Placement Warrants
are collectively referred to herein as, the "Securities"). Upon acceptance of
this Agreement by the Subscriber, the Company shall issue and deliver to the
Subscriber the Note against payment, by federal funds (U.S.) wire transfer of
the Purchase Price.
The following terms and conditions shall apply to this
subscription.
1. Subscriber's Representations and Warranties. The Subscriber
hereby represents and warrants to and agrees with the Company that:
(a) Information on Company. The Subscriber has been
furnished with and has read the Company's Form S-3 filed on or about February
17, 1999 with the U.S. Securities and Exchange Commission (the "Commission")
(hereinafter referred to as the "Reports"). In addition, the Subscriber has
received from the Company such other information concerning its operations,
financial condition and other matters as the Subscriber has requested, and
considered all factors the Subscriber deems material in deciding on the
advisability of investing in the Securities (such information in writing is
collectively, the "Other Written Information").
(b) Information on Subscriber. The Subscriber is an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the Securities Act of 1933, as amended, is experienced in
investments and business matters, has made investments of a speculative nature
and has purchased securities of United States publicly-owned companies in
private placements in the past and, with its representatives, has such knowledge
and experience in financial, tax and other business matters as to enable the
Subscriber to utilize the information made available by the Company to evaluate
the merits and risks of and to make an informed investment decision with respect
to the proposed purchase, which represents a speculative investment. The
1
<PAGE>
Subscriber has the authority and is duly and legally qualified to purchase and
own the Securities. The Subscriber is able to bear the risk of such investment
for an indefinite period and to afford a complete loss thereof.
(c) Purchase of Company Shares. On the Closing Date,
the Subscriber will purchase the Note for its own account and not with a view to
any distribution thereof.
(d) Compliance with Securities Act. The Subscriber
understands and agrees that the Securities have not been registered under the
Securities Act of 1933, as amended (the "1933 Act") by reason of their issuance
in a transaction that does not require registration under the 1933 Act, and that
such Securities must be held unless a subsequent disposition is registered under
the 1933 Act or is exempt from such registration.
(e) Company Shares Legend. The Company Shares and the
shares of Common Stock issuable upon the exercise of the Placement Warrants
shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
KALEIDOSCOPE MEDIA GROUP, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(f) Warrants Legend. The Placement Warrants shall
bear the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO KALEIDOSCOPE MEDIA GROUP, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(g) Note Legend. The Note shall bear the following
legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS
NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS
NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO KALEIDOSCOPE MEDIA GROUP, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
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(h) Communication of Offer. The offer to sell the
Securities was directly communicated to the Subscriber. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(i) Correctness of Representations. The Subscriber
represents that the foregoing representations and warranties are true and
correct as of the date hereof and, unless the Subscriber otherwise notifies the
Company prior to the Closing Date (as hereinafter defined), shall be true and
correct as of the Closing Date. The foregoing representations and warranties
shall survive the Closing Date.
2. Company Representations and Warranties. The Company
represents and warrants to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the respective jurisdictionss of their incorporation
and have the requisite corporate power to own their properties and to carry on
their business as now being conducted. The Company and each of its subsidiaries
is duly qualified as a foreign corporation to do business and is in good
standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the business, operations or prospects or condition (financial
or otherwise) of the Company.
(b) Outstanding Stock. All issued and outstanding
shares of capital stock of the Company and each of its subsidiaries has been
duly authorized and validly issued and are fully paid and non-assessable.
(c) Authority; Enforceability. This Agreement has
been duly authorized, executed and delivered by the Company and is a valid and
binding agreement enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity; and the Company has full
corporate power and authority necessary to enter into this Agreement and to
perform its obligations hereunder and all other agreements entered into by the
Company relating hereto.
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<PAGE>
(d) Additional Issuances. There are no outstanding
agreements or preemptive or similar rights affecting the Company's common stock
or equity and no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, or agreements or
understandings with respect to the sale or issuance of any shares of common
stock or equity of the Company or other equity interest in any of the
subsidiaries of the Company, except as described in the Reports or Other Written
Information.
(e) Consents. No consent, approval, authorization or
order of any court, governmental agency or body or arbitrator having
jurisdiction over the Company, or any of its affiliates, the NASD, NASDAQ or the
Company's Shareholders is required for execution of this Agreement, and all
other agreements entered into by the Company relating thereto, including,
without limitation issuance and sale of the Securities, and the performance of
the Company's obligations hereunder.
(f) No Violation or Conflict. Assuming the
representations and warranties of the Subscriber in Paragraph 1 are true and
correct and the Subscriber complies with its obligations under this Agreement,
neither the issuance and sale of the Securities nor the performance of its
obligations under this Agreement and all other agreements entered into by the
Company relating thereto by the Company will:
(i) violate, conflict with, result in a
breach of, or constitute a default (or an event which with the giving of notice
or the lapse of time or both would be reasonably likely to constitute a default)
under (A) the articles of incorporation, charter or bylaws of the Company, or
any of its affiliates, (B) to the Company's knowledge, any decree, judgment,
order, law, treaty, rule, regulation or determination applicable to the Company,
or any of its affiliates of any court, governmental agency or body, or
arbitrator having jurisdiction over the Company, or any of its affiliates or
over the properties or assets of the Company, or any of its affiliates, (C) the
terms of any bond, debenture, note or any other evidence of indebtedness, or any
agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other instrument to which the Company, or any of its affiliates is a
party, by which the Company, or any of its affiliates is bound, or to which any
of the properties of the Company, or any of its affiliates is subject, or (D)
the terms of any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company, or any of its affiliates is a party; or
(ii) result in the creation or imposition of
any lien, charge or encumbrance upon the Securities or any of the assets of the
Company, or any of its affiliates.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any
security interests, liens, claims or other encumbrances, subject to restrictions
upon transfer under the 1933 Act and State laws;
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<PAGE>
(ii) have been, or will be, duly and validly
authorized and on the date of issuance and on the Closing Date, as hereinafter
defined, and the date the Note is converted, and the Placement Warrants are
exercised, the Securities will be duly and validly issued, fully paid and
nonassessable (and if registered pursuant to the 1933 Act, and resold pursuant
to an effective registration statement will be free trading and unrestricted);
(iii) will not have been issued or sold in
violation of any preemptive or other similar rights of the holders of any
securities of the Company;
(iv) will not subject the holders thereof to
personal liability by reason of being such holders; and
(h) Litigation. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having jurisdiction
over the Company, or any of its affiliates that would affect the execution by
the Company or the performance by the Company of its obligations under this
Agreement, and all other agreements entered into by the Company relating hereto.
(i) Reporting Company. The Company is a publicly-
held company whose common stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The Company's
Common Stock is trading on the NASD OTC Bulletin Board. Pursuant to the
provisions of the 1934 Act, the Company has timely filed all reports and other
materials required to be filed thereunder with the Securities and Exchange
Commission during the preceding twelve months.
(j) No Market Manipulation. The Company has not
taken, and will not take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of the common stock of the Company to facilitate the
sale or resale of the Securities or affect the price at which the Securities may
be issued.
(k) Information Concerning Company. The Reports and
Other Written Information contain all material information relating to the
Company and its operations and financial condition as of their respective dates
which information is required to be disclosed therein. Since the date of the
financial statements included in the Reports, and except as modified in the
Other Written Information, there has been no material adverse change in the
Company's business, financial condition or affairs not disclosed in the Reports.
The Reports and Other Written Information do not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
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<PAGE>
(l) Dilution. The number of Shares issuable upon
conversion (as hereinafter defined) may increase substantially in certain
circumstances, including, but not necessarily limited to, the circumstance
wherein the trading price of the Common Stock declines prior to conversion of
the Note. The Company's executive officers and directors have studied and fully
understand the nature of the Securities being sold hereby and recognize that
they have a potential dilutive effect. The board of directors of the Company has
concluded, in its good faith business judgment, that such issuance is in the
best interests of the Company. The Company specifically acknowledges that its
obligation to issue the Shares upon conversion of the Note and exercise of the
Placement Warrants is binding upon the Company and enforceable, except as
otherwise described in this Subscription Agreement, regardless of the dilution
such issuance may have on the ownership interests of other shareholders of the
Company.
(m) Stop Transfer. The Securities are restricted
securities as of the date of this Agreement. The Company will not issue any stop
transfer order or other order impeding the sale and delivery of the Securities
at such time as the Securities are registered for public sale or an exemption
from registration is available.
(n) Defaults. Neither the Company nor any of its
subsidiaries is in violation of its Articles of Incorporation or ByLaws. Neither
the Company nor any of its subsidiaries is (i) in default under or in violation
of any other material agreement or instrument to which it is a party or by which
it or any of its properties are bound or affected, which default or violation
would have a material adverse effect on the Company, (ii) in default with
respect to any order of any court, arbitrator or governmental body or subject to
or party to any order of any court or governmental authority arising out of any
action, suit or proceeding under any statute or other law respecting antitrust,
monopoly, restraint of trade, unfair competition or similar matters, or (iii) to
its knowledge in violation of any statute, rule or regulation of any
governmental authority material to its business.
6
<PAGE>
(o) No Integrated Offering. Neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the offering of
the Securities pursuant to this Agreement to be integrated with prior offerings
by the Company for purposes of the 1933 Act which would prevent the Company from
selling the Securities under Section 4(2) of the 1933 Act, or any applicable
stockholder approval provisions. Nor will the Company or any of its affiliates
or subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.
(p) Use of Proceeds. The proceeds of the Subscriber
funds to be released to the Company will be used for working capital and for
expenses of this offering.
(q) No General Solicitation. Neither the Company, nor
any of its affiliates, nor to its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Act) in connection with the offer
or sale of the Securities.
(r) Listing. The Company's common stock is listed for
trading on NASD OTC Bulletin Board. The Company has not received any notice that
its common stock will be delisted from the OTC Bulletin Board or that the common
stock does not meet all requirements for the continuation of such listing.
(s) S-3 Eligibility. The Company currently meets, and
will take all necessary action to continue to meet, the "registrant eligibility"
requirements set forth in the general instructions to Form S-3.
(t) Correctness of Representations. The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects and, unless the Company
otherwise notifies the Subscriber prior to the Closing Date, shall be true and
correct in all material respects as of the Closing Date. The foregoing
representations and warranties shall survive the Closing Date.
3. Regulation D Offering. This Offering is being made pursuant
to the exemption from the registration provisions of the Securities Act of 1933,
as amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit C. The Company will provide, at
the Company's expense, such other legal opinions in the future as are reasonably
necessary for the conversion of the Note and exercise of the Placement Warrants.
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<PAGE>
4. Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Sections 1(e) and 1(f) above at such time as (a) the holder thereof is permitted
to dispose of such Securities pursuant to Rule 144(k) under the Act, or (b) upon
resale subject to an effective registration statement after the Securities are
registered under the Act. The Company agrees to cooperate with the Subscriber in
connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide
legal opinions necessary to allow such resales provided the Company and its
counsel receive reasonably requested certifications from the Subscriber and
selling broker, if any.
5. Redemption. The Company may not redeem the Securities
without the consent of the holder of the Securities.
6. Legal Fees/Commissions. The Company shall pay to counsel to
the Subscriber its fee of $20,000 for services rendered to the Subscriber in
reviewing this Agreement and other subscription agreements for the aggregate
subscription amounts of up to $750,000 and acting as escrow agent. The Company
will pay a cash commission and unaccountable expense allowance, in the
aggregate, of twelve percent (12%) of the Purchase Price designated on the
signature page hereto to certain Placement Agents identified on Schedule B
hereto. The cash commissions and legal fees will be payable out of funds held
pursuant to a Funds Escrow Agreement to be entered into by the Company,
Subscriber and an Escrow Agent. The Company will also issue and deliver to the
Placement Agents as additional compensation Placement Warrants designated on
Schedule B hereto. The cash commissions and Placement Warrants will be issued to
the Placement Agents only when, as, and if the corresponding subscription amount
is released from escrow to the Company. All the representations, covenants,
warranties, undertakings, and indemnification including but not limited to
registration rights made or granted to or for the benefit of the Subscriber are
hereby also made and granted to the Placement Agents in respect of the Placement
Warrants and Company Shares issuable upon exercise of the Placement Warrants.
7.1. Covenants of the Company. The Company covenants and
agrees with the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly
after it receives notice of issuance by the Securities and Exchange Commission,
any state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any securities of
the Company, or of the suspension of the qualification of the common stock of
the Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) The Company shall promptly secure the listing of
the Company Shares, and Common Stock issuable upon the exercise of the Placement
Warrants upon each national securities exchange, or automated quotation system,
if any, upon which shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain such listing so long as any other shares
8
<PAGE>
of Common Stock shall be so listed. The Company will use its best efforts to
maintain the listing and trading of its Common Stock on the NASD OTC Bulletin
Board, and will comply in all respects with the Company's reporting, filing and
other obligations under the bylaws or rules of the National Association of
Securities Dealers ("NASD") and such exchanges, as applicable. The Company will
provide the Subscriber copies of all notices it receives notifying the Company
of the threatened and actual delisting of the Common Stock on any exchange or
quotation system on which the Common Stock is listed.
(c) The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Subscriber and Placement Agents and promptly provide copies thereof to
Subscriber.
(d) Until at least two (2) years after the
effectiveness of the Registration Statement on Form S-3 or such other
Registration Statement described in Section 10.1(iv) hereof, the Company will
(i) cause its Common Stock to continue to be registered under Sections 12(b) or
12(g) of the Exchange Act, (ii) comply in all respects with its reporting and
filing obligations under the Exchange Act, and (iii) comply with all
requirements related to any registration statement filed pursuant to this
Agreement. The Company will not take any action or file any document (whether or
not permitted by the Act or the Exchange Act or the rules thereunder) to
terminate or suspend such registration or to terminate or suspend its reporting
and filing obligations under said Acts until the later of (i) two (2) years
after the effective date of the Registration Statement on Form S-3 or such other
Registration Statement described in Section 10.1(iv) hereof, or (ii) the sale by
the Subscribers and Placement Agents of all the Company Shares issuable by the
Company pursuant to this Agreement. Until at least two (2) years after the
Placement Warrants have been exercised, the Company will use its commercial best
efforts to continue the listing or trading of its Common Stock on NASD OTC
Bulletin Board and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the NASD and NASDAQ,
as appropriate.
(e) The Company undertakes to use the proceeds of the
Subscriber's funds for working capital and expenses of this offering.
8. Covenants of the Company and Subscriber Regarding
Idemnifications.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend Subscriber, Subscriber's officers, directors, agents,
affiliates, control persons, and principal shareholders, against any claim,
9
<PAGE>
cost, expense, liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon Subscriber which results,
arises out of or is based upon (i) any misrepresentation by Company or breach of
any warranty by Company in this Agreement or in any Exhibits or Schedules
attached hereto, or Reports or other Written Information; or (ii) any breach or
default in performance by Company of any covenant or undertaking to be performed
by Company hereunder, or any other agreement entered into by the Company and
Subscribers relating hereto.
(b) Subscriber agrees to indemnify, hold harmless,
reimburse and defend the Company at all times against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Company which results, arises out of or
is based upon (a) any misrepresentation by Subscriber in this Agreement or in
any Exhibits or Schedules attached hereto; or (b) any breach or default in
performance by Subscriber of any covenant or undertaking to be performed by
Subscriber hereunder, or any other agreement entered into by the Company and
Subscribers relating hereto.
9.1. Conversion of Note.
a. Upon the conversion of the Note or part thereof,
the Company shall, at its expense, take all necessary action (including the
issuance of an opinion of counsel) to assure that the Company's transfer agent
shall issue stock certificates in the name of Subscriber (or its nominee) or
such other persons as designated by Subscriber and in such denominations to be
specified at conversion representing the number of shares of common stock
issuable upon such conversion, as applicable. The Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that the Shares will be
unlegended, free-trading, and freely transferable, and will not contain a legend
restricting the resale or transferability of the Company Shares provided the
Shares are included in an effective registration statement or are otherwise
exempt from registration.
b. Subscriber will give notice of its decision to
exercise its right to convert the Note or part thereof by telecopying an
executed and completed notice of Conversion to the Company. The Subscriber will
not be required to surrender the Note until the Note has been fully converted or
satisfied. Each date on which a Notice of Conversion is telecopied to the
Company in accordance with the provisions hereof shall be deemed a Conversion
Date. The Company will or cause the transfer agent to transmit the Company's
common stock certificates representing the Shares issuable upon conversion of
the Note (and a Note representing the balance of the Note not so converted, if
requested by Subscriber) to the Subscriber via express courier for receipt by
such Subscriber within five business days after receipt by the Company of the
Notice of Conversion (the "Delivery Date"). To the extent that a Subscriber
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<PAGE>
elects not to surrender a Note for reissuance upon partial payment or
conversion, the Subscriber hereby indemnifies the Company against any and all
loss or damage attributable to a third-party claim in an amount in excess of the
actual amount then due under the Note.
c. The Company understands that a delay in the
delivery of the Shares in the form required pursuant to Section 9 hereof, or the
Mandatory Redemption Amount described in Section 9.2 hereof, beyond the Delivery
Date or Mandatory Redemption Payment Date (as hereinafter defined) could result
in economic loss to the Subscriber. As compensation to the Subscriber for such
loss, the Company agrees to pay late payments to the Subscriber for late
issuance of Shares in the form required pursuant to Section 9 hereof upon
Conversion of the Note or late payment of the Mandatory Redemption Amount, in
the amount of $100 per business day after the Delivery Date or Mandatory
Redemption Payment Date, as the case may be, for each $10,000 of Note principal
amount being converted or redeemed. The Company shall pay any payments incurred
under this Section in immediately available funds upon demand. Furthermore, in
addition to any other remedies which may be available to the Subscriber, in the
event that the Company fails for any reason to effect delivery of the Shares by
the Delivery Date or make payment by the Mandatory Redemption Payment Date, the
Subscriber will be entitled to revoke all or part of the relevant Notice of
Conversion or rescind all or part of the notice of Mandatory Redemption by
delivery of a notice to such effect to the Company whereupon the Company and the
Subscriber shall each be restored to their respective positions immediately
prior to the delivery of such notice, except that late payment charges described
above shall be payable through the date notice of revocation or rescission is
given to the Company.
d. Nothing contained herein or in any document
referred to herein or delivered in connection herewith shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest or dividends required to be paid or other charges hereunder exceed the
maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Subscriber and thus refunded
to the Company.
9.2. Mandatory Redemption. In the event the Company may not
issue Shares on a Delivery Date or at any time when the Note is convertible, for
any reason then at the Subscriber's election, the Company must pay to the
Subscriber five (5) business days after request or on the Delivery Date a sum of
money determined by multiplying the principal of the Note not convertible by
130%, together with accrued but unpaid interest thereon ("Mandatory Redemption
Payment"). The Mandatory Redemption Payment must be received by the Subscriber
on the same date as the Company Shares otherwise deliverable or within five (5)
business days after request, whichever is sooner ("Mandatory Redemption Payment
Date"). Upon receipt of the Mandatory Redemption Payment, the corresponding
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<PAGE>
Note principal and interest will be deemed paid and no longer outstanding.
9.3. Maximum Conversion. The Subscriber shall not be entitled
to convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i) the
number of shares of Common Stock beneficially owned by the Subscriber and its
affiliates on a Conversion Date, and (ii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the determination
of this proviso is being made on a Conversion Date, which would result in
beneficial ownership by the Subscriber and its affiliates of more than 9.99% of
the outstanding shares of Common Stock of the Company on such Conversion Date.
For the purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
Subject to the foregoing, the Subscriber shall not be limited to aggregate
conversions of only 9.99%.
9.4. Injunction - Posting of Bond. In the event a Subscriber
shall elect to convert a Note or part thereof, the Company may not refuse
conversion based on any claim that such Subscriber or any one associated or
affiliated with such Subscriber has been engaged in any violation of law,
unless, an injunction from a court, on notice, restraining and or enjoining
conversion of all or part of said Note shall have been sought and obtained and
the Company posts a surety bond for the benefit of such Subscriber in the amount
of 130% of the amount of the Note, which is subject to the injunction, which
bond shall remain in effect until the completion of arbitration/litigation of
the dispute and the proceeds of which shall be payable to such Subscriber to the
extent it obtains judgment.
9.5. Buy-In. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after the
Delivery Date the Subscriber purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
Subscriber of the Common Stock which the Subscriber anticipated receiving upon
such conversion (a "Buy-In"), then the Company shall pay in cash to the
Subscriber (in addition to any remedies available to or elected by the
Subscriber) the amount by which (A) the Subscriber's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the Note
for which such conversion was not timely honored, together with interest thereon
at a rate of 15% per annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as liquidated damages and
not as a penalty). For example, if the Subscriber purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with
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respect to an attempted conversion of $10,000 of note principal and/or interest,
the Company shall be required to pay the Subscriber $1,000, plus interest. The
Subscriber shall provide the Company written notice indicating the amounts
payable to the Subscriber in respect of the Buy-In.
10.1. Registration Rights. The Company hereby grants the
following registration rights to holders of the Securities.
(i) On one occasion, for a period commencing 31 days
after the Closing Date, but not later than three years after the Closing Date,
the Company, upon a written request therefor from any record holder or holders
of more than 50% of the aggregate of the Company's Shares issued and issuable
upon Conversion of the Note (the Securities and securities issued or issuable by
virtue of ownership of the Securities, and the Put Notes defined in Section
11.1(a) hereof, being, the "Registrable Securities"), shall prepare and file
with the SEC a registration statement under the Act covering the Registrable
Securities which are the subject of such request, unless such Registrable
Securities are the subject of an effective registration statement. In addition,
upon the receipt of such request, the Company shall promptly give written notice
to all other record holders of the Registrable Securities that such registration
statement is to be filed and shall include in such registration statement
Registrable Securities for which it has received written requests within 10 days
after the Company gives such written notice. Such other requesting record
holders shall be deemed to have exercised their demand registration right under
this Section 10.1(i). As a condition precedent to the inclusion of Registrable
Securities, the holder thereof shall provide the Company with such information
as the Company reasonably requests. The obligation of the Company under this
Section 10.1(i) shall be limited to one registration statement.
(ii) If the Company at any time proposes to register
any of its securities under the Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscriber or Holder pursuant to an effective registration statement, each
such time it will give at least 30 days' prior written notice to the record
holder of the Registrable Securities of its intention so to do. Upon the written
request of the holder, received by the Company within 30 days after the giving
of any such notice by the Company, to register any of the Registrable
Securities, the Company will cause such Registrable Securities as to which
registration shall have been so requested to be included with the securities to
be covered by the registration statement proposed to be filed by the Company,
all to the extent required to permit the sale or other disposition of the
Registrable Securities so registered by the holder of such Registrable
Securities (the "Seller"). In the event that any registration pursuant to this
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<PAGE>
Section 10.1(ii) shall be, in whole or in part, an underwritten public offering
of common stock of the Company, the number of shares of Registrable Securities
to be included in such an underwriting may be reduced by the managing
underwriter if and to the extent that the Company and the underwriter shall
reasonably be of the opinion that such inclusion would adversely affect the
marketing of the securities to be sold by the Company therein; provided,
however, that the Company shall notify the Seller in writing of any such
reduction. Notwithstanding the forgoing provisions, the Company may withdraw any
registration statement referred to in this Section 10.1(ii) without thereby
incurring any liability to the Seller.
(iii) If, at the time any written request for
registration is received by the Company pursuant to Section 10.1(i), the Company
has determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed offer
and sale for cash of any of its securities for the Company's own account, such
written request shall be deemed to have been given pursuant to Section 10.1(ii)
rather than Section 10.1(i), and the rights of the holders of Registrable
Securities covered by such written request shall be governed by Section 10.1(ii)
except that the Company or underwriter, if any, may not withdraw such
registration or limit the amount of Registrable Securities included in such
registration.
(iv) The Company shall file with the Commission
within 30 days of the Closing Date (the "Filing Date"), and use its reasonable
commercial efforts to cause to be declared effective an amendment to the Form
S-3 registration statement filed with the Commission on or about February 17,
1999, (or such other form that it is eligible to use) within 120 days of the
Closing Date in order to register the Registrable Securities for resale and
distribution under the Act. The registration statement described in this
paragraph must be declared effective by the Commission within 120 days of the
Closing Date (as defined herein) ("Effective Date"). The Company will register
not less than 350,000 shares of Common Stock in the aforedescribed registration
statement for each $25,000 of Note principal subscribed for and one share of
Common Stock for each common share issuable upon exercise of the Placement
Warrants. The Registrable Securities shall be reserved and set aside exclusively
for the benefit of the Subscriber and Placement Agents, as the case may be, and
not issued, employed or reserved for anyone other than the Subscriber and
Placement Agents. Such registration statement will be promptly amended or
additional registration statements will be promptly filed by the Company as
necessary to register additional Company Shares to allow the public resale of
all Common Stock included in and issuable by virtue of the Registrable
Securities.
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10.2. Registration Procedures. If and whenever the
Company is required by the provisions hereof to effect the registration of any
shares of Registrable Securities under the Act, the Company will, as
expeditiously as possible:
(a) prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for the
period of the distribution contemplated thereby (determined as herein provided),
and promptly provide to the holders of Registrable Securities copies of all
filings and Commission letters of comment;
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for the period specified in paragraph (a) above and comply
with the provisions of the Act with respect to the disposition of all of the
Registrable Securities covered by such registration statement in accordance with
the Seller's intended method of disposition set forth in such registration
statement for such period;
(c) furnish to the Seller, and to each underwriter if
any, such number of copies of the registration statement and the prospectus
included therein (including each preliminary prospectus) as such persons
reasonably may request in order to facilitate the public sale or their
disposition of the securities covered by such registration statement;
(d) use its best efforts to register or qualify the
Seller's Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller and in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify the Seller and each
underwriter under such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Act, of the happening of
any event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
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(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by the Seller or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
10.3. Provision of Documents.
(a) At the request of the Seller, provided a demand
for registration has been made pursuant to Section 10.1(i) or a request for
registration has been made pursuant to Section 10.1(ii), the Registrable
Securities will be included in a registration statement filed pursuant to this
Section 10. In the event of a firm commitment underwritten public offering in
which the Registrable Securities are so included, the lockup, if any, requested
by the managing underwriter may not exceed ninety (90) days after the effective
date thereof.
(b) In connection with each registration hereunder,
the Seller will furnish to the Company in writing such information and
representation letters with respect to itself and the proposed distribution by
it as reasonably shall be necessary in order to assure compliance with federal
and applicable state securities laws. In connection with each registration
pursuant to Section 10.1(i) or 10.1(ii) covering an underwritten public
offering, the Company and the Seller agree to enter into a written agreement
with the managing underwriter in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
10.4. Non-Registration Events. The Company and the Subscriber
agree that the Seller will suffer damages if any registration statement required
under Section 10.1(i) or 10.1(ii) above is not filed within 60 days after
request by the Holder and not declared effective by the Commission within 120
days after such request [or the Filing Date and Effective Date, respectively, in
reference to the Registration Statement on Form S-3 or such other form described
in Section 10.1(iv)], and maintained in the manner and within the time periods
contemplated by Section 10 hereof, and it would not be feasible to ascertain the
extent of such damages with precision. Accordingly, if (i) the Registration
Statement described in Sections 10.1(i) or 10.1(ii) is not filed within 60 days
of such request, or is not declared effective by the Commission on or prior to
the date that is 120 days after such request, or (ii) the registration statement
on Form S-3 or such other form described in Section 10.1(iv) is not filed on or
before the Filing Date or not declared effective on or before the sooner of the
Effective Date, or within five days of receipt by the Company of a communication
from the Commission that the registration statement described in Section
10.1(iv) will not be reviewed, or (iii) any registration statement described in
Sections 10.1(i), 10.1(ii) or 10.1(iv) is filed and declared effective but shall
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thereafter cease to be effective (without being succeeded immediately by an
additional registration statement filed and declared effective) for a period of
time which shall exceed 30 days in the aggregate per year but not more than 20
consecutive calendar days (defined as a period of 365 days commencing on the
date the Registration Statement is declared effective) (each such event referred
to in clauses (i), (ii) and (iii) of this Section 10.4 is referred to herein as
a "Non-Registration Event"), then, for so long as such Non-Registration Event
shall continue, the Company shall pay in cash as Liquidated Damages to each
holder of any Registrable Securities an amount equal to three (3%) percent for
each thirty (30) days or part thereof, of the Purchase Price of the Note,
whether or not converted, and the aggregate amount of the exercise prices of the
Placement Warrants, whether or not exercised, then owned of record by such
holder as of the occurrence of such Non-Registration Event. Payments to be made
pursuant to this Section 10.4 shall be due and payable immediately upon demand
in immediately available funds. In the event a Mandatory Redemption payment is
demanded from the Company by the Holder of a Note, pursuant to Section 9.2 of
this Subscription Agreement, then the Liquidated Damages described in this
Section 10.4 shall no longer accrue from and after the date the Holder receives
the Mandatory Redemption Payment. It shall be deemed a Non- Registration Event
to the extent the Shares into which a Note is convertible assuming complete
conversion of all sums due under the Note are not included in an effective
registration statement as of and after the Effective Date at the Conversion
Price in effect from and after the Effective Date.
10.5. Expenses. All expenses incurred by the Company in
complying with Section 10, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, fee of
one counsel, if any, to represent all the Sellers, and costs of insurance are
called "Registration Expenses". All underwriting discounts and selling
commissions applicable to the sale of Registrable Securities, including any fees
and disbursements of any special counsel to the Seller, are called "Selling
Expenses". The Seller shall pay the fees of its own additional counsel, if any.
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The Company will pay all Registration Expenses in
connection with the registration statement under Section 10. All Selling
Expenses in connection with each registration statement under Section 10 shall
be borne by the Seller and may be apportioned among the Sellers in proportion to
the number of shares sold by the Seller relative to the number of shares sold
under such registration statement or as all Sellers thereunder may agree.
10.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint or
several, to which the Seller, or such underwriter or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Securities
was registered under the Act pursuant to Section 10, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Seller, each such
underwriter and each such controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by any such Seller, the underwriter or any
such controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the Act pursuant to Section 10, the Seller will
indemnify and hold harmless the Company, and each person, if any, who controls
the Company within the meaning of the Act, each officer of the Company who signs
the registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
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officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the Registrable
Securities sold by the Seller under such registration statement bears to the
total public offering price of all securities sold thereunder, but not in any
event to exceed the gross proceeds received by the Seller from the sale of
Registrable Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to such indemnified party other than under this
Section 10.6(c) and shall only relieve it from any liability which it may have
to such indemnified party under this Section 10.6(c) if and to the extent the
indemnifying party is prejudiced by such omission. In case any such action shall
be brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its election so
to assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 10.6(c) for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected, provided, however, that, if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties shall have the right to select one separate
counsel and to assume such legal defenses and otherwise to participate in the
defense of such action, with the reasonable expenses and fees of such separate
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counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution in the event of joint liability under the Act in any case in which
either (i) the Seller, or any controlling person of the Seller, makes a claim
for indemnification pursuant to this Section 10.6 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10.6 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of the
Seller or controlling person of the Seller in circumstances for which
indemnification is provided under this Section 10.6; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (A) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such registration statement; and (B) no
person or entity guilty of fraudulent misrepresentation (within the meaning of
Section 10(f) of the Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
11.1. Obligation To Purchase.
(a) The Subscriber agrees to purchase from the
Company convertible notes in up to the principal amounts ("First Put Note" and
"Second Put Note", collectively "Put Notes") described on the signature page
hereof for up to the aggregate consideration designated on the signature page
hereof (the "First Put" and the "Second Put"). Collectively the Put Notes and
Put Commissions (as hereinafter defined) are referred to as the "Put
Securities".) The Put Notes will be identical to the Notes except that the
Maturity Date will be one year from the First Put Closing Date or Second Put
Closing Date (as hereinafter defined). The Holders of the Put Securities are
granted all the rights, remedies and indemnification granted to the Subscriber
in connection with the Note, including but not limited to, the registration
rights described in Section 10 hereof.
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(b) The agreement to purchase the Put Notes is
contingent on the following (unless waived by the Subscriber):
(i) The timely filing and timely
effectiveness of the registration statement described in Section 10.1(iv) hereof
relating to all the Registrable Securities.
(ii) As of the Put Date, First Put Closing
Date and Second Put Closing Date, the Company will be a full reporting company
with the class of Shares registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934.
(iii) The closing bid price of the Company's
common stock on the OTC Bulletin Board ("Closing Bid Price") for each of the ten
trading days prior to the giving of a Put Notice and prior to the First Put
Closing Date will not be less than $0.40, nor will the aggregate trading volume
in the Company's Common Stock be fewer than 100,000 shares per day for each of
the ten trading days prior to the giving of a Put Notice and prior to the First
Put Closing Date.
(iv) The closing bid price of the Company's
common stock on the OTC Bulletin Board ("Closing Bid Price") for each of the ten
trading days prior to the giving of a Put Notice and prior to the Second Put
Closing Date will not be less than $0.75, nor will the aggregate trading volume
in the Company's Common Stock be fewer than 100,000 shares per day for each of
the ten trading days prior to the giving of a Put Notice and prior to the Second
Put Closing Date.
(v) No material adverse change in the
Company's business or business prospects shall have occurred after the date of
the most recent financial statements included in the Reports. Material adverse
change is defined as any effect on the business, operations, properties,
prospects, or financial condition of the Company that is material and adverse to
the Company and its subsidiaries and affiliates, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise interfere
with the ability of the Company to enter into and perform any of its obligations
under this Agreement, or any other agreement entered into or to be entered into
in connection herewith, in any material respect.
(vi) There not being an adverse variation of
10% or more from the quarterly and annual revenue, gross income and Net Profit
projections set forth on Schedule D hereto for the periods set forth on Schedule
D hereto. Schedule D will be retained by the Escrow Agent referred to in Section
6 hereof and not delivered to the Subscriber unless the Escrow Agent determines
in its own discretion that the actual revenue and/or income differ from the
projections by 20% or more. In any event, the Escrow Agent may deliver the
projections to the Subscriber at the Escrow Agent's discretion. The Company
undertakes to deliver to the Escrow Agent copies of all periodic reports and
other filings by the Company with the Securities and Exchange Commission within
two (2) business days of filing with the Securities and Exchange Commission.
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(vii) The non-occurrence (whether or not
continuing) of an Event of Default as described in Article 3 of the Note.
(viii) The execution and delivery to the
Subscriber of a certificate signed by its chief executive officer representing
the truth and accuracy of all the Company's representations and warranties
contained in this Subscription Agreement as of the Put Date, the First Put
Closing Date and Second Put Closing Date and confirming the undertakings
contained herein, and representing the satisfaction of all contingencies and
conditions required for the exercise of the Put.
(ix) The Company's continued compliance
after the date hereof with the listing requirements of the NASD OTC Bulletin
Board, and the Company's not having received notice from the NASD OTC Bulletin
Board (and any principal market on which the Company's Common Stock is listed
for trading) that the Company is not in compliance with the requirements for
continued listing.
(x) The execution by the Company and
delivery to the Subscriber of all documents reasonably necessary to memorialize
the rights and obligations of each of the parties in relation to the Put.
(xi) For each and every calendar month prior
to the giving of a Put Notice and prior to the Put Closing Date, the Company
shall not have incurred expenses greater than $160,000.
(xii) There shall not have occurred a change
in the current members of the board of directors of the Company nor of the
President, Vice-President, Chief Financial Officer, Chief Executive Officer, or
Chief Operating Officer of the Company prior to the giving of a Put Notice or
Put Closing Date.
(c) The exercise of the First Put and Second Put are
expressly contingent on the declaration of effectiveness by the Securities and
Exchange Commission and the continued effectiveness of the Registration
Statement on Form S-3 or such other form as described in Section 10.1(iv) hereof
relating to the Registrable Securities and the Company's ability to issue Common
Stock upon conversion and/or exercise of the Put Securities, pursuant to an
effective registration statement, with such Common Stock, upon resale, being
unlegended freely transferable Common Stock.
11.2. Exercise of Put.
(a) The Company's right to exercise the First Put and
Second Put expires two weeks after the declaration of effectiveness of the
registration statement described in Section 10.1(iv) of this Subscription
Agreement relating to all the Registrable Securities ("Put Exercise Period").
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(b) The First Put and Second Put may be exercised by
the Company by the giving to the Subscriber of a written notice of exercise
("Put Notice") during the Put Exercise Period in relation to all the subject Put
Securities. The date a Put Notice is given is a Put Date. Each Put Notice must
be accompanied by the (i) officer's certificate described in Section
11.1(b)(viii) above; (ii) a copy of the filed registration statement; (iii)
notice of declaration of effectiveness; (iv) five copies of the final
prospectus; and (v) a legal opinion relating to the Put Securities in form
reasonably acceptable to Subscriber.
(c) Unless otherwise agreed to by the Subscribers,
Put Notices must be given to all Subscribers in proportion to the amounts agreed
to be purchased by all Subscribers undertaking to purchase Put Shares in the
$750,000 offering to which this Subscription Agreement relates. The aggregate
amount of all such Put Notices may not exceed $1,250,000. In the event the
Company does not exercise the Put during the Put Exercise Period, then the
Subscriber may exercise the Put on behalf of the Company, by giving notice to
the Company of such exercise during the seven (7) business days following the
Put Exercise Period.
(d) Payment by the Subscriber in relation to a Put
Notice relating to the First Put must be made within sixty (60) days of receipt
of a Put Notice relating to the First Put and within 135 days after receipt by
the Subscriber of a Put Notice relating to the Second Put. Payment will be made
against delivery to the Subscriber or an escrow agent to be agreed upon by the
Company and Subscriber, of the Put Securities and items set forth in Section
11.2(b) above, and delivery to the Placement Agents of the Put Commissions
relating to the Put being exercised.
(e) On the Closing Date the Company will deliver to
the Subscriber the First Put Note and Second Put Note. The Company will prepare
and retain for issuance on the First Put Closing Date and Second Put Closing
Date the First Put Commission Warrants and Second Put Commission Warrants.
Interest will commence to accrue on the First Put Note and Second Put Note on
the respective Put Closing Dates. In the event the Puts are exercised for an
amount other than the principal amount of the First Put Note and Second Put
Note, then the Subscriber will surrender the appropriate Put Note on a Put
Closing Date in exchange for a reissued Put Note in the correct amount. In the
event the Puts are not exercised, the Subscriber will return the Put Notes to
the Company.
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11.3. Put Placement Warrants.
(a) The First Put Commission Warrants (as defined
herein) payable in connection with the First Put will be identical to the
Placement Warrants except that such First Put Commission Warrants will be
exercisable commencing on the First Put Closing Date and for three years
thereafter at the lower of the exercise price of the Placement Warrants or the
closing bid price of the Company's Common Stock on the OTC Bulletin Board (or
such other principal exchange where traded or listed) on the day prior to the
First Put Closing Date.
(b) The Second Put Commission Warrants (as defined
herein) payable in connection with the Second Put will be identical to the
Placement Warrants except that such Second Put Commission Warrants will be
exercisable commencing on the Second Put Closing Date and for three years
thereafter at the lower of the exercise price of the Placement Warrants or the
closing bid price of the Company's Common Stock on the OTC Bulletin Board (or
such other principal exchange where traded or listed) on the day prior to the
Second Put Closing Date.
11.4. Put Commissions. The Placement Agents identified on
Schedule B hereto shall receive aggregate commissions in connection with the
closing of the First Put and Second Put as follows: (i) cash equal to twelve
(12%) percent of the purchase price of the Put Notes, as set forth on the
signature page hereto; and (ii) one First Put Warrant or one Second Put Warrant
for each $1 of First Put purchase price or Second Put purchase price,
respectively, paid by a Subscriber in connection with the First Put or Second
Put. Collectively, the foregoing are referred to as Put Commissions. The Put
Commissions are set forth on Schedule B hereto. Put Commissions shall be payable
only in connection with the First Put Purchase Price and Second Put Purchase
Price actually paid by a Subscriber. The attorney for the Subscriber shall
receive a payment at the Closing of each Put equal to one (1%) percent of the
Put purchase price for each Put.
12. (a) Right of First Refusal. Until 120 days after the
effective date of the Registration Statement described in Section 10.1(iv)
hereof, the Subscriber shall be given not less than ten (10) business days prior
written notice of any proposed sale by the Company of its common stock or other
securities or debt obligations except as disclosed in the Reports or Other
Written Information. The Subscriber shall have the right during the ten (10)
business days following the notice to agree to purchase an amount of Company
Shares in the same proportion as being purchased in the aggregate offering to
which this Subscription Agreement relates (i.e. $750,000 in the aggregate), of
those securities proposed to be issued and sold, in accordance with the terms
and conditions set forth in the notice of sale. In the event such terms and
conditions are modified during the notice period, the Subscriber shall be given
prompt notice of such modification and shall have the right during the original
notice period or for a period of ten (10) business days following the notice of
modification, whichever is longer, to exercise such right. In the event the
right of first refusal described in this Section is exercised by the Subscriber
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and the Company thereby receives net proceeds from such exercise, then
commissions and fees will be paid by the Company to the Placement Agents in the
same amounts as specified in the notice of sale.
(b) Offering Restrictions. The Company agrees not to
issue any equity, convertible debt or other securities which are or could be (by
conversion, registration, or exemption) free-trading securities prior to the
complete conversion and payment of all sums due or payable under the Note and
Put Securities.
13. Miscellaneous.
(a) Notices. All notices or other communications
given or made hereunder shall be in writing and shall be personally delivered or
deemed delivered the first business day after being telecopied (provided that a
copy is delivered by first class mail) to the party to receive the same at its
address set forth below or to such other address as either party shall hereafter
give to the other by notice duly made under this Section: (i) if to the Company,
to Kaleidoscope Media Group, Inc., 244 West 54th Street, New York, New York
10019, telecopier number: (212) 262-2351, with a copy by telecopier only to
Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York, New York 10017-4608,
Attn: Michael DiGiovanna, Esq., telecopier number: (212) 972-9487, and (ii) if
to the Subscriber, to the name, address and telecopy number set forth on the
signature page hereto, with a copy by telecopier only to Grushko & Mittman, 277
Broadway, Suite 801, New York, New York 10007, telecopier number: (212)
227-5865. Any notice that may be given pursuant to this Agreement, or any
document delivered in connection with the foregoing may be given by the
Subscriber on the first business day after the observance dates in the United
States of America by Orthodox Jewry of Rosh Hashanah, Yom Kippur, the first two
days of the Feast of Tabernacles, Shemini Atzeret Simchat Torah, the first two
and final two days of Passover and Pentecost, with such notice to be deemed
given and effective, at the election of the Subscriber on a holiday date that
precedes such notice. Any notice received by the Subscriber on any of the
aforedescribed holidays may be deemed by the Subscriber to be received and
effective as if such notice had been received on the first business day after
the holiday.
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(b) Closing. The consummation of the transactions
contemplated herein shall take place at the offices of Grushko & Mittman, 277
Broadway, Suite 801, New York, New York 10007, upon the satisfaction of all
conditions to Closing set forth in this Agreement. The closing date shall be the
date that subscriber funds representing the net amount due the Company from the
Purchase Price are transmitted by wire transfer to the Company (the "Closing
Date"). The closing date for the First Put and Second Put shall be the
respective dates on which Subscriber funds representing the net amount due the
Company from the First Put Purchase Price and Second Put Purchase Price,
respectively due, transmitted to or on behalf of the Company ("First Put Closing
Date", "Second Put Closing Date").
(c) Entire Agreement; Assignment. This Agreement
represents the entire agreement between the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed by both
parties. No right or obligation of either party shall be assigned by that party
without prior notice to and the written consent of the other party.
(d) Execution. This Agreement may be executed by
facsimile transmission, and in counterparts, each of which will be deemed an
original.
(e) Law Governing this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to principles of conflicts of laws. Any action brought
by either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties and the
individuals executing this Agreement and other agreements on behalf of the
Company agree to submit to the jurisdiction of such courts and waive trial by
jury. The prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
26
<PAGE>
(f) Specific Enforcement, Consent to Jurisdiction.
The Company and Subscriber acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injuction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof, this being
in addition to any other remedy to which any of them may be entitled by law or
equity. Subject to Section 13(e) hereof, each of the Company and Subscriber
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.
(g) Automatic Termination. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the tenth (10th) business day following the
date this Agreement is accepted by the Subscriber.
[THIS SPACE INTENTIONALLY LEFT BLANK]
27
<PAGE>
Unless Glochi Preziosi receives within January 7th, 1999 this Agreement
initialied on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
Made and effective as of December 23rd, 1998 by and among:
Abrams Gentile Entertainment, Inc., whose registered office is at 244 West 54th
Street, New York, New York 10019 U.S.A. (hereinafter referred to as "Licensor").
Kaleidoscope, whose registered office is at
_______________________________________________________________________________
(hereinafter referred to as "Kaleidoscope")
Annex, whose registered office is at
_______________________________________________________________________________
(hereinafter referred to as "Annex")
on the one hand
and
Glochi Preziosi, Ltd., whose registered office is at 4010 Jardine House,
1 Connaugh Place, Central, Hong Kong; with a correspondence address at 816/7 New
World Center - West Wing, 18-24 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong
(hereinafter referred to as "Licensee"), on the other hand.
PREMISES
WHEREAS, Licensor has designed certain drawings to be reproduced in a
cartoon series, made of at least 22 (twenty-two) episodes of 26 (twenty-six)
minutes each, produced with the SGI technique (defined as a combination of
live-action and computer generated imagery both separately and composited),
entitled "Micronauts" (hereinafter referred to as "Series"), and consequently
all logos, characters, names, and distinctive likeness thereof are Licensor's
exclusive property; and
WHEREAS, Kaleidoscope and Annex, which are Licensor's co-producers,
enter into this Agreement as guarantor of certain obligations to be fulfilled by
AGE, as set forth herein under articles 7.4A), 11.3 and 11.4;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
undertakings herein set forth, the parties hereto agree as follows:
1. Premises and enclosures
The Premises above and the Schedules attached hereto from and integral part of
this Agreement.
<PAGE>
Unless Glochi Preziosi receives within January 7th, 1999 this Agreement
initialied on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
2. Option "A"
2.1. Licensor hereby grants to Licensee the exclusive and irrevocable Option to
acquire the transferable (in whole or in part), exclusive 'Master Toy License
Rights' (as hereinafter defined) in and to the Series (hereinafter referred to
as "Option A").
2.2. Option A shall be exercised, if at all, by Licensee by giving simple
written notice thereof to Licensor within 30 (thirty) days after receiving from
Licensor a trailer of the Series whose length shall be at least 5 (five)
minutes, that shall be delivered within March 1st, 1999, provided that the
production of the Series has begun and subject to article 3.3 herein. If this
condition is not fulfilled, the term fixed above for exercising Option A (30
days after Licensee receives from Licensor the trailer) shall be postponed of a
number of days equal to the delay in beginning the production of the Series.
3. Option "B"
3.1. In addition to Option A, Licensor hereby grants to Licensee the exclusive
and irrevocable Option to extend world wide the exclusive, transferable (in
whole or in part), distribution rights included in 'Master Toy License Rights',
the other 'Master Toy License Rights' remaining unchanged (hereinafter referred
to as "Option B").
3.2. Option B shall be exercised, if at all, by Licensee by giving simple
written notice thereof to Licensor with 30 (thirty) days after receiving from
Licensor the first 6 (six) episodes of the Series, subject to the following
paragraph 3.3.
3.3. Licensee shall not be supposed to exercise either Option A or Option B
before receiving from AGE the applications for the registration of the trademark
"MICRONAUTS" filed by AGE in each of the following classifications and
Countries, respectively: no. 9,16,18,25,28; France, Germany, U.K., Spain,
Canada, Austria, Belgium, Luxembourg, Netherlands, Finland, Denmark, Sweden,
Norway, Portugal.
4. Production of the Series
4.1 Licensor may cause the production of the Series to be increased from 22 to
26 episodes of 26 (twenty-six) minutes each. The first 22 (twenty-two)
episodes of the Series shall be produced and ready for delivery to the
broadcasting networks within April 30th, 2000 and the additional 4 episodes
of the Series - if the Series is increased - shall be produced and ready
for delivery within June 30th, 2000, consistently with Production Schedule
attached hereto (Schedule "A").
4.2 The terms indicated in Schedule "A" attached hereto are binding: if any one
or more of them are not met, article 11.1 below shall apply.
<PAGE>
Unless Glochi Preziosi receives within January 7th, 1999 this Agreement
initialied on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
5. Master Toy License Rights
5.1 Master Toy License Rights shall mean the exclusive worldwide manufacturing
right plus the exclusive rights to market, distribute and sell, directly or
indirectly, throughout Europe, the "Licensed Products", based upon or derived
from the characters or any other matter or thing related or connected with the
Series, listed in Schedule B attached hereto.
5.2 As far as it concerns the so called "Premium Rights" (i.e., the use of the
Property and the transfer of the Licensed Products as premiums in such manner as
to promote a particular product or service other than the Licensed Products),
the Master Toy License Rights shall include the exclusive worldwide
manufacturing right plus the following exclusive rights: i) to distribute the
Licensed Products for onward sale in Europe, in connection with promotional
activities or as premiums or in incentive programs of any kind; and (ii) to
negotiate and conclude directly in Licensee's own name, prior approval by
Licensor, Agreements with third parties for promotions to be conducted in Italy.
5.3 If Licensee exercises Option B, the exclusive distribution rights defined
herein under paragraphs 5.1 and 5.2, shall be extended worldwide, it being
understood that the other 'Master Toy License Rights' will remain unchanged.
6. Term
This Agreement will be effective for a period of five (5) years since December
23rd, 1998.
7. Consideration
7.1 As a consideration for any and all the rights granted herein, Licensee shall
pay quarterly to Licensor a royalty equal to 12%, based on the F.O.B. Hong Kong
(or other manufacturing location) net price of the Licensed Products, charged by
Licensee to its local distributors, less the royalty owned by these distributors
to Licensee if it is included in such price, subject to the following
paragraphs.
7.2 If Licensee transfers (in whole or in part) the 'Master Toy License Rights'
to any company belonging to Licensee's Group (defined as any company which,
directly or indirectly, controls Licensee, is controlled by Licensee or is under
common control with Licensee) and such assignee acts at the same time as
supplier of the Licensed Products and distributor of the same ones, the 12%
royalty rate will be applied on the price payable by this assignee to its
suppliers after deducting shipping expenses, if they are included in such price.
7.3 As far as it concerns distribution in the U.S.A. and Canada, Licensee shall
pay to Licensor a royalty equal to 10% on the net sales turnover earned by its
local distributor, within 30 days after receiving Licensor's invoice based upon
the quarterly
<PAGE>
Unless Glochi Preziosi receives within January 7th, 1999 this Agreement
initialied on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
statements received by Licensee from this distributor, and then forwarded by
Licensee to Licensor.
7.4 Licensee shall pay to Licensor:
A) US $ 20,000 (twenty thousand) upon signing this Agreement. Licensor shall pay
back to Licensee this sum of money, plus interests at the yearly LIBOR rate
applicable on the day this obligation to reimburse arises, accrued during the
period since this sum of money was first paid till the date of actual
re-payment, within 10 (ten) days after the occurrence of any one or more of the
following events:
- - Licensee does not exercise in its sole discretion Option A;
- - this Agreement is terminated for whatever cause under article 11 herein.
In both cases, Kaleidoscope and Annex shall be jointly and severally liable with
Licensor towards Licensee for the prompt and correct performance of this
obligation.
B) US $ 30,000 (thirty thousand) upon receiving from Licensor the applications
for the registration of the trademark "MICRONAUTS" filed by AGE in each of the
following classifications and Countries, respectively: no. 9,16,18,25,28;
France, Germany, U.K., Spain, Canada, Austria, Belgium, Luxembourg, Netherlands,
Finland, Denmark, Sweden, Norway, Portugal. If Licensee does not exercise in its
sole discretion Option A, Licensor will hold this sum of money and all options
shall revert to Licensor, provided that Licensor previously pays back to
Licensee US $ 20,000, as set forth in the foregoing paragraph 7.4 A); Licensor,
Kaleidoscope and Annex hereby waive to any claim based upon failure to exercise
Option "A" and/or Option "B".
C) US $ 50,000 (fifty thousand) if and only if Licensor exercises in its sole
discretion Option A, upon the occurrence thereof.
7.5 If and only if Option A is exercised and subject to the other conditions set
forth herein under the following paragraph, Licensee shall pay to Licensor U.S.
$ 1,400,000 (one million five hundred thousand), in addition to the sums of
money provided herein under paragraph 7.4 A), B) and C), regardless of whether
the Series is made of 22 or 26 episodes, and the total Advance of US $ 1,500,000
shall be fully recoupable on royalties due hereunder pursuant to paragraphs 7.1
to 7.3.
7.6 The sum of money provided herein under paragraph 7.5 (U.S. $ 1,400,000)
shall be payable, provided that at least 22 (twenty-two) episodes of
the Series are produced and delivered to the major broadcasting networks (the
term "major" as used anywhere in this Agreement shall be determined with
reference to the time when and the Country where the Series is broadcast; the
list contained in Schedule C attached hereto is inserted only by way of example
and it is updated as of today, so Licensee may amend Schedule C, by simple
written notice sent to Licensor, as a consequence of changes in the following
elements: (i) audit, (ii) target, (iii) airing - consequently, before making any
arrangement with broadcasting television networks, Licensor will
Unless Giochi Preziosi receives within January 7th, 1999 this Agreement
initialled on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void immediately
after the deadline has gone by without necessity of any notice thereof.
inform Licensee in writing, to let Licensee choose whether to amend Schedule C
or not) of Italy and of at least 2 of the following Countries: Spain, France,
Germany, United Kingdom, within the following terms:
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
(the term "best time slots for children" as used anywhere in this Agreement
shall be determined with reference to the time when, the Country where and
the broadcasting network by which the Series is broadcast - by way of
example, in Italy as of today they are 6.30-9a.m., 1:30-2:30 p.m., 4-5
p.m., 7:30-8 p.m., as possibly amended by simple written notice sent by
Licensee to Licensor) the 1st episode of the Series by a major television
network broadcasting nationwide in Italy;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
the first 13 episodes of the Series by a major television network
broadcasting nationwide in Italy;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrail during the best time slots for children
all the episodes of the Series, whose number may be 22 or 26, by a major
television network broadcast nationwide in Italy;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
the 1st episode of the Series by a major television network broadcasting
nationwide in at least two (2) of the following Countries: Spain, France,
Germany, United Kingdom;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
the 1st episode of the Series by a major television network broadcasting
nationwide in the other (2) of the foregoing Countries;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
the first 13 episodes of the Series by a major television network
broadcasting nationwide in at least two (2) of the following Countries:
Spain, France, Germany, United Kingdom;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
the first 13 episodes of the Series by a major television network
broadcasting nationwide in the other two (2) of the foregoing Countries;
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children
all the episodes of the Series, whose number may be 22 or 26, by a major
television network broadcasting nationwide in at least two (2) of the
following Countries: Spain, France, Germany, United Kingdom;
<PAGE>
Unless Giochi Preziosi receives within January 7th, 1999 this Agreement
initialled on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void immediately
after the deadline has gone by without necessity of any notice thereof.
- - U.S. $ 155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children all the
episodes of the Series by a major television network broadcasting nationwide in
the other two (2) of the foregoing Countries.
Licensee shall be absolved of the commitment to pay each of the foregoing
installments as of 6 (six) months following payment of the preceding
installments.
7.7 If Licensee exercises Option B, the Advance shall be increased of U.S. $
700,000 (seven hundred thousand) if and only if 22 episodes of the Series are
produced with April 30th, 2000 - or U.S. $900,000 (nine hundred thousand) if and
only if the further 4 episodes, in case Licensor elects to increase the Series
to 26 episodes, are produced within June 30th, 2000. This additional Advance
shall be paid, provided that all the episodes of the Series are delivered to a
major broadcasting network or a major Syndication Group of the U.S.A., within
the following terms:
- - One fourth (1/4) upon airing terrestrail throughout the U.S.A. during the
best time slots for children the 1st episode of the Series by a major
television network or a major syndication Group;
- - One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the
best time slots for children the first 13 episodes of the Series by a major
television network or a major Syndication Group;
- - One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the
best time slots for children the first 18 episodes of the Series by a major
television network or a major Syndication Group;
- - One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the
best time slots for children all the episodes of the Series by a major
television network or a major Syndication Group.
Licensee shall be absolved of the commitment to pay each of the foregoing
installments as of 6 (six) months following payment of the preceding
installment.
7.8 The Advance on royalties set forth herein under paragraphs 7.5 and 7.7
shall be reduced, of a sum to be agreed upon in good faith between Licensor and
Licensee, if Licensor cannot file the trademark Micronauts in any one or more of
the Countries and each of the classifications where Licensor commits to carry
out this activity under the following article 8 (paragraphs 1 and 2) and/or in
case the owner of a similar or identical trademark filed previously objects to
marketing the Licensed Products. If the County(ies) concerned are included in
the list contained in paragraph 7.4.B) herein, Licensee may choose, in its sole
discretion, to terminate this Agreement pursuant to article 11 herein instead of
reducing the Advance.
8. Trademark and copyright protection
8.1 Licensor will apply for registration of the trademark Micornaust within 90
<PAGE>
Unless Giochi Preziosi receives within January 7th, 1999 this Agreement
initialled on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void immediately
after the deadline has gone by without necessity of any notice thereof.
(ninety) days after signing this Agreement, in each Country included in Europe
and in Canada, in each of the following classifications: no. 9,16,18,25,28.
8.2 If Option B is exercised, Licensor will apply for registration of the
trademark Micronauts within the following 90 (ninety) days, in each of the
following Countries and classifications, respectively: no. 9,16,18,25,28; each
Country in North and South America, South Africa, Australia, New Zealand, Japan,
Hong Kong, Taiwan, China, Thailand, Vietnam, Korea, Singapore, Indonesia,
Malaysia, Philippines.
8.3 Licensor will solve any problem raised by owners of identical or similar
trademarks filed previously: to this effect, Licensor shall purchase such
trademarks or obtain their owner's authorization to market the Licensed Products
under the Micronauts name, to the benefit of Licensee.
8.4 Licensor will protect the copyright embodied in the Series, in the Licensed
Products and in the artwork created in order to market the Licensed Products, by
carrying out the activities required by the applicable laws throughout the
licenced Territory.
8.5 In case of imitation of the Licensed Products, even if not infringing
copyright laws, Licensee's Italian distributor shall have the right to act in
its own name (including bringing suits) without Licensor's consent. Licensor
shall execute any document required by the italian law for this purpose,
including power of attorney, within 3 days after Licensee's request. Failure to
perform this obligation, shall give Licensee the right to terminate this
Agreement under article 11 below. Licensor may join Licensee's distributor as a
party in the suit, if any, brought against the infringement. As far as it
concerns imitations of the Licensed Products occurred in any other Country,
Licensor shall make its best efforts to assist Licensee's distributors in any
suitable way, including bringing suits in its own name.
9. Broadcasting dates: Licensor will coordinate with Licensee in order to cause
the launching of the Products coincide with the broadcasting of the Series: in
order to achieve this result, and to let Licensee possibly amend Schedule C
attached hereto, Licensor will inform Licensee a reasonable time before selling
the Series to each broadcast network, and will keep Licensee continuously
updated about the broadcast schedule.
10. Market Date
If Licensee does not market any Licensed Products within 12 month after the
Series is broadcast in each Country, the distribution rights of this Licensed
Product in such specific Country shall revert to Licensor. Nothwithstanding the
foregoing, Licensee shall have the rights of first negotiation and last refusal
to distribute this product upon
<PAGE>
Unless Giochi Preziosi receives within January 7th, 1999 this Agreement
initialled on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
o U.S. $155,555 (one hundred fifty-five thousand five hundred fifty-five
dollars) upon airing terrestrial during the best time slots for children all the
episodes of the Series by a major television network broadcasting nationwide in
the other two (2) of the foregoing Countries.
Licensee shall be absolved of the commitment to pay each of the foregoing
installments as of 6 (six) months following payment of the preceding
installment.
7.7 If Licensee exercises Option B, the Advance shall be increased of U.S.
$700,000 (seven hundred thousand) if and only if 22 episodes of the Series are
produced within April 30th, 2000 -- or U.S. $900,000 (nine hundred thousand) if
and only if the further 4 episodes, in case Licensor elects to increase the
Series to 26 episodes, are produced within June 30th, 2000. This additional
Advance shall be paid, provided that all the episodes of the Series are
delivered to a major broadcasting network or a major Syndication Group of the
U.S.A., within the following terms:
o One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the best
time slots for children the 1st episode of the Series by a major television
network or a major Syndication Group;
o One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the best
time slots for children the first 13 episodes of the Series by a major
television network or a major Syndication Group;
o One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the best
time slots for children the first 18 episodes of the Series by a major
television network or a major Syndication Group;
o One fourth (1/4) upon airing terrestrial throughout the U.S.A. during the best
time slots for children all the episodes of the Series by a major television
network or a major Syndication Group.
Licensee shall be absolved of the commitment to pay each of the foregoing
installments as of 6 (six) months following payment of the preceding
installment.
7.8 The Advance on royalties set forth herein under paragraphs 7.5 and 7.7 shall
be reduced, of a sum to be agreed upon in good faith between Licensor and
Licensee, if Licensor cannot file the trademark Micronauts in any one or more of
the Countries and each of the classifications where Licensor commits to carry
out this activity under the following article 8 (paragraphs 1 and 2) and/or in
case the owner of a similar or identical trademark filed previously objects to
marketing the Licensed Products. If the County(ies) concerned are included in
the list contained in paragraph 7.4.B) herein, Licensee may choose, in its sole
discretion, to terminate this Agreement pursuant to article 11 herein instead of
reducing the Advance.
8. Trademark and copyright protection
8.1 Licensor will apply for registration of the trademark Micronauts within 90
<PAGE>
Unless Giochi Preziosi receives within January 7th, 1999 this Agreement
initialled on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
giving Licensee evidence thereof, within 15 days after receiving from Licensee
the notice of termination.
11.3 In case of termination of this Agreement upon occurrence of case 11.1.b)
above occurs, in addition to Licensee's right to claim for damages, Licensor
shall pay to Licensee, within May 15th, 2000, US $250,000 as lump reimbursement
for costs sustained for materials developed by or for Licensee until termination
of this Agreement; Licensee shall neither provide Licensor nor Kaleidoscope nor
Annex with evidence of this costs. Kaleidoscope and Annex shall be jointly and
severally liable with Licensor towards Licensee for the prompt and correct
performance of this obligation.
11.4 As a consequence of termination for whatever breach of Licensor's
obligations hereunder, in addition to Licensee's right to claim for damages,
Licensor shall pay back to Licensee, within 10 (ten) days after request, all
sums paid under this Agreement, plus interests at the yearly LIBOR rate,
applicable on the date on which such obligation of reimbursement arises, accrued
during the period since the date on which each of these sums was first paid till
the date of actual repayment. In cases 11.1a), b) and c) above, the co-producers
Kaleidoscope and Annex shall be jointly and severally liable with Licensor
towards Licensee for the prompt and correct performance of this obligation.
12. Applicable law - Jurisdiction - Place of Venue
This Agreement shall be governed and interpreted according to the Italian law,
applicable to contracts made and entirely performed in Italy, and the Italian
Courts shall have exclusive jurisdiction in respect of any dispute arising in
relation thereto. Exclusive place of venue is Milan. However, as an exception to
the foregoing, Licensee shall have the right to bring its actions or to sue
Licensor and/or Kaleidoscope and/or Annex in front of the competent Court of the
place where Licensor and/or Kaleidoscope and/or Annex have their respective
registered offices and/or domiciles.
List of Enclosures:
Schedule A -- Production Schedule;
Schedule B -- list of the Licensed Products;
Schedule C -- list of major broadcasters.
<PAGE>
Unless Giochi Preziosi receives within January 7th, 1999 this Agreement
initialled on every page (including the enclosures) and countersigned twice by
AGE's Kaleidoscope's and Annex' respective authorized representatives, the
proposal contained herein shall be automatically revoked and void, immediately
after the deadline has gone by without necessity of any notice thereof.
IN WITNESS WHEREOF, the Parties hereto have executed or caused this Agreement to
be executed by their respective representatives thereunto duly authorized, all
in place and as of the date first above written.
Abrams Gentile Entertainment, Inc. Giochi Preziosi, Ltd.
/s/ Giochi Preziosi
- ---------------------------- ----------------------------
Kaleidoscope Annex
- ---------------------------- ----------------------------
Burdensome clause
For the purpose of artl. 1341 and 1342 of the Italian Civil Code, if applicable,
Licensor declares to approve specifically the following clauses of this
Agreement: 2.2. (In case of delay in beginning the production of the Series the
term for exercising Option A is postponed); 3.3 (Licensee shall not be supposed
to exercise either Option before receiving from Licensor certain applications
for registration of the trademark "Micronauts"); 4.4 (In case the terms
indicated in the Production Schedule are not met, Licensee may early terminate
this Agreement); 7.4.B) (waiver to any claim based upon failure to exercise
Option "A" and/or Option "B"); 7.6 and 7.7 (Suspension of payment each
installment of the Advance as of 6 months following the preceding payment); 7.8
(Reduction of the Advance or early termination of the Agrement); 8.5
(Authorization to bring suit in case of imitation of the Licensed Produts); (11)
(Eary terminaton); 12 (Jurisdiction -- Placedof Venue).
- --------------------------- ----------------------------
Kaleidoscope Annex
- ---------------------------- ----------------------------
