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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended First Quarter ended March 31, 1999
Commission File No. 0-17591
KALEIDOSCOPE MEDIA GROUP, INC.
-----------------------------------------------------
(Exact name of registrant as specific in its charter)
Delaware 93-0957030
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
345 Park Avenue South, New York, New York 10010
-----------------------------------------------
(Address of principal executive offices)
(212) 779-6601
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 31, 1998: 30,032,082
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Part I Financial Information
Item 1. Financial Statements (unaudited)......................................................... 1
Consolidated Balance Sheet March 31, 1999 and March 31, 1998 ..................................... 2-3
Consolidated Statements of Income................................................................. 4
Consolidated Statements of Stockholders' Equity (Deficit),
Three months ended March 31, 1999 and March 31, 1998 ............................................. 5
Consolidated Statements of Cash Flows three months ended
March 31, 1999 and March 31, 1998 ................................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................................
Part II Other Information
Item 1. Legal Proceedings........................................................................
Item 2. Changes in Securities....................................................................
Item 6. Exhibits and Reports on Form 8K..........................................................
Signatures........................................................................................
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-1-
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 45,425 $ 181,461
Accounts receivable, less allowance for doubtful
accounts of $116,539 and $-0- in 1998 and 1997 337,310 1,213,122
Expenditures billable to clients - -
Note receivable, less allowance for bad debt of
$50,000 in 1998 - -
Loans receivable--officers and shareholders - -
Program cost inventory - current portion,
net of accumulated amortization 2,705,125 2,537,385
Deferred income taxes - 206,100
Other current assets 47,459 71,812
------------ -------------
Total Current Assets 3,175,319 4,209,880
PROGRAM COST INVENTORY, less current portion,
net of accumulated amortization 1,381,269 2,828,404
DISTRIBUTION RIGHTS (Note 5) - -
LOANS AND ADVANCES RECEIVABLE
--OFFICERS AND SHAREHOLDERS - 36,300
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation 21,922 79,579
INVESTMENT IN JOINT VENTURE 915,952 1,376,500
DEFERRED INCOME TAXES 103,730 356,600
GOODWILL, net of accumulated amortization - 820,025
OTHER ASSETS 11,592 24,116
------------ -------------
$ 5,609,784 $ 9,731,404
============ =============
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Cash overdrafts $ - $ 65,536
Notes payable, current portion 190,000 40,000
Accounts payable and accrued liabilities 1,446,140 651,009
Income taxes payable 1,093,691 923,057
Capitalized lease obligation--current portion - -
Option agreement payable--current portion 43,750 150,000
Deferred rent--current portion - 36,834
Deferred income and client advances - 232,333
----------- -------------
2,773,581 2,098,769
LOANS-OFFICERS & SHAREHOLDERS 40,800 -
DEFERRED RENT, less current portion - 272,104
----------- -------------
Total Liabilities 2,814,381 2,370,873
----------- -------------
CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 100,000,000
shares authorized and 40,955,960 issued in
1999, and $0.01 par value, 30,332,082 shares
issued in 1998 40,956 30,332
Preferred stock, $0.001 par value, 15,000,000
shares authorized and none issued in 1998 - -
Additional paid-in-capital 9,579,931 8,028,632
Accumulated deficit (6,825,484) (698,133)
Stock subscriptions receivable less
allowance for doubtful accounts
of $1,111,542 in 1999 and 1998 - -
Treasury stock 529,000 shares in 1998 and 1997
at cost - -
----------- -------------
Total Stockholders' Equity 2,795,403 7,360,531
----------- -------------
Total Liabilities and Stockholders' Equity $ 5,609,784 $ 9,731,404
=========== =============
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
NET REVENUE $ 38,034 $ 1,027,634
DIRECT PROJECT COSTS
Amortization of program costs - 392,512
Other direct project costs 7,511 6,696
------------ -------------
Total Direct Project Costs 7,511 399,208
------------ -------------
GROSS PROFIT 30,523 628,426
------------ -------------
EXPENSES
Amortization of program costs relating to joint venture - -
Salaries and benefits 274,302 261,171
General and administrative 249,455 294,384
Amortization of goodwill - 11,389
------------ -------------
Total Expenses 523,757 566,944
------------ -------------
INCOME (LOSS) BEFORE GAIN ON REDUCTION IN LIABILITIES,
EQUITY IN INCOME OF JOINT VENTURE AND INCOME TAXES (493,234) 61,482
GAIN ON REDUCTION IN LIABILITIES (Note 8) - 282,965
EQUITY IN INCOME OF JOINT VENTURE - -
------------ -------------
INCOME BEFORE INCOME TAXES (493,234) 344,447
INCOME TAX EXPENSE/BENEFIT (216,880) 151,465
------------ -------------
NET INCOME $ (276,354) $ 192,982
============ =============
NET EARNINGS PER COMMON SHARE
Basic $ (.01) $ 0.01
============ =============
Diluted $ (.01) $ 0.01
============ =============
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1998
Balance--January 1, 1998 26,027,082 $ 26,027 $ 6,197,661 $ (891,115) $ 5,332,573
Issuance of shares and related warrants
for cash consideration 4,005,000 3,805 1,831,171 - 1,834,976
Net income - - - 192,982 192,982
---------- ---------- ------------ ---------- -----------
Balance--March 31, 1998 30,032,082 $ 30,032 $ 8,028,632 $ (698,133) $ 7,360,531
========== ========== ============ ========== ===========
Three Months Ended March 31, 1999
Balance--January 1, 1999 38,660,960 $ 38,661 $ 9,386,258 $(6,549,130) $ 2,875,789
Issuance of shares for cash
consideration 2,295,000 2,295 193,673 - 195,968
Net loss - - - (276,354) (276,354)
---------- ---------- ------------ ----------- -----------
Balance--March 31, 1999 40,955,960 $ 40,956 $ 9,579,931 $(6,825,484) $ 2,795,403
========== ========== ============ =========== ===========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (276,354) $ 192,982
Adjustment to reconcile net income to net
cash provided by used in operating activities:
Amortization and depreciation 6,536 409,540
Equity in income of joint venture - -
Executive producer's fee retained by joint venture - -
Deferred income tax expense (216,880) 59,900
Deferred rent - (10,601)
Gain on reduction of liabilities - (282,965)
Change in assets and liabilities:
Accounts receivable (53,985) (466,441)
Expenditures billable to clients - -
Other current assets (3,005) (22,528)
Other assets - -
Cash overdraft - (128,612)
Accounts payable and accrued liabilities 194,314 (722,410)
Income taxes payable 83,561
Deferred income and client advances - (464,700)
Increase in program cost inventory 70,666 -
---------- ------------
Net Cash Used in Operating Activities (278,708) (1,352,274)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans to officers and shareholders 49,800 -
Expenditures for program costs - (593,434)
Acquisition of property and equipment - (2,436)
Distribution from joint venture 73,500 -
---------- ------------
Net Cash Used in Investing Activities 123,300 (595,870)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of warrants - -
Proceeds from notes payable - -
Repayments of notes payable - (37,500)
Principal payments on capitalized lease obligations - -
Issuance of common stock and related warrants 195,968 1,914,845
---------- ------------
Net Cash Provided by Financing Activities 195,968 1,877,345
---------- ------------
(DECREASE) INCREASE IN CASH 40,560 (70,799)
CASH
Beginning of period 4,865 252,260
---------- ------------
End of period $ 45,425 $ 181,461
========== ============
</TABLE>
See notes to financial statements.
- 6 -
<PAGE>
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The consolidated financial statements provided in this three month
report for the period ended March 31, 1999 include the financial statements of
SeaGull Entertainment for three months, the financial statements of the
Company for three months, and three months of the Tarzan Joint Venture as an
equity investment. These periods of reporting reflect various months of full
ownership or partial ownership in the current fiscal year and are consistent
with the reporting method utilized for the prior fiscal year. The comparative
results reported for the three months ended March 31, 1998 include the
financial statements of SeaGull for three months, the financial statements of
the Company for three months, the combined financial statements of KSG for
three months and three months of the Joint Venture as an equity investment.
Reference is made to Note 2 of the Company's Consolidated Financial
Statements for a discussion of significant accounting policies, including
revenue recognition.
Forward Looking Statements
The following statements and certain other statements contained in
this quarterly report on Form 10-QSB are based on current expectations. Such
statements are forward looking statements that involve a number of risks and
uncertainties. Factors that could cause actual results to differ materially
include the following (i) general economic conditions, (ii) competitive market
influences, (iii) audience appeal and critical reviews of its television
programs, (iv) the ability to identify, acquire the rights to, and to
develop quality properties, and (v) and ability to obtain financing.
Results of Operations
Three Months Ended March 31, 1999 as Compared with Three Months Ended
March 31, 1998.
Net revenues consist of total billings (less any agency fees and
media costs) and accruals for earned fees. Net revenues for the First Quarter of
1999 were $38,034 compared with net revenue of $1,027,634 for the First
Quarter of 1998.
Amortization of program costs (costs to produce, market and
distribute a broadcast or film property) was $392,512 in the First Quarter of
1998 compared to no amortization in 1999.
-7-
<PAGE>
Gross profit decreased by $597,903, to $30,523 for the First Quarter
of 1999 from $628,426 for the First Quarter of 1998.
Salaries and benefits increased by $13,131 to $274,302 in the First
Quarter of 1999 compared to $261,171 for the First Quarter of 1998. The salaries
include amounts accrued for Henry Siegel & Paul Siegel that were not paid during
the First Quarter of 1999 in the amount of $156,250. General and administrative
expenses decreased by $44,929 to $249,455 in the First Quarter of 1999 from
$294,384 for the comparable period in 1998.
There was no amortization of Goodwill in the First Quarter of 1999 as
compared to 11,389 in 1998. The entire Goodwill was written off in 1998.
Losses from operations (before equity in income of joint venture
increased by $554,716 from a profit of $61,482 in the First Quarter of 1998 to a
loss of $493,234 for the First Quarter of 1999.
The Company did not receive any equity in the income of its joint
ventures in the First Quarter of 1998 and 1999. The Joint Venture's only revenue
producing project to date has been "Tarzan: The Epic Adventures" which earned
most of its revenues in 1996 and 1997. Management's estimate of the ultimate
revenues from "Tarzan: The Epic Adventures" have been revised downward.
Losses before income taxes increased by $837,681 to $493,234 in the
First Quarter of 1999 as compared to a profit of 344,447.
The provision for income tax expense was $151,465 in the First Quarter
of 1998 as compared to an income tax benefit of $216,880. The income tax expense
for 1998 does not bear the expected relationship between pretax income and the
federal corporate tax rate of 34% because of (a) the effect of state and local
income taxes and (b) the amortization of goodwill and certain other expenses are
not deductible for income tax purposes.
-8-
<PAGE>
The Company's net income amounted to $192,982, or $0.01 per share,
for the First Quarter of 1998, as compared to net loss of $276,354, or ($0.01)
per share, for the same quarter in 1999.
Net Operating Loss Carryforwards
At December 31, 1997 net operating losses ("NOLs") of the Company
amounted to approximately $121,000 for federal income tax purposes. The NOLs
are not available for state income tax purposes. The NOLs begin to expire
starting in 2011. The Company's subsidiaries file separate income tax returns
in various states and localities. The losses of one subsidiary cannot be used
to offset the losses of another subsidiary for state purposes. Certain of the
Company's subsidiaries have substantial NOLs available for state and local
income tax purposes. In addition, one of the Company's subsidiaries has
approximately $175,000 of NOLs that can only be used to offset future taxable
income (for federal and certain state purposes) of the specific subsidiary to
which they pertain. These NOLs are further limited by the operation of Section
382 of the Internal Revenue Code. The subsidiary is only allowed to use a
maximum of approximately $27,000 of these carryforwards each year.
Liquidity and Capital Resources
Net cash used in operating activities was $1,352,274 in the First
Quarter of 1998 compared with 278,708 in the First Quarter of 1999. The
increase in cash used operating activities was primarily the result of the
reduction of Accounts Payable and Accrued Liabilities.
Net cash used by investing activities in 1998 was $595,870 compared
to the net cash provided in investing activities of $123,300 in 1999. This
change was primarily due to the increase in expenditures for program costs.
Net cash provided in financing activities amounted to $1,877,345 for
the First Quarter of 1998 as compared to $195,968 provided by financing
activities for the First Quarter of 1999. The increase in cash provided by
financing activities was primarily the result of an increase in the receipt of
cash for equity transactions in 1998.
As of March 31, 1998, the Company had cash of $181,461 compared with
45,425 as of March 31, 1999. Operating activities used a net cash outflow of
$278,708. The principle source of cash during the First Quarter of 1999 was
raised through the sale of equity securities in the amount of 195,968.
These amounts were used to reduce the companies liabilities and have available
working capital.
-9-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Jack Woolf has commenced an action in Supreme Court for the State of
California in Los Angeles entitled Jack Woolf vs. BNN Corporation. Mr. Woolf
alleges breach of an agreement with the Company's former subsidiary Celebrity
Shopping Network which Mr. Woolf claims the Company is liable. The damages are
not stated with particularity. Mr. Wolf action was dismissed but Mr. Woolf has
appealed subsequentially this action was settled.
Mr. Barry Synter has commenced a claim 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.
Tokyo Broadcasting Systems has taken a default judgment 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.
-10-
<PAGE>
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. have 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. The Company believes it has valid and
meritorious defenses to the counterclaims, that the counterclaims are otherwise
invalid, and the Company has prepared an appropriate reply. The third defendant,
Andrew Varni, has not yet to date appeared in the action or answered the
complaint. The parties are engaged in discovery at this time.
-11-
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
therewith duly authorized.
KALEIDOSCOPE MEDIA GROUP, INC.
May 20, 1999: By: /s/ Henry Siegel
--------------------------------------------
Henry Siegel, Chief Executive Officer
May 20, 1999: By: /s/ Irving Greenman
--------------------------------------------
Irving Greenman, Chief Financial Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1998
<CASH> 45,425
<SECURITIES> 0
<RECEIVABLES> 377,310
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,175,319
<PP&E> 21,922
<DEPRECIATION> 5,810
<TOTAL-ASSETS> 5,609,734
<CURRENT-LIABILITIES> 2,814,381
<BONDS> 0
0
0
<COMMON> 40,956
<OTHER-SE> 2,754,447
<TOTAL-LIABILITY-AND-EQUITY> 5,609,784
<SALES> 0
<TOTAL-REVENUES> 38,034
<CGS> 7,511
<TOTAL-COSTS> 7,511
<OTHER-EXPENSES> 523,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (493,234)
<INCOME-TAX> (216,880)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (276,354)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
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