<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended Second Quarter ended June 30, 1999
Commission File No. 0-17591
KALEIDOSCOPE MEDIA GROUP, INC.
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(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
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(Address of principal executive offices)
(212) 779-6601
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(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
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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
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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
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page #
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<S> <C>
Part I Financial Information
Item 1. Financial Statements (unaudited).........................................................
Consolidated Balance Sheet June 30, 1999 and June 30, 1998 ....................................... 2-3
Consolidated Statements of Income................................................................. 4
Consolidated Statements of Stockholders' Equity (Deficit),
Six months ended June 30, 1999 and June 30, 1998 ................................................. 5
Consolidated Statements of Cash Flows six months ended
June 30, 1999 and June 30, 1998 .................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................................ 7
Part II Other Information
Item 1. Legal Proceedings........................................................................ 20
Item 2. Changes in Securities.................................................................... 12
Signatures........................................................................................ 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 1998
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<S> <C> <C>
CURRENT ASSETS
Cash $ 7,595 $ 96,675
Accounts receivable, less allowance for doubtful
accounts of $508,654 and $116,539 in 1999 and 1998 444,322 867,536
Notes receivable, less allowance for bad debt of
$50,000 - -
Program cost inventory - current portion,
net of accumulated amortization 696,120 2,583,585
Deferred income taxes 2,488,245 519,200
Other current assets 209,391 203,903
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Total Current Assets 3,845,673 4,270,899
Program Cost Inventory, less current portion,
net of accumulated amortization 749,708 2,946,125
Loans and advances receivable
officers and shareholders - 36,300
Property and equipment at cost less:
accumulated depreciation 17,273 67,381
Investment in joint venture 886,952 1,276,500
Deferred income taxes 455,249 356,600
Goodwill, net of accumulated amortization - 808,636
Other assets 11,592 24,116
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Total Assets $ 5,966,447 $ 9,786,557
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</TABLE>
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<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
And Subsidiaries
CONSOLIDATED BALANCE SHEETS (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
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<S> <C> <C>
CURRENT LIABILITIES
Cash overdrafts $ - $ 172,105
Loans officers 49,800 -
Notes payable 1,140,000 190,000
Accounts payable and accrued liabilities 1,076,689 619,409
Income tax payable 1,089,880 825,407
Option agreement payable 56,250 112,500
Deferred rent -- current portion - 51,596
Deferred income and client advances - 127,288
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Total Current Liabilities 3,412,619 2,101,305
Deferred rent - less current portion - 257,342
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Total Liabilities 3,412,619 2,358,647
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Contingencies (Note 10)
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 100,000,000
shares authorized and 41,155,960 issued in
1999, and $0.01 par value 100,000,000 shares
authorized and 31,882,092 issued in 1998 41,157 31,882
Preferred stock, $.001 par value 15,000,000
shares authorized and none issued in 1999
or 1998 -
Additional paid-in-capital 9,499,149 8,709,287
Accumulated deficit (6,986,478) (1,313,259)
Stock subscription receivable less
allowance for doubtful accounts
of $1,111,542 in 1999 and $438,075 in 1998 - -
Treasury stock 529,000 shares in 1999 and 1998
at cost - -
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Total Stockholders' Equity 2,553,828 7,427,910
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Total Liabilities and Stockholders' Equity $ 5,966,447 $ 9,786,557
=========== =============
</TABLE>
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<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
And Subsidiaries
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
NET REVENUE $ 324,197 $ 106,947 $ 362,231 $ 1,134,581
DIRECT PROJECT COSTS
Amortization of program costs 68,804 - 70,927 392,512
Other direct project costs - 25,535 5,388 32,231
------------ ------------- ------------ -------------
Total Direct Project Costs 68,804 25,535 76,315 424,743
------------ ------------- ------------ -------------
GROSS PROFIT 255,393 81,412 285,916 709,838
------------ ------------- ------------ -------------
EXPENSES
Salaries and Benefits 246,777 281,744 521,079 542,915
General and Administrative 304,249 809,705 553,704 1,104,089
Amortization of Goodwill - 11,389 - 22,778
------------ ------------- ------------ -------------
Total Expenses 551,026 1,102,838 1,074,783 1,669,782
------------ ------------- ------------ -------------
INCOME (LOSS) BEFORE GAIN ON REDUCTION IN LIABILITIES,
EQUITY IN INCOME OF JOINT VENTURE AND INCOME TAXES (295,633) (1,021,426) (788,867) (959,944)
GAIN ON REDUCTION IN LIABILITIES (Note 8) - - - 282,965
------------ ------------- ------------ -------------
INCOME BEFORE INCOME TAXES (295,633) (1,021,426) (788,867) (676,979)
INCOME TAX (BENEFIT) EXPENSE (131,734) (406,300) (351,519) (254,835)
------------ ------------- ------------ -------------
NET INCOME (LOSS) $ (163,899) $ (615,126) $ (437,348) $ (422,144)
============ ============= ============ =============
NET EARNINGS PER COMMON SHARE
Basic $ (.01) $ (.02) $ (.01) $ (.01)
============ ============= ============ =============
Diluted $ (.01) $ (.02) $ (.01) $ (.01)
============ ============= ============ =============
</TABLE>
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<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
And SubsidiariesS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
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<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1999
Balance--January 1, 1999 38,660,960 $ 38,662 $ 9,386,258 $ (6,549,130) $ 2,875,790
Issuance of shares for
cash consideration 2,495,000 2,495 112,891 - 115,386
Net Loss - - - (437,348) (437,348)
---------- ---------- ------------ ---------- -----------
Balance June 30, 1999 41,155,960 $ 41,157 $ 9,499,149 $ (6,986,478) $ 2,553,828
========== ========== ============ ========== ===========
Six Months Ended June 30, 1998
Balance--January 1, 1998 26,027,082 $ 26,027 $ 6,197,661 $ (891,115) $ 5,332,573
Issuance of shares and related
warrants for cash consideration 5,035,000 5,035 2,214,941 - 2,219,976
Issuance of shares to settle
accounts payable and for
services rendered 520,010 520 296,985 - 297,505
Issuance of shares in settlement
of claim 300,000 300 (300) - -
Net loss - - - (422,144) (422,144)
---------- ---------- ------------ ----------- -----------
Balance--June 30, 1998 31,882,092 $ 31,882 $ 8,709,287 $(1,313,259) $ 7,427,910
========== ========== ============ =========== ===========
</TABLE>
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KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(437,348) (422,144)
Adjustment to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Amortization and depreciation 46,029 438,668
Deferred income tax expense (benefit) (351,519) (253,200)
Deferred rent 0 (10,601)
Gain on reduction of liabilities 0 (282,965)
Expense paid through the issuance of stock 0 175,000
Change in assets and liabilities:
Accounts receivable (120,997) (122,174)
Expenditures billable to clients 0 0
Other current assets 0 (128,300)
Other assets (189,718) 0
Cash overdraft (13,051) (22,043)
Accounts payable and accrued liabilities (63,453) (656,505)
Write-down of program costs inventory 70,927 0
Income taxes payable (496) (11,089)
Deferred income and client advances 0 (569,745)
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Net Cash Used in Operating Activities (1,059,626) (1,865,098)
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CASH FLOWS FROM INVESTING ACTIVITIES
Distribution from joint venture 102,500 100,000
Expenditures for program costs (64,820) (757,355)
Acquisition of property and equipment 489 (7,977)
Loans receivable - officers and shareholders - net change 9,000 0
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Net Cash Provided by Investing Activities 47,169 (665,332)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 850,000 150,000
Repayments of notes payable 0 (75,000)
Loans payable to officers and shareholder 49,800 0
Issuance of common stock and related warrants 115,387 2,299,845
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Net Cash Provided by Financing Activities 1,015,187 2,374,845
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INCREASE (DECREASE) IN CASH 2,730 (155,585)
CASH
Beginning of period 4,865 252,260
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End of period $7,595 $ 96,675
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</TABLE>
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<PAGE>
Item 1. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The consolidated financial statements provided in this six month report
for the period ended June 30, 1999 include the financial statements of SeaGull
Entertainment for six months, the financial statements of the Company for six
months, and six 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 six months ended June 30, 1998 include the financial statements of SeaGull
for six months, the financial statements of the Company for six months, the
combined financial statements of KSG for six months and six 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
Six Months Ended June 30, 1999 as Compared with Six Months Ended
June 30, 1998.
Net revenues consist of total billings (less any agency fees and media
costs) and accruals for earned fees. Net revenues for the Second Quarter of 1999
were $324,197 compared with net revenue of $106,947 for the Second Quarter of
1998.
For the six month period ended June 30, 1999, Net Revenues were
$362,231 as compared to $1,134,581 for the six month period ended June 30, 1998.
Amortization of program costs (costs to produce, market and distribute
a broadcast or film property) and other direct project costs was $25,585 in the
Second Quarter of 1998 compared to $68,804 in 1999. For the six month period, it
was $424,743 in 1998 and $76,315 in 1999.
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<PAGE>
Gross profit increased by $173,981, to $255,393 for the Second Quarter
of 1999 from $81,412 for the Second Quarter of 1998. For the six month period
of 1999 the gross profit decreased $423,922 as compared to 1998.
Salaries and benefits decreased by $34,467 to $246,777 in the Second
Quarter of 1999 compared to $281,744 for the Second Quarter of 1998. Salaries
and benefits for the six month period decreased $21,836 to $521,079 in 1999 as
compared to $542,915 in 1998. General and administrative expenses decreased by
$505,456 to $304,249 in the Second Quarter of 1999 from $809,705 for the
comparable period in 1998. General and administrative expense for the six month
period decreased by $550,385 to $553,704 in 1999 from $1,104,089 in 1998.
There was no amortization of Goodwill in the Second Quarter of 1999 as
compared to 11,389 in 1998. The entire Goodwill was written off in 1998.
Accordingly there is no amortization for the 6 month period in 1999 as
compared to $22,778 in 1998.
Losses from operations (before equity in income of joint venture)
decreased by $725,793 from a loss of $1,021,426 in the Second Quarter of 1998 to
a loss of $295,633 for the Second Quarter of 1999. Losses from operations for
the 6 months ending June 30, 1999 are $788,867 as compared to the 6 months in
1998 of $959,944 reflecting a decrease of $171,077.
The Company did not receive any equity in the income of its joint
ventures in the Second 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.
The provision for income tax benefit was $406,300 in the Second Quarter
of 1998 as compared to an income tax benefit of $131,734 in 1999. The income tax
expense for 1998 and 1999 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 loss amounted to $615,126, or $0.02 per share,
for the Second Quarter of 1998, as compared to net loss of $163,899, or ($0.01)
per share, for the same quarter in 1999.
Net Operating Loss Carryforwards
At December 31, 1998 net operating losses ("NOLs") of the Company are
very significant for federal income tax purposes. 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.
Liquidity and Capital Resources
Net cash used in operating activities was $1,865,098 in 1998 compared
with $1,059,625 in 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 $665,332 compared to
the net cash provided in investing activities of $47,169 in 1999. This change
was primarily due to the increase in expenditures for program costs.
Net cash provided in financing activities amounted to $2,374,845 for
1998 as compared to $1,015,187 provided by financing activities for 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 and financing in
1999.
As of June 30, 1998, the Company had cash of $96,675 compared with
$7,595 as of June 30, 1999. Operating activities used a net cash outflow of .
The principle source of cash during 1999 was raised through the sale of equity
securities and financing. These amounts were used to reduce the companies
liabilities.
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<PAGE>
THE COMPANY
General
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 the 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 important, establishing strategic alliances with production
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<PAGE>
and distribution companies. The Company determined not to be responsible for the
financing of production costs of its programs unless such financing was
restricted to future distribution proceeds.
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.
The Entertainment Division (principally consisting of SeaGull's
business activities) is primarily engaged in the business of and 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 acquisition and distribution of entertainment library properties.
The Company signed an agreement to represent Media Partners
domestically and internationally on all their entertainment properties which
includes 63 hours of magic, circus and other programs; while Media Partners will
represent KMG on their sports properties which includes over 100 hours of golf,
fitness and boxing programs. Media Partners located in Milan, Italy is one of
the largest producer/distributors of major sports events in Europe. Their
coverage includes soccer (all major teams), skiing (The World Alpine Ski Cup),
boxing, volleyball and golf. Their magic shows are currently being shown on The
Family Channel in the United States. The first order of business for the new
venture is the renewal of the existing eight magic shows as well as five new
ones.
The Company was appointed as consultants to Streamedia Communications
Inc., an Internet Broadcast Company. The Company will research the availability
and consult on the valuation of film and television products for use on
Streamedia's various websites. KMG will also advise Streamedia on creating an
acquisition program and the staff required to operate it.
-11-
<PAGE>
The Company and James Rupp, President of Streamedia will be working together to
do "syndication" of content across media platforms (TV to internet, internet to
cable, etc.) including the development of appropriate joint ventures and/or
syndication agreements. Streamedia plans to provide free, live and on-demand
programming on proprietary networks through its broadcast and network divisions.
The company will deliver programming to its own networks and to other clients
and will market internet broadcasting services, equipment, tools and talent. The
company also plans to produce an online news and information service.
Recent Securities Developments
From October 1998 through January 1999 the Company issued 1,000,000
shares of Common Stock to Robert Lancelotti at a purchase price of averaging
$.10 per share.
As of December 1998, the Company entered into a Settlement
Agreement in conjunction with claims made by several groups of investors.
Pursuant to the Agreement the Company issued warrants to purchase shares of
the Company's Common Stock at $.10 per share. The shares underlying these
warrants are being registered in this Offering.
In December 1998 the Company issued warrants to purchase 1,000,000
shares of the Company's Common Stock to an investor for consolidation of the
payment of indebtedness of the Company.
Additionally, in January and February 1999 the Company sold 2,725,000
shares to several investors at prices ranging from $.05 per share, $.10 per
share.
The Company entered into a subsequent agreement with Mr. Robert
Lancelotti and Mr. Byron Lerner for the issuance of shares to Messers. Lerner
and Lancelotti. The Company is obligated to issue a total of 3,150,000 and
2,100,000 shares to Messrs. Lerner and Lancelotti, respectively. In certain
circumstances these shares may be returned to the Company.
In April 1999, the Company issued eight (8%) percent convertible
promissory notes aggregating eight hundred fifty thousand dollars ($850,000) to
foreign private investors. The Notes are convertible into an indeterminate
number of shares at a conversion price of the lower of fifteen ($0.15) cents per
share or 70% of the lowest closing price within sixty (60) days of conversion.
In conjunction with the financing, the Company issued a total of 850,000
warrants at an exercise price of $.19. The Company has also issued an additional
$1,250,000 of principal amount of notes which together with 1,250,000 of such
warrants will be canceled upon certain circumstances.
In April 1999, the Board authorized the Company to issue options to
Henry Siegel, Paul Siegel, Henry Siegel Pension Fund and Ray Volpe in the
amounts of 1,381,250, 2,012,500, 1,687,420 and 437,500, respectively, at an
exercise price of $.10 per share. The Optionees have indicated that they may set
off indebtedness owed to them against the exercise price. Indebtedness includes
accrued salary is owed to Henry Siegel and Paul Siegel and in the case of the
Henry Siegel Pension Fund against accrued interest and principal of a Note. The
Company has also issued 2,435,190 shares in settlement of various claims.
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<PAGE>
RISK FACTORS
Each prospective investor should carefully consider the following risk
factors, as well as all other information set forth elsewhere in this Prospectus
and the documents incorporated by reference.
This Prospectus and the documents incorporated by reference contain
certain forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors set
forth below and elsewhere in this Prospectus and the documents incorporated by
reference, including, but not limited to, (i) general economic conditions; (ii)
competitive market influence; (iii) audience appeal and cultural reviews of its
television programs; (iv) availability of funds; and (v) the ability to
identify, acquire the rights to, and to develop quality properties.
Risk Factors Relating to the Company
Recent Losses Financial Condition
The Company incurred a net loss of approximately ($5,659,000) for 1998
compared to a loss of approximately ($280,000) in 1997. There is no assurance
that the Company will be operated profitablily in the future. In addition the
Company has been dependent upon financing for its operations.
Unpredictability of Business. Broadcast media and the entertainment and
sports industries are highly speculative and historically have involved a
substantial degree of risk. Audience appeal and profitability depend upon
factors which cannot be ascertained reliably in advance and over which the
Company may have no or very limited control, including, among other things, the
unpredictability of critical reviews and changing public tastes. There is no
reliable predictor of an entertainment or sports program's popularity, even a
production involving highly experienced and respected talent may not be
successful. As a result, the ultimate profitability to the Company of properties
and ventures in which it has, or may acquire, an interest cannot be assured and
will depend upon many factors including those over which the Company will have
little or no control.
Dependence on New Products. The Company's growth will be dependent on
its ability to identify, acquire the rights to, and develop quality properties
which can be produced and sold at acceptable profit margins. It will also be
dependent on the Company's ability to negotiate in its production contracts the
necessary rights to oversee and generate revenue from the development,
production, distribution and sale of ancillary products related to such
projects. There can be no assurance that the Company will be successful in
identifying, acquiring the rights to, and developing quality properties that
will be successfully produced, distributed and marketed to the public. There
also can be no assurances that in its production contracts, the Company will be
able to negotiate and maintain the rights to such produced project in orders to
generate revenue from the sale of ancillary products. A failure to identify,
acquire and develop new properties for production, distribution and marketing to
the public or a failure to retain sufficient rights to generate revenue from the
sale of ancillary products would have an adverse impact on the Company's future
performance.
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<PAGE>
Possible Loss of Project Development Costs. Although the Company has
participated in creating and producing many projects, the Company has had to
forego retaining substantial equity and control of distribution rights in return
for the total funding of its productions. To increase equity positions in
projects, the Company, prior to production, will be required to make larger
financial commitments for acquisition of film rights in various properties and
to bear the risk of loss of the cost of these film rights if the acquired or
developed property is not sold or produced. There can be no assurances, however,
that the Company will be able to recover all development costs or maintain
significant equity positions or distribution rights in these productions.
Need for Additional Financing and Financing Arrangements. In order to
realize its objectives, the Company may have a need for additional capital in
the future. If so, the Company intends to seek such capital through public or
private borrowing or equity financings. Any additional equity financings may be
dilutive to stockholders, and debt financing, if available, may involve
restrictions on dividends. Adequate funds, whether obtained through financial
markets or other arrangements with corporate partners or other sources, may not
be available when needed or on terms acceptable to the Company. Insufficient
funds may require the Company to delay, scale back or eliminate some or all of
its development projects, with an adverse effect on the Company's future
performance.
The Company from time to time has obtained additional financing from
the sale of its securities and may do so in the future. The Company has also
issued warrants in connection with loans and advances to it and may do so in the
future. Finally, the Company is contemplating forming one or more limited
liability corporations to finance its projects. See, Recent Securities
Developments.
Competition. Competition in the television production industry and
multimedia industries is intense since there are numerous suppliers of product.
In the television production business the Company will compete for the
acquisition of artistic properties and the services of creative and technical
personnel with major entertainment companies that are engaged in the television
production business. The Company will also be competing for available production
financing and favorable television arrangements, and for the public's interest
in, and acceptance of, its creative products. As the Company attempts to expand
its product base, it expects to face greater competition from larger, better
financed and more experienced entities.
Labor Considerations in the Entertainment Industry. The cost of
producing and distributing entertainment programming has increased substantially
in recent years due to, among other things, the increasing demands of creative
talent and industry-wide collective bargaining agreements. Most scriptwriters,
performers, directors and technical personnel involved in the Company's
productions are members of guilds or unions that bargain collectively on an
industry-wide basis from time to time. Action by these guilds or other unions
can significantly disrupt production and have a material adverse effect on the
Company.
-14-
<PAGE>
Protection of Propriety Rights. Although the Company plans to take what
management believes are appropriate and reasonable measures to secure, protect
and maintain or obtain agreements to secure protect and maintain, copyright and
other protections for all of its properties under the laws of applicable
jurisdictions, no assurance can be given that it will be successful in
implementing these actions or that others will not infringe upon the Company's
proprietary rights, in which event, the Company may not have sufficient
resources to enforce or defend these rights.
Regulation of Television and Motion Picture Industry. United States
television stations and networks, as well as foreign governments, impose
restrictions on the content of its programs. The Code and Ratings Administration
of the Motion Picture Association of America, an industry trade association,
decides ratings for age group suitability for domestic theatrical distribution
of its programs. Although it is unlikely that any of the Company's present
productions would fail to meet the criteria established for domestic and foreign
broadcast, to the extent that the Company's projects do not comply with such
standards and practices, they may be required to be edited before exhibition on
applicable television stations, networks and in foreign territories.
Retention of Key Personnel. The Company's operations are dependent upon
the services of Henry Siegel and Paul Siegel. The loss of Henry Siegel or Paul
Siegel could have a material adverse effect on the Company's business. The
Company's success also depends upon its ability to attract and retain
highly-skilled management and other personnel. Competition for such personnel is
intense, and the inability to attract and retain additional qualified employees
or the loss of current key employees could materially and adversely affect the
Company's business, operating results and financial condition.
Preferred Stock. The Company's Certificate of Incorporation authorizes
the issuance of 15,000,000 shares of Preferred Stock with designation, rights
and preferences determined from time to time by its Board of Directors.
Accordingly, the Company's Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
Preferred Stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Risks Relating to this Offering
Volatility of Common Stock. There has been volatility in the market
price of securities of entertainment companies. Future announcements concerning
the Company or its competitors, including variations in financial results,
changes in general market conditions, governmental regulations or other
developments may have a significant impact on the market price of the Company's
Common Stock and could cause the market price of the Company's Common Stock to
fluctuate significantly. In addition, broad market fluctuations and general
economic or political
-15-
<PAGE>
conditions may adversely affect the market price of each of the Company's
securities, regardless of the Company's actual performance.
No Assurance of Active Market. The Common Stock is quoted on the OTC
Bulletin Board and traded on the Frankfurt and Berlin Stock Exchanges. There can
be no assurance that an active market in the Common Stock will develop. In the
absence of an active public trading market, an investor may be unable to
liquidate his or her investment.
Nonpayment of Dividends. The Company has never declared or paid a cash
dividend on its Common Stock and does not expect to pay cash dividends in the
foreseeable future.
Dilutive Effect of Options, Warrants and Convertible Securities. As of
the date hereof, there were options, warrants and notes outstanding to purchase
or acquire in excess of 27,000,000 shares of Common Stock, with exercise and
converging prices ranging from $.10 to $1.10 per share and which will expire on
various dates through April 1, 2002. The outstanding convertible notes are
convertible based upon market prices in the future and the number of shares are
presently indeterminate. If the outstanding options and warrants are exercised
or notes converted, the percentage of capital stock then held by the existing
stockholders will be reduced. Furthermore, the outstanding options and warrants
can be expected to be exercised at a time when the Company would be able to
obtain funds from the sale of Common Stock or other securities at a price higher
than the exercise prices or conversion prices thereof.
-16-
<PAGE>
DESCRIPTION OF SECURITIES
The following descriptions of the Company's securities are qualified in
all respects by reference to the Certificate of Incorporation and By-laws of the
Company. The Certificate of Incorporation authorizes the Company to issue
100,000,000 shares of Common Stock, $.001 par value, and 15,000,000 shares of
"blank check" Preferred Stock, $.001 par value (the "Preferred Stock").
Common Stock
As of June 30, 1999 there were 41,155,960 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to preferential rights with respect to future outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and satisfaction of preferential rights and have no rights to
convert their Common Stock into any other securities. All shares of Common Stock
have equal, non-cumulative voting rights, and have no preference, exchange,
preemptive or redemption rights.
-17-
<PAGE>
Preferred Stock
As of the date hereof, there were no shares of Preferred Stock
outstanding. The Company's Certificate of Incorporation authorizes the issuance
of the Preferred Stock with designations, rights and preferences determined from
time to time by its Board of Directors. The Preferred Stock may be issued in
series, and the Preferred Stock of each series will have such rights and
preferences as are fixed by the Board of Directors in the resolutions
authorizing the issuance of that particular series. In designating any series of
the Preferred Stock, the Board of Directors may fix the number of shares of the
Preferred Stock constituting that series and fix the dividend rights, dividend
rate, conversion rights, voting rights (which may be greater or lesser than the
voting rights of the Common Stock), rights and terms of redemption (including
any sinking fund provisions) and the liquidation preferences of the series of
the Preferred Stock. It is possible, without any action of the stockholders of
the Company, that the holders of any series of the Preferred Stock, when and if
issued, will have priority claims to dividends and to any distributions upon
liquidation of the Company and that they may have other preferences over the
holders of the Common Stock. The Board of Directors may issue series of the
Preferred Stock without action of the stockholders of the Company.
The issuance of the Preferred Stock may be used as an anti-takeover
device without further action on the part of the stockholders. Furthermore, the
issuance of the Preferred Stock may dilute the voting power of holders of the
Common Stock (such as by issuing Preferred Stock with super-voting rights) and
may render more difficult the removal of current management, even if such
removal may be in the stockholders' best interests. The Company has no current
plans to issue any of the Preferred Stock.
Delaware Law and Certain Charter Provisions
The Company will be subject to Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in a wide
range of specified transactions with any interested stockholder, defined to
include, among others, any person or entity who in the previous three years
obtained 15% or more of any class or series of stock entitled to vote in the
election of directors, unless, among other exceptions, the transaction is
approved by (i) the Board of Directors prior to the date the interested
stockholder obtained such status or (ii) the holders of two-thirds of the
outstanding shares of each class or series owned by the interested stockholder.
The Company's Certificate of Incorporation and By-laws contain certain
additional provisions which may have the effect of delaying or preventing a
change in control of the Company. Such provisions include blank check preferred
stock (the terms of which may be fixed by the Board of Directors without
stockholder approval). Accordingly, the Company's Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company.
-18-
<PAGE>
Transfer and Warrant Agent
The transfer agent for the Common Stock is Holladay Stock Transfer,
Inc.
LEGAL MATTERS
Certain legal matters in connection with the securities being offered
hereby will be passed upon for the Company by Parker Duryee Rosoff & Haft, New
York, New York 10017.
EXPERTS
The consolidated financial statements of the Company, included in the
Company's annual report on Form 10-KSB for the fiscal year ended December 31,
1998, which annual report has been incorporated herein by reference, have been
audited by Liebman Goldberg and Drogin LLP, independent certified public
accountants, as indicated in their report with respect thereto, and are
incorporated herein by reference in reliance upon the report of said firm given
upon their authority as experts in accounting and auditing.
-------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus or
incorporated by reference to this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. The delivery of this Prospectus at any time
does not imply that the information contained herein is correct as of any time
subsequent to its date.
-19-
<PAGE>
Item 2. 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. Management believes that the claim lacks merit. 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
-20-
<PAGE>
Group, Inc. (United District Court for the District of California. This action
was commenced AAC Entertainment GMBH Co. ("ACC") for alleged breach of contract.
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. The court has derected that a settlement conference
be held.
Paul Cioffari has 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.
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. The Company has settled with Mr. Wolf in consideration of 35,000
shares of KMG stock.
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. As of this date the note has been fully paid and the action has been
settled.
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. They
have agreed to settle for 300,000 shares of KMG stock.
-21-
<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.
Item 3. Submission of Matters to a Vote of Security Holders
No matter was submitted.
SUBSEQUENT EVENTS
Subsequent to March 31, 1998 but prior to the issuance of these
financial statements the Company entered into several stock transactions which
is reflected on the S-3 filed with the Securities Exchange Commission on May 14,
1999
-22-
<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
-23-
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