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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(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, $.01 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, 1999 are
$1,175,206.
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
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
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important, establishing strategic alliances with production 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.
In April 1999 The company issued received $750,00 in consideraion of
the sale of convertible notes. 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 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) 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.
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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
Northg 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.
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 Production
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The production of a program for first-run syndication begins with the
development of a creative concept. Depending on the type of programming, the
producer will develop a format and, in some instances, a pilot. The format and
the pilot, if any, will be presented by the program's syndicator to
representatives of various television stations around the world, in some
instances accompanied by sales promotion materials created by the producer or
syndicator. Frequently, in order to attract television stations to license
programming for exhibition for the upcoming fall television season, a producer
or syndicator will present its programming at the annual meeting of the National
Association of Television Programming Executives (primarily a domestic
programming exhibition) and at M.I.P. (primarily a foreign programming
exhibition), generally held in January and April, respectively, of each year.
Because the size of the viewing audience of a program for a station can be
affected by the popularity of the programming that precedes and follows it on
the station, syndicators generally attempt to sell their programs to the station
in a given market area with the highest ratings and to arrange for the program
to be broadcast in the most favorable time period and programming environment
possible. If a television station elects to license a program, it generally will
license one year's worth of such programming, subject to that programming being
produced.
The development of programming for first-run syndication may require
significant expenditures before the programming is first broadcast. Depending on
the type of programming, the initial license fees paid by television stations
for the right to broadcast such programming may be less than the costs of
developing, producing, marketing and distributing such programming. The
Company's strategy is to attempt to use strategic partners to fund the costs of
the programming development significantly reduces the Company's financial risk
in program development. This strategy may also, however, limit the Company's
returns on successful programming. Additionally, the Company pre-sells the
foreign distribution rights to programming to further cover programming
development costs.
The ultimate commercial success of a first-run program will depend on
the program's ratings (including the demographics of its audience), which are a
reflection of the program's popularity with viewers. As a program's ratings
improve, the value of the advertising time during that program and the amount
which can be charged to television stations for licensing that program generally
increase. A program's ratings may improve as a result of its being moved to a
more favorable time period or licensed by a greater number of, or more
successful, stations, i.e., stations with better overall ratings. Promotional
efforts by stations on which a program is broadcast can also help to improve a
program's ratings. The demographic composition of a program's audience and the
popularity of the program scheduled in the time period immediately preceding the
time period in which the program is broadcast are additional factors that can
affect a program's ratings. Finally, the distributor's direct consumer marketing
efforts for a program can substantially affect that program's ratings. The
Company seeks to maximize the strength of its programming by negotiating
desirable time slots, selecting optimal stations, and demanding effective
consumer marketing efforts in its syndication clearance efforts.
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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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Revenues from the distribution of U.S. television programs 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 in the United States.
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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" series being produced by the Company.
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.
While the Company's present liquidity situation exists the Company will
concentrate on acquiring distribution rights. When acquiring existing
properties, the Company may pay a nominal fee for an option against a more
substantial purchase price. This option usually enables the Company to develop
the property on its own during the option period before committing to its
acquisition. Securing an option also enhances the Company's ability to obtain
financing or a production commitment before actually buying the property. Option
periods customarily run for a minimum of one year and contain provisions that
enable the Company to extend the option for additional periods. Terms of options
vary significantly and are dependent upon, among other factors, the credibility
and prior success of the writer/owner of the property, the level of revenues or
profits that the Company estimates can be received from the exploitation of the
property, and the estimated cost of further development and production of the
property. Agreements relating to these projects often provide for additional
payments to writers/owners upon their sale, production and/or distribution.
Certain agreements also provide for participation, at various percentage levels,
and or profits from these projects.
In some cases, where the Company already has a working relationship
with outside creative personnel, the Company will agree to co-develop a
property. Generally, the Company will set up a corporation or similar entity
under which it will develop and possibly produce the property. Otherwise the
Company will enter into an agreement to co-develop the property with the owner
or creator. Like options, the terms of the Company's co-development agreements
can vary significantly.
During the development phase of a project, commitments are sought from
external sources
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such as the major entertainment studios, distributors, broadcast networks,
production companies and corporate sponsors. As indicated, it is not the
practice of the Company to expend substantial sums of its own in the development
process unless it has reason to believe that there is a strong likelihood of a
financing or production commitment for the project from such external sources.
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 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 which on the Company's operations cannot be predicted.
One of the ways the Company can ensure that it maintains certain
ownership interests in its properties, both in the rights to sell ancillary
products and by participating in the direct profitability associated with the
broadcast of the program, is to enter into license fee arrangements with third
parties such as networks or distributors. Under this arrangement, the licensor,
in this case the Company, assumes a greater financial risk as the costs to
produce the program may exceed the negotiated license fee. This type of
arrangement generally gives the network or distributor the right to broadcast on
domestic television for a defined period of time. The licensor would retain the
rights to exploit ancillary markets, including foreign distribution of the
program. While the Company has not historically deficit financed productions and
generally would not agree to do so, for selected properties it may agree to such
a licensing arrangement to improve its ownership interest. In these cases, the
Company would assume greater financial risk on the production which could result
in
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losses to the Company if the project failed or if the Company's production costs
exceeded the licensing fees and revenues generated from ancillary markets.
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) full-time persons,
of whom 4 were engaged in sales and marketing five (5) in management, finance
and administration. 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.
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. 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
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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.
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.
12
<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 4. Submission of Matters to a Vote of Security Holders
No matter was submitted.
13
<PAGE>
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" and is traded on the Frankfurt Stock
Exchange and the Berlin Stock Exchange under the symbol "BNN".
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
------------
High Low
---- ----
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.
14
<PAGE>
Dividends
- ---------
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.
15
<PAGE>
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 $1,137,075 in 1998 from $2,741,692 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 $2,063,508 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 lower amount 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
16
<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 $188,698.
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 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 $561,985 to a loss of
$7,389,485 in 1998 from $1,172,500 in 1997. This decrease was a result of the
factors described above.
The provision for income tax benefit was $1,731,470 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,
17
<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 $5,658,015, or $0.19 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
At December 31, 1998, NOLs of the Company amounted to approximately
$8,537,500s 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
Net cash used in operating activities was $3,617,953 in 1998 compared
with $984,388 in 1997. The increase in cash used 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 $1,973 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 $150,332 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.
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. This
decline in cash inflow caused the Company a severe liquidity problem which it
18
<PAGE>
has partially addressed through equity financing, reduction in overhead.
During the year ended December 31, 1998, the Company received no
material cash from its 50% participation in the Joint Venture that produced and
distributed of "Tarzan: The Epic Adventures." This resulted principally from the
obligations of the Joint Venture to its vendor.
Management believes that as additional entertainment properties are
released to the market, cash flows from these properties will improve the
overall Company cash situation significantly. Although each new project going
into production will require additional financial resources, management expects
that financing from venture partners and funding from sponsorships and pre-
sales of programming will provide a significant portion of these needs
At December 31, 1998, the Company had working capital deficity of
$(303,553) as compared to working capital of $801,603 at December 31, 1997.
As a result of the operating and programming requirements, management
is continuing to explore initiatives to ensure adequate interim cash resources.
The Company is seeking to obtain necessary funding from (a) equity financing;
(b) arrangements for profit participation in individual projects and (c)
marketing or advertising tie-ins to programs and is exploring other joint
venture relationships that will share the burden of program investment. The
Company received $750,000 upon the sale of convertible notes in April 1999. The
investors subject to certain conditions which the Company believes are
attainable have agreed to purchase an additional $1,250,000 of convertible
debentures.
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 F-1 through F-28 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.
19
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Henry Siegel 56 Chief Executive Officer, Chairman of the Board
Paul Siegel 56 President and Director
Ray Volpe 57 Director
Martin Miller 57 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.
20
<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 has been a director of the Company since 1995. 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.
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:
21
<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, 1997.
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>
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
22
<PAGE>
<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 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. The Company has not paid
salary under then agreements since November 1999.
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.
23
<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.
24
<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 -- --
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.
25
<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 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
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. In settlement
on claims an agreement to pay indebted of the Company the 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.
26
<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, par value $.01
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.
21.01 Subsidiaries of the Company
23.1 Consent of Independent 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.
(b) Reports on Form 8-K
None
27
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
FINANCIAL STATEMENTS WITH
INDEPENDENT AUDITOR'S REPORT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
- I N D E X -
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Independent Auditors' Report F-2
Financial Statements
Consolidated Balance Sheets F-3-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7-8
Notes to Consolidated Financial Statements F-9-26
</TABLE>
<PAGE>
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 statement of Kaleidoscope Media Group Inc. (formerly BNN Corporation)
at December 31, 1997 were audited by other auditors whose report dated April 14,
1998, expressed an unqualified opinion on those statements.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the financial position of
Kaleidoscope Medial 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 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 does not include any
adjustments that might result from the outcome of this uncertainty.
Garden City, New York
April 14, 1999
F-2
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
Current Assets: 1998 1997
---------- ----------
<S> <C> <C>
Cash $ 4,865 $ 252,260
Accounts receivable, less allowance for
doubtful accounts of $457,143 and
$116,539 in 1998 and 1997, respectively 323,325 746,681
Note receivable, less allowance for bad debt
of $50,000 in 1997 -- --
Program cost inventory - current portion, net
of accumulated amortization 650,929 2,876,975
Deferred income taxes 997,514 266,000
Other current assets 55,006 129,153
---------- ----------
Total current assets 2,031,639 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 1,410,386 356,600
Goodwill, net of accumulated amortization -- 831,414
Other Assets 11,592 24,116
---------- ----------
$5,281,533 $9,266,673
========== ==========
</TABLE>
See notes to financial statements.
F-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 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 in 1998 and 1997 --
Additional paid-in capital 9,386,258 6,197,661
Accumulated deficit (6,549,130) (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 2,875,789 5,332,573
----------- -----------
Total liabilities and stockholders' equity $ 5,281,533 $ 9,266,673
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year 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 (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 Income Taxes (7,200,827) 854,779
Equity in Income of Joint Ventures (188,658) 317,721
----------- -----------
Income before Income Taxes (7,389,485) 1,172,500
Income Tax Expense (Benefit) (1,731,470) 1,452,594
----------- -----------
Net Income (Loss) $(5,658,015) $ (280,094)
=========== ===========
Basic Earnings (Loss) Per Share $ (0.19) $ (0.01)
=========== ===========
Diluted Earnings (Loss) Per Share $ (0.19) $ (0.01)
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <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 3) -- -- 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, 1998 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 -- -- -- (5,658,015) (5,658,015)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 38,660,960 $ 38,661 $ 9,386,258 $(6,549,130) $ 2,875,789
=========== =========== =========== =========== ===========
</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.
F-6
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended
December 31,
--------------------------------
Cash Flows from Operating Activities: 1998 1997
----------- -----------
<S> <C> <C>
Net income (loss) $(5,658,015) $ (280,094)
Adjustment to reconcile net income (loss) to net cash
used in operating activities:
Amortization and depreciation 893,711 1,098,749
Equity in income of joint venture 387,048 (317,721)
Fee income from joint venture recorded as
an increase in the investment -- (186,300)
Deferred income tax expense (benefit) (1,785,300) 736,400
Deferred rent (319,539) (43,653)
Gain from sale of assets -- (3,512,836)
Change in assets and liabilities, net of effects,
in 1996, from purchase of KG:
Accounts receivable 423,356 60,664
Expenditures billable to clients -- 228,071
Other current assets 74,147 68,714
Security deposits payable 10,552 --
Options payable (143,750) --
Other assets 12,524 (3,000)
Cash overdraft (181,097) 194,148
Accounts payable an accrued liabilities (414,294) 12,368
Write-down of program costs 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 shareholders -- (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)
operating activities (7,973) 1,232,964
----------- -----------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the year ended
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Financing Activities:
Deferred offering costs -- (79,869)
Repayments of loans payable - shareholders 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.
F-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 it 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
share 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 for 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 share
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 was amortized using the straight
line method over a period of twenty years, and amounted to $2,608,256
for the years ended December 31, 1997. 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.
F-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. As more fully described in Notes 1 and 3, 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 accounting for on the
equity method. Accordingly, KMG's share of the earnings 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.
F-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.
F-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 10. 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 4) 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 balance
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.
F-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):
- -----------------------------------------------------------------
Earnings (Loss) Per Common Share:
---------------------------------
Basic earnings (loss) per common share is based upon the weighted
average number of common shares outstanding during the year. Diluted
earnings (loss) per common share includes 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 6) would have an anti-dilutive
effect on earnings (loss) per share. As a result it was not used in
the earnings per share calculation.
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, the in 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.
F-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 cancellations of a
$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.
F-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 $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.
F-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 Shareholders':
- --------------------------------------------------------------------
These loans and advances to officers and shareholders 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. 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.
F-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 other
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 reasonable
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 months, including interest at 7.2%, through
January 1998. The final payment under this lease was made in December
31, 1997.
Note 12 - Notes Payable:
December 31,
------------
1998 1997
---- ----
Note payable - due to officer $ 150,000 $ 0
Note payable to the former parent
of KG (see Note 16). ( 40,000) ( 40,000)
--------- ---------
$ 190,000 $ 40,000
========= =========
F-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 a 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
----------
$2,353,688
==========
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.
F-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
not responsibility for the debts of the former affiliate.
Furthermore, management believes that is 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 a recent decision, the court
dismissed plaintiff's claim against the subsidiaries and at the same
time found that the advertising agency may be liable to the plaintiff
pursuant to aforesaid indemnity agreement. The plaintiff and the
advertising agency have submitted arguments to reargue and the
Company believes they intend to appeal in any event. While management
believes, based on the foregoing, that the litigation will not have a
material effect on the Company's financial position, it is as least
reasonable 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 his 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.
F-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 reasonable 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 t assess the probable outcome of these claims, but
it is at least reasonable possible that a material gain or loss could
result. Year Ended December 31,
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 not 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.
Note 16 - Income Taxes:
The provision for income taxes for the year ended December 31, 1998
consists of the following components:
Year Ended December 31,
-----------------------
1998 1997
---- ----
Current
Federal $( 339,038) $ 0
State ( 163,088) 716,194
---------- ----------
( 502,126) 716,194
---------- ----------
Deferred
Federal ( 830,059) 931,800
State ( 399,285) ( 195,400)
---------- ----------
(1,229,344) 736,400
--------- ----------
$(1,731,470) $ 1,452,594
========= =========
F-20
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 16 - Income Taxes (Continued):
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 are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Federal corporate tax rate of 34% applied
to pretax income $( 1,108,393) $ 398,650
State and local income taxes, net of federal benefit ( 949,735) 343,724
Effect of non-taxable gain on lease cancellation ( 64,140)
Effect of non-deductible goodwill amortization 276,112 26,180
Effect of other non-deductible expenses 60,856 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 53,830 ( 146,684)
$ 194,790 $ 1,452,594
============ ============
</TABLE>
<TABLE>
<CAPTION>
Deferred income taxes as reported on the balance sheet consists of:
December 31,
------------
1998 1997
---- ----
<S> <C> <C> <C>
Deferred tax assets $ 2,488,464 $ 818,600
Deferred tax liabilities ( 80,564) ( 154,900)
Valuation allowance 0 ( 41,100)
--------- ----------
$ 2,407,900 $ 622,600
========= ==========
</TABLE>
F-21
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
As of December 31, 1997, the Company had net operating loss ("NOL")
carryforwards of approximately $58,658,500 available to offset future
federal taxable income; the carryforwards are not available for state
income tax purposes. These carryforwards begin to expire in 2011.
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 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.
F-22
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 17 - Capital Structure:
In additional to the Millport warrants described in Note 14, all of
which were still outstanding at December 31, 1997 and the outstanding
stock options described in Note 19, 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 vest 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 during 1998 was as follows:
Balance at December 31, 1997 $ 828,333
Granted 0
Exercised 0
Forfeited 0
Expired 0
---------
Balance at December 31, 1997 $ 828,333
=========
F-23
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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
Year Ended
December 31,
-----------------
1998 1997
---- ----
Assets:
Cash $ 4,865 $ 252,260
Notes receivable 0 0
Loans and advances receivable -
officers and shareholders 9,000 36,300
Liabilities:
Cash overdraft 13,051 194,148
Notes payable 190,000 40,000
F-24
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(Formerly BNN Corporation)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 19 - Fair Value of Financial Instruments (Continued):
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
hold for trading purposes.
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 $ 0
=========== ===========
Income taxes $ 0 $ 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.
F-25
<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 (Continued):
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, and 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 additional debentures
subject to attaining certain conditions. Note 15 discusses the
Company's ability to continue a going concern.
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 15th day of April, 1998.
KALEIDOSCOPE MEDIA GROUP, INC.
By: /s/ Henry Siegel
-------------------------------
Henry Siegel
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Capacity Date
- -------------------------- ---------------------------------------------- ---------------
<S> <C> <C>
/s/ Henry Siegel Chief Executive Officer, Director April 15, 1999
- ---------------- (Principal Executive Officer)
Henry Siegel
/s/ Paul Siegel President, Director April 15, 1999
- ---------------
Paul Siegel
/s/ Irving Greenman Chief Financial Officer (Principal Financial April 15, 1999
- ------------------- Officer and Principal Accounting Officer)
Irving Greenman
/s/ Ray Volpe Director April 15, 1999
- -------------
Ray Volpe
/s/ Martin Miller Director April 15, 1999
- -----------------
Martin Miller
</TABLE>
<PAGE>
DISTRIBUTION AGREEMENT GLO/KMG - A/11/98
GLOBAL ENTERTAINMENT PRODUCTIONS BV
(hereinafter referred to as "Global")
and
KALEIDOSCOPE MEDIA GROUP INCORPORATED
(hereinafter referred to as "KMG")
Preamble
Whereas Global are producers of films (produced principally for television)
and, unless otherwise stipulated, will own and/or control all the relevant
rights to:
o such films; including, but not limited to, the rights to produce and
distribute such films on a world wide basis and in what ever format they may
choose eg. film, video, compact disc, etc;
o any related music (subject to such restrictions as will be stipulated for each
film which may become subject to this agreement); and
o any products which may be derived from such films and which will or may
become the subject of related merchandising agreements
and
<PAGE>
2
Whereas KMG are film distributors and have expertise in syndication and all
other avenues of marketing pertaining to film and allied products, including but
not limited to.
* cable television;
* network television both free and to pay;
* home videos;
* merchandising of film related products.
I. Definitions:
The following meanings, unless clearly inconsistent with the context, will be
assigned to words and phrases used in this agreement and any sub agreements.
Programs: films produced by or acquired by Global, be they films intended
for a single showing, mini series or full series, and
irrespective the presentation medium e.g. 16mm film, 35mm
film, video film, compact disc etc.
Merchandise: products based on programs, be they based on the story,
characters or animals featured in the story, any other products
based in any way on the story, etc., whether such products be in
the printed medium. electronic medium, clothing, toys or any
other product based on or derived from the programs.
Gross revenue: the total revenue collected from the distribution of each
program, subject only, in the case of advertising sales to the
deduction of the standard ad sales fee of 10%. and the ad agency
commission of 15% of the total revenue, where such ad sales fee
or ad agency commission is paid away to a third party for bona
fide services rendered.
<PAGE>
3
Third party: a party at arms length to the parties to this agreement,
and/or any associate or related party to the parties to this
agreement.
Global: Global Entertainment Productions BV.
KMG: Kaleidoscope Media Group Incorporated.
Victory: Victory Media Management a German company with who are
associated, as co-producers and/or co-owners with Global in some
or all of the programs which will be subject to this agreement.
Master
agreement: this agreement.
Sub agreement: a sub agreement of this agreement relating to a specific
program.
Ad sales fee: the standard fee paid to an advertising agent, normally 10% of
the total revenue generated by such sale.
Ad agency
commission: the standard commission paid to advertising agencies, normal1y
at the rate of 15% of total advertising revenue in respect of
the particular sale.
Domicilium: the domicilium execulandi et citandi of the parties, being:
Global-
Baarsieweg 281 III
1058 AE Amsterdam, Holland.
<PAGE>
4
KMG
345 Park Avenue
New York NY 10010
SeaGull: SeaGull Entertainment Incorporated, an associate company of KMG.
North America: the United States of America excluding Canada.
Canada: Canada, both English and French speaking unless otherwise
stated.
USA: the United States of America.
Domestic: the United States of America.
The territory: the USA and Canada.
Other
territory: any country, state or area not forming part of the territory.
2. Joint Distribution
Global and KMG hereby agree that they will jointly distribute
programs and merchandise produced or acquired by Global in the
territory, such distribution to be based on systems and methodology
developed by KMG and agreed by Global
3. Other Territory
KMG may be in a position to assist with distribution in some other
territory, in such event they will only proceed with the specific
consent of Global given in writing. In the event of KMG being the
effective cause of a revenue producing agreement in such other
territory they will be
<PAGE>
5
entitled to a fee of 10% (or such other percentage as may be agreed by
the parties) of the gross revenues from the transaction in question.
4. On-going Representation
the parties have agreed in good faith that - subject to the programs
produced or acquired by Global being of a standard or a type suitable
for distribution in the territory and subject to the revenues from
KMG's distribution of programs being in accordance with budgets
prepared in advance and agreed by both parties in all the various
distribution channels available in the territory - It Is the intention
of Global to offer all programs intended for the territory, to KMG for
distribution, and it is the intention of KMG to undertake the
distribution of all such programs,
5. Sub Agreements
a separate sub agreement of this agreement shall be entered into by the
parties to this agreement in respect of each program to be distributed
jointly by the parties. The sub agreement is intended to ensure
effective implementation of this agreement and shall deal with matters
which are specific to each such program. Sub agreements shall be
negotiated by the parties in good faith and shall form part of this
agreement and be subject to the conditions of this agreement.
6. Production and/or Acquisition Costs
all costs of producing and/or acquiring programs shall be borne by
Global, assisted, where Global has so agreed, by financing arranged by
Victory. KMG shall be only in the distribution and/or sale of completed
programs and any merchandise related thereto.
<PAGE>
6
7. KMG Program Advice
while KMG will not be directly involved in producing or purchasing
programs they will, if so requested by Global, advise on the
suitability of programs for distribution in the territory, including if
appropriate advice as to measures and/or adaptations which could render
programs suitable, or more suitable, for distribution in the territory.
8. Distribution Expense Budget
the parties shall jointly compile an expense budget for the marketing
and distribution costs of each program, such costs shall be only the
direct costs of distribution of the said program. This budget will be
included in the sub agreement for the related program. The budget shall
not be exceeded either in total or in respect of individual items
unless such excess is approved by both parties in writing. Approved
(budgeted) expenditure will be funded by Global as incurred and in any
case where such approved expense is in the first instance paid by KMG
the amount so paid will be refunded by Global, against an invoice
from KMG. Refunds are to be made within 30 days of KMG's invoice. Full
details of all distribution expenses incurred shall be audited by a
suitably qualified CPA should either party request such an audit. Such
audit expenses shall be treated as distribution expenses.
9. Distribution Fee
a distribution fee based on the gross revenues (as defined) derived in
respect of each program shall be calculated on the following basis:
* domestic syndication/cable 35%
* domestic free or pay network television 25%
* home video 20%
<PAGE>
7
* all other - including North American
merchandising 30%
The distribution fee, calculated as above, shall be paid 50% to Global
and 50% to KMG. Distribution fees shall be payable only out of actual
receipts from contracts giving rise to the fees in question (see clause
10) and shall be a first charge against such receipts once expenses
referred to in clause 8 above have been recouped.
10. Application of Total Revenue
the total revenue derived from each program subject to joint
distribution shall be applied as follows:
* firstly the related distribution costs paid by Global shall be
refunded to Global;
* secondly, once the full amount of related distribution costs have
been refunded, the next tranche of receipts shall be applied to paying
the distribution fee, each installment to be shared 50/50 by Global
and KMG;
* thereafter any further receipts shall constitute net profit and shall
be paid to Global;
Revenues shall be distributed monthly as and when received.
11. Revenue to Global Bank Account
all revenue shall be paid into a central fund or account controlled by
Global, as and when received, and the disbursements referred to in 8
shall be made out of such fund or account. Should KMG so require such
fund or account shall be audited by a suitably qualified CPA and the
cost of such audit shall be treated as distribution expenses.
<PAGE>
8
12. Global to Approve all Contracts
each and every contract, of sale or otherwise, arising out of this
agreement shall be subject to Global's approval (which shall not be
unreasonably withheld) and shall not be binding until signed by
Global's authorized representative.
13. Sales Budgets and Evidence of Title
unless otherwise agreed in writing no sub agreement shall be binding on
the parties unless, prior to or concurrently with, signature of
such sub agreement:
* KMG have produced a detailed revenue budget (acceptable to Global),
which shall be a schedule to the sub agreement, reflecting the
anticipated revenues from distribution of the program and sales of
related merchandise;
*Global have provided evidence of clear title to the relevant program
and/or merchandise to the extent relevant to the particular sub
agreement.
14. Right to Distribute Related Products
once KMG have entered into an agreement with Global to distribute a
particular program, they shall be entitled (subject to satisfactory
performance) and obliged, to market any ancillary programs to such
programs and also any related merchandise.
15. Global to Have all Right and Title
all right title and ownership in the programs and any related products
or merchandise shall be vested in and remain with Global at all times
and KMG will use its best
<PAGE>
9
endeavours to prevent any breach and to advise on any such breach that
may come to their attention.
16. Credit as Joint Distributors
both Global and KMG shall be given credit as joint distributors of any
program or related products, in all publicity material including,
without limiting the general application of this provision, any press
release, information brochure etc, including also any verbal
statements, made.
17. Subcontracting by KMG
should KMG wish to sub contract any of their obligations in terms of
this agreement they may do so only with the written consent of Global.
KMG shall be solely responsible for the remuneration of a sub
contractor appointed in terms of this provision but any payments to
approved subcontractors will be reimbursed if provided for in the
budget referred to in clause 8.
18. Good Faith
all representations made by the parties to each other in respect of
this agreement, any sub agreement or any aspect of such agreements are
required to have been made in the utmost good faith.
19. Warranties
Global warrants that it will control, and where appropriate, will
properly license, all material which becomes subject to this agreement,
including any sub agreement. Global and KMO both warrant that they are
legally competent and entitled to enter into this agreement and any sub
agreements, and that they are not under any disability
<PAGE>
10
which could in any way hamper their performance under any such
agreement, and that they will provide to each other such indenmities
and warranties as may become necessary. The parties further agree to
idemnify each other and any employee or other servant, director or
other officer, agent or consultant or shareholder or owner against any
including legal costs arising from any breach or default by the party
concerned.
20. Taking Effect
notwithstanding the date of signature, this agreement, any sub
agreement or related agreement shall only take effect, when approved by
or an behalf of Global's board of directors, Such approval to be given
within seven days of signature of the relevant agreement.
21. Duration or Term
this agreement shall be for an initial period of three years and shall
continue in force thereafter subject to termination by either party
giving the other six months notice in writing.
22. Amendments to be in Writing
this agreement supersedes all other arrangements to date of its taking
effect between the parties and no amendment to this agreement shall
have any force and effect unless reduced to writing and agreed by both
parties.
23. Assignment
no purported assignment of this agreement or any pant thereof shall be
of any force or effect unless reduced to writing and agreed by both
parties.
<PAGE>
11
24. Law of England
this agreement and, unless otherwise provided, any sub or related
agreement shall be subject to the laws of England.
25. Arbitration
to avoid litigation the parties hereto agree that any dispute arising
under this agreement shall be submitted to an independent arbitrator to
be appointed by the President for the time being of the Law Society of
England. The selection of the arbitrator shall be influenced by
consideration of whether the dispute relates to fact or law or both
fact and law. The decision of the arbitrator shall be final and shall
be binding on both parties. The parties shall provide the necessary
funds for the arbitration in equal shares but the arbitrator shall, as
part of his final decision make an order as to how the costs should
finally be borne by the parties.
Signed in ____________________ this _______ day of ___________
199___
For: Kaleidoscope Media Group Incorporated
__________________________ Witness 1 _______________
Director
(Who warrants that he is
empowered to sign this agreement) Witness 2 ________________
<PAGE>
Signed in Amsterdam this 19th day of November 1998.
For: Global Entertainment Productions BV.
/s/ xxxxxxxxxx Witness 1 ___________________
- --------------------------------
Director
(Who warrants that he is
empowered to sign this agreement) Witness 2 ___________________
<PAGE>
Exhibit 20.01
SUBSIDIARIES
Name State of Incorporation Percentage of Ownership
- --------------------------------------------------------------------------------
Kaleidoscope Entertainment, Inc. New York 100%
- --------------------------------------------------------------------------------
Kaleidoscope Holding, Inc. New York 100%
- --------------------------------------------------------------------------------
HSPSMM Inc. Delaware 100%
- --------------------------------------------------------------------------------
SeaGull Entertainment Inc. Delaware 100%
- --------------------------------------------------------------------------------
People & Properties Inc. New York 100%
- --------------------------------------------------------------------------------
Hollywood Connection LLC Delaware 100%
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (333-51373), Form S-3 (333-51373), Form S-3 (333-51373) of our
report dated April 1999 on the consolidated financial statements of Kaleidoscope
Media Group, Inc. and subsidiaries included in the 1998 Annual Report on Form
10-KSB. We also consent to the reference to our Firm under the caption "Experts"
in the prospectuses.
/s/ Liebman Goldberg & Drogin
- ------------------------------
New York, New York
April 15, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,865
<SECURITIES> 0
<RECEIVABLES> 323,325
<ALLOWANCES> 116,539
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<COMMON> 38,661
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<CGS> 4,571,399
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