<PAGE>
As filed with the Securities and Exchange Commission on June 12, 2000
Registration No. 333-51373
======================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment 3
On Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
KALEIDOSCOPE MEDIA GROUP, INC.
(Name of small business issuer in its charter)
Delaware 93-0957030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
244 West 54th Street
New York, New York 10019
(212)757-0700
(Address, including zip code, and telephone number,
including area code, of principal executive offices and place of business)
MYRON HYMAN, Chief Executive Officer
244 West 54th Street
New York, New York 10019
(212)757-0700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
MICHAEL D. DIGIOVANNA, Esq.
PARKER DURYEE ROSOFF & HAFT
529 Fifth Avenue
New York, New York 10017
(212) 599-0500
---------------------
Approximate date of proposed sale to the public: From time to time after the
effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
<PAGE>
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
2
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==============================================================================================================
Title of Each Class of Amount to be Proposed Proposed Maximum Amount of
to be Registered (1) Maximum Aggregate Offering Registration
Registered Offering Price Price Fee
Per Share
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $.001 per share 37,687,229 $______ $____________ $_________
--------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.001 per share 64,601,660 $.30 $19,380,498 $5,562.20
==============================================================================================================
</TABLE>
(1) Included in prior filings a portion of the shares will be deregistered.
(2) Represents fee for additional shares included in this Amendment No. 3. The
Fee is based upon the average of the bid and asked prices of the common stock on
the OTC Bulletin Board on May 25, 2000.
We hereby amend this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION JUNE ___, 2000
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<PAGE>
PROSPECTUS
105,788,889 shares
KALEIDOSCOPE MEDIA GROUP, INC.
105,788,889 shares of
common stock
This prospectus relates to 105,788,889 shares of common stock, par value $.001
per share, of Kaleidoscope Media Group, Inc. These shares are being offered for
sale by the persons named herein under the caption "Selling Stockholders". Most
of the shares offered will be issued in the future pursuant to options, warrants
and convertible notes. We will not receive any of the proceeds from the sale of
shares by the selling stockholders. See "Risk Factors" commencing on page 8.
The common stock is quoted on the OTC Bulletin Board. On June 5, 2000 the price
of the common stock was $0.30 per share.
We have retained no underwriters in connection with this offering.
The date of this Prospectus is June __, 2000
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
4
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY............................................................6
SUMMARY OF FINANCIAL INFORMATION..............................................8
RISK FACTORS...............................................................9-10
WHERE YOU CAN FIND MORE INFORMATION..........................................12
USE OF PROCEEDS..............................................................13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................13
CAPITALIZATION...............................................................14
SELECTED FINANCIAL DATA......................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.................................16
RESULTS OF OPERATION.............................................16-19
LIQUIDITY AND CAPITAL RESOURCES..................................17,19
BUSINESS..................................................................19-25
LEGAL PROCEEDINGS............................................................25
MANAGEMENT................................................................25-26
EXECUTIVE COMPENSATION....................................................27-30
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT....................30-31
CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS............................31-32
PLAN OF DISTRIBUTION......................................................33-34
SELLING SECURITY HOLDERS..................................................34-36
DESCRIPTION OF SECURITIES.................................................36-38
LEGAL MATTERS................................................................38
EXPERTS......................................................................38
5
<PAGE>
PROSPECTUS SUMMARY
This prospectus contains forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus. The
following summary is qualified in its entirety by the more detailed information
and the Financial Statements and Notes thereto appearing elsewhere in this
prospectus, including the information under "Risk Factors."
Kaleidoscope Media Group, Inc. is an entertainment corporation primarily engaged
in distributing television programs. As a distributor for new television
products we market the products to a television station for a fee.
When we refer to "Kaleidoscope" as "we" or "us" we are referring to Kaleidoscope
Media Group, Inc. and all our subsidiaries unless otherwise indicated by the
context.
Our offices are located at 244 West 54th Street, New York, New York 10019 and
our telephone number is 212-757-0700.
THE OFFERING
Shares outstanding before the offering 47,414,540
Does not include shares subject
to outstanding convertible notes
or warrants, some of which may be
sold under this prospectus after
conversion of these notes or the
exercise of these warrants.
Maximum number of shares offered 100,288,889
Includes shares subject to (1)
outstanding convertible notes and
warrants and (2) convertible
notes and warrants that may be
issued after the effectiveness of
the registration statement.
Shares to be outstanding after the offering 147,703,429
The terms of our notes require us
to register more shares than may
be actually issued and sold under
this prospectus. The actual
number of shares that will be
issued depends upon the price of
our common stock at the time of
conversion.
6
<PAGE>
Use of proceeds Except upon exercise of warrants,
we will not receive proceeds. Any
proceeds will be used for working
capital purposes.
Risk Factors An investment in the securities
offered hereby involves a high
degree of risk. Prospective
investors should consider
carefully the factors set forth
under "Risk Factors."
Symbol for common stock KMGG
7
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following table presents selected historical financial data derived from our
Financial Statements. The following data should be read with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Financial Statements and the notes to the Financial Statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year Ended
March 31, December 31,
----------------- --------------------
2000 1999 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (audited) (audited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $578,834 $38,034 $(53,668) $1,137,675
Net income (loss) $52,504 ($493,234) $(4,289,090) $(8,065,915)
Net loss per share $0.001 $(0.01) $(0.10) $(.27)
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited) (audited)
BALANCE SHEET DATA:
Working capital surplus (deficiency) $(4,044,468) $401,738
Total assets $1,683,812 $5,609,784
Total liabilities $5,233,010 $2,814,381
Stockholder's deficiency $(3,549,198) $2,795,403
</TABLE>
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<PAGE>
RISK FACTORS
THE SHARES OFFERED IN THIS PROSPECTUS ARE VERY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. THESE SHARES SHOULD BE PURCHASED ONLY BY PEOPLE WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. BEFORE PURCHASING THESE SHARES, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION
CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN THIS PROSPECTUS.
WE HAVE INCURRED LOSSES AND MAY INCUR LOSSES IN THE FUTURE. While we have
incurred a net gain of approximately $52,504 for the three months ended March
31, 2000, we have sustained losses of $4,289,090 for the fiscal year ended
December 31, 1999, $8,066,000 for the fiscal year ended December 31, 1998. There
is no assurance that we will be operated profitability in the future. In
addition we have been dependent upon financing for its operations.
WE MUST OBTAIN ADDITIONAL FUNDS TO CONTINUE OPERATIONS. We presently have
negative working capital, minimum revenue and difficulty in meeting our
financial obligations. Therefore, we must obtain additional financing. There is
no assurance we can obtain any financings. If we do not obtain adequate
financing and do not achieve adequate cash flow, we may have to cease
operations.
BECAUSE OUR BUSINESS DEPENDS UPON AUDIENCE ACCEPTANCE OF OUR PRODUCT OUR
BUSINESS IS UNPREDICTABLE. Broadcast media and the entertainment and sports
industries are highly speculative and historically have involved a substantial
degree of risk. Audience appeal and profitability depend upon factors which
cannot be ascertained reliably in advance and over which we may have no or very
limited control, including, among other things, the unpredictability of critical
reviews and changing public tastes. There is no reliable predictor of an
entertainment or sports program's popularity, even a production involving highly
experienced and respected talent may not be successful. As a result, the
ultimate profitability of properties which we may distribute cannot be assured
and will depend upon many factors including those over which we will have little
or no control.
WE ARE DEPENDENT ON NEW PRODUCTS AND MAY NOT GENERATE SIGNIFICANT FURTHER
REVENUE. Our growth will be dependent on our ability to identify, acquire the
rights to distribute properties which can be sold at acceptable profit margins.
We will also be dependent on our ability to obtain rights to sell ancillary
products related to such projects. There can be no assurance that we will be
successful in identifying, and acquiring the rights to properties that will be
successfully distributed and marketed to the public.
Risks Relating to this Offering
OUR COMMON STOCK PRICE IS PARTICULARLY VOLATILE AND THE MARKETPLACE MAY DECLINE.
There has been volatility in the market price of securities of entertainment
companies. Future announcements concerning us or our competitors, including
variations in financial results, changes in general market conditions,
governmental regulations or other developments may have a significant impact on
the market price of our common stock and could cause the market price of our
common stock to fluctuate more significantly than other stocks.
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<PAGE>
WE HAVE AN EXTRAORDINARY OVERHANG OF SECURITIES WHICH COULD ADVERSELY AFFECT OUR
COMMON STOCK. Options, Warrants and Convertible Securities. There are presently
options and warrants outstanding to purchase or acquire in excess of 74,411,828
shares of common stock, with exercise and converging prices ranging from $.05 to
$1.10 per share and which will expire on various dates through April 1, 2002 and
later. The outstanding convertible notes are convertible based upon market
prices in the future and the number of shares are presently indeterminate. If
they were converted at the time of the prospectus these notes would be converted
to 21,539,517 shares. If the price of our stock declines, the number of shares
convertible could increase materially. If the outstanding options and warrants
are exercised or notes converted, the percentage of capital stock then held by
the existing stockholders will be reduced substantially. Furthermore, the
outstanding options and warrants can be expected to be exercised at a time when
we would be able to obtain funds from the sale of common stock or other
securities at a price higher than the exercise prices or conversion prices
thereof.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus and in the information incorporated
by reference contains forward-looking statements within the meaning of the
federal securities laws. These statements include, among others, the following:
o Those pertaining to the implementation of our growth strategy
and business strategy;
o Our projected business.
These statements may be found in this prospectus and in the information
incorporated by reference under "Risk-Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Forward-looking statements typically are identified by use of terms, including,
"may," "will," "expect," anticipate," "estimate," and similar words, although
some forward-looking statements are expressed differently. You should be aware
that our actual results could differ materially from those contained in
forward-looking statements due to a number of factors including:
o general economic conditions;
o competitive market influences;
o audience acceptance of our products;
o finding new product to distribute; and
o availability of funds.
o timely delivery of film properties.
You should also consider carefully the statements under "Risk Factors" and other
sections of this prospectus, which address additional factors that cause our
actual results to differ from those set forth in the forward-looking statements.
11
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the Securities and
Exchange Commission in connection with this offering. In addition, we file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy the
registration statement and any other documents filed by us at the Securities and
Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Room. Our
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at "http//www.sec.gov."
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of ours, the
reference may not be complete and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
You may request a copy of these filings, at no cost, by contacting us at:
Myron Hyman, President
Kaleidoscope Media Group. Inc.
244 West 54th Street
New York, New York 10019
Telephone Number: (212) 757-0700
If you would like to request these filings from us, please do so at least five
business days before you have to make an investment decision.
12
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares hereby. Any
proceeds received upon exercise of warrants will be utilized as working capital.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
KMG's common stock is quoted on the OTC Bulletin Board under the symbol "KMGG".
Set forth 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
2000
First Quarter $.52 $.13
1999
Fourth Quarter .18 .09
Third Quarter .30 .145
Second Quarter .31 .160
First Quarter .65 .22
1998
Fourth Quarter $.94 $.42
Third Quarter 1.22 .75
Second Quarter 2.22 .88
First Quarter 2.56 .50
As of May 30, 2000, there were approximately 192 recordholders of the common
stock, although we believe that there are more than 400 beneficial owners of the
common stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000. This
section should be read in conjunction with the financial statements and related
notes appearing elsewhere in this prospectus.
March 31, 2000
--------------
Preferred Stock, $.001 par value; 15,000,000
authorized; none issued and outstanding ----
Common Stock, $.001 par value; 100,000,000 shares $41,356
authorized; 41,355,960 shares issued and outstanding
Additional paid-in capital $9,603,063
Accumulated deficit $(13,193,617)
--------
Total stockholders' equity deficit $(3,549,198)
=======
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial information is derived from the audited
financial statements of the Company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDING THREE MONTHS
DECEMBER 31, ENDING MARCH 31,
-------------------- ----------------
1999 1998 2000 1999
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Income $(53,668) $1,137,675 578,834 493,234
Expenses 2,430,332 3,960,236 489,571 523,757
(Loss) from operations (3,845,614) (7,393,960) 52,504 (276,354)
Net (loss) (4,289,090) (8,065,915) 52,504 (493,234)
(Loss) per share (0.10) (0.27) 0.001 (0.01)
Shares used in computing net 41,355,960 40,955,960 41,355,960 40,955,960
loss per share
BALANCE SHEET DATA:
Working capital (deficit) $(4,098,247) $1,361,067 $(4,044,468) 2,795,403
Total Assets $1,194,486 122,286 $1,683,812 5,609,784
Total long-term debt $10,552 1,217,079 $10,552 40,800
Total Stockholders' equity (deficit) (3,601,701) 467,889 $(3,549,198) 2,795,903
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to Note 2 of our Consolidated Financial Statements for a
discussion of significant accounting policies, including revenue recognition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999.
Net revenues consist of total billings (less any agency fees and media
costs) and accruals for earned fees. Net revenues for the first quarter of 2000
were $578,834 compared with net revenue of $38,034 for the first quarter of
1999. The increase in revenues is due to the signing of several new contracts
over the last six months. These contract include several distribution agreements
and two consulting agreement to Internet streaming companies. A contract for the
distribution of Magnificent Ambersons mini-series has accounted for $325,000 in
revenues for the first quarter of 2000.
Gross profit increased by $511,533, to $542,076 for the first quarter in
2000 from $ 30,523 for the first quarter of 1999.
Amortization of program costs (costs to produce, market and distribute a
broadcast or film property) and other direct project costs was $36,759 in the
first quarter of 2000 compared to $7,511 in 1999. The increase in the
amortization costs is a direct result in the increase of revenue derived from
programs.
Salaries and benefits decreased by $125,582, to $148,720 in the first
quarter of 2000 compared to $274,302 for the first quarter of 1999. General and
administrative expenses increased by $51,120 to $300,575 in the first quarter of
2000 from $249,455 for the comparable period in 1999. The decrease in salaries
and benefits is a result of the closing of the Los Angeles office and the
termination of several employees. The increase in general and administrative
expenses is a result of the amortization of finance costs in the first three
months of 2000 these costs were incurred during third and fourth quarter 1999.
The financed costs are being amortized over the life of the loan. The total
finance costs amortized over the three-month period totaled $76,130. We also
incurred costs of approximately $11,000 for domestic distribution that had not
been incurred during the comparative three months of 1999. The total of these
costs is $87,130. Therefore, by eliminating these costs, general and
administrative expenses have decrease by $36,010.
Interest and local taxes increased to $40,276 in the first quarter of 2000;
there was no interest and local taxes in first quarter of 1999.
Losses from operations (before equity in income of joint venture) decreased
by $545,738 from a loss of $493,234 first quarter of 1999 to a profit of $52,504
for the first quarter of 2000. The company has attained these profits by
aggressively pursuing new programs and reducing overall costs.
We did not receive any equity in income of its joint ventures in the first
quarter of 1999 and 2000. The joint venture's only revenue producing project to
date has been "Tarzan: The Epic Adventures" which earned most of its revenues in
1996 and 1997. Management's estimate of the ultimate revenues from "Tarzan: The
Epic Adventures" have been revised downward.
16
<PAGE>
Our net profit amounted to $52,504, or $0.001 per share, for the first
quarter in 2000, as compared to a net losses of $493,234, or $(0.01) per share,
for the same quarter of 1999.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1998.
Net revenues consist of total billings (less any agency fees and media costs),
and accruals for earned fees. Net revenues decreased by $1,191,343 or 105%, to
($53,668) in 1999 from $1,137,675 in 1998 and resulted in negative revenues in
1999. In addition, revenue reduction in 1999 was in part attributable to
refunded amounts in 1999 that were deposits that were recorded in prior periods.
The refund arose from the failure to produce a program to which the deposit
related and resulted in negative revenues in 1999. In addition, the lower
revenue in 1999 resulted from the above and because we did not enter a new
arrangement for distribution of programs during 1999 and programs under prior
arrangement either were not delivered or postponed in 1999 we did not generate
sufficient revenues to offset the foregoing credit against revenues. We had
anticipated the delivery of "Shaka Zulu " which did not happen until April 2000.
We also had expected sales of the movie "Merlin: The Quest Begins". Even though
we have made efforts to market the library that existed in 1999, we were unable
to sell those products, which aided in management's decision to write-off
essentially all non-performing assets.
Amortization of program costs and other direct project costs decreased by
$3,242,839 from $4,571,399 in 1998 to $1,328,560 in 1999. The decrease is a
direct result in the management's decisions to no longer be directly responsible
for the financing and production of any programs and to reduce expenses.
Salaries and benefits decreased by $109,619, or by 9%, to $1,073,736 in 1999
from $1,183,355 in 1998. This decrease is due to additional reduction in
personnel.
General and administrative expenses decreased by $471,708, or 27%, to $1,244,011
in 1999 from $1,715,719 in 1998. This decrease is largely due to the closing of
the Los Angeles office and the moving of the New York location to a small space.
The balance of the decreases is attributable to the reduction of professional
services.
Amortization of goodwill was decreased by $831,414 to zero in 1999 from $831,414
in 1998. This decreased was derived from the complete write-off taking place in
1998 with the sale of the sports division and the suspension of the sports
operations.
Interest expense was increased by $41,495 to $82,585 in 1999 from $41,090 in
1998. This increase is due to the financing from outside investors as well as
loans from officers. We capitalized all cost related to the financing and
amortized the costs over the life of the loans.
Loss from operations decreased $3,578,346 from a loss of $7,393,960 in 1998 to a
loss of $3,815,614 in 1999. The decrease is largely due to the reduction of
cost, the change in the amortization of capitalized cost, and the complete
write-off of goodwill in 1997.
Our equity in the income from its joint venture decreased $254,838 from a loss
of $188,658 in 1998 to a loss of $443,476 in 1999. The joint venture's only
revenue producing project to date has been "Tarzan: The Epic Adventures" which
earned most of its revenues in 1996 when it was first released. Management's
estimate of the ultimate revenues from "Tarzan: The Epic Adventures" have been
revised downward.
Income before income taxes decreased by $3,130,395 from a loss of $7,393,960 in
17
<PAGE>
1998 to a loss of $4,259,090 in 1999. This decrease was a result of the factors
described above.
We had no provision for income tax benefit in 1999 to loss carryforwards.
Our net loss amounted to $4,259,090, or $.10 per share, for the year ended
December 31, 1999, as compared to net loss of $8,065,915, or $0.27 per share,
for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1999 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Net Operating Loss Carryforwards
Because of our losses we have written off deferred income benefit. Nevertheless,
at December 31, 1998, our net operating losses amounted to approximately
$8,537,500 for federal income tax purposes. The net operating losses are not
available for state income tax purposes. The net operating losses begin to
expire starting in 2011. Our 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 our
subsidiaries have substantial net operating losses available for state and local
income tax purposes. In addition, certain of our subsidiaries have approximately
$175,000 of net operating losses 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 net operating losses are further limited by the
operation of Section 382 of the Internal Revenue Service Code. The subsidiaries
are only allowed to use a maximum of approximately $27,000 of these
carryforwards each year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 we had a working capital deficit of $4,044,268 compared to
a working capital deficit of $4,087,940 as of December 31, 1999. The decrease in
working capital was primarily due to a reduction in value of program cost
inventory as a result of write-offs in 1998 and 1999 as well as a decrease in
net income. As of March 31, 1999, we had cash of $45,425 compared with $45,650
as of December 31, 1999. Operating activities generated a net cash outflow of
$1,502,940. The principle source of cash during 1999 was from the notes issued
in the amount of $1,308,468.
As a result of losses, we have continuous cash flow problems which we have
attempted to resolve with financing. During 1999 and early 2000 we received
$1,877,000 from the sale of convertible notes. A portion of present loans are in
default because we failed to timely file a registration statement. These notes
are, therefore, demands notes. If demand were to be made for payment of the
loans we would not be able to pay the loans and may not be able to continue in
business. The noteholders have agreed not to accelerate their notes for a period
of six months from the date of a forbearance agreement dated May 12, 2000. In
May, we received an additional loan for $250,000. Recently, we entered into
separation agreements with two directors who received salaries and fees
We have taken steps to reverse losses and reduce operating expenses. We have
closed several offices, reduced salaries and otherwise reduced expenses. We have
recently entered into several distribution arrangements which we believe may
generate sufficient cash to cover operational expenses for the balance of the
year 2000. We are always at risk that product will not be timely delivered or
otherwise delivered. If we do not obtain sufficient funds we will not be able to
operate.
18
<PAGE>
Net cash used in operating activities was $1,502,940 in 1999 compared with
$3,617,953 in 1998. An increase of advance from clients in the amount of
$1,001,315 and a decrease in the write-off of program costs.
Net cash used by investing activities in 1999 was $84,081 compared to the net
cash used by investing activities of $7,983 in 1998. This change was primarily
due to cash received from proceeds from joint venture that was offset by cash
used for expenditures for programs costs.
Net cash provided by financing activities amounted to $1,627,767 for the year
ended December 31, 1999 as compared to $3,378,531 net cash provided by financing
activities for the year ended December 31, 1998. The decrease in cash provided
by financing activities was primarily the result of financings involving notes
and warrants.
Inflation
We believe that the relatively moderate rates of inflation in recent years have
not had a significant impact on our net revenue or our profitability.
Year 2000 Compliance
Our accounting programs have been upgrade to be Y-2K compliant. We have plans to
upgrade all other programs by the end of 2000.
BUSINESS
Corporate History
On October 22, 1996 we acquired all the shares of our current wholly subsidiary
HSPSMM, Inc. At that time we were called BNN Corporation and incorporated in
Nevada and were a publicly traded corporation without operations or revenues.
Our subsidiary HSPSMM, Inc. was then called Kaleidoscope Media, Inc. After the
acquisition the former holders of HSPS owned approximately 40% of our then
outstanding shares. On December 3, 1997, we were, a Nevada corporation but we
changed our state of incorporation to Delaware under our present name.
Introduction/Recent Losses
At the beginning of 1998, we were a diversified entertainment, sports and direct
marketing company.
In December 1998 we determined to curtail all significant operations of both the
sports and direct marketing divisions. While we may market existing content
owned by these divisions, for the foreseeable future we will concentrate our
efforts on our entertainment division.
During 1998 we incurred significant losses in the entertainment division because
the introduction of programming was either postponed, or not introduced at all.
The loss also reflects management decision to write-off unproductive property.
In addition, revenues derived from the sales of programs were less than
anticipated. As a result, we took steps to reduce or eliminate costs by moving
offices to less costly quarters, closing the Los Angeles office, reducing the
number of employees and, most importantly, establishing strategic alliances with
production. We also made a decision not to finance production for the
foreseeable future but to act solely as a distributor. We have entered into a
strategic relationship with a firm which performs some of our distribution
functions. In 1999, our problems continued because programming continued to be
postponed, cancelled or not delivered. In addition to losses, we had several
liquidity problems. At the same time we continued our cost-cutting measures and
received financing.
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We have entered into several new arrangements to produce revenues in the current
year. During the first quarter of 2000, we have already received revenues of
$542,000 compared to $38,034 for all of 1999. While we still have substantial
liquidity problems, we anticipate sufficient revenues from operation to meet our
expenses. Our business, however, is always subject to risk of non or late
delivery by third parties which could result in loss of revenue.
Business Strategy
We focus primarily on distribution of programming for television; home video,
the Internet and exploiting related licensing and merchandising opportunities.
It also provides consulting services in the development of specialty television
and Internet programming and is involved in the distribution of specialty
television programming and properties from its entertainment library. We attempt
to use strategic partnerships, pre-sales of distribution rights, and advertising
time to help third party producers finance production budgets. We believe that
its expertise in domestic and foreign syndication, home video, and Internet
broadcasting is an important factor in its ability to successfully compete in
these areas.
Our distribution strategy is to become a leader in the domestic and
international distribution of television properties in four categories: (i) one
hour dramas and mini series; (ii) children's programming; (iii) documentaries
and, (iv) music programming. In furtherance of achieving its strategic goals, we
are seeking to expand our television operations through the acquisition of
distribution and other representation rights to additional entertainment
properties.
Programming Distributed by the Company
We have added new programs to our line up augmenting our library of nearly 200
hours of entertainment, sport and fitness programming. We have entered into
agreements which we anticipate will be revenue producing shortly. All of our
arrangements are always subject to the variables beyond our control like the
failure to complete or make timely delivery of product.
We have also secured distribution rights to two new mini-series. The first of
which is the greatly anticipated remake of the "The Magnificent Ambersons". This
new mini-series is based on the original script developed by Orson Wells. This
4-hour TV mini-series is to begin production in Ireland in July and will be
available early next year. Our distribution agreement guarantees the company a
minimum distribution fee of $500,000 for the year ending December 31, 2000.
Another new mini-series that we will be distributing is "The Diamond Hunters"
which is based on the best selling novel by Wilber Smith. This new mini-series
begins production in Africa this summer and will also be available for
distribution in 2001. The long anticipated mini-series "Shaka Zulu-the Citadel"
has been delivered and we will begin to distribute it in many territories.
We have added 70 hours of light entertainment to our library. In addition, we
have signed a distribution agreement with Information Television Network to
distribute worldwide, award winning programs which focus on the latest
developments in Medicine, Women and Children's health, Technology and the
Environment.
We are actively pursuing relationships, which will establish us as a content
provider to the Internet. We have been retained as a programming consultant to
Streamedia Communications, Inc. Streamedia is a provider to website owners and
content publishers services and tools for streaming, or broadcasting, live and
on-demand video and audio content over the Internet. Henry Siegel is on the
board of directors for Streammedia and will serve as a consultant to the
Streammedia beginning June 1, 2000.
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<PAGE>
Streamedia also creates and operate a series of websites, which enables the web
user to enjoy activities such as listening to radio broadcasts, watch classic
and independent films, watch music videos on demand or to participate in live
interactive web cast or Internet broadcasts. We have also developed a
relationship with another Internet provider, Medium4.Com. This relationship will
result in "Tarzan, The Epic Adventures" being the first TV series to be
available in its entirety on the Internet. We have also signed an agreement to
continue to provide content and act as a program consultant to Medium4.Com. We
have also entered into an agreement with EFIT Corporation to provide them with
several fitness and sports programs from our library to be broadcast on
www.efit.com, a leading health and fitness web site.
We have continued our attempt to distribute internationally its made for
television movie "Merlin: The Magic Begins" based on that legendary character.
The title role had been cast with Jason Connery (son of Sean Connery) and
Deborah Moore (daughter of Roger Moore). The movie was distributed for
broadcasting in 1998.
We entered into a Joint Venture with Abrams Gentile Entertainment ("AGE") and
Gene Kirkwood. AGE is a creator and producer of animated and live action series
and specials. Mr. Kirkwood has been prominent in feature films such as "Rocky."
The Joint Venture ("The Kirkwood Group") will develop and produce feature films
and television mini-series. It is not and will not be liable for any financing
associated with those projects.
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 development and growth of the 500
channel cable system, DBS (Direct Broadcasting Satellite), Pay Cable, home
video, DVD's, 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
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.
Network-affiliated stations, independent stations and cable TV operators serve
the United States television market. During prime time hours (primarily 8pm to
11pm in Eastern and Pacific time zones and 7 pm to 10 pm 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 form independent
producers or "syndicators." A syndicator is generally a company that sells
programming to independent 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
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demand for quality programming. International sales of programming are made to
television distributors on a cash basis. Initial cash down payment is made upon
the agreement of the international channel to display the programming. The
balance of the cash for the licensing fee is generally paid upon delivery of the
programming. The international television networks retain sales of advertising
time.
Television Distribution
Barter syndication is the process whereby a syndicator obtains commitments from
television stations to broadcast a program at 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 us, 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 that has agreed to carry the program.
The creation of the "ad hoc" network of stations, normally represents a
penetration of at least 70% of the total United Stats television households
(calculated by means of 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 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 a 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 attributed to the failure to deliver the agreed-upon
audience.
Cable Network Licenses
Television programming can be licensed for telecast by cable network 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 the programming
for the 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
Based on industry sources, we believe revenues from the distribution of U.S.
television programs industry wide to foreign markets have increased
significantly in recent years. Development in the European television industry,
such as the present trend towards increasing the number of privately owned
channels and greater channel capacity might cause foreign sales to become a more
important component of the distribution of programs produced by the United
States television industry. There is no assurance that the programs distributed
by us will reflect such increase.
The Internet
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The Internet has evolved for an "information provider" to an information and
entertainment provider. This evolution creates a new and potentially highly
interactive revenue source for programming distributed by us. The introduction
of new "streaming" technologies has greatly increased the need for content,
which offers us the opportunity to realize in the form of license fees, revenue
sharing and/or equity producing in the acquiring company.
To date, we have derived little revenue from this service but are actively
pursuing this market.
New Programming
In general, we earn 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. We then sell the
advertising time to national advertisers.
In additional to United States television broadcast rights, we have in the past
acquired, where available on acceptable terms, worldwide broadcast television
and non-standard television distribution rights (such as cable and videocassette
rights) to the program 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 we have the right to
undertake production of the program in the event the producer fails to deliver
the contracted programming. As an example, we have retained the rights for the
worldwide videocassette distribution of the "Tarzan: The Epic Adventures."
Entering into arrangements for distribution of new material or properties for
television and new multimedia productions is essential to our future growth. We
may obtain new properties from several sources: (i) distribution agreement with
the owner of a property; (ii) acquisition of existing properties; (iii)
co-development of new properties; and (iv) development of new properties
internally. As long as we experiences capital shortages, it will concentrate on
acquiring distribution rights as opposed to being responsible for financing of a
project.
Revenue Sources
Our television programming business generates two significant sources of
revenue, distribution fees and the sale of advertising time.
Distribution Fees
In most cases, our distribution revenues are based on a percentage of the net
revenues derived from the sale of advertiser sponsorships or on cash license
fees. Generally, we advance all distribution costs of items such as advertising,
promotion, tape shipping and tape duplication and recover such expenses from the
program revenues. In some instances, these expenses are assumed by us as part of
its distribution fee. Our fee for distribution is generally between 20% to 30%
and the fee for advertiser sales representation is generally between 5% to 10%
of net revenues. However, each fee arrangement is separately negotiated and may
be subject to variation. The sums in excess of our fees and expenses and profit
positions (where applicable) are remitted to the producers of the programs,
which in certain cases may also be us.
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 our interest to establish as high an
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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 the advertising
time on such program. If the television programs does not achieve the assumed
rating or demographic make-up (as determined by A.C. Nielsen or similar rating
services), we may be obligated to offer the advertiser additional time ("make
goods") on the same program or other programs to fulfill any short fall in the
actual rating or demographic assumptions. Alternatively, we may be obligated to
refund a portion of the advertising fee. "Make goods" are the predominant means
whereby we satisfy such obligations to advertisers.
Among the sponsors that have in the past purchased participation in our programs
are General Motors, Proctor & Gamble, Kraft/General Foods, Hershey and Bristol
Meyers. Sales are made through our sales force and through advertising agencies
representing the sponsors. We barter syndication licenses provide that we
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, our fee for sales of advertising time is between 5% and 10% of net
revenues.
Competition
Competition in the production and distribution of television programming is
intense. We are a minor participant in the television distribution business. Our
programming competes with other first run programming, network reruns and
programs produced by local television stations.
We compete with many other companies that have been acquiring, producing and
distributing programs for a longer period to time than us, and most of theses
companies have greater financial resources than us. 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., Pearson Television and Viacom International, Inc. We
compete with other companies for the sale of television advertising time,
including Tribune Broadcasting Co./Entertainment Co., Viacom International,
Inc., Pearson Television and King World.
Our 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 our programming to lose its appeal. Television
programming also competes for audiences with many other forms of entertainment
and leisure time activities, some of which include new areas of technology (e.g.
video games and home video). The impact of these on our operations cannot be
predicted.
Principal Customers
No customers accounted for more than 10% of our net revenues during the year
ended December 31, 1999.
Employees
At May 15, 1999, we employed five (5) persons all of whom were full-time
employees. We have no collective bargaining agreement with our employees and we
believe that our relationship with our employees is good.
Property
Our principal executive offices are located at 244 West 54th Street, New York,
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New York and consist of approximately 2,000 square feet at a rental of $6,000.
We sub-lease the space on a month-to-month basis and the lessee's lease expires
in 2002.
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 our inactive subsidiaries and other unrelated parties seeking to enforce
a default judgment of $21,000,000 entered in 1995 for prior action in 1998. The
subsidiaries have vigorously defended themselves in this litigation.
Furthermore, management believes that if any subsidiary were found liable for a
judgment, its subsidiaries would be able to obtain indemnification from prior
owner of the former affiliate's business, a major advertising agency.
A default judgment has also been obtained by Darrell N. Griffin against Paul
Siegel, an officer and director for us, 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 our 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. We are
obligated to indemnify Mr. Siegel in accordance with Delaware law.
A judgment has been obtained by our former auditor Paneth Haber and Zimmerman in
the amount of $230,373.02. We have settled the indebtedness underlying the
judgment for $75,000 and the judgment will be withdrawn upon payment of a final
installment of $10,000 by July 2000.
On October 28, 1998 Paul Cioffari commenced an action against us and its
subsidiary claiming failure of us to perform its agreement to pay Mr. Cioffari
agreed consideration for entertainment property allegedly delivered by Mr.
Cioffari to us. Cioffari vs. BNN Company (Supreme Court New York County).
Defendants seek damages up to $700,000 on a variety of claims. We deny all
liability. This action is in the pre-trial stage.
Prior to March 31, 2000 we settled several actions that were pending. These
actions were:
ACC Entertainment GMBH Co. v. Kaleidoscope Media Group, Inc. commenced October
27, 1998 United States District Court for the District of California by ACC
Entertainment GMBH Co. ("ACC") for alleged breach of contract seeking damages of
$250,000. The contract provided for certain rights to our Merlin film to be
produced by us in return for an investment of $375,000. This case has been
settled in consideration of $100,000.
On August 5, 1998 Mr. Barry Synter commenced an action against us 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 our alleged
failure to permit transfer by Mr. Synter of stock certificates allegedly owned
by him. We agreed to settle this action in consideration of the issuance of
900,000 shares of its common stock.
An action has also been commenced by Eric Ashenberg a former officer of
Celebrity Showcase Network, its prior subsidiary for damages arising from our
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. Mr. Ashenberg sought damages in the amount of $450,000. We have
settled this action in consideration of 300,000 shares to Mr. Ashenberg.
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On December 19, 1997, we filed an action in the United States District Court
Southern District of New York entitled Kaleidoscope Media Group, Inc. vs.
Entertainment Solutions, Inc., James K. Isenhour, and 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 we entered into with
defendants to promote a sports tournament of Latin American boxing in 1997
called "Boxcino". We seek damages of at least $500,000 plus punitive damages in
the action. Defendants James Isenhour and Entertainment Solutions, Inc. has
answered the complaint, asserting various affirmative defenses and two
counterclaims, for breach of contract and quantum merit, seeking damages of not
less than $250,000. In September 1999 we obtained a default judgment against all
defendants, which also dismissed all counterclaims. The defendants have declared
bankruptcy.
MANAGEMENT
Directors, Executive Officers, Promoters and Control Persons,
As May 15, 2000 our directors and executive officers were as set forth below.
Name Age Position
---- --- --------
Myron A. Hyman 60 President, Chief Executive Officer
Richard Kostyra 59 Director
Kevin Eastman 37 Director
Ann F. Collins 35 Secretary
Myron A. Hyman has been our president and chief operating officer since December
1999. Mr. Hyman was formerly general counsel to CBS Records Group and Associate
General Counsel for CBS, Inc. from 1977 to 1979. He was president of MGM/UA Home
Video from 1980 to 1983 and the president of Tomorrow Entertainment from 1984 to
1986 before going into his own law practice specializing in the entertainment
industry. His firm represents clients in film, music, television, home video,
and product licensing.
Mr. Hyman has been employed by us since December 1999. Until May 12, 2000, Mr.
Hyman was our president and chief operating officer. On that date he became our
chief executive officer. Between September 1999 and December 1999, Mr. Hyman was
engaged by us as a consultant and devoted a substantial amount of time to our
affairs.
Ann F. Collins has been secretary since December 1999. Ms. Collins started her
career in Accounting with Dancer Fitzgerald and Sample after her gradation from
Mercy College with a degree in accounting. After the merger of that firm with
Saatchi & Saatchi Advertising she continued her position to senior accountant.
When Lifestyle Marketing Group (a division of S&S) left and merged with People &
Properties, Inc. she became director of finance until its merger with SeaGull
Entertainment and the formation of Kaleidoscope Media Group, Inc. when she then
became controller.
Richard Kostyra became a member of the board of directors in December 1999. Mr.
Kostyra is the president and founder of Media First International. Prior to
founding Media First International, Inc. Mr. Kostyra was executive vice
president and director of Media Services of J. Walter Thompson. A media
planning, buying and consulting company with offices in New York, Boston, and
Minneapolis, Media First International has billings in excess of $300 million
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and includes among its entertainment industry clients cable networks Outdoor
Channel and Speedvision, and a host of motion picture distributors including
Lions Gate, Trimark, Stratosphere and Palm Pictures. Media First International
has been the winner of numerous awards for excellence in media planning and
buying including the prestigious Media Week Magazine's "Media Plan of The Year"
competition for the best use of radio, network TV, and newspaper.
Mr. Kevin Eastman became a member of the board of directors in February 2000.
Mr. Eastman is the co-creator of the "Teenage Mutant Ninja Turtles" and owner of
Heavy Metal Magazine. The "Teenage Mutant Ninja Turtles", a worldwide toy and
media phenomenon, literally revolutionized the children's licensing industry.
Mr. Eastman has continued his activities as a creator of children's properties.
Sony Family Entertainment is currently developing an Eastman property,
"Underwhere," as an animated feature film. Mr. Eastman's varied business
interests include ownership of Heavy Metal Magazine, a publication in existence
since 1977, recognized as being the cutting edge of pop culture. He is the
creator and co-producer of "Heavy Metal 2000" the follow-up to "Heavy Metal: The
Movie," the animated cult film produced by Ivan Reitman. "Heavy Metal 2000" is
slated for release by Columbia Pictures this summer.
Executive officers serve at the discretion of the board of directors.
Compliance with Section 16(a) of the Exchange Act.
Forms 3, 4 and 5 have not yet been filed by any officer, director or beneficial
owner of more than ten (10%) percent of our common stock. We had no securities
registered under the Exchange Act prior to our last fiscal year and, therefore,
no such reporting person was required to file reports under Section 16(a) of the
Exchange Act in prior years. In reports for officers and directors will be filed
by June 30, 2000. We will encourage beneficial owners of more than ten (10%)
percent of our common stock to file their reports by the same date.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid or
accrued by us or our subsidiaries for services rendered during the fiscal years
ended December 31, 1997, 1998, and 1999 to our chief executive officer and to
each executive officer whose compensation exceeded $100,000 during its fiscal
year ended December 31, 1999:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
<S> <C> <C> <C>
Name and Principal Position Year Salary Shares
Henry Siegel - Chief Executive Officer 1999 $350,000* 350,000
1998 350,000*
1997 350,000
Paul Siegel - President 1999 75,000* 350,000
1998 275,000*
1997 275,000
Irving Greenman - Chief Financial Officer
1998 $164,215 1,000,000
</TABLE>
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* Partial 1998 and 1999 salary amounts were not paid but accrued. None of the
above individuals are presently employees. All accrued amounts were released on
May 12, 2000 pursuant to separation agreements described in "Certain
Transactions." The options to Mr. Henry Siegel and Paul Siegel have also been
cancelled.
The following table sets forth all grants of stock options to each of
the named executive officers of KMG during the fiscal year ended December 31,
1999. Pursuant to the separation agreements described in "Certain Transactions,"
the options granted to Messrs. Henry and Paul Siegel set forth below have been
cancelled.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Shares Percent 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> <C>
Henry Siegel 350,000 13% $42,000 April 15, 2009
Paul Siegel 350,000 13% $42,000 April 15, 2009
Irving Greenman 1,000,000 74% $240,000 April 15, 2009
</TABLE>
The following table sets forth information as to options exercised by each of
the named executives during the fiscal year ended December 31, 1999 and the
value of in-the-money options held by such executives at December 31, 1999.
Pursuant to the separation agreements described in "Certain Transactions," the
options granted to Messrs. Henry and Paul Siegel set forth below have been
cancelled.
Options Exercised in Last Fiscal Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of
Shares of
Common
Stock Number of Shares of Common
Acquired on Value Stock Underlying Unexercised Value of In-the-Money Options at
Name Exercise Realized Options at 12/31/99 12/31/99
--------------------------------------------------------------------------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Henry Siegel* 0 -- 3,500,000/-- 7,000/--
Paul Siegel* 0 -- 3,500,000/-- 7,000/--
Irving Greenman 0 -- 1,000,000/-- 40,000/--
</TABLE>
Represents difference between exercise price and market value of $0.12 on such
date. The foregoing excludes some options held by Siegel Pension Trust.
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Employment Agreements
In December 1999 Myron Hyman, as our president and chief operating officer,
entered into a thirty-seven (37) month employment agreement with us at a salary
of $150,000 increasing to $200,000 for months 13 through 25 and $250,000 for the
balance of the term. Effective January 3, 2000 the agreement provides for
payments of bonus at the sole discretion of the board additional life insurance
and an automobile allowance. The agreement provides for severance in certain
circumstances including a change of control. Mr. Hyman was granted an option to
purchase our shares as described below.
Mr. Hyman's employment agreement provides that he is to receive as of January 3,
2000 options to purchase a number of shares equal to five (5%) percent of the
outstanding shares on December 31, 2000. The options vest as to one-third (1/3)
of the shares on each December 31, 2000, 2001 and 2002. The number of shares
shall be based on the number of outstanding shares on the vesting date less the
number of shares, if any, previously issued. The exercise price shall be 50% of
market price at the time of vesting and the exercise period is to be five (5)
years after vesting.
Compensation of Directors
Directors who are not employed by us 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 KMG.
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Stock Option Plan
KMG has adopted a 1996 Stock Option Plan for officers, employees and consultants
of KMG or any of its subsidiaries and other entities in which KMG has an
interest. The 1996 Stock Option Plan provides for the granting of options which
are intended to qualify either as 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 requirements of such section. As of December 31, 1997, options
to purchase 835,000 shares of common stock had been granted.
The 1996 is administered by the board of directors or a committee of the board
of directors. The board of directors 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 Stock Option Plan as
the board of directors may impose. The exercise price in incentive stock options
may not be less than 100% of fair market value of the common stock at the date
of grant (110% in the case of the 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 the time of option grant) with
respect to which incentive stock options become exercisable for the first time
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 our
capital stock), as the board of director my determine.
The 1996 Stock Option Plan (but not options previously granted hereunder) 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.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 15, 2000 by (i) each stockholder known
by us to be the beneficial owner of more than 5% of the outstanding common
stock, (ii) each director of KMG, (iii) each executive officer named in the
Summary Compensation Table above and (iv) all directors and executive officers
as a group. Except as otherwise indicted, the based information furnished by
such owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
30
<PAGE>
<TABLE>
<CAPTION>
Name and address of Number of Shares
Beneficial Owner Beneficially Owned Percentage of Class
---------------- ------------------ -------------------
<S> <C> <C>
Henry Siegel (1) 3,000,000* 6.5%
244 West 54th Street
New York, New York
Myron Hyman (3) 300,000 .6%
244 West 54th Street
New York, New York
Paul Siegel
5777 West Century Boulevard 3,000,000* 6.5%
Los Angeles, California 90045
Richard Kostyra(2) 587,560 1.3%
Kevin Eastman(2) 100,000 0.2%
Byron Lerner 4,700,000 8.0%
Ray Volpe (2) 3,342,864 6.6%
136 Madison Avenue
New York, New York
Libra Finance, S.A.(2) 57,125,202 56.9%
P.O. Box 4603
Zurich, Switzerland
Esquire Trade Finance Inc.(2) 6,670,000 12.4%
Austinvest AnStalt Balzers(2) 6,680,000 12.4%
Amro International(2) 5,012,260 9.6%
Nesher Inc.(2) 2,840,000 5.6%
All directors and executive
officers as a group (5 persons) 700,000(1)(2) 0.6%
</TABLE>
---------------------
(1) Exclusive of shares which may be issued to Mr. Siegel and his pension fund
in November 2000.
(2) Includes presently exercisable options or warrants to purchase shares of
common stock and/or presently convertible notes as follows: Libra Finance, S.A.
25,780,200, Esquire Trade Finance Inc. 6,670,000, Austinvest AnStalt Balzers
6,680,000, Amro International 5,012,260, Nesher Inc. 2,840,000, Ray Volpe
437,500, Richard Kostyra 350,000, Byron Lerner 2,000,000 and Kevin Eastman
100,000.
(3) Exclusive of options not presently exercisable.
31
<PAGE>
CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Pursuant to an agreement, dated as of April 1, 1997 between the Company and
By-The-Way Corporation, a corporation wholly-owned by Ray Volpe, one of our
former directors. By-The-Way Corporation granted to us in perpetuity the right
at any time to develop, produce, distribute, market, license or otherwise
exploit 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 us to By-The-Way Corporation of $150,000
per year. Such option payment will be offset against gees or amounts payable by
us for any exploitation rights granted to us by By-The-Way Corporation. During
the year ended December 31, 1997, we paid By-The-Way Corporation $150,000.
On May 12, 2000 we entered into separation agreements with each of Henry Siegel
and Paul Siegel. Henry Siegel was our chief executive officer and a director.
Mr. Siegel was a director. Each of Henry and Paul Siegel resigned all positions
held by them with us and all agreements between us and each of the Siegel's and
their entities was terminated. Mr. Siegel's employment agreement called for
salary and fee payments to related entities of $250,000 increasing to $350,000
in 2002. All rights to receive accrued salary (or consulting fees) for both
Henry Siegel and Paul Siegel were terminated. Options to purchase 2,057,420 and
350,000 shares of our common stock respectively owned by Henry Siegel and Paul
Siegel were cancelled. The cancelled options included options to acquire an
indeterminate number of shares equal to one (1%) percent of the outstanding
shares as of December 31, 2002. We have agreed to issue and additional 6,650,000
shares of common stock to Mr. Henry Siegel of which 5,000,0000 shares are to be
issued in November, 2000. If the market price of our shares falls below $1.00
prior to May, 2001 we may have to issue additional shares to Mr. Siegel.
We have also agreed to pay Mr. Siegel twenty-five (25%) percent of revenues
received from projects he participated in while an officer and assign to him the
benefits of consulting arrangement which depended on the services of Mr. Henry
Siegel. We issued an additional 525,000 shares to Paul Siegel. We have agreed to
arrange for the sale of 500,000 shares of common stock per month for each of
Messrs. Henry and Paul Siegel through November, 2000. If the proceeds do not
equal $300,000 then we may have to pay the difference to them. The sale of these
shares are included in the registration statement. Pursuant to our understanding
with Mr. Henry Siegel any amounts in excess will be contributed to us. The
parties have exchanged general releases although we are still liable to
indemnify them and Paul Siegel in accordance with law.
During 1998 the pension trust for the benefit of Henry Siegel advanced us
$150,000. Mr. Henry Siegel and Mr. Paul Siegel advanced us $50,000 in 1999 as
non-interest bearing loans. These loans were repaid in January 2000. At the same
time we entered into a separate agreement with Henry Siegel we entered into an
agreement with Mr. Siegel's pension fund pursuant to which we agreed to repay on
May 12, 2000 the full amount of the fund with shares of common stock at the
market price on the same date. Options to the pension fund have been terminated.
Mr. Richard Kostyra purchased 200,000 shares of our common stock in May, 1999 at
a price of ten ($.10) cents per share. Mr. Kostyra subsequently became a
director and was granted 200,000 shares.
32
<PAGE>
We believe the terms of the transaction with our affiliates described above are
as favorable to us as would have been obtained from independent third parties.
PLAN OF DISTRIBUTION
Sales of the shares may be made from time to time by the selling stockholders,
or, subject to applicable law, by pledgees, donees, distributees, transferees or
other successors in interest. Sales may be made at prices at terms then
prevailing or at prices related to the then current market price, or at
privately negotiated prices as follows:
o on the over-the-counter market or foreign securities exchange,
o in privately negotiated transactions or
o otherwise or in a combination of these transactions.
In addition, any shares covered by this prospectus which qualify for sale
pursuant to Section 4(1) of the Securities Act or Rule 144 promulgated
thereunder may be sold under such provisions rather than pursuant to this
prospectus. Without limiting the generality of the foregoing, the shares may be
sold in one or more of the following types of transactions:
o a block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker-dealer.
In effecting sales, brokers or dealers engaged by the selling stockholders may
arrange for other brokers or dealers to participate in the resales.
In connection with distributions of the shares or otherwise, broker-dealers may
engage in short sales of the shares. That is they may sell the shares prior the
dealer acquiring the shares. The selling stockholders may also sell shares short
and deliver the shares to close out such short positions.
The selling stockholders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares
registered hereunder, which the broker-dealer may resell pursuant to this
prospectus. The selling stockholders may also pledge the shares registered
hereunder to a broker or dealer and upon a default, the broker or dealer may
effect sales of the pledged shares pursuant to this prospectus.
Brokers, dealers or agents may receive compensation in the form of commissions,
discounts or concessions from the selling stockholders in amounts to be
33
<PAGE>
negotiated in connection with the sale. These brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales and any commission,
discount or concession may be considered to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the selling
stockholders, or any other broker-dealer, is acting as principal or agent for
the selling stockholders, the compensation to be received by underwriters who
may be selected by the selling stockholders, or any broker-dealer, acting as
principal or agent for the selling stockholders and the compensation to be
received by other broker-dealers, in the event the compensation of such other
broker-dealers is in excess of usual and customary commissions, will, to the
extent required, be set forth in a supplement to this prospectus. Any dealer or
broker participating in any distribution of the shares may be required to
deliver a copy of this prospectus, including any prospectus supplement, if any,
to a person who purchases any of the shares from or through the dealer or
broker.
We have advised the selling stockholders that during the time they may be
engaged in a distribution of the shares they are required to comply with
Regulation M adopted under the Securities Exchange Act. In general, Regulation M
precludes the selling stockholders, any affiliated purchasers and any
broker-dealer or other person who participates in a distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. A "distribution" is defined in the rules as an offering of
securities that is distinguished from ordinary trading activities. This
distinction depends on the "magnitude of the offering and the presence of
special selling efforts and selling methods." Regulation M also prohibits any
bids or purchases made in order to stabilize the price of a security in
connection with the distribution of that security.
It is anticipated that the selling stockholders will offer all of the shares for
sale. Further, because it is possible that a significant number of shares could
be sold at the same time, the sales, or the possibility of sale, may have a
depressive effect on the market price of the common stock.
SELLING SECURITYHOLDERS
The following table contains certain information as of June 1, 2000
with respect to the selling stockholders. The number o f shares that may
actually be sold by the selling stockholders will be determined by the selling
stockholders, which may depend upon a number of factors, including, among other
things, the market price of the common stock.
<TABLE>
<CAPTION>
Number of Shares of Number of Shares Shares of Common Stock
Common Stock Owned of Common Stock Owned After Sale of
Name of Before Offering (1)(4) Being Offered All Shares (2)(4)
Stockholders
------------------- ---------------------- ---------------- ----------------------
<S> <C> <C> <C>
Brae Limited 356,556 350,000(3) 6,556
Staffin Limited 651,666 650,000(3) 1,666
Rowlett Enterprises Limited 800,000 800,000 -0-
Southern Provinces Limited 800,000 800,000 -0-
Coastal Provinces Limited 800,120 800,000 120
NewCard, Inc. 800,000 800,000 -0-
Newco. Management Limited 800,000 800,000 -0-
Rothesay Limited 285,539 285,539(3) -0-
ARAN Limited 500,000 500,000 -0-(3)
Craignine Limited 500,000 500,000 -0-(3)
Chesterton Trading 500,000 500,000(3) -0-
Robert Lancelotti 1,962,000 1,962,000 -0-
Carol Sitte 1,000,000 1,000,000 -0-
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Byron R. Lerner 4,700,000(3)(4) 4,700,000(3)(4) -0-
Kevin Eastman(A) 100,000 100,000 -0-
Pasquale Ceruasio 120,000 120,000 -0-
Darrell C. Lerner 40,000 40,000 -0-
Conviro Associates 500,000 500,000 -0-
R&A Cervasio 100,000 100,000 -0-
S&J Aiello 125,000 125,000 -0-
B&F Marano 100,000 100,000 -0-
Gloria Samuels 250,000 250,000 -0-
James Faro 10,000 10,000 -0-
Frank Massro 5,000 5,000 -0-
Timothy Deignan 5,000 5,000 -0-
Eric Tjaden 20,000 20,000 -0-
James Tubbs 10,000 10,000 -0-
Eunyung Eudie Yang 10,000 10,000 -0-
Richard Volpe 10,000 10,000 -0-
Donald J. Schleifer 100,000 100,000 -0-
Artur Gomes 100,000 100,000 -0-
Oranzio Bencivenni 100,000 100,000 -0-
Luigi Andreotti 50,000 50,000 -0-
Esquire Trades Finance Inc. 7,401,000 7,401,000 -0-
Ellis Enterprises Ltd. 2,360,000 2,360,000 -0-
Austinvest AnStalt Balzers 10,964,000 10,964,000 -0-
Amro International 7,224,760 7,224,760 -0-
Nesher Inc. 4,240,000 4,240,000 -0-
Guarantee & Finance Corp. 700,000(4) 700,000(4) -0-
Libra Finance, SA 27,025,200(3) 37,025,200(3) -0-
Talibya B. Investments 2,285,100(3) 2,285,100(3) -0-
B. Hayut 1,624,000 1,624,000 -0-
J. Hayut 212,500(3) 212,500(3) -0-
Irving Greenman(B) 1,000,000(3) 1,000,000 -0-
Barbara Hamway 500,000(3) 500,000 -0-
Richard Gersh Associates, Inc. 352,770(3) 352,770 -0-
Paul Siegel(B) 3,350,000 3,350,000 -0-
Henry Siegel(B) 3,350,000 3,350,000 -0-
Ray Volpe(5)(B) 3,342,864 350,000 -0-
Pegasus Finance 2,010,000(3) 2,010,000(3) -0-
Yap Lay Kwan 138,500 138,500 -0-
Gary Hudson 100,000 100,000 -0-
Richard Kostyra(A) 350,000 350,000 -0-
Jack Woolf 35,000 35,000 -0-
Media Partners International BV 1,640,625 1,640,625 -0-
Tree House Media 146,000 146,000 -0-
Eric Ashenberg 300,000 300,000 -0-
Jan McCormack 250,000(3) 250,000(3) -0-
Polly Bergan 100,000(3) 100,000(3) -0-
David Haselhof 250,000(3) 250,000(3) -0-
Paneth Haber Zimmerman 300,000 300,000 -0-
Myron Hyman(A) 300,000 300,000 -0-
Mark DiPippa 60,000 60,000 -0-
Tempomedia 1,100,000 1,100,000 -0-
Lawrence Montorff 200,000 200,000 -0-
BKS Entertainment 40,000 40,000 -0-
Snow Becker Krauss, P.C. 300,000 300,000 -0-
Barry Sytner 600,000 600,000 -0-
</TABLE>
----------
(A) One our present officers or directors
(B) One of our former officers or directors
35
<PAGE>
(1) Represents those shares of common stock held by the selling stockholders, if
any, together with those shares that a selling stockholder has the right to
acquire within 60 days from the date of this prospectus.
(2) Assumes all of the shares being offered will be sold. Because the selling
stockholders may sell all, some or none of the shares that he, she or it holds,
and because the offering contemplated by this prospectus is not now a "firm
commitment" underwritten offering, the actual number of shares that will be held
by the selling stockholders upon or prior to termination of this offering may
vary.
(3) Includes shares issuable upon the exercise of warrants or options.
(4) Represents rights to obtain an indeterminate number of shares based on lower
of market price or a fixed price pursuant to convertible notes. The number above
reflects the minimum number of shares required to be registered pursuant to the
terms of convertible notes as well as a number of shares issuable upon the
exercise of warrants, except for 37,500 shares in case of Ellis Enterprises Ltd.
and 150,000 shares in case of Amro International which are issuable upon
exercise of warrants.
(5) Messr. Ray Volpe have been granted presently exercisable options covering
437,500 shares.
Does not include unrestricted shares held by unaffiliated shareholders, the
amount of such shares varies from time to time as the holders purchase and sell
such shares periodically.
The selling stockholders may have sold, transferred or otherwise disposed of all
or a portion of their shares since the date on which they provided the
information regarding their common stock in transactions exempt from the
registration requirements of the Securities Act. Additional information
concerning the selling stockholders may be set forth from time to time in
prospectus supplements to this prospectus.
DESCRIPTION OF SECURITIES
The following descriptions of our securities are qualified in all respects by
reference to our Certificate of Incorporation and By-laws. The Certificate of
Incorporation authorizes us to issue 100,000,000 shares of common stock, $.001
par value, and 15,000,000 shares of "blank check" preferred stock, $.001 par
value. We have agreed with the purchase of our convertible notes to increase our
authorization or consummation of a reverse stock split to enable all the notes
to be converted and the warrants to be exercised which were acquired in
connection with the issuance of the notes.
Common Stock
As of May 1, 2000 there were 45,419,730 shares of common stock outstanding. The
holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of the stockholders. Subject to terms of
future outstanding preferred stock, holders of common stock are entitled to
receive dividends as may be declared by our board of directors out of funds
legally available for this purpose. In the event of our liquidation, dissolution
or winding up, holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and satisfaction of preferential
rights and have no rights to convert their common stock into any other
securities. All shares of common stock have equal, non-cumulative voting rights,
and have no preference, exchange, preemptive or redemption rights.
Preferred Stock
There are no shares of preferred stock outstanding our Certificate of
Incorporation authorizes the issuance of the Preferred Stock with designations,
rights and preferences determined from time to time by its board of directors.
The preferred stock may be issued in series, and the preferred stock of each
series will have such rights and preferences as are fixed by the board of
directors in the resolutions authorizing the issuance of that particular series.
36
<PAGE>
In designating any series of the preferred stock, the board of directors may fix
the number of shares of the preferred stock constituting that series and fix the
dividend rights, dividend rate, conversion rights, voting rights (which may be
greater or lesser than the voting rights of the common stock), rights and terms
of redemption (including any sinking fund provisions) and the liquidation
preferences of the series of the Preferred Stock. It is possible, without any
action of our stockholders, that the holders of any series of the preferred
stock, when and if issued, will have priority claims to dividends and to any
distributions upon our liquidation and that they may have other preferences over
the holders of the common stock. The board of directors may issue series of the
preferred stock without action of our stockholders.
The issuance of the preferred stock may be used as an anti-takeover device
without further action on the part of the stockholders. Furthermore, the
issuance of the preferred stock may dilute the voting power of holders of the
common stock including preferred stock with super-voting rights. This may make
it more difficult to remove current management, even in situations where removal
may be in the stockholders' best interests. We have no current plans to issue
any of the preferred stock.
Convertible Notes
We have issued convertible notes bear interest at 8% per annum. The convertible
notes mature on March 9, 2001. The notes are convertible into shares of our
common stock. The conversion price is equal to 75% of the lowest bid price for
shares of our common stock over the preceding 60 trading days, but is limited to
$.10. The shares of our common stock that are issuable upon exercise of the
convertible notes are being registered in this registration statement. Different
notes have different maturities.
On May 12, 2000, we executed a forbearance letter with the following parties
Austinvest Anstalt Balzers, Esquire trade and Finance Inc., Amro International,
SA, Nesher, Inc., Moshe Manoah, Guarantee & Finance, Corp., Ellis Enterprises
Ltd., Baruh Hayut, S & A Holding, and Avi Ron with regards to the
above-referenced notes by which such parties agreed not to jeopardize our
financial condition for at least another six months from the date of the
forbearance letter.
Delaware Law and Certain Charter Provisions
We are subject to Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in a wide range of specified
transactions with any interested stockholder, defined to include, among others,
any person or entity who in the previous three years obtained 15% or more of any
class or series of stock entitled to vote in the election of directors, unless,
among other exceptions, the transaction is approved:
o the Board of Directors prior to the date the interested stockholder
obtained such status or
o the holders of two-thirds of the outstanding shares of each class or
series owned by the interested stockholder.
Our Certificate of Incorporation and By-laws contain certain additional
provisions which may have the effect of delaying or preventing a change in
control. These provisions include blank check preferred stock containing term
may be fixed by our board of directors without stockholder approval.
37
<PAGE>
Accordingly, our board of directors is empowered, without stockholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of the common stock. In the event of issuance, the preferred stock could
be used, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control by us.
Transfer Agent
The transfer agent for our common stock is North American Transfer Co., 147
Merrick Road, Freeport, New York 11520.
LEGAL MATTERS
Legal matters in connection with the securities offered will be passed upon by
Parker Duryee Rosoff & Haft, New York, New York 10017.
EXPERTS
Our consolidated financial statements included in this prospectus have been
audited by Liebman Goldberg & Drogin LLP, independent certified public
accountants, as set forth in their report, and are included herein in reliance
upon the report of said firm given upon their authority as experts in accounting
and auditing.
38
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS WITH
INDEPENDENT AUDITORS' REPORT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
For the years ended December 31, 1999 and 1998
CONTENTS
PAGE #
Independent Auditors' Report 1
Financial Statements:
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Deficit 6
Consolidated Statements of Cash Flows 7 - 8
Notes to Consolidated Financial Statements 9 - 26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Kaleidoscope Media Group Inc.
We have audited the accompanying consolidated balance sheet of Kaleidoscope
Media Group, Inc. and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the two years 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 audits.
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
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the financial position of
Kaleidoscope Media Group, Inc. and Subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for the two years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has suffered recurring losses from operations
and has a working 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 11. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Liebman Goldberg & Drogin, LLP
Garden City, New York
March 7, 2000
F-2
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
Current Assets: 1999
----------------
Cash $ 45,650
Accounts receivable, less allowance for
doubtful accounts of $411,428 213,222
Program cost inventory - current portion, net
of accumulated amortization 280,119
Other current assets 148,397
-----------
Total current assets 687,388
Property and Equipment, at cost, less
accumulated depreciation 41,680
Investment in Joint Venture 453,826
Other Assets 11,592
----------
$1,194,486
==========
See notes to financial statements.
F-3
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
December 31,
Current Liabilities: 1999
-----------
<S> <C>
Convertible notes payable .............................................. $ 1,308,468
Accounts payable and accrued liabilities ............................... 1,997,475
Loans payable, officer ................................................. 249,800
Income taxes payable ................................................... 906,302
Deferred income and client advances .................................... 304,282
Cash overdrafts ........................................................ 19,308
-----------
Total current liabilities .......................................... 4,785,635
Security Deposit Payable ....................................................... 10,552
-----------
Total liabilities .................................................. 4,796,187
-----------
Stockholders' Deficit:
Common stock, $0.001 par value, 100,000,000 shares authorized; and
41,355,960 issued in 1999 .......................................... 41,356
Preferred stock, $0.001 par value, 15,000,000
shares authorized, none issued in 1999 ............................. -
Additional paid-in capital ............................................. 9,103,063
Accumulated deficit .................................................... (13,246,120)
-----------
Total stockholders' deficit ........................................ (3,601,701)
-----------
Total liabilities and stockholders' deficit ........................ $ 1,194,486
===========
</TABLE>
See note to financial statements.
F-4
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years ended
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Net Revenue $ (53,668) $1,137,675
------------ ------------
Direct Project Costs:
Amortization of program costs and
other direct project costs 1,328,560 4,571,399
Other direct project costs 33,054 -
------------ ------------
Total direct project costs 1,361,614 4,571,399
------------ ------------
Gross Loss (1,415,282) (3,433,724)
------------ ------------
Expenses:
Amortization of program costs relating to joint venture - 188,658
Salaries and benefits 1,073,736 1,183,355
General and administrative 1,274,011 1,715,719
Amortization of goodwill - 831,414
Interest 82,585 41,090
------------ ------------
Total expenses 2,430,332 3,960,236
------------ ------------
Operating Loss (3,845,614) (7,393,960)
Gain on Lease Cancellation - 193,133
------------ ------------
Loss before Equity in Loss of Joint
Ventures and Income Taxes (3,845,614) (7,200,827)
Loss Income of Joint Venture (443,476) (188,658)
------------ ------------
Loss before Income Tax Expense (4,289,090) (7,389,485)
Provision for Taxes - 676,430
--------- ------------
Net Loss $ (4,289,090) $ (8,065,915)
============ ============
Basic Loss Per Share $ (0.10) $ (0.27)
============ ============
Diluted Loss Per Share $ (0.10) $ (0.27)
============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional
Shares Common Paid-in Accumulated
Issued Stock Capital Deficit Total
---------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 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 - - - (8,065,915) (8,065,915)
---------- -------- ---------- ------------- ------------
Balance - December 31, 1998 38,660,960 38,661 9,386,258 (8,957,030) 467,889
Issuance of shares 2,695,000 2,695 216,805 - 219,500
Net loss - - - (4,289,090) (4,289,090)
---------- -------- ----------- ------------- ------------
Balance - December 31, 1999 41,355,960 $ 41,357 $ 9,603,062 $ (13,246,120) $ (3,601,701)
========== ======== =========== ============= ============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years ended
December 31,
------------- -------------
Cash Flows from Operating Activities: 1999 1998
------------- -------------
<S> <C> <C>
Net (loss) $ (4,289,090) $ (8,065,915)
Adjustment to reconcile net (loss) to net cash
used in operating activities:
Amortization and depreciation 169,529 893,711
Equity in income of joint venture 443,476 188,658
Expense paid through the issuance of stock 56,250 -
Deferred income tax expense - 622,600
Deferred rent - (319,539)
Change in assets and liabilities:
Accounts receivable 110,103 423,356
Other current assets (6,333) 74,147
Investment in joint venture - 198,390
Security deposits payable - 10,552
Options payable - (143,750)
Other assets (241,361) 12,524
Cash overdraft 6,257 (181,097)
Accounts payable and accrued liabilities 615,385 (414,294)
Write-down of program cost inventory 1,328,560 3,712,932
Income taxes payable - 66,805
Deferred income and client advances 304,282 (697,033)
------------ ------------
Net cash (used in) operating activities (1,502,942) (3,617,953)
------------ ------------
Cash Flows from Investing Activities:
Distributions from joint venture 102,500 -
Expenditures for program costs (156,744) -
Acquisition of property and equipment (28,447) (7,973)
Loans receivable - officer 9,000 -
Investment in joint venture (10,350) -
------------ ------------
Net cash (used in)
investing activities (84,041) (7,973)
------------ ------------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Years ended
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows from Financing Activities:
Repayments of loans payable - stockholders - 27,300
Proceeds from notes payable 1,308,468 150,000
Loans payable to officers 99,800 -
Issuance of common stock 219,500 3,201,231
------------- ----------
Net cash provided by (used in) financing activities 1,627,768 3,378,531
------------- ----------
(Decrease) increase in cash 40,785 (247,395)
Cash - January 1, 4,865 252,260
------------- ----------
Cash - December 31, $ 45,650 $ 4,865
========== ==========
</TABLE>
See notes to financial statements.
F-8
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 1 - Organization and Description of Business:
On October 22, 1996, Kaleidoscope Media Group, Inc. ("KMG"), changed
its name from BNN Corporation in December 1997 (upon reincorporating
as a Delaware corporation - it had been a Nevada corporation) and was
a publicly traded corporation without significant operations,
acquired all of the outstanding share of HSPSMM, Inc. ("HSPS") which
changed it name from Kaleidoscope Media Group, Inc. in November 1997.
The transaction was effected by issuing additional KMG shares in an
amount that resulted in the original HSPS shareholders receiving
approximately 40.3% of the outstanding shares of BNN. The original
HSPS shareholders owned additional shares of KMG from before the
October 22, 1996 transaction. After the consummation of the
transaction, they owned approximately 47% of the outstanding shares,
and with the other 53% scattered, had effective control.
For financial reporting purposes, the transaction was recorded as a
recapitalization of HSPS. HSPS is the continuing, surviving, entity
for accounting purposes, but adopted the capital structure of KMG
which is the continuing entity for legal purposes. All references to
shares of common stock have been restated to reflect the equivalent
number of KMG shares.
To clarify the corporate names discussed above, the parent company,
formerly called BNN Corporation, has adopted the name of the former
subsidiary, Kaleidoscope Media Group, Inc. which in turn changed its
name to HSPSMM, Inc. All references in these financial statements to
KMG refer to the "new" KMG; all references to HSPS refer to the "old"
KMG.
HSPS was formed in May of 1996, at which time it issued 5,685,688
common shares to acquire approximately 91% of the outstanding shares
of SeaGull Entertainment, Inc. ("SeaGull") and 3,814,312 common
shares to acquire 100% of the outstanding stock of the Kaleidoscope
Group ("KG"), a marketing and consulting company engaged primarily in
sports and event marketing. Since, as a result of the transaction,
stockholders of SeaGull owned a majority of the common stock of HSPS,
the acquisition of SeaGull by HSPS was accounted for as a
recapitalization of SeaGull. Accordingly, the historical financial
statements are those of SeaGull. The acquisition of KG was accounted
for as a purchase of KG by SeaGull. The shares issued to acquire KG
were assigned a value of $2,900,000, based upon the fair value of
KG's net assets. At the date of acquisition, KG had a stockholders'
deficit of approximately $539,670, resulting in the recording of
goodwill of $3,439,670. 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.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 1 - Organization and Description of Business (Continued):
Kaleidoscope Media Group, Inc is primarily engaged in the business of
the development domestic and international distribution of
entertainment properties as well as exploiting the related licensing
and merchandising opportunities, home video distribution and
distribution of programming for Internet broadcasting. It also
provides consulting services in the development of specialty
television programming and is involved in the acquisition and
distribution of entertainment library properties.
Note 2 - Summary of Significant Accounting Policies:
Principles of 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 includes 50% owned joint venture in Keller Siegel
Entertainment and is accounted for on the equity method. KMG also has
an investment of 40% in a joint venture, The Kirkwood Group.
Accordingly, KMG's share of the loss of the joint ventures 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 periods.
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.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 2 - Summary of Significant Accounting Policies (Continued):
Program Cost Inventory (Continued):
During 1999, The Company had written off $1,328,560 of program cost
inventory due to lower 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.
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 expensed as incurred.
Deferred Revenue:
Deferred revenue represents 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.
Depreciation:
Property and equipment are stated at cost and are depreciated on
straight-line and accelerated methods over the estimated useful lives
of the assets. Leasehold improvements are amortized over the term of
the lease.
F-11
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 2 - Summary of Significant Accounting Policies (Continued):
Cash Overdrafts:
KMG and the various subsidiaries maintain most of their cash balances
in the same bank but in separate accounts owned by the different
corporations. The Company's practice has generally been to view the
group of accounts at the same bank as one balance and to move funds
from one account to another, with the bank's cooperation, as funds
are needed to pay checks as presented. Because there is no legal
right of offset of one subsidiary's positive balance with another's
overdraft balance, generally accepted accounting principles require
that the overdraft balances be shown separately as a liability.
Incentive Stock Option Plan:
Stock based compensation is recognized using the intrinsic value
method under which compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock
at the measurement date over the exercise price. For disclosure
purposes, pro-forma net income and earnings per share are provided as
if the fair value method had been applied.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenues and
expenses during the years then ended. Actual results could differ
from those estimated.
Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", requires disclosure of the fair value information,
whether or not recognized in the balance sheet, where it is
practicable to estimate that value. The carrying value of cash, cash
equivalents and accounts receivable approximates fair value.
Impairment of Long-Lived Assets:
The Company has not completed it's evaluation of the adoption of SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". However, management believes
any such effect will not be material.
Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income", which is effective for
financial statements with fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have a material effect, if any, on its
financial position or results of operations.
F-12
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 2 - Summary of Significant Accounting Policies (Continued):
Loss Per Common Share:
Basic loss per common share is based upon the weighted average number
of common shares outstanding during the year. Diluted earnings (loss)
per common share include the effects of potential dilution that would
occur if securities (such as warrants) or other contracts (such as
options) to issue common stock were exercised or converted into
common stock. Such instruments that are convertible into common stock
are excluded from the computation in periods in which they have an
anti-dilutive effect. Inclusion of the contingent shares potentially
issuable as a result of the KMG transaction would have an
anti-dilutive effect on earnings (loss) per share. As a result it was
not used in the earnings per share calculation. The weighted average
number of common shares used to calculate loss per common share
during 1999 and 1998 was 40,860,878 and 29,779,026, respectively.
The Company adopted Financial Accounting Standards Board (FASB)
Statement No. 128, "Earnings per Share". The Statement establishes
standards for computing and presenting earnings per share (EPS). It
replaced the presentation of primary EPS with a presentation of basic
EPS and also requires dual presentation of basic and diluted EPS on
the face of the income statement.
Income Taxes:
Income tax expense (benefit) consists of income taxes currently due
or refundable arising from the period's operations as adjusted by the
deferred tax expense (benefit). The deferred tax expense (benefit)
arises from those changes in the Company's deferred tax assets and
liabilities relating to operations. Deferred tax assets and
liabilities result from temporary differences between the amounts of
assets and liabilities recorded on the financial statements and the
amounts recorded for income tax purposes. Deferred tax assets also
result from certain income attributes existing at the balance sheet
date that can provide future income tax benefits including net
operating loss carryforwards which can be used to offset future
taxable income. The deferred tax assets and liabilities are
calculated based on the currently enacted tax rates that apply to the
periods that the temporary differences are expected to reverse or the
tax attributes are expected to be utilized. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management,
it is likely that some portion or all of the deferred tax assets will
not be realized.
The Company files a consolidated Federal income tax returns which
includes all the subsidiaries. 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.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 3 - Major Customers:
There were no major customers in 1999 or 1998.
Note 4 - Program Cost Inventory:
Program cost inventory consisted of the following:
December 31,
1999
----
Released, less accumulated amortization $ 0
In-process 280,119
-------
280,119
Less: Current portion (280,119)
--------
Noncurrent portion $ 0
========
Note 5 - Related Party Transactions:
Mr. Henry Siegel, Chairman of the Board, Chief Executive Officer and
Director of the Company since 1995, is an officer of Seagull
Entertainment, a wholly owned subsidiary. Mr. Siegel's brother Paul is
also a Director of the Company. During 1998, the Pension Trust for the
benefit of Henry Siegel advanced the Company $150,000. The Company is
currently accruing interest at a rate of 15% per annum. As of December
31, 1999 the Company has recorded accrued interest in the amount of
approximately $34,000 related to the Pension Trust advance to the
Company. No repayment terms have been established as of December 31,
1999.
F-14
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 6 - Property and Equipment:
Property and equipment consisted of the following:
December 31,
------------
1999 1998
---- ----
Automobile $ 0 $ 51,543
Furniture and fixtures 14,855 14,855
Computers and office equipment 74,873 46,426
-------- --------
89,728 112,824
Less: accumulated depreciation (48,048) (84,366)
-------- -------
$ 41,680 $ 28,458
======== ========
Depreciation expense was $15,255 and $62,297 for the years ended
December 31, 1999 and 1998 respectively.
Note 7 - Investment in Joint Ventures:
The Company has a 50% ownership interest in Keller-Siegel
Entertainment LLC ("KSE"). KSE produces Tarzan: The Epic Adventures,
an hour long action adventure television series that first aired in
September, 1996. Revenue is derived from both domestic and foreign
sources. Summarized financial information of KSE as of December 31,
and the years then ended are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Assets $ 98,027 $ 281,671
Liabilities 98,027 281,671
-------- -------
Members capital $ - $ -
======== =======
Revenue $ 14,575 $ 36,865
======== =======
Net income $ 23,890 $(317,316)
======== =======
Company's equity in net (loss) income $ 188,658 $(188,658)
======== =======
</TABLE>
F-15
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 7 - Investment in Joint Ventures (continued):
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. As
of December 31, 1999, the Company had made a decision to write down
the investment in KSE by approximately 50%. The Company feels the
ultimate recognition in revenues from Tarzan series will not be met.
The production costs for the two part premiere episode along with
certain pre-release marketing costs were funded by STI Entertainment
("STI") under an agreement by which STI was to fund the production
costs for the entire season's episodes in exchange for significant
gross profit participation. STI refused to supply the funding for
the remaining episodes. As a result, KSE incurred significant costs
in arranging for alternate financing. During 1997, STI asserted a
claim for an accounting, contending that they were due monies for
the premiere episode. Management vigorously contests this claim,
contending that STI materially breached its contract with KSE, which
material breach excused any further performance of KSE thereunder,
and also contending that KSE has been damaged in an amount exceeding
$2,800,000. A complaint has been filed by KSE against STI and others
seeking damages for breach of contract and to declare that KSE is
excused from all future performance under the contract. Management
and STI are now engaged in settlement discussions. Despite
management's belief that it has a strong case for the damages claim
against STI and against STI's claim for profit participation, due to
the uncertainties inherent in litigation, it is at least reasonably
possible that a material liability could result, although the amount
cannot be estimated.
Note 8 - Convertible Notes Payable:
Convertible Notes Payable as of December 31, 1999 as
summarized as follows:
8% Convertible Note Payable
Dated April 1999, 8% Interest Per
Annum Principal and Interest
Due January 2, 2001 $ 850,000
8% Convertible Note Payable
Dated August 1999, 8% Interest Per
Annum Principal and Interest Due
January 2, 2001 112,000
8% Convertible Note Payable
Dated December 1999, 8% Interest
Per Annum, Principal and Interest
Due January 2, 2001 346,468
----------
$1,308,468
==========
In April 1999, the Company issued 8% convertible promissory notes
payable aggregating $850,000 to non related investors. The Notes
are convertible into an indeterminate number of shares at a
conversion price of the lower of fifteen cents per share or 70% of
the lower closing price within sixty days of conversion. In
conjunction with the financing, the Company issued 850,000 warrants
at an exercise price of $.19 per warrant.
In August 1999, the Company sold an additional $112,000 principal
amount of notes and issued an additional 1,500,000 warrants to
acquire our common stock. The Company believes these securities were
issued pursuant to an exemption from the registration requirements
of the Securities Act of 1933 pursuant to Section 4(2).
In December 1999, the Company received an additional amount of
$346,468 from the sale of the convertible notes. The maturity date
on all the notes is January 1, 2001.
F-16
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 9 - Commitments:
The Company currently leases the space for its principal office in
New York, NY under a month-to-month basis with monthly payments of
$6,000. The Company's month-to-month lease will expire in July 2006.
The Company is also the lessee of office space, located in Los
Angeles, California, under a lease which expires in June 2002. In
1998, the Company signed an agreement with the landlord of its Los
Angeles office space to re-let its premises. The sublease agreement
stipulates that the Company will remain primarily liable for the
payment of all rental amounts. Mr. Paul Siegel and Henry Siegel have
personally guaranteed the Lease Agreement. The office lease provide
for future escalation based on certain cost increases.
Rent expense was $115,697 and $246,811 for the years ended December
31, 1999 and 1998 respectively. In 1998, rent expense was offset by
sublease income of $194,053.
On July 1, 1999, Mr. Paul Siegel ceased to be an employee of the
Company and became a consultant. He is receiving fees of $10,000 per
month plus an automobile allowance. The Company has terminated his
previous employment agreement. As of December 31, 1999, the Company
owes Mr. Paul Siegel approximately $36,000 which has been accrued at
the balance sheet date.
In December 1999, the Company entered into an employment agreement
with Myron Hyman, President and Chief Operating Officer of the
Company. The agreement is for thirty-seven months and provides for a
base salary of $150,000 increasing to $200,000 for months 13 through
25 and $250,000 for the balance of the term. Effective January 3,
2000 the agreement provides for payments of bonus at the sole
discretion of the board additional life insurance and an automobile
allowance. The agreement provides for severance in certain
circumstances including a change of control.
The chief executive officer entered into a new three year agreement
upon the expiration of his existing employment agreement on December
21, 1999. Mr. Siegel is to receive an annual salary of $150,000 in
the first year with an increase to $200,000 in the second year and
$250,000 in the third year. The agreement provides for payments of
bonus at the sole discretion of the board additional life insurance
and an automobile allowance. The agreement provides for severance in
certain circumstances including a change of control.
F-17
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 10 - Contingencies:
On June 21, 1996, a suit was filed against two of the Company's
subsidiaries and other unrelated parties in the amount of
$21,000,000 alleging that they are successors to the alleged
liability for a default judgment entered against a former affiliate
of the subsidiaries in April, 1995 for an alleged action taking
place in 1988. The subsidiaries have vigorously defended themselves
in this litigation. Management believes that the claim against the
former affiliate lacks merit and that, in any case, its subsidiaries
have no responsibility for the debts of the former affiliate.
Furthermore, management believes that if any judgment were to be
entered against the subsidiaries, it would be able to obtain
indemnification from the prior owner of the former affiliate's
business, a major advertising agency. In 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 reasonably possible that a material liability could
result, although the amount cannot be estimated.
At the time of the May, 1996 acquisition of KG, KG had a note
payable (jointly and severally with a former affiliate that is now
insolvent) to a former parent company in the amount of $225,000. KG
was contesting its liability under this note because of various
claims against the former parent. In accounting for the acquisition,
the Company valued the liability at $40,000 based on a signed
settlement agreement with the former parent's bankruptcy trustee.
Subsequent to the issuance of the 1996 financial statement, the
settlement was rejected by the creditors of the former parent. No
efforts have been made by the former parent's bankruptcy estate to
collect this debt, the Company still intends to assert its
counterclaims if the matter is litigated. No adjustment has been
made to the original $40,000 valuation assigned to the debt. It is,
however, at least reasonably possible that the Company would be
required to pay the full $225,000, resulting in a loss of $185,000.
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. In
September 1999, the Company obtained a default judgment against all
defendants which also dismissed all counterclaims. In addition the
defendants have declared bankruptcy.
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.
F-18
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 10 - Contingencies (Continued):
During 1998, various claims were filed against the Company alleging
breach of contract, failure to pay in accordance with a contract of
services, alleged failure to permit the transfer of stock
certificates and unpaid salary to a former subsidiary's employee.
These claims are in excess of $2,750,000. The Company denies all
liability and in certain instances has counter-claimed for damages.
It is not possible to assess the probable outcome of these claims,
but it is at least reasonably possible that a material gain or loss
could result.
In December 1999, the Company had reached an agreement on a claim
filed in 1998 between ACC Entertainment and the Company. The
agreement calls for the Company to pay ACC $100,000. As of December
31, 1999, the Company has recorded a liability for this claim.
Other contingencies include an action for an alleged unpaid bonus of
$25,000 and claims for approximately $89,000 arising from a sporting
event managed by KG in early 1996. Management believes that the
claims are not valid and no liabilities have been recorded for these
amounts as management believes that no loss is probable. It is,
however, reasonably possible that the Company will have to pay these
claims.
Going Concern:
As shown in the accompanying financial statements, the Company
incurred a net loss of $4,289,090 during the year ended December 31,
1999, and as of that date, the Company's current liabilities
exceeded its current assets by $4,098,248. Those factors, create an
uncertainty about the Company's ability to continue as a going
concern. However, the Company has recently completed a transaction
whereby they issued convertible debentures for the sum of $750,000.
The investors, subject to certain conditions, which the Company
believes are attainable, have agreed to purchase an additional
$1,250,000 of convertible debentures. The ability of the Company to
continue as a going concern is dependent upon the completion of this
financing. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern.
F-19
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 11 - Income Taxes:
The tax benefit for the year ended December 31, 1999 and the provision
for income taxes for the year ended December 31, 1998 consist of the
following components:
Year Ended December 31,
--------------------------
1999 1998
---- ----
Current
Federal $ - $ -
State 4,530 53,830
----------- ---------
4,530 53,830
----------- ---------
Deferred
Federal 1,007,990 334,336
State 755,884 228,264
----------- ---------
1,763,874 622,600
----------- ---------
$ 1,768,404 $ 676,430
=========== =========
The income tax expense (benefit) 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.
Deferred income taxes as reported on the balance sheet consists of:
December 31,
----------------------------
1999 1998
---- ----
Deferred tax assets $ 6,178,347 $ 4,730,257
Deferred tax liabilities - -
Valuation allowance (6,178,347) (4,730,257)
----------- -----------
$ - $ -
=========== ===========
As of December 31, 1999, the Company had net operating loss ("NOL")
carryforwards of approximately $11,800,000 available to offset future
federal taxable income; the carryforwards are not available for state
income tax purposes. These carryforwards begin to expire in 2011. The
Company has provided a full 100% valuation allowance on the deferred
tax assets as at December 31, 1999 to reduce such deferred income tax
assets to zero as it is managements belief that realization of such
amounts do not meet the criteria required by generally accepted
accounting principles. Management will review the valuation allowance
requirement periodically and make adjustments as warranted.
F-20
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 12 - Capital Structure:
During 1998, the Company issued 12,633,878 shares of common stock to
various non-related parties. The Company received $3,201,231 in
capital for 11,943,868 shares; the remaining 690,010 shares were for
services rendered.
In January and February 1999, the Company sold 3,725,000 shares to
various investors at prices ranging from $.05 to $.10 per share.
During the same period, the Company entered into agreements with Mr.
Robert Lancelotti and Mr. Bryon Lerner for the issuance of shares. The
Company is obligated to issue a total of 3,150,000 and 2,100,000
shares to Mr. Lancelotti and Lerner respectively. The Company believes
these securities were issued pursuant to an exemption from the
registration requirements of the Securities Act
Note 13 - Stock Options:
In December 1997, the shareholders authorized the implementation of an
Incentive Stock Option plan which granted employees 835,000 options.
The options vested one-third each on January 2, 1997, 1998 and 1999.
The 1997 options, although vesting retroactively to January 1997, were
not effective until the shareholder approval. Each option entitles the
holder to purchase one share of Common Stock at $.62. Each option can
be exercised at any time over a five year period.
Stock option activity was as follows:
December 31,
--------------------
1999 1998
---- ----
Balance at January 31, 828,333 -
Granted - 835,000
-------
Exercised - -
Forfeited - -
Expired - (6,667)
------- -------
Balance at December 31, 828,333 828,333
======= =======
As described in Note 2, the Company accounted for the granting of
stock options under the intrinsic value method and, accordingly, no
compensation cost has been recognized for stock options in the
financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options, the
company's net loss would have been increased to the pro forma amounts
indicated below:
Net loss:
As reported $(4,289,090)
===========
Pro forma $(4,289,090)
===========
Net loss per share:
As reported $ (0.10)
===========
Pro forma $ (0.10)
===========
F-21
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 14 - 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,
1999 1998
---- ----
Assets:
Cash $ 45,560
Loans and advances receivable -
officers and stockholders - 9,000
Liabilities:
Cash overdraft $ 19,308 13,051
Notes payable - -
As a result of the difficulties presented in the valuation of the
loans receivable and payable from the officers and shareholders
because of their related party nature, estimating the fair value of
these financial instruments is not considered practicable. The fair
value of the cash, notes receivable, cash overdraft and notes payable
do not differ materially from their carrying amounts.
None of the above are derivative financial instruments and none are
held for trading purposes.
Note 15 - Supplemental Statement of Cash Flows Disclosure:
Interest and Income Taxes Paid
Cash payments for the following were:
December 31,
1999 1998
---- ----
Interest $ - $ 36,568
========== ==========
Income taxes $ - $ -
========== ==========
F-22
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 16 - Segment Information:
As described in Note 1, the Company's operations have been classified
into two segments, the Entertainment Division and the Sports Division.
Summarized information by business segment for 1999 is as follows:
<TABLE>
<CAPTION>
Direct
Entertainment Sports Marketing Other Total
------------- ------ --------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue $ (53,668) $ - $ - $ - $ (53,888)
=========== =========== =========== ======== ===========
Operating loss $ (53,688) $ - $ - $ - $ (53,888)
Equity in Loss from joint ventures (443,476) - - - (443,476)
----------- ----------- ----------- -------- -----------
Pretax loss $(4,289,090) $ - $ - $ - $(4,289,090)
=========== =========== =========== ======== ===========
Total identifiable assets $ 740,660 $ - $ - $ - $ 740,660
=========== =========== =========== ======== ===========
Depreciation and amortization $ 169,529 $ - $ - $ - $ 169,523
=========== =========== =========== ======== ===========
</TABLE>
As described in Note 1, the Company's operations have been classified
into two segments, the Entertainment Division and the Sports Division.
Summarized information by business segment for 1998 is as follows:
<TABLE>
<CAPTION>
Direct
Entertainment Sports Marketing Other Total
------------- ------ --------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue $ 748,249 $ - $ - $389,426 $ 1,137,675
=========== =========== =========== ======== ===========
Operating loss $(5,611,304) $(7,221,773) $(1,040,231) $(19,652) $(7,393,960)
Gain on lease cancellation - - - 193,133 193,133
Equity in Loss from joint ventures (188,658) - - - (188,658)
----------- ----------- ----------- -------- -----------
Pretax loss $(5,799,962) $ (722,773) $(1,040,231) $173,481 $(7,389,485)
=========== =========== =========== ======== ===========
Total identifiable assets $ 1,884,181 $ - $ - $ - $ 1,884,181
=========== =========== =========== ======== ===========
Depreciation and amortization $ 893,711 $ - $ - $ - $ 893,711
=========== =========== =========== ======== ===========
Capital expenditures $ - $ - $ - $ - $ -
=========== =========== =========== ======== ===========
</TABLE>
F-23
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 17 - Subsequent Events:
As discussed in Note 11, the Company in March 2000, issued $225,000 of
8% convertible notes maturing on March 9, 2001. Common Stock Purchase
Warrants were issued for the right to purchase 2,765,000 shares of the
company. The Agreement stipulates that the use of the funds are to be
used for working capital and expenses of the offering.
F-24
<PAGE>
Index
Page #
------
Part I Financial Information
Item 1. Financial Statements (unaudited)...................
Consolidated Balance Sheet March 31, 2000.................. 1-2
Consolidated Statements of Income three months ended
March 31, 2000 and March 31, 1999.......................... 3
Consolidated Statements of Cash Flows three months ended
March 31, 2000 and March 31, 1999.......................... 4
Notes to Financial......................................... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations........................ 7-9
F-25
<PAGE>
Kaleidoscope Media Group, Inc
(Formerly Bnn Corporation)
and Subsidaries
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2000
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $ 2,597
Accounts receivable, less allowance for doubtful
accounts of $411,428 706,717
Expenditures billable to clients 12,550
Program cost inventory - current portion,
net of accumulated amortization 313,598
Other current assets 142,528
------------
Total Current Assets 1,177,990
Property and equipment at cost less:
accumulated depreciation of $50.390 40,304
Investment in joint venture 453,926
Other assets 11,592
------------
Total Assets $ 1,683,812
============
</TABLE>
F-26
<PAGE>
Kaleidoscope Media Group, Inc
(Formerly Bnn Corporation)
and Subsidaries
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2000
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES
Cash overdrafts $ 8,338
Loans officers 84,800
Notes payable 1,877,000
Accounts payable and accrued liabilities 2,095,236
Income tax payable 906,302
Deferred income and client advances 250,782
------------
Total Current Liabilities 5,222,458
LONG TERM LIABILITIES
Security deposit payable 10,552
------------
Total Liabilities 5,233,010
------------
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, 100,000,000
shares authorized and 41,355,960 issued in 1999 41,356
Preferred stock, $0.001 par value 15,000,000
shares authorized and none issued --
Additional paid-in-capital 9,603,063
Accumulated deficit (13,193,617)
------------
Total Stockholders' Deficit (3,549,198)
------------
Total Liability and Stockholders' Deficit $ 1,683,812
============
</TABLE>
F-27
<PAGE>
Kaleidoscope Media Group, Inc
(Formerly Bnn Corporation)
and Subsidaries
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
NET REVENUE $ 578,834 $ 38,034
DIRECT PROJECT COSTS
Amortization of program costs 29,934 --
Other direct project costs 6,825 7,511
--------- ---------
Total Direct Project Costs 36,759 7,511
--------- ---------
GROSS PROFIT 542,076 30,523
--------- ---------
EXPENSE
Salaries and benefits 148,720 274,302
General and administrative 300,575 249,455
Interest & local taxes 40,276 --
--------- ---------
Total Expenses 489,571 523,757
--------- ---------
INCOME (LOSS) BEFORE EQUITY IN LOSS OF JOINT VENTURE AND
PROVISION FOR INCOME TAXES 52,504 (493,234)
EQUITY IN LOSS OF JOINT VENTURE -- --
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 52,504 (493,234)
PROVISION FOR INCOME TAXES -- --
--------- ---------
NET INCOME (LOSS) $ 52,504 $(493,234)
========= =========
NET EARNINGS PER COMMON SHARE
Basic Earnings (Loss) Per Share $ 0.001 $ (0.01)
========= =========
Diluted Earnings (Loss) Per Share $ 0.001 $ (0.01)
========= =========
</TABLE>
F-28
<PAGE>
Kaleidoscope Media Group, Inc.
(formerly BNN Corporation)
And Subsidaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 52,504 $(493,234)
Adjustment to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Amortization and depreciation 77,506 5,810
Changes in assets and liabilities:
Accounts receivable (493,495) (53,985)
Expenditures billable to clients (6,216) --
Deferred financing costs (94,545) --
Other assets 17,951 7,547
Cash overdraft (10,970) (13,051)
Accounts payable and accrued liabilities 212,759 194,498
Write-down of program costs inventory 29,934 --
Income taxes payable -- 3,315
Deferred income and client advances (53,500) --
--------- ---------
Net Cash Used in Operating Activities (268,073) (349,100)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Distribution from joint venture -- 73,500
Investment in joint venture (100) --
Expenditures for program costs (63,413) 70,666
Acquisition of property and equipment -- 726
Loans receivable - officers and shareholders - net change -- 9,000
--------- ---------
Net Cash Provided by (Used In) Investing Activities (63,513) 153,892
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans payable to officers and shareholder (15,000) --
Proceeds from notes payable 410,533 40,800
Deferred financing costs incurred (32,000)
Repayments of notes payable (75,000) --
Issuance of common stock and related warrants -- 195,968
--------- ---------
Net Cash Provided by Financing Activities 288,533 236,768
--------- ---------
INCREASE (DECREASE) IN CASH (43,053) 41,560
CASH
Beginning of period 45,650 4,865
--------- ---------
End of period $ 2,597 $ 45,425
========= =========
</TABLE>
F-29
<PAGE>
KALEIDOSCOPE MEDIA GROUP, INC.
(formerly BNN Corporation)
AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Note 1 - BASIS OF PRESENTATION:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of results for the interim period.
The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for the
full year.
Note 2 - MAJOR CUSTOMERS
KMG has increased its revenues substantial over the first three
months of 2000 by adding several new programs to its distribution
library. These additions include a major contract with Global
Entertainment for the distribution of Magnificent Ambersons mini
series.
Note 3 - NOTES PAYABLE
During the three-month period the Company issued eight (8%) percent
convertible promissory notes aggregating two hundred and fifty
thousand dollars ($250,000) to foreign private investors. These notes
mature March 9, 2001 together with interest, unless the parties agree
to extend the maturity date. The Notes are convertible into an
indeterminate number of shares at a conversion price of the lower of
ten ($0.10) cents per share or 70% of the lowest closing price within
sixty (60) days of conversion. In conjunction with the financing, the
Company issued a total of 27,625,000 warrants at an exercise price of
$0.11. The Company incurred financing costs of $32,000, which is
being amortized over the life of the note.
F-30
<PAGE>
-------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article Sixth of the Certificate of Incorporation of Kaleidoscope Media Group,
Inc. (the "Company") provides that no director shall be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except with respect to (1) a breach of the director's duty of loyalty
to the Company or its stockholders, (2) acts or omissions not in good faith
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit.
Article Sixth also provides that the Company shall indemnify, to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, any and all persons whom it shall
have power to indemnify under such sections, including officers of the Company
acting in such capacity.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the Company's estimates of the expenses
to be incurred by it in connection with the Common Stock being offered hereby:
SEC Registration Fee............................................. $
Printing expenses................................................ 7,500
Legal fees and expenses.......................................... 15,000
Accounting fees and expenses..................................... 10,000
Blue Sky expenses................................................ --
Miscellaneous expenses........................................... 2,500
--------
TOTAL.................................................. $ 35,000
------------
* Estimated
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Recent Securities Developments
From October 1998 through January 1999 we issued 1,000,000 shares of common
stock to Robert Lancelotti at a purchase price of averaging $.10 per share.
Sales of Securities
In January and February 1999 we sold 3,725,000 shares to several investors at
prices ranging from $.05 per share to $.10 per share. During the same period we
entered into agreements with Mr. Robert Lancelotti and Mr. Byron Lerner for the
issuance of shares to Messrs. Lerner and Lancelotti. We are obligated to issue a
total of 3,150,000 and 2,100,000 shares of Messrs. Lerner and Lancelotti,
respectively. In certain circumstances these shares may be returned to the
Company. We believe these securities were issued pursuant to an exemption from
the registration requirements of the Securities Act of 1943 pursuant to Section
4(2) thereof.
o In April 1999 we issued eight (8%) percent convertible promissory
notes aggregating $850,000 to foreign private investors. The Notes
are convertible into an indeterminate number of shares at a
conversion price of the lower of fifteen (.15) cents per share or
70% of the lowest closing price within sixty (60) days of
conversion. In conjunction with the financing, we issued a total of
850,000 warrants at an exercise price of nineteen (.19) cents. We
have also issued an additional $1,250,000 of principal amount of
notes which were to be paid for in installments after our
registration statement becomes effective. In August 1999 we sold an
additional $112,000 principal amount of notes and issued an
additional 1,500,000 warrants to acquire our common stock.
We believe these securities were issued pursuant to an exemption from the
registration requirements of the Securities Act of 1933 pursuant to Section 4(2)
thereof.
We also sold 350,000 shares of our common stock to an investor in July 1999 at
approximately seven (.07) cents per share and 200,000 shares to another investor
in October 1999 at a price of ten (.10) cents per share. The Company believes
these securities were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof.
In December 1999 and January 2000 we received an additional $500,000 from the
sale of our convertible notes. Many of the same investors who purchased our
prior notes in connection, with financing completed in April and August 1999
purchased these notes. These notes are exercisable at the lower of market price
as defined in the notes or ten (.10) cents. The notes are due in January 2001.
At the time we also issued warrants to purchase 30,000,000 of our shares of
common stock at $.10 per share. In connection with the sale of these notes we
modified the existing notes and related warrants as follows:
II-2
<PAGE>
o The maturity date was extended to January 1, 2001.
o The maximum conversion price of these notes were reduced to ten
cents.
Dividends
We plan to retain any future earnings for use in its business and, accordingly,
we do not anticipate paying dividends in the foreseeable future to the holders
of the common stock. Payment of dividends is within the discretion of our Board
of Directors ("Board of Directors") and will depend, among other factors, upon
our earnings financial condition and capital requirements.
Item 27. Exhibits and Financial Statement Schedules.
3.01(5) Certificate of Incorporation of the Company
3.02(5) By-laws of the Company
4.01(5) Specimen Certificate
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 and
Properties, Inc. (3).
10.08 Agreement dated as of August 20, 1997, among, Interpublic Group of
Companies, Inc., 345 PAS Sports, Inc., and People and 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.
II-3
<PAGE>
(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 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.
Item 28. Undertakings.
The undersigned Company hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any Prospectus required by Section 10(a)(3)
of the Securities Act;
(b) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Registrant pursuant to Item 24 of this Part II to the Registration Statement,
or otherwise, Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against the public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements of filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on June 12, 2000.
KALEIDOSCOPE MEDIA GROUP INC.
By: /s/ Myron Hyman
---------------------------------
Myron Hyman, Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Henry Siegel and Paul Siegel, and each of
them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and the documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE>
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Capacity Date
---------- -------- ----
<S> <C> <C>
/s/ Myron Hyman
---------------------------- Chief Executive Officer, Director June 12, 2000
Myron Hyman
/s/ Ann Collins
---------------------------- Chief Financial Officer (Principal Financial June 12, 2000
Ann Collins Officer and Principal Accounting Officer)
/s/ Kevin Eastman
---------------------------- Director June 12, 2000
Kevin Eastman
/s/ Richard Kostrya
---------------------------- Director June 12, 2000
Richard Kostrya
</TABLE>
II-6
