<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 1998
Commission File No 1-13084
BYRON PREISS MULTIMEDIA COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 13-3676574
- ------------------------ ----------------
(State of Incorporation) (I.R.S. Employer
Identification
number)
24 West 25th Street
New York, New York 10010
- ------------------- --------
(Address of principal executive offices) (Zip code)
(212) 989-6252
(Issuer's telephone number)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
---- ----
The number of shares outstanding of the issuer's class of common equity, as of
the latest practical date is 8,359,379 shares of common stock par value $.001
per share as of November 10, 1998.
Page 1 of 19 pages
<PAGE>
BYRON PREISS MULTIMEDIA COMPANY, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements:
Consolidated Balance Sheet as of September 30, 1998. 3
Consolidated Statements of Operations for three months
and nine months ended September 30, 1998 and 1997 4-5
Consolidated Statement of Changes in Shareholders' Equity
for nine months ended September 30, 1998. 6
Consolidated Statements of Cash Flows for the
the nine months ended September 30, 1998 and 1997. 7-8
Notes to Consolidated Financial Statements. 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14-16
PART II
- -------
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Page 2 of 19 pages
<PAGE>
PART I FINANCIAL INFORMATION
- ----------------------------
Item 1. Financial Statements
BYRON PREISS MULTIMEDIA COMPANY,INC. AND SUBSIDIARIES
-----------------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
September 30,
1998
------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 616,863
Accounts receivable, net 660,316
Inventory 239,792
Other current assets 173,289
------------
Total current assets 1,690,260
PREPUBLICATION COSTS AND RIGHTS PURCHASED 683,383
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 402,245
GOODWILL, net of accumulated amortization 2,926,973
OTHER ASSETS 960,869
------------
Total assets $ 6,663,730
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,753,617
Current maturities of long-term debt 1,570,129
Liabilities from discontinued operations 665,865
Deferred income 407,480
Other current liabilities 322,671
------------
Total current liabilities 4,719,762
LONG TERM DEBT, less current maturities 2,057,429
OTHER LONG-TERM LIABILITIES 113,067
------------
Total liabilities 6,890,258
------------
MINORITY INTEREST 182,071
SHAREHOLDERS' EQUITY:
Preferred Stock, 5,000,000 shares authorized;
0 shares issued and outstanding
Common Stock, 30,000,000 shares authorized; 8,359,379
shares issued and outstanding, $.001 par value 8,359
Additional paid-in-capital 15,458,554
Accumulated deficit (15,875,512)
------------
Total shareholders' equity (408,599)
------------
Total liabilities and shareholders' equity $ 6,663,730
============
The accompanying notes are an integral part of this consolidated balance sheet.
Page 3 of 19 pages
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BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 1,427,311 $ 575,431 $ 5,455,787 $ 2,298,363
COST OF REVENUES 777,247 240,561 3,251,795 1,462,108
----------- ----------- ----------- -----------
Gross profit from
continuing operations 650,064 334,870 2,203,992 836,255
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,206,147 562,513 3,492,487 2,826,463
----------- ----------- ----------- -----------
Loss from continuing oper.
before interest (556,083) (227,643) (1,288,495) (1,990,208)
INTEREST EXPENSE 108,862 55,604 322,000 15,082
----------- ----------- ----------- -----------
Loss from continuing
operations (664,945) (283,247) (1,610,495) (2,005,290)
DISCONTINUED OPERATIONS:
Loss from discontinued
operations (97,877) (523,887) (257,238) (3,289,071)
----------- ----------- ----------- -----------
Net loss $ (762,822) $ (807,134) $(1,867,733) $(5,294,361)
=========== =========== =========== ===========
NET LOSS PER SHARE INFORMATION:
BASIC NET LOSS PER SHARE:
Continuing operations $ (0.08) $ (0.04) $ (0.20) $ (0.33)
Discontinued operations (0.01) (0.07) (0.03) (0.54)
----------- ----------- ----------- -----------
Total $ (0.09) $ (0.11) $ (0.23) $ (0.87)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4 of 19 pages
<PAGE>
BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(unaudited)
-----------
continued
- ---------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
DILUTED NET LOSS PER SHARE:
Continuing operations $ (0.08) $ (0.04) $ (0.20) $ (0.33)
Discontinued operations (0.01) (0.07) (0.03) (0.54)
------------- ------------- ------------- -------------
Total $ (0.09) $ (0.11) $ (0.23) $ (0.87)
============= ============= ============= =============
COMMON SHARES USED IN COMPUTING PER SHARE
AMOUNTS:
Basic 8,359,379 7,174,438 8,026,630 6,064,706
============= ============= ============= =============
Diluted 8,359,379 7,174,438 8,026,630 6,064,706
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 5 of 19 pages
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BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------
(unaudited)
-----------
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1997 $ 7,399 $ 14,618,221 $(14,007,779) $ 617,841
Purchase of High Text
Interactive, Inc. net assets 150 189,400 -- 189,550
Purchase of OnRamp
School Productions, Inc.
(nka: Internet Education
Group, Inc. (IEG)) 400 342,593 -- 342,993
Conversion of debt and accrued
interest into shares 410 308,340 -- 308,750
Net loss for the nine months
ended September 30, 1998 -- -- (1,867,733) (1,867,733)
------------ ------------ ------------ ------------
BALANCE,
September 30, 1998 $ 8,359 $ 15,458,554 $(15,875,512) $ (408,599)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 6 of 19 pages
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BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------------
(Unaudited)
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,867,733) $(5,294,361)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities-
Depreciation and amortization 423,684 302,882
Amortization of prepublication costs
and rights purchased 1,821,529 1,860,327
Minority interest in loss of consolidated
subsidiary (11,898) --
Amortization of discount on convertible
debentures 4,723 --
Amortization of debt issuance costs 138,294 --
Changes in operating assets and liabilities
Accounts receivable 300,580 878,587
Inventory (52,836) 356,262
Other current assets (218,685) 33,789
Accounts payable and accrued expenses 247,115 (974,441)
Liabilities from discontinued operations (49,317) 1,000,000
Other current liabilities (47,853) (235,928)
Deferred income (312,798) 643,895
Other long-term liabilities 35,353 380,627
----------- -----------
Net cash provided by (used for)
operating activities 410,158 (1,048,361)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions -- (600,000)
Purchase of equipment and leasehold improv (28,109) (44,402)
Prepublication costs and rights purchased (1,160,990) (1,559,283)
----------- -----------
Net cash used for investing activities (1,189,099) (2,203,685)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from financings 759,872 2,305,033
Repayment of debt (557,314) --
----------- -----------
Net cash provided by financing
activities 202,558 2,305,033
----------- -----------
Net (decrease) in cash and
cash equivalents (576,383) (947,013)
CASH AND CASH EQUIVALENTS, beginn. of period 1,193,246 1,381,998
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 616,863 $ 434,985
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
Page 7 of 19 pages
<PAGE>
BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------------
(continued) (unaudited)
- ----------- -----------
1998 1997
------------ ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 113,270 $ 64,538
============ ==========
Income taxes $ 8,845 $ 26,756
============ ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Debt issued for acquisition $ -- $1,750,000
============ ==========
Stock issued for acquisitions $ 550,000 $ 400,000
============ ==========
Debentures converted to equity $ 300,000 $ --
============ ==========
The accompanying notes are an integral part of these consolidated statements.
Page 8 of 19 pages
<PAGE>
BYRON PREISS MULTIMEDIA COMPANY, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1998 AND 1997
---------------------------
1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The balance sheet as of September 30, 1998 and the related statements of
operations, statement of changes in shareholders' equity and statements of cash
flows for the periods ended September 30, 1998 and 1997 have been prepared by
the Company, without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly its
financial position, results of operations and cash flows as of September 30,
1998 and 1997 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the December 31,1997 audited financial statements
and notes thereto. The results of operations for the three and nine months ended
September 30,1998 are not necessarily indicative of the operating results for
the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owed subsidiaries, Dolphin, Inc., Multi Dimensional
Communications, Inc., New Media Schoolhouse, Inc., its majority- owned
subsidiary, Virtual Comics, Inc., Internet Education Group, Inc. and two wholly
owned inactive subsidiaries, Byron Preiss Multimedia Holdings, Inc. and Byron
Preiss Multimedia On-Line Services, Inc. In March 1998, the Company merged
OnRamp School Productions, Inc. into Internet Education Group, Inc. a wholly
owned subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation.
RECLASSIFICATION
----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NET LOSS PER SHARE
------------------
Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings Per
Share". In accordance with SFAS No. 128, net loss per common share amounts
("basic EPS") were computed by dividing net loss by the weighted average number
of common shares outstanding and contingently issuable shares (which satisfy
certain conditions) and excluded any potential dilution. Net loss per common
share amounts-assuming dilution ("diluted EPS") were computed by reflecting
potential dilution from the exercise of stock options and warrants. SFAS No. 128
requires the presentation of both basic EPS and diluted EPS on the face of the
income statement. Net loss per share amounts
Page 9 of 19 pages
<PAGE>
for the same prior-year periods have been restated to conform with the
provisions of SFAS No. 128; however, the result of that restatement was not
material. Basic net loss per common share is computed by dividing the Company's
net loss by the weighted average common shares outstanding for each year
presented. Diluted net loss per common share is equal to basic net loss per
common share for each year presented as the effect of all outstanding stock
options and warrants outstanding was antidilutive.
COMPREHENSIVE INCOME
--------------------
During the quarter ended March 31, 1998, the Company adopted SFAS No. 130.
"Reporting Comprehensive Income," which requires companies to report all changes
in equity during a period, except those resulting from investments by owners,
and distributions to owners for the period in which they are recognized.
Comprehensive income is the total of net income and all other nonowner changes
in equity (or other comprehensive income) such as unrealized gains/losses on
securities classified as available-for-sale, foreign currency transaction
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of annual financial statements
or in the case of interim reporting, in the footnotes to the financial
statements. For the nine month periods ended September 30, 1998 and 1997, the
Company's operations did not give rise to material items includible in
comprehensive income which were not already included in net income. Accordingly,
the Company's comprehensive income is the same as its net income for all periods
presented.
3. DISCONTINUED OPERATIONS
-----------------------
In March 1998, the Company adopted a plan to discontinue operations dedicated to
the development, marketing and sale of entertainment software in the retail
market, which includes the sales of Virtual Comics, Inc. Management has
restructured the Company to specialize in the development and marketing of
educational software as well as the publishing of books and software for the
educational and consumer markets. This decision was made due to declining
revenues, high operating costs, and increased competition in the entertainment
software marketplace. As a result, the Company recorded a charge against
earnings at December 31, 1997 of approximately $4,700,000 and for the nine
months ended September 30,1998 an additional charge of $257,238. In October 1998
the Company announced its intention of selling all of its operating divisions to
Frontline Communications Corporation (See Note 8 to Financial Statements).
4. ACQUISITIONS
------------
In February 1998, the Company acquired certain net assets of High Text
Interactive, Inc. for 150,000 common shares of the Company for a total purchase
price of $189,550.
In February 1998, the Company entered into a letter of intent with New Century
Education Corporation ("NCEC") whereby the Company will acquire all the issued
and outstanding stock. In view of the Company's announcement of its intention to
sell all of its operating divisions, the Company has ceased all discussions
concerning this acquisition.
Page 10 of 19 pages
<PAGE>
On March 5, 1998, the Company acquired OnRamp School Productions, Inc.
("OnRamp") for 400,000 common shares of the Company for a total purchase price
of $360,000. Subsequent to the purchase, OnRamp changed its name to the Internet
Education Group, Inc. As there have been no significant revenues from this
operation, the Company initiated an evaluation of its various technology rights
and costs. This operation has been inactive during the third quarter and current
revenues and expenses are included as part of discontinued operations.
Proforma financials relating to the acquisitions consummated in 1998
were not prepared due to the fact that sales and results of operations from such
subsidiaries were not material.
5. SEGMENT INFORMATION.
--------------------
Due to increased competition in the consumer entertainment software market and
increasing consumer demand for the Company's book titles, the Company changed
its strategy from a vertical approach of selling entertainment CD-ROMs to
placing more emphasis on its book publishing operations, and effectively
segmented its primary operations into educational multimedia development and
book publishing. Although certain of the published book titles may eventually
migrate into digital formats, operating information of all book titles has been
included in the book publishing segment detailed below as such titles have not
been specifically identified.
The Company's educational multimedia operations are dedicated to the development
of products for use on digital mediums, including CD-ROMs, on-line services and
other electronic formats.
The book publishing operations are based on the creation of original material
using licensed trademarked characters and books using original or licensed
properties.
Page 11 of 19 pages
<PAGE>
In the table set forth below, information regarding operations for each
of the Company's industry segments as of September 30, 1998 is as follows:
Nine months ending September 30, 1998 (000's omitted)
-------------------------------------
Education
Multimedia Book
Development Publishing Consolidated
Net Revenues $ 3,708 $ 1,748 $ 5,456
========
Loss from operation (1,128) (161) (1,289)
Other income/(expense) (net) (322)
Loss from discontinued operations (257)
--------
Net loss $ (1,868)
========
Identifiable assets $ 5,268 $1,301 $ 6,569
Corporate assets 95
--------
$ 6,664
========
Depreciation and amortization of
equipment and leasehold
improvements $ 116 $ 54 $ 170
Capital expenditures $ 18 $ 10 $ 28
6. LONG-TERM DEBT
--------------
Acquisition Financing:
----------------------
7% convertible note payable in 39 monthly
installments of $53,087 commencing
January 2, 1998. Original amount $1,750,000 $1,346,152
6% convertible notes payable in 24 monthly
installments of $16,719 commencing
February 1, 1998. Original amount $375,000 254,241
Financing:
----------
6% convertible debenture, due November 30, 1999 $1,300,000
11% demand secured convertible note 500,000
miscellaneous notes 227,165
----------
3,627,558
Less--Current maturities (1,570,129)
Long-term debt, less current maturities $2,057,429
Page 12 of 19 pages
<PAGE>
7. LEGAL PROCEEDINGS
-----------------
The Company has been named a defendant in an action commenced by Bushinghall,
Ltd ("Bushinghall") in the Supreme Court in the State of New York, County of New
York. Bushinghall has alleged that the Company has materially breached a
registration rights agreement between the Company and Bushinghall (the
"Registration Rights Agreement) by its failure to register the shares (the
"Bushinghall Shares") underlying the $1.3 million 6% convertible debentures due
November 30, 1999 (the "Bushinghall Notes") with the Securities and Exchange
Commission. Bushinghall is seeking damages of not less than $130,000 in addition
to an unstated amount of direct damages. In October 1998 Bushinghall Limited
amended its complaint to add claims for dishonoring its request to convert
debentures into the Company's common stock and penalties associated therewith.
(See Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources, and Part II Item 1. Legal
Proceedings for further discussion)
The Company, as previously reported, was advised by NASDAQ Listing
Board that in order to continue listing the Company's common stock on the Nasdaq
SmallCap Market, it must maintain a closing bid price greater than or equal to
$1.00. The Company was also informed that it does not comply with NASDAQ's net
tangible assets/market capitalization/net income requirement. On October 27,
1998, NASDAQ notified the Company that its shares would be delisted effective
immediately.
8. SUBSEQUENT EVENTS
-----------------
In October 1998 the Board of Directors appointed Niall Duggan as a
Director of the Company. Mr. Duggan is a resident of the United Kingdom and a
Engineer by profession. Mr. Duggan is employed by VenGua Capital Markets Ltd.
On October 29, 1998 Frontline Communications Corporation ("Frontline")
(NASDAQ: FCCN) a public company headquartered in Pearl River, New York announced
it entered into a non-binding letter of intent to purchase substantially all of
the assets of five (5) subsidiaries of Byron Preiss Multimedia Company, Inc. The
assets include the operations of (i) Dolphin,Inc. (ii) Multi Dimensional
Communications, Inc. (iii) New Media Schoolhouse, Inc. (iv) Internet Education
Group, Inc. and (v) the publishing division of the Company. At this time there
can be no assurances that the Frontline transaction will be consummated.
Page 13 of 19 pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations:
----------------------
(a) General.
--------
In September 1998, two of the Company's directors, Matthew Shapiro and
Roger Cooper resigned as Directors of the Company. Messrs. Shapiro and Cooper
did not have any disagreement with the financial, accounting and/or management
policies of the Company. Messrs. Shapiro and Cooper provided their resignations
from the Board in order to assist the Company in raising interim financing.
Additionally, Securities Management, Inc. ("Securities") a secured lender of the
Company, requested that the Board of Directors appoint two nominees as Directors
of the Company as a condition of Securities not exercising the rights granted to
Securities as part of a secured financing arrangement. Securities nominated Mr.
Edward Fitzpatrick and Mr. Mark Palestine to the Board. Mr. Fitzpatrick is an
investment banker and a principal shareholder of VenGua Capital Markets, Ltd. an
investment banking firm located in the United Kingdom. Mr. Palestine is a
financial consultant and a certified public accountant. Also in September 1998
the Board of Directors named Byron Preiss Chairman of the Company and
simultaneously, named James R. Dellomo, the Company's Chief Financial Officer as
Acting President.
(b) Results of Operations.
----------------------
Net Revenues from Continuing Operations. Revenues from continuing
operations for the three months ended September 30, 1998 more than doubled to
$1,427,311 up from $575,431 for the prior comparable period. For the nine months
ended September 30, 1998 revenues from continuing operations increased 137% to
$5,455,787 up from $2,298,363 for the same period a year ago. The increase in
revenues for both the three and nine months ended September 30, 1998 can be
attributed to the inclusion of revenues from its subsidiaries, Dolphin, Inc, an
educational software developer acquired in March 1997 totalling $1,659,060 for
the nine months ended September 30, 1998 and Multi Dimensional Communications,
Inc. and New Media Schoolhouse, Inc., which are respectively publishers and
direct marketers of proprietary and third party education titles, acquired in
November 1997, totalling $743,646 for the same nine month period. Under a
contract to provide the development of a web site, video and book, the Company
recorded net revenues of $595,000 for the nine month period ending September 30,
1998, and with revenues from two CD-ROMs (X-Files: Unrestricted Access and Total
Titanic) the Company recorded total revenues of $557,737 for the same nine month
period.
Under the Company's agreements with Marvel Entertainment Group, the Company
co-published and distributed with the Putnam Berkley Group, Inc. a number of
books generating revenues totalling $865,363 for the nine months ended September
30, 1998.
Under the Company's co-publishing and distribution arrangements with Pocket
Books, a division of Simon & Schuster, the Company generated revenues totalling
$882,848 for the nine months ended September 30, 1998.
Revenues from licensing fees and royalties totalled $147,303 for the nine months
ended September 30, 1998.
Page 14 of 19 pages
<PAGE>
Cost of Revenues from Continuing Operations. Cost of revenues for the three
months ended September 30, 1998 increased to $777,247 as compared to $240,561
for the same period a year ago. Cost of revenues for the nine months period
ended September 30, 1998 totalled $3,251,795 as compared to $1,462,108 for the
comparable period ended September 30, 1997. The dollar increase in the cost of
revenues is principally attributed to the inclusion of newly acquired
subsidiaries, as noted above. The gross profit from continuing operations for
the three months ended September 30,1998 increased to $650,064 from $334,870,
however, the gross profit percentage decreased to 45.5% as compared to 58.2% for
the comparable three month period a year ago. For the nine months ended
September 30, 1998 the gross profit from continuing operations increased to
$2,203,992 up from $836,255 and the gross profit percentage increased to 40.4%
up from 36.4% for the comparable nine month period a year ago.
Selling, General and Administrative Expenses from Continuing Operations.
Selling, General and Administrative expenses from continuing operations for the
three and nine months ended September 30, 1998 was $1,206,147 and $3,492,487
respectively, as compared to $562,513 and $2,826,463 respectively for the prior
year comparable periods. As a percentage of revenues from continuing operations,
selling, general and administrative expenses declined to 84.5% and 64.0%,
respectively for the three and nine months ended September 30, 1998 as compared
to 97.8% and 122.9%, respectively for the same periods a year ago. The increase
in the dollar amount of selling, general and administrative expenses for both
the three and nine month periods can be attributed to the inclusion of selling,
general and administrative expenses of the newly acquired subsidiaries slightly
offset by the reduction in selling, general and administrative expenses of the
parent company caused by a major reduction in headquarter personnel.
Interest Expense. Net interest expense totalled $108,862 for the three months
ended September 30,1998 and $322,000 for the nine months ended September 30,
1998 as compared to interest expense of $55,604 and $15,082 respectively for the
same periods a year ago. The increase in interest expense is principally due to
interest costs (including non-cash charges) associated with the issuance of
convertible notes and debentures in late fiscal 1997 as well as interest
associated with an 11% Demand Secured Convertible Debenture issued in June 1998.
Liquidity and Capital Resources. The Company has approximately $1,277,179 of
cash and cash equivalents and accounts receivables as of September 30, 1998 down
from $1,599,137 as at June 30, 1998. The Company's working capital deficit
increased to $3,029,502 at September 30, 1998, from $2,225,656 working capital
deficit reported at June 30, 1998. During the first nine months of 1998,
$410,158 of cash was provided by operating activities compared to the prior
comparable nine month period when $1,048,361 was used for operating activities.
Net cash used in investing activities was reduced to $1,189,099 for the first
nine months of 1998 from $2,203,685 for the comparable nine month period a year
ago. The decline of $1,014,586 is principally due to the fact that no cash was
used for current acquisitions and there was a reduction in spending for
prepublication costs and rights purchased.
Net cash provided from financing activities in 1998 was $202,558, representing
principally the proceeds from a $500,000 11% secured demand convertible
debenture as well as a $150,000 note to partially finance working capital of a
subsidiary
Page 15 of 19 pages
<PAGE>
offset by repayment of debt totalling $557,314. In the comparable 1997 period,
proceeds were obtained through the issuance of convertible debentures.
In December 1997, the Company entered into a Securities Purchase
Agreement, whereby it may issue up to $2.8 million in convertible debentures
subject to certain conditions. Under this agreement, the Company issued, in
December 1997, $1.3 million of 6% convertible debentures due November 30, 1999
(the "Bushinghall Note"). At this time, management of the Company is continuing
its attempt to renegotiate the terms of the Agreement and the Bushinghall Note.
However, the Company did not register the shares of common stock underlying the
Bushinghall Note pursuant to a registration rights agreement. The Company's
failure to file such a registration statement has led to a legal action against
the Company for allegedly failing to comply with the terms of the registration
rights agreement. The amount of the action is for an amount of not less than
$130,000. In addition, the Company has been requested to convert $400,000 of the
$1.3 million debenture into common stock of the Company.
Based upon allegations that Bushinghall was in violation of the
Agreement Management has deemed it to be in the best interest of the Company and
its shareholders not to register the shares underlying the Bushinghall Note or
comply with Bushinghall's request. Management has met with representatives of
the debenture holder and its investment banker in an attempt to resolve the
matter. However, there can be no assurances that there will be a favorable
resolution to this matter. As a result of this situation the Company's
management has been unable to raise the necessary capital or obtain new
financing in order for it to provide the necessary cash flow to operate its
subsidiaries efficiently or to make timely payments of its debt obligations. In
addition, the Company is not current in its payments under certain notes issued
in connection with prior acquisitions of material subsidiaries and may be in
technical default under other notes. As management indicated in its June 30,
1998 10QSB, if this situation continued for a long period of time it would have
a material adverse effect on the business. It was recently reported that
management of the Company has entered into negotiations and signed a letter of
intent to sell all of its operating divisions to Frontline Communications
Corporation.
As previously reported, the Company was advised by NASDAQ Listing
Qualification Board that to continue listing of the Company's common stock on
the Nasdaq SamallCap Market, it must maintain a closing bid price greater than
or equal to $1.00. The Company was also informed that it does not comply with
NASDAQ's net tangible assets/market capitalization/net income requirement. On
October 27, 1998 NASDAQ notified the Company that its shares would be delisted
effective immediately.
Unless the Company is able to raise additional funding from financing
by invested capital, bank financing or loans or other accommodation the Company
will not have sufficient cash available to maintain continued business
operations. In view of the delisiting of the Company's common shares from NASDAQ
Small Cap Market, together with the fact that management has been unable to
raise the necessary capital to fund the operations of its subsidiaries the
Company recently announced the signing of a letter of intent for sale of its
operating divisions to Frontline Communications Corporation, an internet service
provider. Frontline Communications Corporation was incorporated in February 1997
and on May 13, 1998
Page 16 of 19 pages
<PAGE>
raised $5,904,000 from the sale of 1,600,000 shares of Common Stock. Upon
completion of the sale of all of the Company's operating entities, the Company
will have a sizable equity investment in Frontline Communication Corporation. At
this time management is exploring various possible transactions with the
remaining shell company.
YEAR 2000.
- ----------
The Company utilizes software and related technologies throughout its
organization including its subsidiaries that will be affected by the date change
in year 2000. System modifications or replacements are underway or planned which
should make all significant computer systems at the Company and its subsidiaries
compliant with the Year 2000. The Company existing software products held for
sale may, or may not be Year 2000 compliant and the cost to make such software
Year 2000 compliant might be cost prohibitive. This may have a adverse impact on
the sales of certain of the Company's products. The Company has not yet
determined whether its principal suppliers are year 2000 compliant. Failure by
such suppliers to become Year 200 compliant could have an adverse impact on the
Company.
FORWARD-LOOKING INFORMATION. Statements contained in this Form 10-QSB that are
not historical facts, including, but not limited to, statements found in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 that involve
a number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Form 10-QSB could differ
materially from those stated in such forward-looking statements and other risks
detailed from time to time in the Company's periodic earnings releases and
reports filed with the Securities and Exchange Commission, as well as the risks
and uncertainties discussed in this Form 10-QSB.
PART II
- -------
Item 1. Legal Proceedings
- -------
The Company has been named a defendant in an action commenced by
Bushinghall, Ltd. ("Bushinghall") in the Supreme Court in the State of New York,
County of New York. Bushinghall has alleged that the Company has materially
breached a registration rights agreement between the Company and Bushinghall
(the "Registration Rights Agreement") by its failure to register the shares (The
"Bushinghall Shares") underlying the $1.3 million 6% convertible debentures due
November 30, 1999 (the "Bushinghall Notes") with the Securities and Exchange
Commission. Bushinghall is seeking damages of not less than $130,000 in addition
to an unstated amount of direct damages. In October 1998 Bushinghall filed a
motion to amend its complaint to add claims for the Company dishonoring its
request to convert debentures into the Company's common stock. In addition to
damages of not less than $130,000 as noted above, Bushinghall is now seeking
additional damages of not more than $250,000 as its second cause of action,
additional damages to be determined by the court as its third cause of action
and a sum of $330,000 plus $5,500 per day from October 8, 1998 together with
interest, costs reasonalbel attorneys fees and other reflief as the Court may
deem appropirate as its fourth cause of action. Management intends to vigorously
defend
Page 17 of 19 pages
<PAGE>
against the foregoing claim. See Management Discussion and Analysis of Financial
Resources, for further discussion.
In September 1998 the Company appealed the staff decision to delist the
Company's. common shares. However, on October 27, 1998 the Company was advised
by the Nasdaq Listing Qualifications Appeal Panel that the Company's securities
would be delisted effective with the close of business October 27, 1998.
Item 5. Other Information
- -------
On June 16, 1998 the Company completed a private placement of its 11%
Convertible Secured Demand Note in the aggregate principal amount of $500,000.
The note was sold to one accredited institutional investor pursuant to a Demand
Convertible Secured Promissory Note Agreement dated as of June 15, 1998. The
note is collateralized by a security interest in certain of the Company's
accounts receivable and intangible assets. Subject to certain restrictions, the
Note may be converted into shares of Common Stock at the option of the Holder
anytime at a conversion price equal to the lesser of $.875 or the product of .80
times the closing bid price of the Common Stock on the day of conversion. The
Company paid a 6% or $30,000 financial consulting fee for arranging the
transaction.
The President and CEO of the Company resigned and has a claim against
the Company with respect to his Employment Agreement. Discussions are underway
to determine if a settlement is possible.
Item 6.
- -------
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits
The following Exhibit is hereby filed as part of this Quarterly Report
on form 10QSB:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
b. Form 8K September 10, 1998 Resignation of Registrant's
Directors and Appointments of
new Board members.
Form 8K October 22, 1998 Resignation of President/CEO
and appointment of an Acting
President.
Page 18 of 19 pages
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BYRON PREISS MULTIMEDIA COMPANY, INC.
Date November 14, 1998 By:/s/ James R. Dellomo
Acting President &
Chief Financial Officer
Date: November 14, 1998 By:/s/ Bruce Brazer
Controller
Page 19 of 19 pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Company's
Consolidated Balance Sheet and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 616,863
<SECURITIES> 0
<RECEIVABLES> 660,316
<ALLOWANCES> 0
<INVENTORY> 239,792
<CURRENT-ASSETS> 1,690,260
<PP&E> 402,245
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,663,730
<CURRENT-LIABILITIES> 4,719,762
<BONDS> 0
0
0
<COMMON> 8,359
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,663,730
<SALES> 5,455,787
<TOTAL-REVENUES> 5,455,787
<CGS> 3,251,795
<TOTAL-COSTS> 3,251,795
<OTHER-EXPENSES> 3,492,487
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (322,000)
<INCOME-PRETAX> (1,867,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,610,495)
<DISCONTINUED> (257,238)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,867,733)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
