<PAGE>
Filed Pursuant to Rule 424(b)
Registration No. 333-2294
KIDEO PRODUCTIONS, INC.
1,400,000 Shares of Common Stock and Redeemable Warrants
to Purchase 1,400,000 Shares of Common Stock
As described below, an additional 290,000 shares of Common Stock are being
registered in connection with this offering on behalf of certain selling
stockholders; however, such shares are being registered for resale purposes
only and not as part of the underwritten offering.
Kideo Productions, Inc. (the "Company") is offering hereby 1,400,000 shares
(the "Shares") of the common stock of the Company (the "Common Stock") and
redeemable warrants to purchase 1,400,000 shares of Common Stock (the
"Warrants"). The Shares and Warrants may be purchased separately and will be
separately transferable immediately upon issuance. Each Warrant entitles the
registered holder thereof to purchase one share of Common Stock at a price of
$4.00, subject to adjustment in certain circumstances, for a period of four
years commencing June 24, 1997. The Warrants are redeemable by the Company, upon
the consent of the Underwriter, at any time commencing June 24, 1997, upon
notice of not less that 30 days, at a price of $.10 per Warrant, provided that
the closing bid quotation of the Common Stock for the period of 20 consecutive
trading days ending on the third day prior to the day on which the Company gives
notice has been at least 150% (currently $6.00, subject to adjustment) of the
then effective exercise price of the Warrants. See "Description of Securities."
Prior to this offering, there has been no public market for the Common Stock
or the Warrants and there can be no assurance that any such market will develop.
The Common Stock and Warrants have been approved for listing on the Nasdaq
SmallCap Market ("Nasdaq") under the symbols "KIDO" and "KIDOW," respectively,
however, there can be no assurance that an active trading market will develop as
a result of such listing. Additionally, the Company has consented to the denial
of secondary trading of its securities in New Jersey. See "Risk Factors - No
Secondary Trading in New Jersey." The offering prices for the Shares and
Warrants, and the exercise price of the Warrants, were determined pursuant to
negotiations between the Company and the Underwriter and do not necessarily
relate to the Company's book value or any other established criteria of value.
For a discussion of factors considered in determining the offering prices, see
"Underwriting." The Company will utilize approximately one-third of the
estimated net proceeds of this offering for the repayment of indebtedness,
including to affiliates, and other pre-existing obligations. See "Use of
Proceeds."
This Prospectus also relates to the offer and sale by certain persons
(collectively, the "Selling Stockholders") of up to 290,000 shares of Common
Stock (collectively, the "Selling Stockholders' Shares") issued in connection
with the Company's recent bridge financings. The Selling Stockholders' Shares
are not part of this underwritten offering, however, and may not be offered
or sold prior to 12 months following the date of this Prospectus without the
prior written consent of the Underwriter. The Company will not receive any of
the proceeds from the sale of the Selling Stockholders' Shares. See
"Prospectus Summary--Recent Financings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Selling Stockholders and Plan of Distribution."
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 11 AND "DILUTION" ON PAGE 22.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
==============================================================================
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $5.00 $.50 $4.50
Per Warrant .. $.10 $.01 $.09
Total(3) ..... $7,140,000 $714,000 $6,426,000
</TABLE>
- -----------------------------------------------------------------------------
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to sell to the Underwriter warrants
(the "Underwriter's Warrants") to purchase up to 140,000 shares of Common
Stock and/or 140,000 warrants and to retain the Underwriter as a
financial consultant. The Company has also agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
Underwriter's nonaccountable expense allowance in the amount of $214,200
($246,330 if the Underwriter's over-allotment option is exercised in
full), estimated at $709,200. The Selling Stockholders will not bear any
of the expenses of this offering.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 210,000
additional shares of Common Stock and/or 210,000 additional Warrants, on
the same terms as set forth above, solely for the purpose of covering
over-allotments, if any. If the Underwriter's over-allotment option is
exercised in full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $8,211,000, $821,100 and
$7,389,900, respectively. See "Underwriting."
----------
The Shares and Warrants are being offered, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter reserves the right to withdraw, cancel or modify the offering
and to reject any order in whole or in part. It is expected that delivery of
certificates representing the Shares and Warrants will be made against
payment therefor at the offices of the Underwriter, 650 Fifth Avenue, New
York, New York 10019, on or about June 28, 1996.
----------
Whale Securities Co., L.P.
The date of this Prospectus is June 24, 1996.
<PAGE>
KIDEO (TM)
[COLOR INSERTS]
[color photograph of child sitting in front of]
television set holding the Company's product]
AVAILABLE INFORMATION
As of the date of this Prospectus, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith will file
periodic reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission"). The Company intends to furnish
its stockholders with annual reports containing audited financial statements
and such other periodic reports as may be required by law.
------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Except as otherwise noted, all
information contained in this Prospectus, including per share data and
information relating to the number of shares outstanding, (i) gives effect,
retroactive to the Company's inception, to an 8.6545-for-1 split of the
Common Stock effected on January 5, 1996 (the "Stock Split"), (ii) gives
effect to the consummation of the transactions comprising the Pending
Recapitalization described below (which will occur upon or immediately prior
to the consummation of this offering), as if they had occurred as of the date
of this Prospectus, and (iii) assumes no exercise of the Underwriter's
over-allotment option to purchase up to 210,000 additional shares of Common
Stock and/or 210,000 additional Warrants. See " Pending Recapitalization,"
"Underwriting" and Notes 8 and 12 of Notes to Consolidated Financial
Statements.
THE COMPANY
Kideo Productions, Inc. (the "Company") develops, manufactures and markets
digitally personalized videos ("Kideos") for children. In Kideos, a child's
face and spoken name are digitally placed by a personal computer into a story
template stored as digital video, which is then output to analog video,
allowing the child to become the star in a personalized VHS videocassette.
Each of the Company's current Kideo titles has a playing time of
approximately 20 minutes and is in video-picturebook format (although, in the
Company's latest product, the illustrated body of the child's character exhibits
two-dimensional full-motion animation).
The Company currently offers four Kideo titles, each of which was
developed by the Company and has a digital story template which utilizes
content that is proprietary to the Company. In addition, a personalized Kideo
is produced using the Company's proprietary computerized personalization
production process. It is this production process -- a sophisticated
technological system for the low cost, mass production of digitally
personalized videos, implemented by the Company in the latter half of 1995 --
which the Company believes will provide it with a meaningful short- to
near-term competitive advantage over new entrants into the emerging market
for digitally personalized video products. The Company has filed two patent
applications relating to this process with the United States Patent and
Trademark Office.
The Company launched its Kideo line nationally in the spring of 1994 and
has, to date, relied primarily on national catalogue retailers to market and
sell its products. Each of the Company's current Kideo titles has a suggested
retail list price of $29.95, but the Company believes that more than half of
all Kideos being sold by its customers are being offered at an actual retail
price of $34.95 or higher. The Company's primary target market for its Kideo
titles is currently children between the ages of two and seven. With its
existing Kideos targeting this market, the Company has created -- and
believes it dominates -- a unique product niche in the home video market.
Over the approximately one and a half years that Kideos have been
marketed, the Company believes that it has developed important sales and
distribution relationships with some of the country's most respected
catalogue retailers and retail stores. During the nine months ended April 30,
1996, Kideo order kits were available for purchase at various times through
such national mail order catalogues as Hammacher Schlemmer, Spiegel, the
Boston Museum of Fine Arts, Personal Creations, Fingerhut, Celebration
Fantastic, One Step Ahead, Johnson Smith, Just Between Us, Skymall and
Critics Choice Video. Since the Company first began marketing its products,
sales through catalogue retailers have in fact been the primary distribution
outlet for Kideos. Order forms are also provided as inserts in every package
of finished portrait photographs picked up by Sears Portrait Studio customers
in the United States.
The Company's long-term business strategy is to become a premier market
leader, both domestically and internationally, in the development,
manufacturing and marketing of a wide variety of digitally per-
3
<PAGE>
sonalized home video and other audiovisual products for children and other
consumers. For the near term, however, the Company intends to focus its
efforts primarily on the continued expansion of the Kideo concept and product
line. The key elements of the Company's strategy are:
o to develop additional Kideo titles for children, including (i) titles
featuring newly-created proprietary content, (ii) a series of titles,
each featuring the same cast of proprietary characters, (iii) titles
for children beyond pre-school age, and (iv) titles featuring the
licensed use of popular children's characters;
o to develop other digitally personalized audiovisual products likely to
appeal to a demographic base spanning both children and adults, such as
personalized screen savers and other personalized software products for
personal computers; and
o to expand the Company's sales and marketing efforts by increasing its
distribution channels (e.g., through increased use of targeted direct
marketing).
Using the current capabilities of its recently developed and proprietary
production system, the Company intends to introduce, during the Fall of 1996, a
new series of Kideo titles in which, for the first time, the two-dimensional
characters (including the illustrated body of the child's character) are fully
animated and in which even the personalized facial image of the child's
character has limited motion, such as eyes that blink and lips that move up and
down. This new series of Kideo titles is called the "Gregory and Me"(TM) series.
In each title in this series, the child's character will interact with Gregory
Gopher(TM) and other of the Company's proprietary characters. Following the
commercial introduction of the Gregory and Me videos, the Company will continue
to seek to expand its product line by exploiting more sophisticated digital
personalization technologies, as they become available, in order to offer
progressively more sophisticated and entertaining personalized media products.
The Company, a Delaware corporation, was originally incorporated in August
1993 under the laws of the State of New York. The stockholders of the
Company's New York predecessor, which was also known as Kideo Productions,
Inc. (referred to herein as "Kideo-NY"), exchanged all of their outstanding
shares of common stock of Kideo-NY for the capital stock of the Company in
January 1995. Effective upon such exchange, Kideo-NY became a wholly-owned
subsidiary of the Company until it was merged into the Company in March 1996.
Unless the context otherwise requires, the terms "Company" and "Kideo
Productions, Inc." as used in this Prospectus refer to Kideo Productions,
Inc., a Delaware corporation; its predecessor, Kideo-NY; and its wholly-owned
subsidiary, Kideo Productions (Canada), Inc. ("Kideo- Canada").
The Company's principal executive offices are located at 611 Broadway,
Suite 523, New York, New York 10012, and its telephone number is (212)
505-6605. Third-party trademarks referenced in this Prospectus are the
property of their respective holders.
RECENT FINANCINGS
1995 Pre-Bridge Financing
During September and October 1995, the Company effectuated a private
placement of $300,000 of its securities to six existing stockholders,
including an affiliate of Charles C. Johnston, a director of the Company (the
"1995 Pre-Bridge Financing"). In connection with such financing, the Company
issued to the investors an aggregate of $300,000 in principal amount of 9%
promissory notes (the "1995 Pre-Bridge Notes") and 90,000 shares of Common
Stock (the "1995 Pre-Bridge Shares"). The 1995 Pre-Bridge Notes bear interest
at the rate of 9% per annum and are due and payable on the earlier of (i) one
year from the date of issuance and (ii) the consummation of an initial public
offering of the Company's securities. The net proceeds of the 1995 Pre-Bridge
Financing were used for working capital purposes. The Company intends, upon
the consummation of this offering, to use approximately $316,000 of the
proceeds from this offering to repay all of the 1995 Pre-Bridge Notes,
including interest accrued thereon through and until such repayment date. In
addition, the 90,000 1995 Pre-Bridge Shares are included in the Selling Stock-
4
<PAGE>
holders' Shares and are being registered by the Company for resale by their
holders concurrently with this offering. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Certain Transactions -- Transactions with
Johnston" and "Selling Stockholders and Plan of Distribution."
1996 PRE-BRIDGE FINANCING
In January 1996, the Company obtained an aggregate of $125,000 in
financing (the "1996 Pre-Bridge Financing") from two of its executive
officers (Robert J. Riscica, the Company's Chief Financial Officer, and
Marvin H. Goldstein, the Company's Vice President-Comptroller). In connection
with this 1996 Pre- Bridge Financing, Messrs. Riscica and Goldstein purchased
two and one-half units of the Company's securities, which units were
identical to the Bridge Units subsequently issued in connection with the 1996
Bridge Financing, as such terms are defined immediately below (except that,
unlike the shares of Common Stock included in the Bridge Units, the shares
included in these units (the "1996 Pre-Bridge Shares") are not included in
the Selling Stockholders' Shares being registered concurrently with this
offering). As a result of the 1996 Pre-Bridge Financing, the Company issued
to Messrs. Riscica and Goldstein unsecured 9% promissory notes of the Company
in the aggregate principal amount of $125,000 (the "1996 Pre- Bridge Notes")
and an aggregate of 25,000 1996 Pre-Bridge Shares. The Company intends, upon
consummation of this offering, to use approximately $129,000 of the proceeds
from this offering to repay all of 1996 Pre-Bridge Notes, including interest
accrued thereon through and until such repayment date. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions --
Transactions with Management."
1996 BRIDGE FINANCING
In February 1996, the Company completed the sale of 15 units (the "Bridge
Units") to 11 private investors (the "1996 Bridge Financing"), each Bridge
Unit consisting of (i) an unsecured 9% promissory note of the Company in the
principal amount of $50,000, due and payable on the earlier of the
consummation of this offering and February 23, 1997 (subject to extension,
under certain circumstances, to February 23, 1998) (each, a "Bridge Note")
and (ii) 10,000 shares of Common Stock (the "Bridge Shares"), at a price of
$50,000 per Bridge Unit. The Company received gross proceeds of $750,000 from
the sale of the Bridge Units. After the payment of $75,000 in placement fees
to the Underwriter, who acted as placement agent for the Company with respect
to the sale of the Bridge Units, and other offering expenses of approximately
$85,000, the Company received net proceeds of approximately $590,000 in
connection with the 1996 Bridge Financing. The Company's sale of the 15
Bridge Units resulted in the Company's issuance of a total of $750,000 in
principal amount of Bridge Notes and 150,000 Bridge Shares. The Company
intends, upon the consummation of this offering, to use approximately
$767,000 of the proceeds from this offering to repay all of the Bridge Notes,
including interest accrued thereon through and until such repayment date. The
150,000 Bridge Shares are included in the Selling Stockholders' Shares and
are being registered by the Company (for resale by their holders)
concurrently with this offering. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Selling Stockholders and Plan of
Distribution."
JUNE 1996 FINANCING
In June 1996, the Company completed the sale of two units (the "June 1996
Units") to two private investors (the "June 1996 Financing"), each June 1996
Unit consisting of (i) an unsecured 9% promissory note of the Company in the
principal amount of $100,000, due and payable on the earlier of the
consummation of this offering and February 23, 1997 (subject to extension,
under certain circumstances, to February 23, 1998) (each, a "June 1996 Note")
and (ii) 25,000 shares of Common Stock (the "June 1996 Shares"), at a price
of $100,000 per June 1996 Unit. The Company received gross proceeds of
$200,000 from the sale of the June 1996 Units. After the payment of $20,000
in placement fees to the Underwriter, who acted as placement agent for the
Company with respect to the sale of the June 1996 Units, the Com-
5
<PAGE>
pany received net proceeds of $180,000 in connection with the June 1996
Financing. The Company's sale of the two June 1996 Units resulted in the
Company's issuance of a total of $200,000 in principal amount of June 1996
Notes and 50,000 June 1996 Shares. The Company intends, upon the consummation
of this offering to use $200,000 of the proceeds from this offering to repay
all of the June 1996 Notes, including interest acrued thereon through and
until such repayment date. The 50,000 June 1996 Shares are included in the
Selling Stockholders' Shares and are being registed by the Company (for
resale by their holders) concurrenlty with this offering. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Selling
Stockholders and Plan of Distribution."
PENDING RECAPITALIZATION
On or immediately prior to the consummation of this offering, the Company
intends to effectuate a recapitalization of its outstanding securities as
follows (the "Pending Recapitalization"): (i) all 1,048.672 of the currently
outstanding shares of Series A Preferred Stock (the "Series A Preferred Stock")
of the Company (including 48.672 shares which were issued in December 1995 in
payment of the then outstanding dividends due on the Series A Preferred Stock)
will be automatically converted into an aggregate of 293,533 shares of Common
Stock; (ii) dividends outstanding on the Series A Preferred Stock immediately
prior to its conversion, in the anticipated aggregate amount of $60,484 (as of
April 30, 1996 such dividends, if then declared, would have aggregated $43,818)
will be paid; (iii) the Company will redeem certain Class A Warrants exercisable
to purchase an aggregate of 34,989 shares of Common Stock at $2.86 per share and
certain Class B Warrants exercisable to purchase an aggregated of 17,496 shares
of Common Stock at $5.72 per share, for an aggregate redemption price of
approximately $88,000; and (iv) all $1,000,000 principal amount currently
outstanding under the Company's 10% Convertible Subordinated Debentures due in
1998 (the "Debentures") will be converted into 279,889 shares of Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
----------
The Common Stock and Warrants offered hereby have been qualified for sale
pursuant to certain state securities laws. The Company has not applied for
registration of its securities in certain jurisdictions and has withdrawn its
application in New Jersey by reason of specific provisions contained in New
Jersey's securities laws. As of the date of this Prospectus, Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois,
Louisiana, Maryland, Nevada, New York and Rhode Island residents, and California
and Washington residents meeting certain investor suitability criteria described
below, will be able to purchase securities in this offering.
Notice to California Investors. Each purchaser of Common Stock and
Warrants in California must be an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Securities Act,"), or satisfy one of the following
suitability standards: (i) minimum actual gross income of $65,000 and net
worth (exclusive of home, home furnishings and automobiles) of $250,000; or
(ii) minimum net worth (exclusive of home, home furnishing and automobiles)
of $500,000.
Notice to Washington Investors. Each purchaser of Common Stock and
Warrants in Washington must be an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
The Company has consented to the denial of secondary trading in its
securities in the State of New Jersey. As a result of this action, stockholders
of the Company will not be able to sell their shares of Common Stock or Warrants
through a broker-dealer whose office is located in New Jersey or to any New
Jersey resident, whether through a broker-dealer or not, unless such denial is
removed, of which there can be no assurance.
6
<PAGE>
THE OFFERING
Securities offered ............ 1,400,000 shares of Common Stock and
Warrants to purchase 1,400,000 shares of
Common Stock. The Shares and Warrants may be
purchased separately and will be separately
transferable immediately upon issuance. See
"Description of Securities."
Common Stock to be
outstanding after this
offering .................... 2,938,985 shares of Common Stock(1)(2)
Warrants(3)
Number to be outstanding after
this offering .............. 1,400,000 Warrants
Exercise terms .............. Exercisable for a period of four years
commencing June 24, 1997, each to purchase one
share of Common Stock at a price of $4.00 per
share, subject to adjustment in certain
circumstances, including in the event of a
stock split or dividend, recapitalization,
reorganization, merger or consolidation of the
Company. See "Description of Securities Public
Warrants."
Expiration date ............. June 24, 2001
Redemption .................. Redeemable by the Company, upon the consent
of the Underwriter, at a redemption price of
$.10 per Warrant, at any time commencing June
24, 1997 provided that notice of not less than
thirty (30) days is given and the closing bid
quotation of the Common Stock has been at least
150% (currently $6.00, subject to adjustment)
of the then effective exercise price of the
Warrants for the period of 20 consecutive
trading days ending on the third day prior to
the day on which notice is given. See
"Description of Securities -- Public Warrants."
Use of Proceeds ............... The Company intends to apply the $5,716,800
estimated net proceeds of this offering
approximately as follows: $1,500,000 for
marketing; $1,431,000 for the repayment of the
1995 Pre-Bridge Financing, the 1996 Pre-Bridge
Financing, the 1996 Bridge Financing and the
June 1996 Financing (collectively, the "Bridge
Financings"); $1,120,000 for creative
development; $500,000 for the repayment of
certain pre-existing obligations; $360,000 for
capital expenditures; and $805,800 for working
capital and general corporate purposes. As a
result of such applications, the Company will
utilize approximately a third of the estimated
net proceeds of this offering for the repayment
of indebtedness, including to affiliates, and
other pre-existing obligations. See "Use of
Proceeds."
Risk Factors .................. The securities offered hereby are
speculative and involve a high degree of
risk and immediate substantial dilution and
should not be purchased by investors who
cannot afford the loss of their entire
investment. See "Risk Factors" and
"Dilution." Such risk factors include, among
others:
o a limited operating history;
o a going concern qualification in the
independent auditor's report;
7
<PAGE>
o history of significant losses, limited
revenues and anticipated future losses;
o dependence on the proceeds of this
offering and need for additional
financing;
o the developing market for, and unproven
acceptance of, the Company's products
and its limited marketing capabilities;
o dependence on key personnel and a
limited number of customers;
o potential obsolescence due to rapid
technological changes and potentially
intense competition; and
o the seasonality and significant
fluctuations associated with the
Company's quarterly financial results.
Nasdaq symbols ................. Common Stock -- KIDO
Warrants -- KIDOW
- ------
(1) Includes the 50,000 June 1996 Shares.
(2) Does not include: (i) 1,400,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 280,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 83,975
shares of Common Stock reserved for issuance upon exercise of the Class A
Warrants and Class B Warrants beneficially owned by Charles Johnston, a
director and principal stockholder of the Company (representing those
Class A Warrants and Class B Warrants which are not being redeemed in
connection with the Pending Recapitalization and which are sometimes
referred to herein as the "Johnston Warrants"); (iv) 341,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options,
and 9,000 shares of Common Stock reserved for issuance upon exercise of
options available for future grant, under the Company's 1996 Stock Option
Plan (the "Option Plan"); (v) 45,003 shares of Common Stock reserved for
issuance upon exercise of outstanding non-plan options held by Richard L.
Bulman, the Chairman of the Board and President of the Company (the
"Bulman Options"); and (vi) up to a maximum of 50,000 shares of Common
Stock reserved for issuance in the event the Company fails under certain
circumstances to maintain an effective registration statement with
respect to the Selling Stockholders' Shares. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Management -- 1996 Stock Option Plan,"
"Certain Transactions," "Underwriting," and "Description of Securities."
(3) Does not include any warrants referenced in clauses (ii) and (iii) of
note 2 above.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Set forth below is certain summary financial information for the periods
and as of the dates indicated. This information is derived from, and should
be read in conjunction with, the consolidated financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Period from
November 1, (the Nine-Month Period
(date operations Ended April 30,
commenced) Year Ended --------------------------------
to July 31, 1994 July 31, 1995 1995 1996
---------------- --------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales ........................... $ 38,223 $ 521,186 $ 426,489 $ 669,734
Gross profit (loss) ............. $ (56,930) $ (136,312) $ (102,352) $ 173,213
Loss from operations ............ $ (404,989) $ (1,460,088) $(1,129,382) $(1,168,140)
Other expenses .................. -- $ 118,485 $ 22,473 $ 420,166
Net loss ........................ $ (404,989) $ (1,578,573) $(1,151,855) $(1,588,306)
Pro forma net loss(1) ........... -- $ (1,916,573) $(1,408,855) $(1,662,306)
Pro forma net loss per share(1) . -- $ (1.18) $ (.90) $ (1.01)
Weighted average number of shares
outstanding .................... 1,571,450 1,571,450 1,571,450
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
April 30, 1996 (unaudited)
--------------------------------------------------------
July 31, 1995 Actual Pro Forma (2) As Adjusted(3)
--------------- ------------------- ---------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents . $ 61,137 $ 56,553 $ 45,524 $4,472,422
Working capital (deficit) . $ (681,806) $ (1,821,529) $(1,863,347) $3,508,197
Total assets ............. $1,447,717 $ 1,689,391 $ 1,542,664 $5,494,214
Total liabilities ........ $2,061,339 $ 3,222,608(4)(5)(6) $ 2,273,397(7) $1,178,751
Stockholders' equity
(deficiency) ............ $ (613,622) $ (1,533,217) $ (730,733)(8)(9) $4,315,463(10)
</TABLE>
- ------
(1) The pro forma financial information reflects the operations of the
Company as if the employment agreements described in the section
"Employment Agreements" herein had been entered into on August 1, 1994.
(2) Gives effect to: (i) the application in June 1996 of approximately $103,000
of the proceeds from the 1996 Bridge Financing for the repayment of debt and
certain interest expenses; (ii) the sale of two June 1996 Units in June 1996
in connection with the June 1996 Financing (including the issuance of
$200,000 in principal amount of June 1996 Notes and 50,000 June 1996 Shares)
and the application of the $180,000 in net proceeds therefrom; and (iii) the
Pending Recapitalization transactions, including the conversion of the
$1,000,000 principal amount of Debentures into 279,889 shares of Common
Stock, the conversion of the Series A Preferred Stock into 293,533 shares of
Common Stock, the redemption of certain outstanding warrants for
approximately $88,000 and the payment of dividends on the Series A Preferred
Stock in the aggregate amount of $43,818 (the amount which, if such
dividends had been declared at April 30, 1996, would have then been
outstanding). The adjustments in this footnote 1 are collectively referred
to herein as the "Pro Forma Adjustments." See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and Note 12 of
Notes to Consolidated Financial Statements.
(3) Gives effect to the sale of the 1,400,000 Shares and 1,400,000 Warrants
being offered hereby and the anticipated application of the estimated net
proceeds therefrom, including for the repayment of the Bridge Financings.
See "Use of Proceeds."
9
<PAGE>
(4) Includes $136,364 allocated to the 1995 Pre-Bridge Notes and $81,818 of
amortization of the $163,636 loan discount associated with the 1995
Pre-Bridge Notes (resulting from the allocation of $163,636 of the
$300,000 proceeds from the 1995 Pre-Bridge Financing to the issuance of
the 90,000 1995 Pre-Bridge Shares). Such loan discount is being
amortized beginning from the issuance of the 1995 Pre-Bridge Notes over
their estimated one-year term. Upon the repayment of the 1995 Pre-
Bridge Notes in connection with the consummation of this offering, the
unamortized portion of the loan discount on such payment date will be
charged to earnings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- 1995 Pre-Bridge Financing."
(5) Includes $66,986 allocated to the 1996 Pre-Bridge Notes and $15,712 of
amortization of the $58,014 loan discount associated with the 1996
Pre-Bridge Notes (resulting from the allocation of $58,014 of the
proceeds from the 1996 Pre-Bridge Financing to the issuance of the
25,000 1996 Pre-Bridge Shares). Such loan discount is being amortized
beginning from the issuance of the 1996 Pre- Bridge Notes over their
estimated one-year term. Upon the repayment of the 1996 Pre-Bridge Notes
in connection with the consummation of this offering, the unamortized
portion of the loan discount on such payment date will be charged to
earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources
-- 1996 Pre-Bridge Financing."
(6) Includes $476,175 allocated to the 1996 Bridge Notes and $51,342 of
amortization of the $273,825 loan discount associated with the 1996
Bridge Notes (resulting from the allocation of $273,825 of the estimated
proceeds from the 1996 Bridge Financing to the issuance of the 150,000
1996 Bridge Shares). Such loan discount is being amortized beginning
from the issuance of the 1996 Bridge Notes over their estimated one-year
term. Upon the repayment of the 1996 Bridge Notes in connection with the
consummation of this offering, the unamortized portion of the loan
discount on such payment date will be charged to earnings. In addition,
$160,000 of debt issuance costs ($30,000 of which has been amortized)
relating to the 1996 Bridge Notes have been recorded as an asset and are
being amortized over the same period as the above loan discount. Upon
the repayment of the 1996 Bridge Notes, the unamortized portion of such
debt issuance costs will also be charged to earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources -- 1996 Bridge Financing."
(7) Includes $110,000 allocated to the June 1996 Notes. Does not include any
of the $90,000 loan discount associated with the June 1996 Notes
(resulting from the allocation of $90,000 of the proceeds from the June
1996 Financing to the issuance of the 50,000 June 1996 Shares). Such
loan discount is being amortized beginning from the issuance of the June
1996 Notes over their estimated term. Upon the repayment of the June
1996 Notes in connection with the consummation of this offering, the
unamortized portion of the loan discount on such payment date will be
charged to earnings. In addition, $20,000 of debt issuance costs
relating to the June 1996 Notes have been recorded as an asset and are
being amortized over the same period as the above loan discount. Upon
the repayment of the June 1996 Notes, the unamortized portion of such
debt issuance costs will also be charged to earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--June 1996 Financing."
(8) Includes $90,000 of the proceeds from the June 1996 Financing allocated
to the issuance of 50,000 June 1996 Shares. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
(9) Gives effect to the charge to operations resulting (in connection with
the Pending Recapitalization) from the redemption by the Company of
certain warrants for an aggregate redemption price of approximately
$88,000 and the recognition of deferred financing costs of approximately
$156,000 associated with the conversion of $1,000,000 principal amount
of the Debentures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
(10) Because the four Bridge Financings are being repaid upon the
consummation of this offering, "stockholders equity" includes the
recognition of a charge to operations of $81,818 of unamortized loan
discount associated with the 1995 Pre-Bridge Financing, $42,302 of
unamortized loan discount associated with the 1996 Pre-Bridge Financing,
$222,483 of unamortized loan discount, as well as $130,000 of
unamortized deferred financing costs, associated with the 1996 Bridge
Financing and $90,000 of loan discount, as well as $20,000 of deferred
financing costs, associated with the June 1996 Financing.
10
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RISK FACTORS
The securities being offered hereby are highly speculative and involve a
high degree of risk, including but not limited to, those risk factors set
forth below, and therefore should not be purchased by anyone who cannot
afford a loss of his entire investment. Prior to making an investment in the
Company, each prospective investor should carefully consider the following
risk factors inherent in and affecting the business of the Company and this
offering.
Limited Operating History. Although the Company was organized in August
1993, it did not launch its initial line of Kideo products until the spring
of 1994. The Company thus has a limited operating history upon which an
evaluation of its business and prospects can be based. Such prospects must be
considered in light of the numerous risks, expenses, difficulties and delays
frequently encountered in connection with the formation and early phase of
operation of a new business, the development and commercialization of new
products based on innovative technology (such as Kideos, which are an
emerging business concept in a new and largely untested market) and the rapid
technological changes and evolving industry standards associated with the
industry in which the Company operates. See "Business."
Going Concern Qualification in Independent Auditor's Report; History of
Significant Losses; Limited Revenues; Accumulated Deficit; Anticipated Future
Losses. The report of independent accountants on the Company's consolidated
financial statements for all periods presented contains an explanatory
paragraph stating that the Company's consolidated financial statements have
been prepared assuming that the Company will continue as a going concern
while expressing doubt as to the Company's ability to do so without the
infusion of additional capital. The consolidated financial statements do not
include any adjustments that might result from the outcome of such
uncertainty. The Company has incurred substantial operating losses since its
inception, resulting in an accumulated deficit of $3,620,540 as of April 30,
1996. For its fiscal year ended July 31, 1995, the Company had revenues of
approximately $521,000 and a net loss of approximately $1,579,000, and, for
the nine months ended April 30, 1996, the Company had revenues of
approximately $669,700 and a net loss of approximately $1,588,300. The
Company expects that its net loss for the fiscal year ending July 31, 1996
will substantially exceed the net loss for the prior fiscal year and that the
Company will continue to operate at a loss until such time, if ever, when its
operations generate sufficient revenues to cover its costs. There can be no
assurance that revenues will increase significantly in the future, or even be
sustained, or that the Company will ever achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and Consolidated Financial Statements.
Significant Capital Requirements; Working Capital Deficit; Dependence on
Offering Proceeds; Need for Additional Financing. The Company's capital
requirements in connection with its development and marketing activities have
been and will continue to be significant. Because the Company has operated at
a loss since its inception and is not generating sufficient revenues from its
operations to fund its activities (as of April 30, 1996, the Company had a
working capital deficit of $1,821,529 and, after giving effect to the Pro
Forma Adjustments, a pro forma working capital deficit of $1,863,347), it
has, to date, been substantially dependent on loans from its stockholders and
private placements of its securities to fund its operations. The Company is
dependent upon the proceeds of this offering to continue its creative
development activities and fund its marketing and production expansion plans,
as well as its other working capital requirements. Although the Company
anticipates, based on its currently proposed plans and assumptions relating
to its operations (including assumptions regarding the progress and timing of
its new product development efforts), that the net proceeds of this offering,
together with anticipated revenues from operations and its current cash and
cash equivalent balances, will be sufficient to fund the Company's operations
and capital requirements for at least 12 months following the consummation of
this offering, there can be no assurance that such funds will not be expended
prior thereto due to unanticipated changes in economic conditions or other
unforeseen circumstances. In the event the Company's plans change or its
assumptions change or proved to be inaccurate, the Company could be required
to seek additional financing sooner than currently anticipated. The Company
has no current arrangements with respect to, or potential sources of, any
additional financing, and it is not anticipated that existing stockholders
will provide any portion of the Company's future financing requirements.
Consequently, there can be no assurance that any additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all. Any inability to obtain additional financing when needed would have a
material adverse effect on the Company,
11
<PAGE>
requiring it to curtail and possibly cease its operations. In addition, any
additional equity financing may involve substantial dilution to the interests
of the Company's then existing stockholders. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Developing Market; New Entrants; Unproven Acceptance of the Company's
Products. The market for digitally personalized media products has only
recently begun to develop, is rapidly evolving and currently has few proven
products. As it evolves, the Company believes it likely that this market will
become characterized by rapid technological changes and an increasing number
of market entrants. As is typical in the case of a new and rapidly evolving
industry, demand and market acceptance for recently introduced products are
subject to a high level of uncertainty and there can be no assurance that
products like those of the Company will meet with widespread consumer
acceptance. The Company believes, for example, that in order for Kideos to
meet with widespread consumer acceptance, they will ultimately need to be
produced so that (unlike the present time) the personalized child characters
appearing in them can exhibit substantially the same features as the animated
and live-action characters now appearing in popular children's films and
television shows -- such features as three- dimensional full-motion animation
and lips that move in synchronization with the child character's voice. There
can be no assurance that the Company will ever succeed in developing a
production system capable of producing Kideos with those types of features at
a cost acceptable to the Company. In addition, because the market for the
Company's products is new and evolving, it is difficult to predict the future
growth rate (if any) and size of this market or which methods of product
distribution will ultimately prove successful. The Company, for instance, has
experienced difficulties in attempting to market its products through mass
market retailers. It believes that such difficulties may stem inherently from
the fact that a customer at a retail store cannot make an impulse purchase of
a Kideo (but instead must take home, fill out and send in a Kideo order form
and then wait two to four weeks to receive the product). There can be no
assurance that the market for the Company's products will develop to a point
that will enable the Company's business to grow significantly (if at all) or
become profitable. If the market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or, if the Company's products
do not achieve market acceptance, the Company's business, operating results
and financial condition will be materially adversely affected. See "Business
- -- Competition and Industry Background."
Limited Marketing Capabilities. The Company has only recently commenced
significant marketing activities relating to product commercialization and
currently has limited marketing experience and limited financial, personnel
and other resources to undertake extensive marketing and advertising
activities. Developing market acceptance for the Company's existing and
proposed products will require substantial marketing efforts and the
expenditure of a significant amount of funds to inform consumers about the
Company's products. Although the Company intends to use approximately
$1,500,000 (26.2%) of the estimated net proceeds of this offering in
connection with its proposed marketing activities (primarily in connection
with the development and support of various forms of direct-to-consumer
marketing), there can be no assurance that the Company will be able to
penetrate existing children's video markets on a widescale basis or position
its products to appeal to mainstream consumer markets, or that any marketing
efforts undertaken by the Company will result in any increased demand for or
greater market acceptance of the Company's existing and proposed products.
The Company relies, and intends to continue relying, both on direct sales and
on arrangements with third parties for the marketing of its products,
including arrangements with reputable distributors (such as catalogue
retailers and retail stores). There can be no assurance that they or the
Company will be able to successfully market the Company's products or that
their efforts will result in any significant increase in revenues. See "Use
of Proceeds" and "Business -- Marketing."
Dependence on Key Personnel. The success of the Company will be largely
dependent on the abilities and continued personal efforts of its executive
officers, including especially those of Richard L. Bulman, the Company's
President and Chairman of the Board. All of the Company's current employment
agreements with its officers expire by December 1998. Any incapacity or
inability of Mr. Bulman or other of the Company's officers to perform their
services would have a material adverse effect on the Company. Moreover, other
than key man life insurance on the life of Mr. Bulman in the amount of
$2,000,000, the Company does not intend to have key man life insurance on the
lives of its officers or employees. The success of the Company will also be
dependent upon its ability to continue to retain and attract qualified
personnel. There is considerable and often intense
12
<PAGE>
competition for the services of such personnel, both on a national level and
within the rapidly growing community of young computer-related businesses
that have recently chosen to locate in New York City, the site of the
Company's offices. There can be no assurance that the Company will be able
either to retain its present personnel or to acquire additional qualified
personnel as and when needed. The loss of any of its key employees' services
could have a material adverse effect on the Company's operations. See
"Business -- Employees" and "Management."
Dependence on Limited Number of Customers. For the fiscal year ended July
31, 1995 and the nine months ended April 30, 1996, approximately 42% and 28%,
respectively, of the Company's revenues were derived from sales through the
Hammacher Schlemmer catalogue. The Company does not have a written agreement
with such company, and the loss of its business would have a material adverse
effect on the Company. For the nine months ended April 30, 1996,
approximately 7% of the Company's revenues were derived from sales of Kideos
through order form inserts placed in the photographic portrait orders picked
up by customers of Sears Portrait Studios. The Company's agreement with the
corporation that operates the Sears Portrait Studios has expired and been
continued by the mutual oral agreement of the parties. That agreement could
be terminated by the other party at any time. Such a termination could have a
material adverse effect on the Company. See "Business -- Marketing."
Potential Obsolescence due to Rapid Technological Changes. The
technologies underlying the Company's products (such as personal computer
hardware and software), as well as the market for those products, are subject
to rapid changes and evolving industry standards often resulting in product
obsolescence or short product lifecycles. While the Company will continue to
devote its efforts and funds to further developing and enhancing its existing
products, technologies and production facilities, there can be no assurance
that it will succeed in those efforts. The Company's future operating results
will likely depend to a considerable extent upon its ability to develop and
implement improved technologies for the production of digitally personalized
media products that embody features (e.g., improved animation) superior to
those displayed by the Company's existing Kideos. The development and
implementation of such new technologies is a complex and uncertain process
requiring high levels of skill and innovation, as well as accurate
anticipation of technological and market trends, and there can be no
assurance that the Company's efforts in this direction will succeed. The
Company's digitally personalized media products are designed for a relatively
new and largely untested market. Such a new market is particularly
susceptible to rapidly changing and evolving technologies and industry
standards. The introduction by the Company's existing or future competitors
of digitally personalized media products embodying superior technologies or
the emergence of new industry standards could exert adverse price pressures
on the Company's existing or future products or could render the Company's
technologies obsolete or its products unmarketable, any of which occurrences
would have a material adverse effect on the Company. See "Business --
Technology Overview," "-- Potential Future Products" and "-- Competition and
Industry Background."
Competition. The Company believes that the market for digitally
personalized video media -- although only in its development stages -- will
likely evolve into a highly competitive market. The Company is aware of only
one other company in this country that is currently producing and marketing
personalized video media products. However, there are numerous other
companies involved in video media production who could possibly enter the
personalized market segment in which the Company is doing business. Many of
such companies have substantially greater financial, technical, production,
marketing and other resources than those of the Company. In the case of an
entity with such resources, the Company does not believe that there currently
are, or are likely to be in the foreseeable future, prohibitive barriers to
entry into the business of developing and marketing digitally personalized
media products. Accordingly, the ability of the Company to compete will
depend on its ability to complete development of, and introduce into the
marketplace in a timely manner, its proposed products and technology, and to
continually enhance and improve such products and technology. There can be no
assurance that the Company will be able to compete successfully, that its
existing or future competitors will not develop technologies or products that
render the Company's products and technology obsolete or less marketable (or
otherwise have a material adverse effect upon the Company's operations) or
that the Company will be able to successfully enhance its proposed products
or technology or adapt them satisfactorily. See "Business -- Competition and
Industry Background."
Seasonality; Significant Fluctuations in Quarterly Financial
Results. Based upon the Company's limited operating history, it expects that
a substantial portion of its revenues in any fiscal year may result from
sales during the months of October through December. The Company believes
that a reason for this sales pattern is
13
<PAGE>
that a significant percentage of its products have been given as gifts and,
as such, sell at larger volumes during the holiday season. For that and other
reasons, the Company's results of operations are likely to vary significantly
from quarter to quarter, and financial results for any given fiscal quarter
will not necessarily be indicative of the results to be anticipated for a
full fiscal year. Other such reasons could include significant fluctuations
in demand for the Company's products, a change in the mix of distribution
channels through which products are sold, the introduction of new products by
the Company or its competitors, and changes in general economic conditions.
Moreover, as a result of the Company's limited operating history, the Company
does not have historical financial data for a significant number of periods
on which to base planned operating expenses. Accordingly, the Company's
expense levels are based in part on its expectations as to future revenues
and to a large extent are fixed. However, the Company typically operates with
no backlog. As a result, quarterly sales and operating results generally
depend on the volume and timing of and ability to fulfill orders received
within the quarter, which are difficult to forecast. The Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenue. Accordingly, any significant shortfall of demand for
the Company's products and services in relation to the Company's expectations
would have an immediate adverse impact on the Company's business, operating
results and financial condition. Due to all of the foregoing factors, it is
likely that the Company's operating results in some future quarter will be
below the expectations of public market analysts and investors. In such an
event, the market price of the securities offered hereby would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Limited Assurances as to Protection of Proprietary Technology. The Company
currently has no patents relating to its proprietary technology, although it
has filed two patent applications with the United States Patent and Trademark
Office relating to aspects of its digital personalization production process.
Any patent applications like the ones filed by the Company involve complex
legal and factual questions, and the scope and breadth of patent claims that
may be allowed (if any) is inherently uncertain. Accordingly, with respect to
any patent application filed by the Company, whether now or in the future,
there can be no assurance that any patent will issue as a result of such an
application, that the claims allowed under any patent will be sufficiently
broad to protect the Company's proprietary technology or processes to which
such application relates, or that any patent issued to the Company will not
be challenged, invalidated, designed around by others or otherwise
circumvented. Even if patents are issued, there can also be no assurance as
to the degree or adequacy of protection any such patents may afford. In
either event, there can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate to prevent
misappropriation of the technology or independent development by others of
hardware and software products with features based upon, or otherwise similar
to, those of the Company's products. In addition, if the Company were to
become involved in litigation to enforce any patent that may be issued to it,
the attendant costs could be substantial or even prohibitive. The Company
accordingly may not enjoy any effective patent protection with respect to its
proprietary technology and processes. In addition, although the Company
believes that its existing technologies and implementations of such
technologies do not infringe upon the rights of others, it is possible that
third parties may currently have, or may be granted in the future, patents
claiming products or processes that are necessary for or useful to the
development of the Company's technology, and that legal actions could be
brought against the Company asserting infringement. In addition, there can be
no assurance that products developed by the Company in the future will not
infringe the current or future patent rights of others, giving rise to
infringement claims against the Company. In the case of such infringement,
the Company could, under certain circumstances, be required to modify its
products or to obtain a third-party license in order to render the Company's
technology or processes non-infringing. Such thirty-party license might not
be granted, or may not be available to the Company on reasonable terms,
either of which results could materially adversely affect the Company's
business and prospects. See "Business -- Intellectual Property Rights."
Possible Inability to Use or Register the Word "KIDEO" as a Trademark.
The Company has adopted and used the word "KIDEO" as its principal trademark
for its products and services and has applied for registration of this
trademark in the United States Patent and Trademark Office. Another party had
previously registered two allegedly similar trademarks but had ceased using
them and had filed for bankruptcy under Chapter 11. In July 1994, the Company
commenced proceedings against the successor to the original owner of these
two trademarks (the "Successor") in order to obtain the cancellation of these
trademarks on the basis of abandonment. The Company prevailed in one
proceeding but the other proceeding is still pending. This latter proceed-
14
<PAGE>
ing is currently suspended, pursuant to a stipulation agreed upon by the
Company and the Successor while they discuss a possible settlement. There can
be no assurance that a settlement satisfactory to the Company will be
reached. If a satisfactory settlement is not obtained, the Company intends to
recommence the pending proceeding. In that event, the Company expects (based
upon statements made to it by the Successor) that the Successor will allege
that, even if the previously registered trademarks were abandoned by the
original owner, the Successor nonetheless made the first use thereafter of
the trademark "KIDEO" in the United States. Although the Company believes
that it should prevail in this proceeding and that the Successor's claim of
"first use" is also without merit, a proceeding of this nature is a lengthy
and potentially expensive process, and there can be no assurance that the
Company will ultimately obtain a registered trademark for the word "KIDEO"
and obtain the right to use this mark in connection with its products and
services. Another third party also has been using the trademark "KIDEO"
locally in the State of Illinois and has obtained an Illinois state
registration of this mark. This may prevent the Company from using this mark
in the state of Illinois. See "Business -- Legal Proceedings."
Broad Discretion in Application of Proceeds; Substantial Use of Proceeds
for Repayment of Debt and Other Pre-Existing Obligations and to Benefit
Related Parties. Approximately $805,800 (14.1%) of the estimated net proceeds
of this offering has been allocated to working capital and general corporate
purposes. Accordingly, the Company's management will have broad discretion as
to the application of such proceeds. In addition, the Company intends to use
approximately $1,931,000 (33.8%) of the estimated net proceeds of this
offering to repay indebtedness (including accrued interest thereon) and
satisfy pre-existing obligations (such as trade payables) and, therefore,
such funds will be unavailable to fund future growth. Included in the
indebtedness to be repaid are the 1996 Pre-Bridge Notes payable to Robert J.
Riscica and Marvin H. Goldstein, two of the Company's officers, in the
principal amounts of $100,000 and $25,000, respectively, and a 1995
Pre-Bridge Note payable to Charles C. Johnston, a director of the Company, in
the principal amount of $100,000. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Certain Transactions."
Substantial Dilution. Investors purchasing Shares in this offering will
incur immediate and substantial dilution of approximately $3.54 (71%) per
share between the adjusted net tangible book value per share of Common Stock
after this offering and the initial public offering price of $5.00 per Share.
See "Dilution."
Lack of Prior Public Market; Arbitrary Offering Price; Possible Volatility
of Market Prices. Prior to this offering, there has been no public trading
market for any of the Company's securities and there can be no assurance that
a regular trading market for either the Common Stock or the Warrants will
develop, or be sustained, after this offering. Moreover, the initial public
offering prices of the Shares and the Warrants and the exercise price of the
Warrants have been determined by negotiations between the Company and the
Underwriter and, as such, are arbitrary in that they do not necessarily bear
any relationship to the assets, book value or potential earnings of the
Company or any other recognized criteria of value and may not be indicative
of the prices that may prevail in the public market. In addition, the market
prices of the Company's securities following this offering may be highly
volatile, as has been the case with the securities of other companies in
emerging growth businesses. Factors such as the Company's financial results,
the introduction of new products by the Company or its competitors, and
factors affecting the video industry generally may have a significant impact
on the market price of the Company's securities. Additionally, in recent
years, the stock market itself has experienced a high level of price and
volume volatility and market prices for the stock of many companies
(particularly of small and emerging growth companies, the common stock of
which trade in the over-the-counter-market) have experienced wide price
fluctuations which have not necessarily been related to the operating
performance of such companies. See "Underwriting."
No Dividends. The Company has never paid any cash or other dividends on
its Common Stock. Payment of dividends on the Common Stock is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, its capital requirements and financial condition, and other
relevant factors. For the foreseeable future, the Board intends to retain
future earnings, if any, to finance its business operations and does not
anticipate paying any cash dividends with respect to the Common Stock. In
addition, the payment of cash dividends in the future will potentially be
limited by the Company's obligations to first pay interest on its then
outstanding Debentures and could be further limited or prohibited by the
terms of financing agreements that may be entered into by the Company or by
the terms of any preferred stock that may be issued by the Company. See
"Dividend Policy" and "Description of Securities -- Debentures."
15
<PAGE>
Control by Existing Stockholders; Significant Management Holdings. Upon
the consummation of this offering, the Company's existing stockholders will
own approximately 52% of the outstanding shares of Common Stock. As a result,
purchasers of the Shares offered hereby will be minority stockholders, and
although entitled to vote on matters submitted for a vote of the
stockholders, will not control the outcome of such a vote. In addition, upon
the consummation of this offering, the Company's directors and officers as a
group will own an aggregate of approximately 21% of the outstanding shares of
Common Stock (27% when beneficial ownership is considered) and will thus
continue to be able to exert significant influence over all matters requiring
stockholder approval, including the election of directors and the approval of
significant corporate transactions (such as acquisitions of the Company or
its assets). If they were to act together as a group, the Company's officers
and directors could delay or prevent a change of control of the Company. See
"Principal Stockholders" and "Description of Securities."
Delaware Anti-Takeover Statute; Possible Adverse Effects Associated with
the Issuance of "Blank Check" Preferred Stock. The Company is a Delaware
corporation and, thus, upon the consummation of this offering, will become
subject to the prohibitions imposed by Section 203 of the Delaware General
Corporation Law ("DGCL"), which is generally viewed as an anti-takeover
statute. In general, this statute will prohibit the Company, once public,
from entering into certain business combinations without the approval of its
Board of Directors and, as such, could prohibit or delay mergers or other
attempted takeovers or changes in control with respect to the Company. Such
provisions may discourage attempts to acquire the Company. In addition, the
Company's Certificate of Incorporation authorizes the Company's Board of
Directors to issue up to 5,000,000 shares of "blank check" preferred stock,
from time to time, in one or more series, solely on the authorization of its
Board of Directors. The Board of Directors will thus be authorized, without
further approval of the stockholders, to fix the dividend rights and terms,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences, and any other rights, preferences, privileges and restrictions
applicable to each new series of preferred stock. The issuance of such stock
could, among other results, adversely affect the voting power of the holders
of Common Stock and, under certain circumstances, make it more difficult for
a third party to gain control of the Company, discourage bids for the Common
Stock at a premium, or otherwise adversely affect the market price of the
Common Stock and Warrants. See "Description of Securities - Preferred Stock"
and "-- Anti-Takeover Provisions of Delaware Law."
Adoption of Certain Charter and By-Law Provisions Having Anti-Takeover
Effects. The Company amended and restated its Certificate of Incorporation in
February 1996 in certain ways that may, under certain circumstances, make it
more difficult for a third party to gain control of the Company (e.g., by
means of a tender offer), prevent or substantially delay such a change of
control, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock and Warrants. The
Certificate of Incorporation provides that following the consummation of this
offering the Company's Board of Directors will be classified into three
classes of directors, with each class serving a staggered three-year term,
and stockholder action may only be effected at a duly called meeting of
stockholders and not by a written consent in lieu of a meeting. These
provisions could make it more difficult for stockholders to effect certain
corporate actions that might facilitate a proposed acquisition of the Company
(e.g., the replacement of directors of the Company) and have the effect of
delaying or preventing a change of control of the Company. See "Management --
Directors and Executive Officers."
Limitations on Liability of Directors and Officers. The Company's
Certificate of Incorporation includes provisions to eliminate, to the full
extent permitted by the DGCL as in effect from time to time, the personal
liability of directors of the Company for monetary damages arising from a
breach of their fiduciary duties as directors. The Certificate of
Incorporation also includes provisions to the effect that (subject to certain
exceptions) the Company shall, to the maximum extent permitted from time to
time under the law of the State of Delaware, indemnify, and upon request
shall advance expenses to, any director or officer to the extent that such
indemnification and advancement of expenses is permitted under such law, as
it may from time to time be in effect. In addition, the Company's By-Laws
(the "By-Laws") require the Company to indemnify, to the full extent
permitted by law, any director, officer, employee or agent of the Company for
acts which such person reasonably believes are not in violation of the
Company's corporate purposes as set forth in the Certificate of
Incorporation. As a result of such provisions in the Certificate of
Incorporation and the By-Laws, stockholders may be unable to recover damages
against the directors and officers of the Company for actions taken by them
which
16
<PAGE>
constitute negligence, gross negligence or a violation of their fiduciary
duties, which may reduce the likelihood of stockholders instituting
derivative litigation against directors and officers and may discourage or
deter stockholders from suing directors, officers, employees and agents of
the Company for breaches of their duty of care, even though such an action,
if successful, might otherwise benefit the Company and its stockholders. See
"Management -- Limitations of Liability and Indemnification."
Possible Inability to Exercise Warrants. Holders of Warrants will be able
to exercise the Warrants only if (i) a current prospectus under the
Securities Act relating to the securities underlying the Warrants is then in
effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company will, following the
consummation of this offering, use its best efforts to maintain a current
prospectus covering the securities underlying the Warrants, to the extent
required by federal securities laws, there can be no assurance that the
Company will be able to do so. Moreover, the Company intends to qualify the
sale of the Common Stock and the Warrants in a limited number of states.
Although certain exemptions in the securities laws of certain states might
permit Warrants to be transferred to purchasers in states other than those in
which the Warrants were initially qualified, the Company will be prevented
from issuing Common Stock in such other states upon the exercise of the
Warrants unless an exemption from qualification is available or unless the
issuance of Common Stock upon exercise of the Warrants is qualified. The
Company is under no obligation to seek, and may decide not to seek or may not
be able to obtain, qualification of the issuance of such Common Stock in all
of the states in which the ultimate purchasers of the Warrants reside. In
such a case, the Warrants held will expire and have no value if such Warrants
cannot be sold. Accordingly, the market for the Warrants may be limited
because of these restrictions. See "Description of Securities -- Public
Warrants."
Potential Adverse Effect of Redemption of Warrants. The Warrants may be
redeemed by the Company, upon the consent of the Underwriter, at any time
commencing June 24, 1997, upon notice of not less than 30 days, at a price of
$.10 per Warrant, provided that the closing bid quotation of the Common
Stock, for the period of 20 consecutive trading days ending on the third day
prior to the day on which the Company gives notice, has been at least 150%
(currently $6.00, subject to adjustment) of the then effective exercise price
of the Warrants. Redemption of the Warrants could force the holders: (i) to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so; (ii) to sell the Warrants at the
then market price when they might otherwise wish to hold the Warrants; or
(iii) to accept the redemption price, which is likely to be substantially
less than the market value of the Warrants at the time of redemption.
Moreover, although the Warrant Agreement (as defined herein) requires the
Company to have in effect, as of the date of redemption (if and when the
Warrants become redeemable by the terms thereof), a current prospectus under
the Securities Act relating to the securities underlying the Warrants, the
Company will not be required to qualify the underlying securities for sale
under all applicable state securities laws prior to exercising its redemption
rights. See "Description of Securities -- Public Warrants."
Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have outstanding 2,938,985
shares of Common Stock, of which the 1,400,000 Shares offered hereby and,
subject to certain contractual restrictions with the Underwriter, the 290,000
Selling Stockholders' Shares included in the Registration Statement of which
this Prospectus forms a part, will be freely tradeable without restriction or
further registration under the Securities Act. All of the remaining 1,248,985
shares of Common Stock are "restricted securities" (as that term is defined
in Rule 144 under the Securities Act) and in the future may only be sold
pursuant to a registration statement under the Securities Act, in compliance
with the exemption provisions of Rule 144 or pursuant to another exemption
under the Securities Act. Commencing one year following the date of this
Prospectus, substantially all of these restricted shares will either become
eligible for sale in the public market pursuant to Rule 144 or subject to the
exercise of certain demand and/or piggyback registration rights which the
Company from time to time has granted to various of its securityholders. No
prediction can be made as to the effect, if any, that sales of such
securities, or the availability of such securities for sale, will have on the
market prices prevailing from time to time for the Common Stock and Warrants.
However, even the possibility that a substantial number of the Company's
securities may, in the near future, be sold in the public market may
adversely affect prevailing market prices for the Common Stock and Warrants
and could impair the Company's ability to raise capital through the sale of
its equity securities. In addition, any future exercise of the registration
rights held by existing securityholders of the Company could cause it to
incur sub-
17
<PAGE>
stantial expenses and could have a further negative impact upon the Company's
ability to raise capital through the sale of its equity securities. See
"Description of Securities -- Registration Rights," "Shares Eligible for
Future Sale," "Underwriting" and "Selling Stockholders and Plan of
Distribution."
Benefits of the Offering to Current Stockholders. Upon the consummation of
this offering, the current stockholders of the Company will realize certain
benefits, including the creation of a public trading market for their shares
of Common Stock (although, all of such shares are subject to a 12-month
lock-up agreement with the Underwriter and, apart from the shares of stock
held by the Selling Stockholders, will not be registered for sale under the
Securities Act), and the corresponding facilitation of sales by such
stockholders of their shares of Common Stock in the secondary market. All of
such stockholders purchased their Common Stock at prices substantially below
the initial public offering price. If, at the time the existing stockholders
are able to sell their shares of Common Stock in the public market, the
market price per share remains at the $5.00 initial public offering price per
Share (of which there can be no assurance), then such stockholders would
realize an aggregate gain of $4,524,616 ($2.94 per share) on the sale of all
of their existing shares. Additionally, a portion of the proceeds of this
offering will be used to repay indebtedness owing to the investors in the
Bridge Financings, each of whom is an existing stockholder. See "Use of
Proceeds," "Dilution," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Underwriting".
Possible Restriction on Market Making Activities in the Company's
Securities. Rule 10b-6 under the Exchange Act may prohibit the Underwriter
from engaging in any market making activities with regard to the Company's
securities for the period from nine business days (or such other applicable
period as Rule 10b-6 may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter may be
unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable. Any temporary cessation of such
market making activities could have an adverse effect on the market price of
the Company's securities. See "Underwriting."
No Secondary Trading in New Jersey. The Company has consented to the denial
of secondary trading in its securities in the State of New Jersey. As a result
of this action, stockholders of the Company will not be able to sell their
shares of Common Stock or Warrants through a broker-dealer whose office is
located in New Jersey or to any New Jersey resident, whether through a
broker-dealer or not, unless such denial is removed, of which there can be no
assurance.
Possible Delisting of Securities from Nasdaq. While the shares of Common
Stock and Warrants meet the current Nasdaq listing requirements and are included
on Nasdaq as of the date of this Prospectus, there can be no assurance that the
Company will meet the criteria for continued listing. Continued inclusion on
Nasdaq generally requires that (i) the Company maintain at least $2,000,000 in
total assets and $1,000,000 in capital and surplus, (ii) the minimum bid price
of the Common Stock be $1.00 per share, (iii) there be at least 100,000 shares
in the public float valued at $200,000 or more, (iv) the Common Stock have at
least two active market makers, and (v) the Common Stock be held by at least 300
holders. If the Company is unable to satisfy Nasdaq's maintenance requirements,
its securities may be delisted from Nasdaq. In such event, trading, if any, in
the Common Stock and Warrants would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD's "Electronic
Bulletin Board." Consequently, the liquidity of the Company's securities could
be impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts' and the news media's coverage of the Company, and lower
prices for the Company's securities than might otherwise be attained.
Risks Relating to Low-Priced Stocks. If the Company's securities were
delisted from Nasdaq, they could become subject to Rule 15g-9 of the Exchange
Act, which imposes additional sales practice requirements on broker-dealers
which sell such securities to persons other than established customers and
"accredited investors" (generally, individuals with net worths in excess of
$1,000,000 or annual incomes exceeding $200,000 or $300,000 together with
their spouses). For transactions covered by this rule, a broker-dealer must
make a spe-
18
<PAGE>
cial suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently,
such rule may adversely affect the ability of broker-dealers to sell the
Company's securities and may adversely affect the ability of purchasers in
the offering to sell in the secondary market any of the securities acquired
hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction by broker-dealers involving a penny
stock, unless exempt, the rules require delivery, prior to any transaction in
a penny stock, of a disclosure schedule prepared by the Commission relating
to the penny stock market. Disclosure is also required to be made regarding
commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks. These penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or meet certain
minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of
a penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the Commission finds that such a
restriction would be in the public interest. If the Company's securities were
subject to the rules on penny stocks, the market liquidity for the Company's
securities could be severely adversely affected.
Tax Loss Carryforward. The Company's net operating loss carryforwards
("NOLs") expire in the year 2010. Under Section 382 of the Internal Revenue
Code of 1986, as amended, utilization of prior NOLs is limited after an
ownership change, as defined in Section 382, to an annual amount equal to the
value of the loss corporation's outstanding stock immediately before the date
of the ownership change multiplied by the federal long-term exempt tax rate.
The additional equity financing obtained by the Company in connection with
its Bridge Financings has resulted, and this offering will result, in an
ownership change and, thus, in limitations on the Company's use of its prior
NOLs. In the event the Company achieves profitable operations, any
significant limitation on the utilization of its NOLs would have the effect
of increasing the Company's tax liability and reducing net income and
available cash resources. See Consolidated Financial Statements.
Possible Rescission of Bridge Financing. Because the Company's June 1996
Financing was conducted after the Company filed its registration statement (of
which this Prospectus forms a part) for this offering on March 12, 1996, it is
possible that the June 1996 Financing could be integrated with this offering. If
the two offerings were integrated, the two purchasers of securities in the June
1996 Financing would have a claim for rescission of their investment because the
June 1996 Financing was not registered under the Securities Act. Although the
Company does not believe that the two offerings should be integrated, or that
the investors in the June 1996 Financing would have a claim for rescission,
there can be no assurance that this is correct. If a claim for rescission of the
June 1996 Financing were upheld, the Company does not believe that it would have
a material adverse impact on the Company or its investors because the Company is
repaying the entire $200,000 principal amount of the June 1996 Financing, plus
interest, out of the proceeds of this offering. As a result, a successful claim
for rescission would have no impact on the Company's finances which has not
already been contemplated by the terms of this offering. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources -- June 1996 Financing."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,400,000 Shares and
1,400,000 Warrants offered hereby (after deducting underwriting discounts and
commissions and other expenses of the offering) are estimated to be
approximately $5,716,800 ($6,648,570 if the Underwriter's over-allotment
option is exercised in full). The Company will receive no proceeds from the
sale of the Selling Stockholders' Shares. The Company expects to use the net
proceeds (assuming no exercise of the Underwriter's over-allotment option)
approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage
Application of Proceeds Dollar Amount of Net Proceeds
- ----------------------- --------------- ---------------
<S> <C> <C>
Marketing (1) ..................................... $1,500,000 26.2%
Repayment of Bridge Financings (2) ................ 1,431,000 25.0
Creative development (3) .......................... 1,120,000 19.6
Repayment of certain pre-existing obligations (4) . 500,000 8.8
Capital expenditures (5) .......................... 360,000 6.3
Working capital and general corporate purposes (6) . 805,800 14.1
--------------- ---------------
Total ........................................... $5,716,800 100.0%
=============== ===============
</TABLE>
- ------
(1) Represents the costs associated with planned television and print
advertising in connection with the Company's development and
implementation of its direct marketing capabilities. See "Business
Marketing -- Direct Sales."
(2) Represents the repayment of (i) the 1995 Pre-Bridge Notes in the
aggregate principal amount of $300,000, (ii) the 1996 Pre-Bridge Notes in
the aggregate principal amount of $125,000, (iii) the Bridge Notes in the
aggregate principal amount of $750,000, (iv) the June 1996 Notes in the
aggregate principal amount of $200,000 and (v) interest accrued on all of
the foregoing, at the rate of 9% per annum through and until the
anticipated date of repayment, in the estimated aggregate amount of
$56,000. The $1,195,000 in aggregate net proceeds from the Bridge
Financings was, and is, being used in connection with the Company's
operations, including to initiate the production of new programming, for
pre-offering expenses payable in connection with this offering, to repay
certain outstanding indebtedness and accrued interest (in the aggregate
amount of $105,000) and for working capital and general corporate
purposes. Included in the notes being repaid is a total of $225,000 (plus
related interest) payable to certain affiliates of the Company, including
1996 Pre-Bridge Notes payable to Robert J. Riscica and Marvin H.
Goldstein, two of the Company's officers, in the principal amounts of
$100,000 and $25,000, respectively, and a 1995 Pre-Bridge Note payable to
Charles C. Johnston, a director and principal stockholder of the Company,
in the principal amount of $100,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Certain Transactions."
(3) Represents funding for the development of future Kideo programming, of
which $365,000 relates to the first three titles in the Company's new
Series of Kideo titles (which are currently in progress and expected to
be completed during fiscal 1996) and $755,000 relates to the development
of additional programming and titles planned for the following fiscal
year and for the development of Kideo related merchandise for release by
the end of 1996. See "Business -- Potential Future Products."
(4) Represents the estimated amount of net proceeds required to be used to
fund certain past due obligations of the Company to professionals,
vendors and equipment lessors.
(5) Represents the costs associated with the purchase of additional equipment
to be used in the manufacture of the Company's Kideo products and the
expansion of its production capability. See "Business -- Technology
Overview" and "-- Production of Kideo Products."
(6) A portion of the proceeds allocated to working capital may be utilized to
pay the salaries of the Company's executive officers, which are
anticipated to aggregate $485,000 for the twelve months following the
date of this Prospectus. See "Management."
20
<PAGE>
If the Underwriter's over-allotment option is exercised in full, the
Company will realize additional net proceeds of approximately $931,770. If
the 1,400,000 Warrants offered hereby are exercised, the Company will realize
proceeds relating thereto of approximately $5,600,000, before any
solicitation fees which may be paid in connection therewith. Such additional
proceeds are expected to be added to the Company's working capital. See
"Underwriting."
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimates based upon its currently proposed
plans and assumptions relating to its operations and certain assumptions
regarding general economic conditions. If any of these factors change, the
Company may find it necessary or advisable to reallocate some of the proceeds
within the above-described categories or to use portions thereof for other
purposes. The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations (including assumptions regarding the
progress and timing of its new product development efforts), that the net
proceeds of this offering, together with anticipated revenues from operations
and its current cash and cash equivalent balances, will be sufficient to fund
the Company's operations and contemplated capital requirements for at least
twelve months following the consummation of this offering. In the event that
the Company's plans change, or its assumptions change or prove to be
inaccurate, or the proceeds of this offering prove to be insufficient to fund
operations (due to unanticipated expenses, delays, problems or otherwise),
the Company could be required to seek additional financing sooner than
currently anticipated. Depending upon the Company's progress in the
development of its products and technology, the acceptance of such products
by the children's video market, and the state of the capital markets, the
Company may also determine that it is advisable to raise additional equity
capital within the next 12 months. The Company has no current arrangements
with respect to, or sources of, any additional financing, and there can be no
assurance that any additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, including possibly requiring the Company to curtail significantly,
or cease, its operations.
Proceeds not immediately required for the purposes described above will be
invested principally in short- term bank certificates of deposit, short-term
securities, United States Government obligations, money market instruments
and/or other interest-bearing investments.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock, and the
Board does not intend to declare or pay any dividends on its Common Stock in
the foreseeable future. The Board currently intends to retain all available
earnings (if any) generated by the Company's operations for the development
and growth of its business. The declaration in the future of any cash or
stock dividends on the Common Stock will be at the discretion of the Board
and will depend upon a variety of factors, including the earnings, capital
requirements and financial position of the Company and general economic
conditions at the time in question. In the case of cash dividends payable on
the Common Stock (if ever declared by the Board), the Company's ability to
pay them following this offering would depend upon whether, at that time, it
has satisfied in full its obligations to pay all interest then due on the
Debentures. In addition, the payment of cash dividends on the Common Stock in
the future could be limited or prohibited by the terms of financing
agreements that may be entered into by the Company (e.g., a bank line of
credit or an agreement relating to the issuance of other debt securities of
the Company) or by the terms of any series of Preferred Stock that may be
issued. See "Description of Securities -- Preferred Stock."
21
<PAGE>
DILUTION
The difference between the initial public offering price per share of
Common Stock and the adjusted net tangible book value per share of Common
Stock after this offering constitutes the dilution to investors in this
offering. Net tangible book value per share on any given date is determined
by dividing the net tangible book value (total tangible assets less total
liabilities) of the Company on such date by the number of shares of Common
Stock outstanding on such date.
At April 30, 1996, the net tangible book value (deficit) of the Company
was ($2,182,330), or ($2.38) per share of Common Stock. After giving
retroactive effect as of that date to the Pro Forma Adjustments (see footnote
1 of "Prospectus Summary -- Summary Consolidated Financial Statements"), the
pro forma net tangible book value (deficit) of the Company as of April 30,
1996 would have been ($1,244,148), or ($.81) per share of Common Stock. After
also giving retroactive effect as of that date to the sale of the 1,400,000
Shares and 1,400,000 Warrants being offered hereby and to the receipt and
application (including for the repayment of the notes issued in connection
with the Bridge Financings) of the estimated net proceeds therefrom (less
underwriting discounts and commissions and the estimated expenses of this
offering), the adjusted net tangible book value of the Company as of April
30, 1996 would have been $4,277,396, or $1.46 per share of Common Stock,
representing an immediate increase in net tangible book value of $2.27 per
share to existing stockholders and an immediate dilution of $3.54 (71%) per
share to new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<CAPTION>
Initial public offering price ...................... $5.00
<S> <C> <C>
Net tangible book value before Pro Forma Adjustments $(2.38)
Increase attributable to Pro Forma Adjustments ... 1.57
---------
Pro forma net tangible book value before offering . $ (.81)
Increase attributable to new investors ........... 2.27
---------
Adjusted net tangible book value after offering .... 1.46
--------
Dilution to new investors .......................... $3.54
========
</TABLE>
The following table sets forth a comparison between the existing
stockholders (giving retroactive effect to the Pro Forma Adjustments) and the
investors in this offering with respect to the number of shares of Common
Stock acquired from the Company, the percentage ownership of such shares, the
total consideration paid, the percentage of total consideration paid and the
average price paid per share.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Per
------------------------ -------------------------- -----------
Number Percent Amount Percent Share
----------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders . 1,538,985 52.4% $ 3,177,323 31.2% $2.06
New investors ........ 1,400,000 47.6% 7,000,000 68.8% $5.00
----------- --------- ------------- --------- -----------
Total .............. 2,938,985 100.0% $10,177,323 100.0%
=========== ========= ============= =========
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If the Underwriter's over-allotment option is exercised in full, the
new investors will have paid $8,050,000 for 1,610,000 shares of Common Stock,
representing approximately 72% of the total consideration for 51% of the
total number of shares of Common Stock outstanding. See "Underwriting."
22
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of April 30, 1996: (i) on an actual basis; (ii) on a pro forma basis,
giving effect as of such date to the Pro Forma Adjustments (see footnote 1 of
"Prospectus Summary -- Summary Consolidated Financial Information"); and (iii)
as further adjusted to reflect, as of such date, the issuance of the 1,400,000
Shares and 1,400,000 Warrants offered hereby and the anticipated application of
the estimated net proceeds therefrom (including for the repayment of the notes
issued in connection with the Bridge Financings).
<TABLE>
<CAPTION>
April 30, 1996
-------------------------------------------------------
Actual Pro Forma As Adjusted
------------------- --------------- --------------
<S> <C> <C> <C>
Short-term debt, including current maturities on long- term
debt ................................................. $1,104,386(1)(2)(3) $1,111,357(4) $ 172,961
=================== =============== ==============
Long-term debt and obligations under capital leases, net
of current maturities ................................ $ 1,121,079 $ 121,079 $ 121,079
------------------- --------------- --------------
Stockholders' equity:
Preferred Stock, $0.01 par value, issuable in series:
5,000,000 shares authorized; 1,048.672 shares of Series
A Preferred Stock issued and outstanding (actual); no
shares issued and outstanding (pro forma and as adjusted) 10 -- --
Common Stock, $0.0001 par value: 15,000,000 shares
authorized; 915,563 issued and outstanding (actual);
1,538,985 issued and outstanding (pro forma); 2,938,985
issued and outstanding (as adjusted) (5) ......... 92 154 294
Additional paid-in capital .......................... 2,087,221 3,177,169 8,809,829
Accumulated deficit ................................. (3,620,540) (3,908,056) (4,494,660)
------------------- --------------- --------------
Total stockholders' equity (deficiency) ............. (1,533,217) (730,733)(6)(7) 4,315,463(8)
------------------- --------------- --------------
Total capitalization ............................... ($ 412,138) $ (609,654) $ 4,436,542
=================== =============== ==============
</TABLE>
- ------
(1) Includes $136,364 allocated to the 1995 Pre-Bridge Notes and $81,818 of
amortization of the $163,636 loan discount associated with the 1995
Pre-Bridge Notes (resulting from the allocation of $163,636 of the
$300,000 proceeds from the 1995 Pre-Bridge Financing to the issuance of
the 90,000 1995 Pre-Bridge Shares). Such loan discount is being amortized
beginning from the issuance of the 1995 Pre-Bridge Notes over their
estimated one-year term. Upon the repayment of the 1995 Pre-Bridge Notes
in connection with the consummation of this offering, the unamortized
portion of the loan discount on such payment date will be charged to
earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
1995 Pre-Bridge Financing."
(2) Includes $66,986 allocated to the 1996 Pre-Bridge Notes and $15,712 of
amortization of the $58,014 loan discount associated with the 1996
Pre-Bridge Notes (resulting from the allocation of $58,014 of the
proceeds from the 1996 Pre-Bridge Financing to the issuance of the 25,000
1996 Pre-Bridge Shares). Such loan discount is being amortized beginning
from the issuance of the 1996 Pre-Bridge Notes over their estimated
one-year term. Upon the repayment of the 1996 Pre-Bridge Notes in
connection with the consummation of this offering, the unamortized
portion of the loan discount on such payment date will be charged to
earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
1996 Pre-Bridge Financing."
(3) Includes $476,175 allocated to the 1996 Bridge Notes and $51,342 of
amortization of the $273,825 loan discount associated with the 1996
Bridge Notes (resulting from the allocation of $273,825 of the estimated
proceeds from the 1996 Bridge Financing to the issuance of the 150,000
1996 Bridge Shares). Such loan discount is being amortized beginning from
the issuance of the 1996 Bridge Notes over their estimated one-
23
<PAGE>
year term. Upon the repayment of the 1996 Bridge Notes in connection with
the consummation of this offering, the unamortized portion of the loan
discount on such payment date will be charged to earnings. In addition,
$160,000 of debt issuance costs ($30,000 of which has been amortized)
relating to the 1996 Bridge Notes have been recorded as an asset and are
being amortized over the same period as the above loan discount. Upon the
repayment of the 1996 Bridge Notes, the unamortized portion of such debt
issuance costs will also be charged to earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources -- 1996 Bridge Financing."
(4) Includes $110,000 allocated to the June 1996 Notes. Does not include any
of the $90,000 loan discount associated with the June 1996 Notes
(resulting from the allocation of $90,000 of the proceeds from the June
1996 Financing to the issuance of the 50,000 June 1996 Shares). Such loan
discount is being amortized beginning from the issuance of the June 1996
Notes over their estimated term. Upon the repayment of the June 1996
Notes in connection with the consummation of this offering, the
unamortized portion of the loan discount on such payment date will be
charged to earnings. In addition, $20,000 of debt issuance costs relating
to the June 1996 Notes have been recorded as an asset and are being
amortized over the same period as the above loan discount. Upon the
repayment of the June 1996 Notes, the unamortized portion of such debt
issuance costs will also be charged to earnings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources -- June 1996 Financing."
(5) Does not include (i) 1,400,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 280,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 83,975
shares of Common Stock reserved for issuance upon exercise of the
Johnston Warrants; (iv) 341,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options, and 9,000 shares of Common
Stock reserved for issuance upon exercise of options available for future
grant, under the Option Plan; (v) 45,003 shares of Common Stock reserved
for issuance upon exercise of the Bulman Options; and (vi) up to a
maximum of 50,000 shares of Common Stock reserved for issuance in the
event the Company fails under certain circumstances to maintain an
effective registration statement with respect to the Seller Stockholders'
Shares. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources,"
"Management -- 1996 Stock Option Plan," "Certain Transactions,"
"Description of Securities" and "Underwriting."
(6) Includes $90,000 of the proceeds from the June 1996 Financing allocated
to the issuance of the 50,000 June 1996 Shares. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Liquidity and Capital Resources."
(7) Gives effect to the charge to operations resulting from the redemption by
the Company of certain warrants for an aggregate redemption price of
approximately $88,000, the recognition of deferred financing costs of
approximately $156,000 associated with the conversion of $1,000,000
principal amount of the Debentures, in connection with the Pending
Recapitalization and dividends of $43,818, payable June 1996, on the
Series A Preferred Stock (the amount which, if such dividends had been
declared at April 30, 1996, would have then been outstanding). See
"Managements Discussion and Analysis of Financial Condition and Results of
Operation."
(8) Because the four Bridge Financings are being repaid upon the consummation
of this offering, "stockholders equity" includes the recognition of a
charge to operations of $81,818 of unamortized loan discount associated
with the 1995 Pre-Bridge Financing, $42,302 of unamortized loan discount
associated with the 1996 Pre-Bridge Financing, $222,483 of unamortized
loan discount, as well as $130,000 of unamortized deferred financing
costs, associated with the 1996 Bridge Financing and $90,000 of loan
discount, as well as $20,000 of deferred financing costs, associated with
the June 1996 Financing.
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of July 31, 1994 and 1995 and for
the period from inception to July 31, 1994 and the year ended July 31, 1995
is derived from the Company's consolidated financial statements, audited by
Goldstein Golub Kessler & Company, P.C., included elsewhere in this
Prospectus. The data as of April 30, 1995 and 1996 (including the pro forma
data as of April 30, 1996) and for the nine-month periods then ended is
derived from the Company's unaudited financial statements included elsewhere
in this Prospectus, which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for the nine months ended April 30, 1996 are not necessarily
indicative of the results that may be expected for the full year. The
following data should be read in conjunction with the financial statements of
the Company, including the notes thereto. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Period from
November 1, (the
(date operations Nine-Month Period
commenced) Year Ended Ended April 30,
--------------------------------
to July 31, 1994 July 31, 1995 1995 1996
---------------- --------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales .............................. $ 38,223 $ 521,186 $ 426,489 $ 669,734
Gross profit (loss) ................ $ (56,930) $ (136,312) $ (102,352) $ 173,213
Loss from operations ............... $ (404,989) $ (1,460,088) $ (1,129,382) $ (1,168,140)
Other expenses ..................... -- $ 118,485 $ 22,473 $ 420,166
Net loss ........................... $ (404,989) $ (1,578,573) $ (1,151,855) $ (1,588,306)
Pro forma net loss(1) .............. -- $ (1,916,573) $ (1,408,855) $ (1,662,306)
Pro forma net loss per share(1) .... -- $ (1.18) $ (.90) $ (1.01)
Weighted average number of shares
outstanding ...................... 1,571,450 1,571,450 1,571,450
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
April 30, 1996 (unaudited)
-------------------------------------------------
July 31, 1995 Actual Pro Forma (2) As Adjusted(3)
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ........ $ 61,137 $ 56,553 $ 45,524 $4,472,422
Working capital (deficit) ........ $ (681,806) $ (1,821,529) $ (1,863,347) $3,508,197
Total assets ..................... $1,447,717 $ 1,689,391 $ 1,542,664 $5,494,214
Total liabilities ................ $2,061,339 $ 3,222,608 $ 2,273,397 $1,178,751
Stockholders' equity (deficiency) . $ (613,622) $ (1,533,217) $ (730,733) $4,315,463
</TABLE>
- ------
(1) The pro forma financial information reflects the operations of the
Company as if the employment agreements described in the section
"Employment Agreements" had been entered into on August 1, 1994.
(2) Gives effect to the Pro Forma Adjustments, consisting of: (i) the
application in June 1996 of approximately $103,000 of the proceeds from the
1996 Bridge Financing for the repayment of debt and certain interest
expenses; (ii) the sale of two June 1996 Units in June 1996 in connection
with the June 1996 Financing (including the issuance of $200,000 in
principal amount of June 1996 Notes and 50,000 June 1996 Shares) and the
application of the $180,000 in net proceeds therefrom; (iii) the Pending
Recapitalization transactions, including the conversion of $1,000,000 in
principal amount of Debentures into 279,889 shares of Common Stock, the
conversion of the Series A Preferred Stock into 293,533 shares of Common
Stock, the redemption of certain outstanding warrants for approximately
$88,000, and the payment of dividends on the Series A Preferred Stock in the
aggregate amount of $43,818 (the amount which, if such dividends had been
declared at April 30, 1996, would have then been outstanding). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 12 of Notes to Consolidated Financial Statements.
(3) Gives effect to the sale of the 1,400,000 Shares and 1,400,000 Warrants
being offered hereby and the anticipated application of the estimated net
proceeds therefrom, including for the repayment of the Bridge Financings.
See "Use of Proceeds."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in August 1993 (and began operations in November
1993) to develop, manufacture and market personalized videos for children.
The process of mass-producing personalized videos was developed internally
and supplemented with additional technology purchased in 1995 (see "1995
Technology Acquisition" described below). Two patent applications for this
process are pending. The Company is currently developing several new titles
featuring full motion animation with characters and story lines that will be
proprietary to the Company and available for merchandising and licensing
applications. A significant portion of the proceeds from this offering is
intended to fund the development and marketing of these titles and others
planned for release during the fall of 1996 and early 1997.
The Company has incurred substantial operating losses since its inception,
resulting in an accumulated deficit of approximately $3,620,540 as of April
30, 1996. For its fiscal year ended July 31, 1995, the Company had revenues
of approximately $521,200 and a net loss of approximately $1,578,600, and,
for the nine months ended April 30, 1996, the Company had revenues of
approximately $669,700 and a net loss of approximately $1,588,300. The
Company expects that its net loss for the fiscal year ending July 31, 1996
will substantially exceed the net loss for the prior fiscal year and that the
Company will continue to operate at a loss until such time, if ever, when its
operations generate sufficient revenues to cover its costs. The report of
independent accountants on the Company's consolidated financial statements
for all periods presented contains an explanatory paragraph stating that the
Company's consolidated financial statements have been prepared assuming that
the Company will continue as a going concern while expressing doubt as to the
Company's ability to do so without the infusion of additional capital. The
consolidated financial statements do not include any adjustments that might
result from the outcome of such uncertainty.
The Company recognizes revenue at the time of shipment of a completed
personalized video to the ultimate consumer. Sales of personalized videos
through mail order houses or retail stores are generated from pre- paid order
kits that the ultimate consumer purchases from these outlets. The Company
records a receivable from the mail order house or retail store upon shipment
of the pre-paid order kits but defers recognition of its revenue until the
personalized video has been created and shipped to the ultimate consumer.
Collection of the receivable for the pre-paid order kits from the mail order
house or retail store is separate from the production of the personalized
video. The pre-paid order kits are billed at full wholesale prices to these
outlets and the Company receives no additional revenue from these outlets
upon the sale to the ultimate consumer.
On or prior to the consummation of this offering, the Company intends to
effectuate the Pending Recapitalization of its securities, in connection with
which: (i) all 1,048.672 of the currently outstanding shares of Series A
Preferred Stock of the Company will be automatically converted into an
aggregate of 293,533 shares of Common Stock; (ii) the Company will redeem
certain Class A Warrants exercisable to purchase an aggregate of 34,989
shares of Common Stock at $2.86 per share and certain Class B Warrants
exercisable to purchase an aggregate of 17,496 shares of Common Stock at
$5.72 per share, for an aggregate redemption price of approximately $88,000;
and (iii) the $1,000,000 principal amount currently outstanding under the
Debentures will be converted into 279,889 shares of Common Stock.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in
this Prospectus.
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO THE NINE MONTHS ENDED APRIL 30,
1995
Sales. Sales increased 57%, or $243,200, from $426,500 in the nine months
ended April 30, 1995 to $669,700 in the nine months ended April 30, 1996.
Sales generated through catalogs increased by $131,200.
26
<PAGE>
Direct customer orders increased by $64,400, and sales generated through
retail outlets accounted for the remaining $47,600 of sales growth. The
Company expects that a significant portion of future revenue will be derived
from direct customer orders, to be solicited through television and print
advertising, although there can be no assurances that this expectation will
be realized. The Company recognizes revenue at the time it ships the
completed personalized video to the consumer.
Cost of Sales. Cost of sales decreased 6%, or $32,300, from $528,800 in
the nine months ended April 30, 1995 to $496,500 in the nine months ended
April 30, 1996. Increases in material costs (resulting principally from
increased order volume and higher depreciation expenses) were more than
offset by reduced consulting fees, savings in amortization of storylines and
lower direct payroll costs.
Operating Expenses. Operating expenses inclusive of interest expense
increased 68%, or $712,000, to $1,761,500 in the nine months ended April 30,
1996 from $1,049,500 in the nine months ended April 30, 1995. Selling expenses
increased by $24,500, primarily as a result of increased sales volume. The
significant components of the selling expense increase are in packaging
materials for the catalog and retail-sourced sales, shipping expenses and
commissions to sales representatives. General and administrative expenses rose
$289,700 when compared to the nine months ended April 30, 1995. The primary
causes of this increase were in development expenses related to enhancing the
technology used to personalize videos, costs incurred in connection with
expanding the Company's customer and production databases, and in staffing to
accommodate increased business. The development and database expenses are
relatively fixed costs and are expected to be ongoing as the Company expands its
title offerings and production volume. Other expenses increased by $397,800.
Interest accounts for $306,900 of this increase and is related to $44,900
primarily for capitalized leases on manufacturing equipment, $113,000 for
interest on the Debentures and $149,000 for amortization of original issue
discount related to the Bridge Financings. Amortization of debt issuance costs
and other expenses related to the Debentures and 1996 Bridge Financing was
$90,900.
PERIOD FROM NOVEMBER 1, 1993 TO JULY 31, 1994 ("INITIAL OPERATING PERIOD")
COMPARED TO THE YEAR ENDED JULY 31, 1995 ("FISCAL 1995")
The Company commenced operations on November 1, 1993. During the
nine-month Initial Operating Period, approximately 1,500 personalized videos
were sold. During the subsequent full year of operations, approximately
21,300 personalized videos were sold.
Sales. Sales increased by 1,264%, or $483,000, from $38,200 in the Initial
Operating Period to $521,200 in the year ended July 31, 1995. Catalog-sourced
sales accounted for $317,100 of the increase. There were no catalog sales in
the prior period. Direct orders from consumers grew 525%, accounting for an
increase of $134,400 to full year sales of $160,000 in the fiscal year ended
July 31, 1995. Retail-sourced sales increased 252%, to $44,000, from $12,500
in the Initial Operating Period. The increase in sales for the fiscal year
ended July 31, 1995 is attributable to the Company's representation in
several nationally and regionally recognized catalogs, including, most
notably, Hammacher Schlemmer, which accounted for 42% of the Company's total
sales for the year. Retail sales growth was driven by the Company's sales
arrangement with Sears Portrait Studios. Several direct marketing initiatives
in print and television, as well as a higher level of consumer awareness of
the Company's products, drove the growth in direct sales. As described above,
the Company expects that a significant portion of future revenue will be
derived from direct customer orders solicited through print and television
advertising, although there are no assurances that this expectation will be
realized. The Company's sales are highly seasonal, with 49% of orders placed
during the October-December period in the fiscal year ended July 31, 1995.
Orders in the Initial Operating Period were not significant due to the timing
of the startup of operations.
Cost of Sales. Cost of sales increased 591% or $562,300 from $95,200 in
the Initial Operating Period to $657,500 in the fiscal year ended July 31,
1995. Depreciation and amortization of product content costs accounted for
$185,000 of the increase. Materials increased by $65,000 and direct labor
accounted for $247,000.
Operating Expenses. Operating expenses inclusive of interest expense
increased 314%, or $1,094,200, from $348,100 in the Initial Operating Period
to $1,442,300 for the fiscal year ended July 31, 1995. Selling expenses
increased 524%, from $107,000 in the Initial Operating Period to $667,700 in
the fiscal year ended July 31, 1995. The increase reflects the acceleration
of the Company's marketing efforts. The significant components of
27
<PAGE>
the increase were: television advertising, direct mail, Sears rollout, trade
show costs, commissions, shipping, and sales salaries. General and
administrative expenses increased 172%, or $415,000, reflecting higher
payroll costs incurred in connection with the expansion of the business,
database costs, professional fees and development expenses. Interest accounts
for an additional $118,500 of the increased operating expenses and is related
to capitalized leases on manufacturing equipment and interest on the
Debentures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements in connection with its development and
marketing activities have been and will continue to be significant. As of
April 30, 1996, the Company had a working capital deficit of $1,821,529 and,
after giving effect to the Pro Forma Adjustments, a pro forma working capital
deficit of $1,863,347. The Company is dependent upon the proceeds of this
offering to continue its creative development activities and fund its
marketing and production expansion plans, as well as its other working
capital requirements. The Company anticipates, based on its currently
proposed plans and assumptions relating to its operations (including
assumptions regarding the progress and timing of its new product development
efforts), that the net proceeds of this offering, together with anticipated
revenues from operations and its current cash and cash equivalent balances,
will be sufficient to fund the Company's operations and capital requirements
for at least 12 months following the consummation of this offering. In the
event the Company's plans change or its assumptions change or prove to be
inaccurate, however, the Company could be required to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to, or potential sources of, any additional
financing, and it is not anticipated that existing stockholders will provide
any portion of the Company's future financing requirements. Consequently,
there can be no assurance that any additional financing will be available to
the Company when needed, on commercially reasonable terms, or at all.
Because the Company has operated at a loss since its inception and has not
generated sufficient revenues from its operations to fund its activities, it
has, to date, been substantially dependent on loans from its stockholders and
private placements of its securities to fund its operations. These financings
are described below:
September 1994 Financing
In September 1994, the Company borrowed an aggregate principal amount of
$250,000 from nine accredited investors participating in a private placement
of the Company's 10% promissory notes (the "September 1994 Financing"). The
net proceeds of the September 1994 Financing were used for working capital
purposes. The September 1994 Financing was subsequently restructured as a
result of the Company's inability to repay the indebtedness in November 1994,
when it was originally due. As a result of that restructuring, in May 1995,
in connection with the initial closing of the May 1995 Units Financing
(described below): (i) $75,000 in principal amount of the September 1994
Financing was repaid; (ii) $175,000 in principal amount of the September 1994
Financing was converted into 1.75 of the units sold in the May 1995 Units
Financing; and (iii) the lenders in the September 1994 Financing were issued,
in proportion to their respective initial September 1994 loans, Class A
Warrants to purchase an aggregate of 34,989 shares of Common Stock and Class
B Warrants to purchase an aggregate of 17,496 shares of Common Stock. All of
these Class A Warrants and Class B Warrants are being redeemed in connection
with the Pending Recapitalization.
Johnston Financings
In October 1994, Charles C. Johnston (then and now a director of the
Company) and J&C Resources, a corporation of which Mr. Johnston is the sole
stockholder, (together, "Johnston") invested an aggregate of $300,000 in the
Company, in consideration of which Johnston was issued 3,226.085 shares of
Preferred Stock of the Company. In March 1995, Johnston (i) returned his
3,226.085 shares of Preferred Stock to the Company for cancellation in
exchange for a promissory note of the Company in the principal amount of
$300,000, and (ii) loaned the Company an additional $100,000 (collectively,
the "Johnston Financings"). The net proceeds of the Johnston Financings were
used by the Company for working capital purposes. The $400,000 principal
amount of notes issued pursuant to the Johnston Financings (the "Johnston
Notes") accrued interest at a rate of 12% per annum and were secured by a
pledge of substantially all of the Company's assets (which security has since
been terminated). In addition, pursuant to the terms of the Johnston Notes,
in May 1995 Johnston received Class A Warrants to purchase an aggregate of
55,983 shares of Common Stock and Class B Warrants to purchase an
28
<PAGE>
aggregate of 27,992 shares of Common Stock (collectively, the "Johnston
Warrants"). The Johnston Notes were to have matured in September 1995;
however, prior to such time and in accordance with their terms, in June 1995
the $400,000 aggregate principal amount of the Johnston Notes was converted
into four of the units sold in the May 1995 Units Financing. The interest
owed on the Johnston Notes at the time of such conversion was not paid. The
$17,000 interest owed on the Johnston Notes at the time of such conversion
was paid to Mr. Johnston out of the net proceeds of the 1996 Bridge
Financing. See "Certain Transactions -- Transactions with Johnston" and
"Description of Securities -- Johnston Warrants."
December 1994 Financing
In December 1994, the Company borrowed an aggregate principal amount of
$400,000 from eight accredited investors participating in a private placement
of the Company's promissory notes, which notes were to be repaid in an amount
equal to 105% of the principal amount borrowed on the earlier of (i) the
consummation of a subsequent private placement generating net proceeds to the
Company in excess of $950,000 and (ii) May 15, 1995 (the "December 1994
Financing"). The net proceeds of the December 1994 Financing were used for
working capital purposes. As a result of an agreement made in March 1995
among the Company and the lenders of the December 1994 Financing, in May 1995
(in connection with the initial closing of the May 1995 Unit Financing) the
$400,000 principal amount of the December 1994 Financing was converted into
four of the units sold in the May 1995 Units Financing, and the December 1994
lenders were paid interest equal to 5% of their original investment in the
December 1994 Financing.
May 1995 Units Financing
During the period from May through October 1995, the Company consummated a
series of sales of units of its Debentures and Series A Preferred Stock,
having an aggregate purchase price of $2,000,000, to 79 accredited investors
participating in the May 1995 Units Financing. For each $100,000 unit
purchased in the May 1995 Units Financing, a purchaser received 50 shares of
Series A Preferred Stock and a Debenture in the principal amount of $50,000.
Of the 20 units sold in the May 1995 Units Financing: (i) 1.75 units
represented the conversion in May 1995 of $175,000 of the then-outstanding
principal amount due in connection with the September 1994 Financing; (ii) 4
units represented the conversion in June 1995 of the $400,000 aggregate
principal amount then outstanding in connection with the Johnston Financings;
and (iii) 4 units represented the conversion in May 1995 of the $400,000
aggregate principal amount then outstanding in connection with the December
1994 Financing, each described above. The net proceeds from the sale of the
remaining 10.25 units in the May 1995 Units Financing were used (a) to repay
the remaining $75,000 principal amount of the September 1994 Financing, (b)
to pay the 5% interest owing in respect of the December 1994 Financing, and
(c) for working capital purposes.
1995 Pre-Bridge Financing
During September and October 1995, the Company effectuated a private
placement of its securities to six existing stockholders participating in its
1995 Pre-Bridge Financing, for aggregate gross proceeds to the Company of
$300,000. In connection with such financing, the Company issued to the
investors an aggregate of $300,000 in principal amount of 1995 Pre-Bridge
Notes and 90,000 1995 Pre-Bridge Shares. The 1995 Pre- Bridge Notes bear
interest at the rate of 9% per annum and are due and payable on the earlier
of (i) one year from the date of issuance and (ii) the consummation of an
initial public offering of the Company's securities. The net proceeds of the
1995 Pre- Bridge Financing were used for working capital purposes. The
Company intends, upon the consummation of this offering, to use approximately
$316,000 of the proceeds from this offering to repay all of the 1995
Pre-Bridge Notes, including interest accrued thereon through and until such
repayment date. In addition, the 90,000 1995 Pre-Bridge Shares are included
in the Selling Stockholders' Shares and are being registered by the Company
for resale by their holders concurrently with this offering. See "Selling
Stockholders and Plan of Distribution."
1996 Pre-Bridge Financing
In January 1996, the Company obtained $125,000 in financing from two of
its executive officers (Robert J. Riscica, the Company's Chief Financial
Officer, and Marvin H. Goldstein, the Company's Vice President- Controller).
In connection with this 1996 Pre-Bridge Financing, Messrs. Riscica and
Goldstein purchased two
29
<PAGE>
and one-half units of the Company's securities, which units were identical to
the Bridge Units subsequently sold in connection with the 1996 Bridge
Financing (except that, unlike the Bridge Shares, the 1996 Pre-Bridge Shares
are not included in the Selling Stockholders' Shares being registered
concurrently with this offering). As a result of the 1996 Pre-Bridge
Financing, the Company issued to Messrs. Riscica and Goldstein (i) 1996
Pre-Bridge Notes in the aggregate principal amount of $125,000, bearing
interest at the rate of 9% per annum and due and payable on the earlier of
the consummation of this offering or February 23, 1997 (subject to extension,
under certain circumstances, to February 23, 1998, and (ii) 25,000 1996
Pre-Bridge Shares. The proceeds from the 1996 Pre-Bridge Financing are being
used by the Company for working capital and general corporate purposes. The
Company intends, upon the consummation of this offering, to use approximately
$129,000 of the proceeds from this offering to repay all of the 1996
Pre-Bridge Notes, including interest accrued thereon through and until such
repayment date. See "Certain Transactions -- Transactions with Management."
1996 Bridge Financing
In February 1996, the Company completed the sale of 15 Bridge Units to 11
private investors in connection with the 1996 Bridge Financing, each Bridge
Unit consisting of: (i) a Bridge Note in the principal amount of $50,000,
bearing interest at the rate of 9% per annum and due and payable on the
earlier of the consummation of this offering or February 23, 1997 (subject to
extension, under certain circumstances, to February 23, 1998); and (ii)
10,000 Bridge Shares, at price of $50,000 per Bridge Unit. The Company
received gross proceeds of $750,000 from the sale of the Bridge Units. After
the payment of $75,000 in placement fees to the Underwriter, who acted as
placement agent for the Company with respect to the sale of the Bridge Units,
and other offering expenses of approximately $85,000, the Company received
net proceeds of approximately $590,000 in connection with the 1996 Bridge
Financing. Those net proceeds were used to repay certain indebtedness, to pay
past due trade payables and for working capital and general corporate
purposes. The Company intends, upon the consummation of this offering, to use
approximately $767,000 of the proceeds from this offering to repay all of the
Bridge Notes, including interest accrued thereon through and until such
repayment date. The 150,000 Bridge Shares are including in the Selling
Stockholders' Shares and are being registered by the Company for resale by
their holders concurrently with this offering. See "Selling Stockholders and
Plan of Distribution."
June 1996 Financing
In June 1996, the Company completed the sale of two units (the "June
Bridge Units") to two private investors (the "June 1996 Financing"), each
June 1996 Unit consisting of (i) an unsecured 9% promissory note of the
Company in the principal amount of $100,000, due and payable on the earlier
of the consummation of this offering and February 23, 1997 (subject to
extension, under certain circumstances, to February 23, 1998) (each, a "June
1996 Note") and (ii) 25,000 shares of Common Stock (the "June 1996 Shares"),
at a price of $100,000 per June 1996 Unit. The Company received gross
proceeds of $200,000 from the sale of the June 1996 Units. After the payment
of $20,000 in placement fees to the Underwriter, who acted as placement agent
for the Company with respect to the sale of the June 1996 Units, the Company
received net proceeds of $180,000 in connection with the June 1996 Financing.
The Company's sale of the two June 1996 Units resulted in the Company's
issuance of a total of $200,000 in principal amount of June 1996 Notes and
50,000 June 1996 Shares. The Company intends, upon the consummation of this
offering to use $200,000 of the proceeds from this offering to repay all of
the June 1996 Notes, including interest accrued thereon through and until
such repayment date. The 50,000 June 1996 Shares are included in the Selling
Stockholders' Shares and are being registered by the Company (for resale by
their holders) concurrenlty with this offering. See "Selling Stockholders and
Plan of Distribution."
1995 TECHNOLOGY ACQUISITION
In July 1995, the Company, through its wholly owned subsidiary
Kideo-Canada, acquired (the "Technology Acquisition") certain computer
hardware and software assets (the "Assets") from V-Seion Multimedia Systems,
Inc. (as the "Seller" in such transaction), of which Bradley Dahl was then
the sole stockholder. As a result of the Technology Acquisition, Mr. Dahl
became employed by the Company as Vice President-Development. The purchase
price paid by the Company for such assets was approximately $144,000 and was
paid (i) by cash in the sum of approximately $37,000, (ii) partly through the
forgiveness of a loan made previously by Kideo-Canada to the Seller in the
principal amount of approximately $37,000, and (iii) partly through the
transfer from Kideo-
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Canada to the Seller of 19,645 shares of Common Stock of the Company, which
shares were valued at approximately $70,000. In addition, legal fees of
approximately $48,000 incurred in connection with the Technology Acquisition
were capitalized in connection therewith. See "Certain Transactions -- 1995
Technology Acquisition."
Approximately three weeks before the Technology Acquisition was
consummated, the Seller had acquired the Assets from IVS Holdings Ltd., a
British Columbia corporation ("IVS") and Interactive Videosystems Inc., a
British Columbia corporation ("IVI") and the parent corporation of IVS. IVS
and IVI are hereinafter collectively called the "Prior Asset Owners". Mr.
Dahl had been one of a team of four persons who had been engaged as
independent subcontractors by the Prior Asset Owners in connection with their
operation of a business that, until approximately December 1994, had utilized
the Assets principally to produce a line of digitally personalized videos for
children which were marketed under the name of "Starmaker" videocassettes
(the "Starmaker Business"). The Starmaker Business had engaged in marketing
only two Starmaker titles -- The Forgetful King's Festival and Rocket Rescue
and sold those titles primarily in Canada.
In approximately December 1994, the Prior Asset Owners ceased selling the
two Starmaker titles to consumers when they closed the office of the
Starmaker Business in Vancouver and dismissed all of the personnel thereof
except for Mr. Dahl. From December 1994 through the time of the Seller's
acquisition of the Assets from the Prior Asset Owners, the Starmaker Business
generated no revenues from the sale of Starmaker titles to consumers;
instead, the only revenues generated by the Starmaker Business during that
period were derived from the Spring 1995 sale to three third parties of a
turnkey production system that would permit such parties to engage in the
on-site production and sale for their own account of the two Starmaker
titles.
At the time of their acquisition by Kideo-Canada, the Assets consisted of
substantially all of the assets that the Prior Asset Owners had used in
connection with operating the Starmaker Business. The Assets were comprised
principally of: (i) PC software technologies (the "Acquired Software
Technologies") which, in the opinion of the Company, would enable the
production at a lower cost than could be achieved with the Company's own
then-existing technologies of Kideos featuring a superior implementation of
two-dimensional and three dimensional partial-motion and full-motion
animation in the child character's animated body; and (ii) PCs, other
computer-related hardware and office supplies that had been used in the
Starmaker Business (the "Acquired Equipment").
Since consummating the Technology Acquisition, the Company has employed
the Acquired Software Technologies so as to (i) adapt and integrate them into
its process for the computerized mass production of digitally personalized
videos and (ii) take advantage of such software's ability to produce improved
animation in the child-character whose digitally personalized face appears in
a Kideo. The Company has, for example, modified the Acquired Software
Technologies in order to enable them to produce multiple Kideos
simultaneously (prior to the Company making such improvements, such software
had been capable of producing only one Starmaker video at a time). With
respect to the Acquired Equipment, while the Starmaker Business had utilized
it in part for the actual production of Starmaker videos, the Company has not
been utilizing such equipment for the production of Kideos. The Company
instead uses the Acquired Equipment as general office equipment for its
Vancouver facility. In addition, although the Company has, as a result of the
Technology Acquisition, become the owner of the two Starmaker titles and of
the rights to the Starmaker name, the Company has not resumed the sale of
those titles in the Canadian or any other market, does not intend to sell
those titles in any market and does not intend to market its own digitally
personalized videos under the Starmaker name. Consistent with its own selling
practices, the Company also has not continued the practice of the Starmaker
Business of selling turnkey systems for the production of digitally
personalized videos.
As the foregoing demonstrates, the revenue producing activities of the
Starmaker Business had, in essence, ceased by the end of 1994, and the
Company, since consummating the Technology Acquisition, has not resumed or
otherwise continued such activities. Accordingly, because the revenue
producing activities that were once associated with the Assets have not
remained generally the same as before the Technology Acquisition, the Company
does not believe that the financial condition or results of operations of the
Starmaker Business would in any way be relevant or material to an analysis of
the Company's business or future operations. The Company therefore has not
included in this Prospectus the historical financial statements of the
Starmaker Business.
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BUSINESS
GENERAL
The Company develops, manufactures and markets digitally personalized
videos ("Kideos") for children. In Kideos, a child's face and spoken name are
digitally placed by a personal computer into a story template that is stored
as digital video. The digital video is then output to analog video, allowing
the child to become the star in a personalized VHS videocassette. Each of the
Company's current Kideo titles has a playing time of approximately 20 minutes
and is in video-picturebook format (although, in the Company's latest
Gregory and Me(TM) Kideos, the illustrated body of the child's character
exhibits two-dimensional full-motion animation).
The Company currently offers four Kideo titles, each of which was
developed by the Company and has a digital story template which utilizes
content that is proprietary to the Company. In addition, a personalized Kideo
is produced using the Company's proprietary computerized personalization
production process. It is this production process -- a sophisticated
technological system for the low cost, mass production of digitally
personalized videos, implemented by the Company in the latter half of 1995 --
which the Company believes will provide it with a meaningful short- to
near-term competitive advantage over new entrants into the emerging market
for digitally personalized video products.
The Company launched its Kideo line nationally in the spring of 1994 and
has, to date, relied primarily on national catalogue retailers, such as
Hammacher Schlemmer and Spiegel, to market and sell its products. Each of the
Company's current Kideo titles has a suggested retail list price of $29.95,
but the Company believes that more than half of all Kideos being sold by its
customers are being offered at an actual retail price of $34.95 or higher.
The Company's primary target market for its Kideo titles is currently
children between the ages of two and seven. With its existing Kideos
targeting this market, the Company has created -- and believes it dominates
- -- a unique product niche in the home video market.
OPERATING STRATEGY
The Company's long-term business strategy is to become a premier market
leader, both domestically and internationally, in the development,
manufacturing and marketing of a wide variety of digitally personalized
consumer media products. For the near term, however, the Company intends to
focus its efforts primarily on the continued expansion of the Kideo concept
and product line. The key elements of the Company's strategy are:
o to develop additional Kideo titles for children, including (i) titles
featuring newly-created proprietary content, (ii) a series of titles,
each featuring the same cast of proprietary characters, (iii) titles
for children beyond pre-school age, and (iv) titles featuring the
licensed use of popular children's characters;
o to develop other digitally personalized audiovisual products likely to
appeal to a demographic base spanning both children and adults, such as
personalized screen savers and other personalized software products for
personal computers; and
o to expand the Company's sales and marketing efforts by increasing its
distribution channels (e.g., through increased use of targeted direct
marketing). See " -- Potential Future Products" and -- Marketing."
Using the current capabilities of its recently developed and proprietary
production system, the Company intends to introduce, during the Fall of 1996,
its new Gregory and Me(TM) series of titles in which, for the first time, the
two-dimensional characters (including the illustrated body of the child's
character) are fully animated and in which even the personalized facial image of
the child's character has limited motion (such as eyes that blink and lips that
move up and down). The Company will continue to seek to expand its product line
by exploiting more sophisticated digital personalization technologies, as they
become available, in order to offer to consumers progressively more
sophisticated and entertaining personalized media products. See " -- Technology
Overview" and " -- Potential Future Products."
TECHNOLOGY OVERVIEW
The Company's production of Kideos was made possible by relatively recent
advancements in the capabilities of affordable desktop personal computers
("PCs") to process, manipulate and edit digital video information. A Kideo is
created by overlaying a digitized photographic image of a child's face onto
the body of an illustrated
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character embodied in a pre-existing digital story template and then
recording, to a VHS videocassette, the resulting series of digital images to
the accompaniment of music and narration. The narrative track is also
personalized in appropriate places by inserting the spoken name of the child.
The three older Kideo titles -- Mr. Tibbs & the Great Pet Search; My
Alphabet; and 1,2,3, Come Count With Me -- were conceived and produced by the
Company prior to the Company's development of its current production process,
using a less advanced production system (referred to herein as the "TVL
system"). These three Kideo titles consist merely of 130 to 150
two-dimensional full-screen illustrated images (or "frames") in which the
child appears as the main character together with other illustrated
characters who comprise the standard content of the particular title. In the
three Kideo titles produced with the TVL system, the illustrated body of the
child's personalized character can be moved around within a frame, but only
in a limited number of frames, and each frame appears on screen for almost
six seconds before fading to the next frame. As a result, the finished Kideo
product has a somewhat static appearance that might be likened to a "video
picturebook," as distinguished from the full-motion animation a consumer
experiences when viewing, for example, a videocassette of Disney's The Lion
King.
The Company's fourth and newest Kideo title, My Christmas Wish, which was
introduced to the market in the latter half of 1995, was the first Kideo
title to be produced by the Company with its new proprietary Kideo production
system. Because the Company utilized some of the new and more advanced
production technologies available to it with such system, the two-dimensional
illustrated body of the child's personalized character in this latest Kideo
title exhibits a significantly greater range of animated motion -- although
still not full-motion animation. In My Christmas Wish, not only can the
illustrated character be moved around the screen, but there is also movement
within the illustrated body itself (i.e., arms can be raised, the head
turned, etc.).
During the Fall of 1996, the Company intends to introduce its new Gregory and
Me(TM) series of titles to the market and, in producing these new titles,
intends to utilize other of its new production system's more advanced
capabilities. Use of such capabilities will enable the illustrated body of the
child's personalized character in these new Kideo products to exhibit
two-dimensional full-motion animation (instead of merely partial-motion
animation) and the personalized facial image of such character to exhibit, for
the first time, at least some limited motion, such as eyes that blink and lips
that move in a flapping sort of manner. The Company's ultimate objective for the
evolution of its production system, however, is to create a system capable of
producing, at low cost, Kideos -- as well as other digitally personalized
consumer media products -- in which the customer's personalized character can:
(i) exhibit two dimensional or three dimensional full-motion animation, both in
its illustrated body and in the features of its personalized facial image (e.g.,
moving eyes and eyebrows and lips that move in synchronization with sound); and
(ii) appear in combination and interaction with other two dimensional or three
dimensional full- motion illustrated characters and/or human actors. The Company
believes that such features may be required in order for digitally personalized
media products to achieve broad consumer acceptance. There can be no assurance,
however, that the Company will ever succeed in developing a production system
capable of producing products with such features at a cost acceptable to the
Company. For instance, while the Company believes that, at the present time,
there are existing technologies (such as those that enabled Pixar Animation
Studios to produce the feature film Toy Story) that could be used to produce
products with such features, the costs associated with such production would
make those products far too expensive for the broad-based consumer market.
PRODUCTION OF KIDEO PRODUCTS
The TVL Production System
Until recently, the TVL system (jointly developed by the Company and
Television Laboratories Inc. ("TVL") and first implemented by the Company in
October 1994) served as the Company's primary system for producing
personalized videos. This customized hardware/software system can store, and
record to VHS videocassette, personalized Kideos in a video-picturebook
format, in which only minimal animation is possible, i.e., the illustrated
body of the child's personalized character can be moved from place to place
within some of the frames, but there is no movement within the character's
illustrated body itself. Each of the Company's first three Kideo titles --
Mr. Tibbs & the Great Pet Search, My Alphabet and 1,2,3, Come Count With Me
- -- was created by the Company using the TVL system.
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The TVL system couples Macintosh PCs with a customized version of TVL's
Director Turbo video processing and editing system, which is a computer
hardware/software system that employs custom computer processor boards to
handle digital video information. The TVL system uses these custom computer
processor boards to create two-dimensional animation screen effects, in
real-time, on three different layers: (i) a photograph of the customer is
frame-grabbed by the TVL system and stored to its computer hard-disk; (ii)
the screen version of the customer's face is then manually silhouetted (or
"cut-out") on screen by the TVL system's human operator; and (iii) the
computerized cut-out of the customer's face is then automatically sized and
placed by the TVL system in each of the 130 to 150 frames of the Kideo title
being produced. The time required for the TVL system to then record the VHS
version of the personalized Kideo story template is approximately equal to
the playing time of the videocassette tape itself (about 20 minutes). Each of
the Company's TVL-system production stations is generally comprised of six
networked TVL systems.
The Company currently utilizes 32 TVL systems, two of which it owns and 30
of which it leases (at a monthly lease payment of approximately $550 per
system). No license fee or royalty is payable by the Company on Kideos
produced using the TVL system. Leases for 5 of the TVL systems will expire
during 1996, and the leases for the other 25 leased TVL systems will expire
in November and December 1997. Pursuant to the terms of the Company's
agreements with the lessors of its TVL systems (all of which were entered
into prior to the Company's development of its new production system), the
Company will acquire all of its currently leased TVL systems upon their
respective lease expiration dates, for an aggregate purchase price of
approximately $33,119 (which represents less than 20% of the Company's funds
which are currently being held by such lessors as security deposits).
The New Kideo Production System
The Company's new Kideo production system was developed in order to
further the Company's ultimate objective of creating digitally personalized
products featuring two-dimensional and three-dimensional full- motion
animation. The Company developed this new system using, in large part,
certain computer software assets and production technologies that it acquired
through an asset purchase transaction consummated with a Canadian company in
July 1995. The new production system (which is based upon the use of
affordable IBM- compatible PCs) produces Kideos by employing PC hardware,
proprietary computer software and proprietary production technologies and
components in combination with various commercially available multimedia
production software applications. The Company claims proprietary rights in,
and is seeking to patent various aspects of, the resulting digital production
process. See " -- Intellectual Property Rights" and "Certain Transactions --
Asset Purchase Agreement."
The Company used its new production system in the development of My
Christmas Wish. As a result, this title is the first Kideo title in which the
illustrated body of the child's personalized character is able to exhibit
actual two-dimensional partial-motion animation. The new Kideo production
system is already capable, however, of producing an even wider range of
motion than that exhibited by the personalized character in My Christmas
Wish. The more advanced technologies utilized in the new system make it
possible to produce a personalized video in which (i) the illustrated body of
the child's personalized character can exhibit two-dimensional full- motion
animation and (ii) the personalized facial image of the child's character can
exhibit at least some limited motion, such as eyes that blink and lips that
move up and down (although not necessarily in synchronization with the
soundtrack). The Company expects that these improvements in the features of
its Kideos will enable it to produce new titles that will be more
entertaining and engaging for the child for whom a Kideo is purchased.
The Company believes that in addition to improving the quality and
features of the Company's products -- its new Kideo production system will
afford it a variety of other competitive advantages, including these:
o Less Costly Production Equipment. A single production station employing
the Company's new production system consists of eight networked desktop
PCs at a total acquisition cost to the Company of approximately $32,000
(including the installation and integration of all related proprietary
and third- party components and software applications). In contrast,
there is approximately a $102,000 cost to the Company of acquiring a
single TVL-system production station (which consists of only six
networked Macintosh PCs but requires the installation of six Director
Turbo systems as well, each of which includes an additional computer
and custom computer processor boards and other components and software
which are not required when using the Company's new system).
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o Reduced Production Time. When using the new production system, the time
required to manually silhouette (or "cut") the customer's face and then
for the PC to automatically size and place that face's digital image
throughout a digital video template is reduced by approximately 50%
when compared with the time required for these procedures using the TVL
system. (The time required to then complete the final step in the
process, i.e., to record the VHS version of the Kideo, remains, as with
the TVL system, approximately equal to the playing time of the
videocassette tape itself.)
o Greater Production Yields. A single production station employing the
Company's new production system is capable of producing approximately
160 personalized Kideos during an eight-hour shift, as compared to the
less than 80 such Kideos that a single TVL-system production station is
capable of producing during the same shift.
o Simplified Operating Procedures. The new production system has proven
to be easier to operate than the TVL system from the point of view of
the Company's production personnel who are engaged in the process
either of "cutting" the child's face or of recording the finished Kideo
to VHS videocassette. Because of this greater ease of use, the Company
has found that less time (about one week) is required to train
newly-hired personnel to perform these functions using the new system.
In addition to My Christmas Wish, the Company's new production system is
now also being used (in tandem with the TVL system) to produce the other
three existing Kideo titles.
PRODUCT FULFILLMENT
The Company designs, develops and produces its Kideo products as finished
goods at its New York City facility, without employing any subcontractors in
the production process. Pre-paid Kideo order kits are shipped to the
Company's customers from a third-party fulfillment center located in
Minneapolis, Minnesota. The components used in the production of Kideos
(e.g., PCs, commercially available multimedia production software
applications, and VHS videocassettes and related labels and packaging) are
readily available to the Company from a large number of competitively priced
suppliers. Once ordered, a personalized Kideo is produced and shipped to the
customer generally within two to four weeks after the order is received.
There is consequently no meaningful backlog.
The Company believes that it currently has the production capacity,
personnel and other resources required in order to produce and deliver its
existing Kideo products, as well as new Kideo titles planned for introduction
during 1996, on a timely basis and in accordance with the Company's estimated
demand for its products. This belief is derived in large part from the nature
of both the TVL system and the Company's new production system, each of which
is comprised of modular production stations. In the event of increased demand
for its Kideos, the Company's experience has been that one or more production
stations can be added and the related production personnel trained in about
one week. In addition, because the Company sells a Kideo by first selling the
order kit for the desired title, the Company at any point in time can
accurately forecast the short-term demand for its products based upon the
number of Kideo order kits then in circulation. As a result, the Company
believes that it can anticipate a need to add new Kideo production stations
reasonably in advance of having actually to meet any increased future demand
for its products.
EXISTING KIDEO TITLES
The Company currently markets four Kideo titles -- Mr. Tibbs & the Great
Pet Search; My Alphabet; 1,2,3, Come Count With Me; and My Christmas Wish --
which feature characters developed by the Company (respectively, Mr. Tibbs,
Alexander G. Bear, Counting Cat and the Company's own version of Santa
Claus). Each story lasts for approximately 20 minutes and is in a
video-picturebook format (although My Christmas Wish, as described above,
employs two-dimensional partial animation). These titles have been produced
almost entirely using the Company's in-house resources, with a few outside
contractors providing various services (relating mainly to audio support,
e.g., music, singing and editing).
Each of the four existing Kideo titles has been designed to take advantage
of the power of video personalization to stimulate the imagination of
children by literally placing them in exciting and educational situations
where they can see themselves learning and having fun. They ride on the back
of a hippo while counting four turtles in a boat; they learn about the letter
"L" by leapfrogging over Alexander G. Bear; and they dive beneath the sea to
meet a tortoise. Mr. Tibbs even asks, "Sarah, would you like a zebra for a
pet?"
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In addition to the child's face appearing in each frame of his or her
personalized Kideo, the child's name is spoken in various appropriate places
on the Kideo soundtrack. The Company maintains an extensive digital archive
of the audio recordings of the spoken first names of all of its
child-customers. The archive is updated on a regular basis as new Kideo
orders are received which require the recording and insertion of a name not
then in the Company's database. In its Kideo order kits and other marketing
materials, the Company makes a commitment to its potential customers to
produce a Kideo in which any specified name of a child will be spoken on the
Kideo to that child's personalized character. The child's name is also
printed on the outside cover of each tape (which is packaged in a white vinyl
album cover), as well as on the label of the tape itself. The tape shells
come in assorted bright colors.
Each of the Company's Kideo stories has a suggested retail list price of
$29.95. The Company believes, however, that more than half of all Kideos are
currently being sold by its customers at an actual retail price of $34.95 or
higher. For the fiscal year ended July 31, 1995 and the nine months ended
April 30, 1996, sales of Mr. Tibbs & the Great Pet Search accounted for
approximately 35% and 34%, respectively, of the Company's revenues, sales of
My Alphabet accounted for approximately 46% and 40%, respectively, thereof,
sales of 1, 2, 3, Come Count with Me accounted for approximately 17% and 14%,
respectively, thereof, and sales of My Christmas Wish, the marketing of which
commenced in connection with the 1995 holiday season, accounted for
approximately 12% thereof.
POTENTIAL FUTURE PRODUCTS
There can be no assurance that the Company will ever be successful in
developing any of the potential new products described below (or their
associated production methodologies) or that any of such products, if
commercialized, will be successfully marketed by the Company or contribute
materially to the Company's future revenues or profits, if any.
Near-Term Product Development Goals
From among the many conceivable new product opportunities envisioned by
the Company, it currently intends, in the short- to near-term, to continue to
direct its product development efforts towards the market segment that it
believes it has largely created and accordingly knows best the home-consumer
market for digitally personalized products that are essentially videos in
nature (as opposed to, for example, computer games or other computer software
titles). For the near future, the Company also intends to focus its efforts
primarily on the continued expansion of the Kideo concept and product line.
The Gregory and Me(TM) Series. The Company believes that, for the foreseeable
future, it will continue to derive the substantial majority of its revenue from
the sale of Kideos embodying its own proprietary content. The Company
accordingly will focus its product development efforts on the creation and
exploitation of such content. In the Fall of 1996, for example, the Company
plans to introduce new Kideo titles as part of the Gregory and Me(TM) series
which will feature the same cast of proprietary characters in each title, led in
each case by Gregory Gopher. The Company anticipates marketing three titles in
this new Kideo series during 1996, with additional titles following during 1997.
The titles in the Gregory and Me(TM) series will be produced utilizing the
Company's newly-implemented production system and, as currently envisioned, the
Company's proprietary characters appearing throughout the new series will be a
combination of two-dimensional animated characters and three-dimensional live
action puppet-based characters. The child's personalized character will interact
with these other characters in various entertaining environments (although, when
it interacts with the puppet-based characters, the puppets will be rendered only
in two-dimensional versions). The illustrated body of the child's personalized
character will exhibit two- dimensional full-motion animation, and the
personalized facial image of the child's character will exhibit limited motion,
such as eyes that blink and lips that move up and down. In addition, the child's
personalized character will appear throughout each title in the Gregory and
Me(TM) series on a nearly continuous basis (whereas in the four existing Kideos
the personalized character appears far less frequently).
Kideo Related Merchandise. By focusing on the use of proprietary content
and characters to expand its line of Kideos, the Company believes that it may
be able to leverage the investment it makes in the creation of such
characters into an additional revenue stream, i.e., by selling other, related
merchandise featuring those same characters. Gregory Gopher, Mr. Tibbs,
Alexander G. Bear and Counting Cat, for instance, could all be produced as
plush stuffed-
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animal toys or could be featured in children's coloring books and work books.
The Company's newly- implemented Kideo production system currently has the
capability not only to produce such books, but also to produce them so that
every page will show the child's digitally personalized character (using a
laser-printed version of the same photograph of the child that was used in
creating that child's personalized Kideo). The Company currently envisions
that it will seek to begin marketing plush toys and coloring books and work
books by the end of 1996.
Kideos Featuring Popular Licensed Characters. Although the Company will be
focusing on the development and exploitation of its proprietary content, it
will not ignore the opportunity to expand its line of Kideos to include
titles featuring licensed characters that are popular in the children's
market. In such a Kideo title, the child's personalized character could
conceivably appear alongside and interact with animated characters (e.g.,
Bugs Bunny and Johnny Quest) or live-action characters (e.g., Barney and The
Mighty Morphin Power Rangers). To date, however, the Company has not entered
into any agreements or negotiations with respect to the licensing of any such
characters, and there can be no assurance either that any such licenses will
be made available to the Company or that, if made available, they will be
offered on terms and conditions that are acceptable to the Company.
Longer-Term Product Development Goals
The Company expects that, over the course of the next decade or so, the
digital/electronic audiovisual media industries will experience significant
growth and that this growth could present businesses employing technologies
like those the Company has developed with numerous opportunities to apply
digital personalization to virtually any popular media content. While no
assurance can be given to this effect, such opportunities could someday in
the future result in consumer products that might conceivably include
personalized computer screen savers, personalized interactive video games or
even personalized interactive television programming. In order to capitalize
on such opportunities, it is part of the Company's long-term strategy for the
development of future products to create digitally personalized audiovisual
products that are likely to appeal to a broad demographic base, spanning both
children and adults. The Company also intends to continually seek to expand
its product line by exploiting more sophisticated digital personalization
technologies, as they become available, in order to offer progressively more
sophisticated and entertaining personalized media products.
In furtherance of its longer-term product development goals, the Company
is currently engaged in, among other things, attempting to develop a line of
personalized computer screen savers in which a person of the customer's
choice (child, spouse, boss, etc.) will appear in digitally rendered and
animated scenes. In such a screen saver as in existing Kideos the
photographic facial image of the selected person would be digitally processed
and placed onto an animated body. The Company has successfully developed a
prototype of such a screen saver and currently expects that, if this screen
saver product can be successfully commercialized, it could be (i) loaded from
disk onto any IBM- or Macintosh-compatible PC or (ii) played on
Macintosh-compatible PCs using the popular Berkeley Systems After Dark series
of screen saver programs. The manufacturing of a personalized screen saver
would simply require that the customer provide a photograph to the Company.
The Company would then create the personalized product and copy it to a 3.5"
PC diskette (or other PC storage media), which could then be sent directly to
the customer.
MARKETING
General
Over the approximately one and a half years that Kideos have been
marketed, the Company believes that it has developed important sales and
distribution relationships with some of the country's most respected
catalogue retailers and retail stores. During the nine months ended April 30,
1996, Kideo order kits were available for purchase at various times through
such national mail order catalogues as Hammacher Schlemmer, Spiegel, the
Boston Museum of Fine Arts, Personal Creations, Fingerhut, Celebration
Fantastic, One Step Ahead, Johnson Smith, Just Between Us, Skymall, Critics
Choice Video and Troll Learn & Play. Since the Company first began marketing
its products, sales through catalogue retailers have in fact been the primary
distribution outlet for Kideos. Retail stores currently selling Kideo order
kits include the FAO Schwarz flagship store in New York City. Order forms are
also provided as inserts in every package of finished portrait photographs
picked up by Sears Portrait Studio customers in the United States.
37
<PAGE>
The Company is seeking to expand its sales and marketing efforts by
increasing its distribution channels. One way in which the Company seeks to
attract new customers is through attendance at the country's major trade
shows for children's entertainment products. During 1995, for example, the
Company presented its Kideo products at the Toy Fair 1995 convention and at
the annual convention of the Video Software Dealers Association.
Catalogue Sales
For the fiscal year ended July 31, 1995 and the nine months ended April
30, 1996, catalogue sales accounted for approximately 61% and 63%
respectively of the Company's revenues. Sales through the Hammacher Schlemmer
catalogue, in particular, accounted for approximately 42% and 28%,
respectively, of the Company's revenues. The Company believes that the
initial placement of Kideo information in mail order catalogues resulted
largely from the Company's engagement of an independent national catalogue
representative who represents over forty catalogues nationwide. This
representative (who is still being utilized by the Company) receives 15% of
the net sales proceeds generated by its product placements.
During the 1995 Christmas holiday season, Kideos were the third highest
selling item in Hammacher Schlemmer's "Christmas" and "Gift" mail order
catalogues and the fourth highest selling item in its "Holiday" catalogue.
The titles in the new Kideo Series are currently scheduled to appear in the
Hammacher Schlemmer fall 1996 holiday catalogs. Because of the success
generally experienced by Hammacher Schlemmer and other catalogue retailers
who were among the first to offer Kideos in their catalogues, the Company
currently is finding it increasingly easy to convince other catalogue
retailers to feature Kideos in their publications. In the twelve months ended
March 31, 1996, the number of nationally distributed catalogues in which
Kideos were marketed increased from four to approximately a dozen. The
Company will continue to target major catalogues as potential new marketing
outlets for Kideos during 1996. During the fall 1996 holiday season, for
example, Kideos will appear for the first time in the Sears 1996 Wish Book.
Retail Portrait Studios
Since approximately January 1995, Kideos have been marketed in Sears
Portrait Studios located throughout the United States, Canada and Puerto
Rico. The Sears Portrait Studios are operated by Consumer Programs
Incorporated ("CPI"). Initially, this marketing program was conducted
utilizing in-store displays of Kideo order kits in hundreds of Sears Portrait
Studio retail locations. The experience of CPI and the Company with this
initial marketing approach was not satisfactory and was consequently changed
in April 1995. Under the new marketing program, CPI inserts, into each
customer's package of processed photograph(s) taken at a Sears Portrait
Studio, an order form which explains what a Kideo is and can be used to order
a Kideo through CPI. Although sales of Kideos through this marketing program
were made only during the last three months of the fiscal year ended July 31,
1995, they accounted for approximately 5% of the Company's revenues for that
year. For the nine months ended April 30, 1996, sales of Kideos through Sears
Portrait Studios accounted for approximately 7% of the Company's revenues. As
a result of its experience with this marketing program, CPI has orally agreed
to expand the program to include the placing of Kideo order forms into
customer packages at approximately 50 of the nearly 280 Fox Photo Finishing
locations that CPI owns or manages (on a 90-day test basis) in mid 1996.
The Company's written agreement with CPI relating to the Sears Portrait
Studio marketing program (the "CPI Agreement") expired in July 1995, but this
marketing program has been continued since then, under the same terms,
pursuant to an oral agreement between the Company and CPI. While the Company
has no reason to believe that this oral agreement will be terminated by CPI
in the near future, there can be no assurance that it will be continued for
any extended period of time (if at all). Pursuant to such agreement, CPI
currently retains approximately 50% of the retail sales price of Kideos sold
through Sears Portrait Studios and remits the balance of the sales price to
the Company. The Company expects that, if the 90-day test referred to above
proves favorable (of which there can be no assurance), a similar arrangement
with CPI could be agreed upon with respect to sales generated from Fox Photo
Finishing locations.
The CPI Agreement contains an exclusivity provision which prohibits the
Company from selling Kideos through retail portrait studios other than Sears
Portrait Studios. The Company accordingly has no current plans to pursue the
test marketing of Kideos at other retail portrait studios. The Company
remains free, however, under its arrangement with CPI, to sell Kideos through
other photograph finishing outlets. Many major retail chain
38
<PAGE>
stores, as well as pharmacy chains, provide photo-finishing services to their
customers. The Company is accordingly in the process of approaching a number
of such companies to determine if they would be willing to agree to include
Kideo order kits in their customers' packages of finished photos. Along these
lines, the Company has recently developed a marketing relationship with
Nashua Photo (also known as York Photo), one of the nation's largest
direct-to-consumer photo-finishing companies. Kideos as a result are
currently being offered to Nashua's customers on the cover of the catalog
that is included by Nashua with finished photographs being delivered to
customers. Under this arrangement, Nashua is purchasing Kideo order kits from
the Company on the same terms and conditions as apply to catalog retailers.
Mass Market Retail Toy and Other Stores
In March 1994, the FAO Schwarz flagship store on Fifth Avenue in New York
City became the first retail store to market the Company's products. The
store used an in-store display that provided order kits for Kideos. Most
retailers typically sell a Kideo order kit for $34.95. To date, however,
sales of Kideos through retail toy stores and other retail stores have been
negligible, and there accordingly can be no assurance that any of the
Company's current or future efforts to expand the marketing of Kideos through
mass market retail locations will prove successful or meaningful to the
Company's operations.
Direct Sales
Direct sales to consumers accounted for approximately 31% and 24% of the
Company's revenues for the fiscal year ended July 31, 1995 and the nine
months ended April 30, 1996, respectively (as compared to approximately 67%
and 22% of revenues for the corresponding prior fiscal periods). Favorable
customer word- of-mouth has historically been a major source of
direct-to-consumer sales of Kideos. During 1995, referrals by satisfied
purchasers of Kideos generally accounted for approximately 40 daily telephone
inquiries by potential new customers (and the number of such referral
inquiries increased to approximately 100 per day during the October to
December holiday selling season).
The Company believes that, over the long term, if sufficient funding could
be obtained, its direct sales efforts could ultimately become its largest
distribution channel. The Company bases its belief in part upon recent
reported experiences in the "special interest" segment of the domestic home
video industry, where direct response marketing has been generating
approximately 39% of all sales of special interest home video titles. The
Company's own recent experience with direct response marketing has been
similarly encouraging. In November 1995, the Company conducted a
direct-response test mailing to approximately 3,000 consumers who had
previously purchased a Kideo. This test generated additional Kideo purchases
from approximately 10% of the targeted mailing audience (a figure that is
considered extraordinarily high when compared to average purchase rates for
direct response mailings which range from 1% to 2%). In March 1996, the
Company conducted another direct- response test mailing to approximately
1,000 consumers who had recently previously purchased a Kideo. While results
from this mailing are still being received by the Company, this test has to
date generated additional Kideo purchases from approximately 6.5% of the
targeted mailing audience.
To date, however, the high costs of developing a broad-based direct
marketing capability have prevented the Company from engaging in meaningful
direct marketing activities. The Company intends to commence television
advertising for its products upon the consummation of, and using proceeds
from, this offering. The Company anticipates that the development and
implementation of its direct marketing capabilities will consume the
substantial majority of its marketing expenditures during the remainder of
the current fiscal year. In furtherance of developing such marketing
capabilities, the Company has also recently employed a new Vice President of
Marketing. See "Management -- Directors and Executive Officers."
CUSTOMER SATISFACTION AND SERVICE
A Kideo customer's satisfaction is guaranteed by the Company in that, if
unhappy with the product, the customer may return it until the Company has
produced and delivered a satisfactory Kideo. Even with this policy, refunds
have historically been negligible.
The Company provides its customers with the opportunity to track the
status of their Kideo orders by utilizing the Company's automated, toll-free
telephone response system (the "Customer Response System"). A cus-
39
<PAGE>
tomer who orders a Kideo receives his order number for it from the Kideo
order kit that he purchased. When the Company receives that order kit, it
creates a digital, computerized version of the order (including the
corresponding order number) together with a physical bar-coded version (which
also embodies the order number information). At each stage of the Company's
process of manufacturing that particular Kideo, the bar-coded physical order
is manually "swiped" through an optical scanner, resulting in the
computerized version of the order being updated as to where that customer's
Kideo is in the production process (e.g., the child's voice has been recorded
and/or inserted into the title; the child's face has been digitized; etc.).
Because the Company's production system is fully computerized and networked,
when that customer calls the toll-free number and inputs his order number,
the Company's customer service operator can respond instantly with the status
of the order in question after checking the appropriate computer database.
COMPETITION AND INDUSTRY BACKGROUND
The Company believes that the market for digitally personalized video
media -- although only in its development stages -- will likely evolve into a
highly competitive market. The technologies which have enabled the production
of digitally personalized video products utilizing relatively low cost PC
hardware and software (as opposed to more expensive computer workstations and
larger computer systems) have only been available since approximately 1993.
As a result, there is relatively limited information available concerning the
potential market and demand for personalized video media products or
concerning the performance and prospects of companies seeking to do business
in this new and largely untested market.
To the Company's knowledge, at present there is only one other company
marketing personalized video media of any kind: U.R. The Star ("URTS"). URTS,
a Florida-based company, has been in the personalized video business since
1993. The Company believes that URTS currently offers six stories, each
having a suggested retail list price of $19.95. Although the URTS product
features a combination of two-dimensional and three-dimensional partial
motion animation, the Company does not believe that these products compete
effectively with Kideos on the basis of quality. While each URTS tape is
approximately 12 to 15 minutes long, for example, the child's face will
appear on-screen only for a total of approximately 60 seconds. Several
minutes can pass without the child's face appearing at all. The Company does
not believe that URTS engages in substantial marketing of its stories through
major national catalog retailers, direct mail-order solicitations or
television advertising.
There are numerous other companies involved in video media production who
could possibly enter the personalized market segment in which the Company is
doing business. Many of such companies have substantially greater financial,
technical, research, development, production, marketing and other resources
than those of the Company. Although the Company believes -- based upon the
technical expertise it has developed in its market and the quality, price and
features of its products -- that it will be able to compete favorably with
its existing and future competitors, there can be no assurances in this
regard. In light of the fact that the personalized video media business is in
the earliest stages of its development, there also can be no assurance that
existing or future competitors of the Company will not develop technologies
and products that are significantly superior to those of the Company, or that
their products will not gain substantially greater market acceptance, or that
developments of such nature will not ultimately render the Company's
technologies obsolete or its products unmarketable. Despite risks of this
nature, the Company believes that its new, proprietary Kideo production
system -- a uniquely sophisticated technological system for the low cost,
mass production of digitally personalized videos -- will provide it with a
meaningful short- to near-term competitive advantage over new entrants into
the emerging market for digitally personalized video products. The Company
does not believe that even well- financed potential competitors will be able,
in a relatively short period of time, to successfully research, develop, test
and implement production systems capable of low-cost mass production of
digitally personalized videos.
INTELLECTUAL PROPERTY RIGHTS
The Company believes that its prospects for success depend more upon the
dedication, knowledge, ability, experience and technological expertise of its
employees than upon any legal protection that may be afforded to the
Company's proprietary rights.
40
<PAGE>
The Company claims proprietary rights in various technologies (including
hardware and software), videos, cartoon characters, music, text, graphic
images, techniques, methods and trademarks which relate to the Company's
products and operations. Like many computer-related technology companies, the
Company seeks to protect such proprietary rights by relying upon a
combination of patent, trade secret, copyright, trademark and unfair
competition laws and various contractual restrictions, including
confidentiality and non-disclosure agreements.
Although the Company intends to protect its rights vigorously, there can
be no assurance as to the degree of legal protection that may be afforded to
the proprietary rights claimed by the Company. It is possible, for example,
that trade secrets may not be established, that secrecy obligations will not
be honored or enforceable, or that other parties will independently develop
technologies or processes that are similar or superior to those of the
Company. It is also possible that a consultant or other third party engaged
by the Company might independently develop certain technological information
which such party then applies to one of the Company's own technological
processes. In such an event, a dispute could arise as to the ownership of the
proprietary rights to the information developed by such party. It is possible
that such a dispute might not be resolved in the Company's favor, despite
steps the Company may have taken in a contract with the party at issue
seeking to claim ownership in information developed by that party while
engaged by the Company.
In addition, although the Company has filed two patent applications with
the United States Patent and Trademark Office relating to aspects of its
digital personalization production process, the Company's intellectual
property rights are not currently the subject of any issued patents in any
jurisdiction. Moreover, patent applications like the ones filed by the
Company involve complex legal and factual questions, and the scope and
breadth of patent claims that may be allowed (if any) is inherently
uncertain. As a result, even if a patent is issued to the Company, there can
be no assurance as to the degree or adequacy of protection that such patent
may afford.
The Company has applied for a registered trademark for the word "KIDEO."
Since one or more other parties may have rights to this trademark, however,
there can be no assurance that the Company will ultimately obtain a
registered trademark for the word "KIDEO" for use with respect to its
products and services. See " -- Legal Proceedings."
EMPLOYEES
As of June 1, 1996, the Company employed 16 full-time and three part-time
employees, including three in administration and finance, five in marketing
and sales, one in new product creation, four in production, one in shipping,
and five who are secretarial/clerical, database or customer service
employees. During the Christmas holiday season (roughly the months of October
through December), the Company generally employs approximately 30 additional
part-time employees to perform production and database tasks. The Company's
employees are not represented by any labor organizations. Management believes
that its relationship with its employees is good.
PROPERTY
The Company leases facilities in New York City pursuant to a two-year
lease expiring in September 1997 and operates a small office in Vancouver,
British Columbia, on a month-to-month basis. All of the Company's employees
work out of its New York City facilities, except for one employee (Bradley
Dahl) who works from the Vancouver office. The Company believes that its
facilities are adequate for its present staff and production operations and
could serve an increased demand for its products. See "Management."
LEGAL PROCEEDINGS
The Company has adopted and used the word "KIDEO" as its principal
trademark for its products and services and has applied for registration of
this trademark in the United States Patent and Trademark Office. Another
party had previously registered two allegedly similar trademarks but had
ceased using them and had filed for bankruptcy under Chapter 11. On July 6,
1994, the Company commenced proceedings, before the Trademark Trial and
Appeals Board of the United States Patent and Trademark Office, against such
party's successor (the "Successor"), seeking to obtain the cancellation of
these trademarks on the basis of abandonment. The Company has prevailed in
one proceeding, but the other proceeding is still pending. This latter
proceeding
41
<PAGE>
is currently suspended, pursuant to a stipulation agreed upon by the Company
and the Successor, while they discuss a possible settlement. There can be no
assurance that a settlement satisfactory to the Company will be reached. If a
satisfactory settlement is not obtained, the Company intends to recommence
the pending proceeding. In that event, the Company expects (based upon
statements made to it by the Successor) that the Successor will allege that,
even if the previously registered trademarks were abandoned by the original
owner, the Successor nonetheless made the first use thereafter of the
trademark "KIDEO" in the United States. Although the Company believes that it
should prevail in this proceeding and that the Successor's claim of "first
use" is also without merit, a proceeding of this nature is a lengthy and
potentially expensive process, and there can be no assurance that the Company
will ultimately obtain a registered trademark for the word "KIDEO" and obtain
the right to use this mark in connection with its products and services.
Another third party also has been using the trademark "KIDEO" locally in
the State of Illinois and has obtained an Illinois state registration of this
mark. This may prevent the Company from using the "KIDEO" mark in the state
of Illinois.
In the event that the Company does not prevail in obtaining the
unquestioned right to use the mark "KIDEO," it does not believe that its
business or prospects will be materially adversely affected. While the
Company thinks that the name "Kideo" is particularly well-suited to the type
of product that it sells, the Company does not believe that its market
penetration to date has been extensive enough that the inability to market
products under the Kideo name will adversely affect its ability to find new
customer accounts or damage its relationships with existing accounts.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors and executive officers of the Company. All
officers serve at the discretion of the Board of Directors. There is
currently one vacancy on the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
-------------------- ----- ----------------------------------
<S> <C> <C>
Richard L. Bulman .. 31 Chairman of the Board and President
Robert J. Riscica .. 44 Chief Financial Officer
Marvin H. Goldstein . 49 Vice President-Controller
Bradley Dahl ....... 36 Vice President-Development
Joanne Denk ........ 34 Vice President-Marketing
Richard D. Bulman .. 61 Secretary and Director
Charles C. Johnston . 61 Director
Thomas Griffin ..... 58 Director
</TABLE>
Richard L. Bulman is the founder of the Company and has served as its
President and Chairman of the Board since its inception in August 1993. Prior
thereto, from April 1991 to June 1993, Mr. Bulman was Director of
Applications Development at Targa Systems Corp. ("Targa"), where he was
responsible for developing customized multimedia applications for such
clients as International Business Machines ("IBM"), John Hancock Mutual Life
and Keystone Foods (McDonalds). From February 1990 to April 1991, Mr. Bulman
managed his own marketing consulting firm, Richard Bulman Consulting, in
Milan, Italy, where he had responsibility for developing international
marketing and advertising campaigns for a broad range of clients including
multinational corporations such as Montedison and Instrumentation
Laboratories. From December 1988 to February 1990, Mr. Bulman was Advertising
Manager for 7 Days Magazine in New York. Richard L. Bulman is the son of
Richard D. Bulman, a director of the Company.
Robert J. Riscica was engaged as the Company's Chief Financial Officer in
December 1995. For approximately the ten preceding years, he served in a
variety of executive positions with various companies owned or controlled by
Ronald O. Perelman's holding company, MacAndrews & Forbes Group Incorporated,
including as: Executive Vice President, Operations, Marvel Entertainment
Group (1992-1995); Chief Financial Officer, Marvel Entertainment Group
(1990-1992); and Director, Special Projects, MacAndrews & Forbes Group
Incorporated (1985-1990). Mr. Riscica has been licensed as a certified public
accountant in the State of New York since 1978.
Marvin H. Goldstein was the Chief Financial Officer of the Company from
June 1994 until December 1995, when Mr. Riscica was engaged to fill that
position and Mr. Goldstein became Vice President-Controller. Mr. Goldstein
also has been a partner of Golden Pearl Associates, a real estate management
firm that owns, manages and operates various business interests since 1980.
In addition, from August 1979 to December 1993, Mr. Goldstein owned and
operated Hermans Haberdashery Co. Inc., a retail clothing firm, and prior to
that time he was with the accounting firm of Grant Thornton for approximately
four years and was a partner at William Greene & Co., CPAs for approximately
five years. Mr. Goldstein has been licensed as a certified public accountant
in the State of New York since 1972.
Bradley Dahl has served as the Company's Vice President of Development
since July 1995. Prior to being employed by the Company, Mr. Dahl served as
the Creative Director of Interactive Videosystems, Inc. from January 1993 to
April 1995, where he market tested and developed certain technologies (later
acquired by the Company) relating to the mass production of digitally
personalized video products. Prior to his employment at Interactive
Videosystems, Mr. Dahl was, from May 1992 to January 1993, a product
developer for Serius Imaging and, from May 1990 to May 1992, an Account
Representative at Impex Controls Ltd., a company that develops computer-based
network control systems for institutions such as hospitals and prisons. From
January 1984 to May 1990, Mr. Dahl was the President of Alphatel Videotex
Directories Ltd., which developed, marketed and operated digital video
multimedia local area networked systems for large corporations and government
agencies.
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<PAGE>
Joanne Denk has served as the Company's Vice President of Marketing since
January 1996. Prior to being employed by the Company, Ms. Denk served as
Executive Vice President of Marketing of the Home Shopping Network Direct,
Inc. from January 1995 to December 1995. Ms. Denk also served as General
Manager of Home Shopping Showcase, Inc. from September 1993 to December 1994.
Prior to her employment with the Home Shopping Network, Ms. Denk was employed
by Time-Life Video, Inc., serving as its Vice President of Marketing from
December 1992 to August 1993, its Director of Broadcast Media from September
1992 to November 1992, and its Marketing Director of Television and Print
from October 1990 to August 1992. From May 1989 to September 1990, Ms. Denk
was the Marketing Manager of U.S. New Video, Inc., a subsidiary of U.S. News
& World Report, and, from June 1988 to April 1989, she served as an Account
Executive at the radio station WCHV-AM1260. From September 1985 to May 1988,
Ms. Denk was a Media Buyer for A. Eicoff & Company, Inc., where she managed
national direct response television campaigns for U.S. News & World Report,
AT&T and TV Guide.
Richard D. Bulman has served as Secretary and a director of the Company
since August 1993. Mr. Bulman has served as the Chairman of the Board of
Directors of Targa since March 1992. Prior to joining that company, Mr.
Bulman was Vice President and General Manager for the International Market
Network (IMNET), a joint venture between IBM and Merrill Lynch & Co., from
March 1988 to January 1991. For the preceding 30 years, Mr. Bulman held
various positions at IBM, including Group Director and Chief Financial
Officer of the U.S. Product Group, Group Director of the U.S. Marketing and
Services Group, and Vice President, Chief Financial Officer and Treasurer of
the IBM Service Bureau Corporation. Mr. Bulman has also served as President
of Bedford Associates, a subsidiary of British Airways, Chairman and Chief
Executive Officer of Information Systems, Inc., a technology outsourcing
company, and a consultant to various venture capital firms. Richard D. Bulman
is the father of Richard L. Bulman, the President and Chairman of the Board
of the Company.
Charles C. Johnston has served as a director of the Company since June
1994. Mr. Johnston has served as the Chairman of the Board of the Computer
Systems and Services Business Unit of Teleglobe, Inc. of Montreal, Canada
since November 1989. He was previously founder, Chief Executive Officer and
Chairman of the Board of ISI Systems, Inc., a provider of specialty data
processing services and software which was acquired by Teleglobe, Inc. in
1989. Mr. Johnston has also served as Chairman and Chief Executive Officer of
Ventex Technologies, a company involved in the design and sale of electronic
transformers for the neon lighting industry. Mr. Johnston serves on the Board
of Directors of I.D. Matrix of Clearwater, Florida, Wordenglass & Electric,
Inc. and Spectrum Signal Processing of Vancouver, Canada, and is a trustee of
Worcester Polytechnic Institute.
Thomas Griffin has served as a director of the Company since February
1996. Mr. Griffin has been the Co-Chairman of Griffin Bacal, Inc., an
advertising agency that he founded in 1978, for more than five years prior to
the date hereof. Griffin Bacal focuses on the advertising and marketing of
entertainment products and services for children and adults. Mr. Griffin is
also the founder, and since 1978 has been Co-Chairman, of Sunbow
Entertainment, Inc., a company that produces and distributes animated and
live action dramatic television programming for children. Mr. Griffin also
has been serving as a director of both DDB Needham Worldwide since July 1994
and the Eastern Region of the American Association of Advertising Agencies
since January 1994.
The Company currently has authorized five directors (pursuant to a
resolution adopted by the Board of Directors in accordance with the
Certificate of Incorporation). There is one vacancy on the Board. The Company
expects that, prior to the consummation of this offering, the Board will
appoint a non-management director to fill the vacancy and serve as one of the
Class I directors described two paragraphs below. The Board has not yet
determined who it will appoint to this directorship.
Certain stockholders currently have a contractual right to nominate an
additional director to the Board. Such right has not been exercised and will
expire upon the consummation of this offering. Mr. Johnston also has a
contractual right to continue to be nominated as a director until the
consummation of this offering.
All directors will hold office until the annual meeting of stockholders to
be held following the end of the fiscal year ending July 31, 1996 (the "1996
Annual Meeting") and until their successors are duly elected and qualified.
In February 1996, the Board of Directors and the requisite number of
stockholders approved an Amended and Restated Certificate of Incorporation of
the Company. As a result, the Certificate of Incorporation now provides that,
upon the closing of this offering, the terms of office of the directors will
be divided into three
44
<PAGE>
classes, designated Class I, Class II and Class III. At the 1996 Annual
Meeting, Class I directors (consisting initially of Thomas Griffin) will be
elected for a term expiring at the annual meeting of stockholders to be held
in 1997, Class II directors (consisting initially of Charles C. Johnston)
will be elected for a term expiring at the annual meeting of stockholders to
be held in 1998, and Class III directors (consisting initially of Richard L.
Bulman and Richard D. Bulman) will be elected for a term expiring at the
annual meeting of stockholders to be held in 1999. At each annual meeting of
stockholders beginning with the 1997 annual meeting, the successors to
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following
election (and in each case until their successors have been duly elected and
qualified). Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal number of directors.
The Company has agreed, for a period of five years following the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter to the Company's Board of
Directors or, at the Underwriter's option, as a nonvoting advisor to the
Board. The Underwriter has not yet exercised its right to designate such
person, and has informed the Company that it does not currently anticipate
that it will exercise such right in the foreseeable future. See
"Underwriting."
The Company has obtained key man life insurance on the life of Richard L.
Bulman in the amount of $2,000,000.
DIRECTOR COMPENSATION
The Company reimburses the directors for reasonable travel expenses
incurred in connection with their activities on behalf of the Company but
does not pay its directors any fees for Board participation (although it may
do so in the future).
EXECUTIVE COMPENSATION
For the fiscal year ended July 31, 1995, the executive officers in the
aggregate were paid approximately $146,000, and no executive officer received
aggregate cash compensation in excess of $100,000. Richard L. Bulman, the
Chairman of the Board and President, received cash compensation during the
fiscal year ended July 31, 1995 totaling approximately $88,000 and cash
compensation totaling approximately $28,000 in respect of the preceding
fiscal year (all of which represented salary in each case). Mr. Bulman also
holds options to purchase shares of Common Stock which were granted to him in
connection with the May 1995 Units Financing. See "Certain Transactions --
Bulman Options."
The following table summarizes the cash and other compensation paid by the
Company to Richard L. Bulman in respect of the fiscal year ended July 31,
1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Award
--------------
Annual Compensation Securities
-------------------------------------- --------------
Name and Year Ended Underlying
Principal Position July 31, Salary/$ Bonus/$ Options
----------------------- ------------ ---------- --------- --------------
<S> <C> <C> <C>
Richard L. Bulman,
Chairman and President . 1995 88,000 0 45,003(1)
</TABLE>
- ------
(1) Represents non-plan options granted to Mr. Bulman in connection with the
May 1995 Units Financing. See "Certain Transactions -- Bulman Options."
45
<PAGE>
The following table sets forth all grants of options to purchase Common
Stock which were awarded by the Board during the fiscal year ended July 31,
1995:
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------
Number of
Securities Percent of Total
Underlying Options Granted Exercise or
Options To Employees in Base Price
Granted Fiscal Year ($/share) Expiration Date
------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Richard L. Bulman . 45,003(1) 100% $3.57 December 31, 1999
</TABLE>
- ------
(1) Represents options to purchase shares of Common Stock which were granted
to Mr. Bulman in connection with the May 1995 Units Financing. See
"Certain Transactions -- Bulman Options."
The following table sets forth information concerning outstanding options
to purchase Common Stock held by Richard L. Bulman as of the year ended July
31, 1995. Mr. Bulman did not exercise any options in the fiscal year ended
July 31, 1995:
OPTION EXERCISES DURING FISCAL YEAR ENDED JULY 31, 1995
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares July 31, 1995 July 31, 1995
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---------------------- --------------- ------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
Richard L. Bulman .... -- -- 0 exercisable/ $-0- exercisable/
45,003 $-0- unexercisable
unexercisable
</TABLE>
EMPLOYMENT AGREEMENTS
Richard L. Bulman. Effective January 1, 1996, the Company entered into a
three-year employment agreement with Mr. Bulman, the Chairman of the Board
and President of the Company. Pursuant to this agreement, Mr. Bulman is to
receive a base salary of $125,000 for 1996, which will be subject to annual
increases determined at the Board's discretion (but not less than the annual
increase in the cost of living). Mr. Bulman will also be eligible to receive
a discretionary annual bonus in respect of each of the fiscal years ending
July 31, 1996 and 1997. Each such annual bonus will be payable at the sole
discretion of the Board, based upon whatever factors and considerations the
Board may deem relevant in connection with the fiscal year at issue. The
Company currently anticipates that, in determining whether to pay any such
bonus, the Board may take into consideration, with respect to the fiscal year
at issue, the Company's achievement of profitability (if any), the
performance of the Common Stock in the public trading market, whether the
Company achieved the budget goals established by the Board for that fiscal
year, and the Company's management of its resources over the course of that
year. In the event the Board decides to award any such annual bonus, the
amount of such bonus must be reasonably acceptable to the Underwriter. Under
the agreement, Mr. Bulman is entitled to a $1 million term life insurance
policy and to long-term disability insurance, and his employment is subject
to confidentiality restrictions and a two-year non-competition covenant.
Pursuant to the employment agreement, Mr. Bulman was granted ten-year options
under the Option Plan to purchase an aggregate of 125,000 shares of Common
Stock at a price of $5.00 per share, which options vest in increments as
follows: (i) as to 41,667 shares, on March 13, 1996; (ii) as to 41,667
shares, on January 1, 1997; and (iii) as to 41,666 shares, on January 1,
1998. All of such options will vest immediately in the event of the
termination without cause of Mr. Bulman's employment prior to December 31,
1998. In the event of his termination for cause, however, the Option Plan
will result in the simultaneous termination of all of Mr. Bulman's
then-unexercised options. Mr. Bulman's employment agreement also provides
that, in the event of the termination without cause of his employment before
December 31, 1998, he will be
46
<PAGE>
entitled to receive severance pay in an amount equal to his annual base
salary for the then-current year of the term of the agreement. In the event
Mr. Bulman's employment is terminated for cause, however, he will not be
entitled to receive any severance pay. Mr. Bulman's employment agreement
defines "cause" as including (in summary terms) his commission of a fraud on
the Company, misappropriation of Company funds or assets, possession of an
illegal substance, a material violation of any covenant in his Employment
Agreement, or knowingly influencing the Company's financial reporting in a
manner inconsistent with generally accepted accounting principles.
Robert J. Riscica. Effective January 1, 1996, the Company entered into a
one-year employment agreement with Mr. Riscica, which provides for him to
serve as Chief Financial Officer of the Company. Pursuant to the agreement,
Mr. Riscica is to receive a base salary of $105,000 for 1996, which will be
subject to annual increases thereafter, at the discretion of the Board, if
the agreement's term is extended. Mr. Riscica is also eligible to receive a
discretionary annual bonus in respect of the fiscal year ending July 31, 1996
and the fiscal year ending July 31, 1997 (if the agreement's term has been
extended beyond that date). As in the case of the discretionary bonus
potentially payable to Mr. Bulman, each such annual bonus will be payable to
Mr. Riscica at the Board's sole discretion. In the event the Board decides to
award any such annual bonus, the amount of such bonus must be reasonably
acceptable to the Underwriter. Mr. Riscica's employment is subject to
confidentiality restrictions and a two-year non-competition covenant.
Pursuant to the employment agreement, Mr. Riscica was granted ten-year
options under the Option Plan to purchase 35,000 shares of Common Stock at a
price of $5.00 per share. The options vest in increments as follows: (i)
12,000 shares vested on March 13, 1996; and (ii) 12,000 shares and 11,000
shares will vest on, respectively, January 1, 1997 and 1998, provided that
Mr. Riscica remains employed on each such date. In the event of his
termination for cause, however, the Option Plan will result in the
simultaneous termination of all of Mr. Riscica's then-unexercised options.
Mr. Riscica's employment agreement also provides that, in the event of the
termination without cause of his employment before the then- effective
expiration date of such agreement, Mr. Riscica will be entitled to receive
severance pay in an amount equal to half of his then-current annual base
salary. In the event Mr. Riscica's employment is terminated for cause,
however, he will not be entitled to receive any severance pay. Mr. Riscica's
employment agreement contains a definition of "cause" identical to that
contained in Mr. Bulman's employment agreement.
Marvin H. Goldstein. In November 1995, the Company entered into an
employment agreement with Mr. Goldstein which provides for his employment as
Vice President-Comptroller for a two-year term commencing on January 1, 1996.
After December 31, 1997, the term of Mr. Goldstein's employment agreement
will be automatically extended each year for an additional one-year period,
unless either party notifies the other to the contrary. The agreement
provides that Mr. Goldstein's base salary is $75,000 for 1996 and will
increase each year the agreement is in effect by at least the percentage
increase of the consumer price index for the preceding year. Mr. Goldstein is
also eligible to receive a discretionary annual bonus in respect of each of
the fiscal years ending July 31, 1996 and 1997. As in the case of the
discretionary bonus potentially payable to Mr. Bulman, each such annual bonus
will be payable to Mr. Goldstein at the Board's sole discretion. In the event
the Board decides to award any such annual bonus, the amount of such bonus
must be reasonably acceptable to the Underwriter. Mr. Goldstein's employment
is subject to confidentiality and non-competition restrictions. Pursuant to
the employment agreement, Mr. Goldstein was granted ten-year options under
the Option Plan to purchase 20,000 shares of Common Stock at a price of $5.00
per share. The options vest in increments as follows: (i) 7,000 shares vested
on March 13, 1996; and (ii) 7,000 shares and 6,000 shares will vest on,
respectively, January 1, 1997 and 1998, provided that Mr. Goldstein remains
employed on each such date. In the event of his termination for cause,
however, the Option Plan will result in the simultaneous termination of all
of Mr. Goldstein's then-unexercised options. Mr. Goldstein's employment
agreement also provides that, in the event of the termination without cause
of his employment before the then-effective expiration date of such
agreement, Mr. Goldstein will be entitled to receive severance pay in an
amount equal to ten months of his then-current annual base salary. In the
event Mr. Goldstein's employment is terminated for cause, however, he will
not be entitled to receive any severance pay. Mr. Goldstein's employment
agreement contains a definition of "cause" substantially identical to that
contained in Mr. Bulman's employment agreement.
Bradley Dahl. In July 1995, the Company entered into an employment
agreement with Mr. Dahl which provides for his employment as Vice President
of Development through June 30, 1997. Mr. Dahl's annual base salary is
$100,000 in Canadian dollars (which is approximately $73,000). Mr. Dahl's
employment is subject to
47
<PAGE>
confidentiality and non-competition restrictions. In January 1996, the
Company agreed that Mr. Dahl would be granted ten-year options under the
Option Plan to purchase 10,000 shares of Common Stock a price of $5.00 per
share. The options, which were granted to him in March 1996, will vest in
increments of 4,000 shares on January 1, 1997 and 3,000 shares on each
January 1st of 1998 and 1999, provided that Mr. Dahl remains employed on each
such date. In the event of his termination for cause, however, the Option
Plan will result in the simultaneous termination of all of Mr. Dahl's
then-unexercised options. In general terms, Mr. Dahl's employment agreement
defines "cause" as a material breach by him of his covenants contained in
that agreement (subject to notice of and an opportunity to cure such breach),
his commission of a felony, or his perpetration of a common law or statutory
fraud against the Company.
Joanne Denk. Ms. Denk has entered into an employment agreement with the
Company which provides for her employment as Vice President of Marketing for
a two-year term that commenced January 2, 1996. The agreement provides that
Ms. Denk's base salary is $105,000 for 1996 and is subject to annual
increases thereafter at the discretion of the Board. Ms. Denk is also
entitled to an annual gross-revenue-based bonus payable in respect of the
twelve months ending December 31, 1996 (up to a maximum of $37,500, if the
Company is not profitable during that period, and a maximum of $50,000, if
instead it is profitable). Her employment agreement also provides that a
gross-revenue-based bonus will be payable to her in respect of the twelve
months ending December 31, 1997 based upon a formula (to be similar to the
one currently in place for her 1996 bonus) which has been approved by the
Company's President, approved by the Board and approved as reasonably
acceptable to the Underwriter. be reasonably acceptable to the Underwriter.
Ms. Denk's employment is subject to confidentiality and non-competition
restrictions. Pursuant to the employment agreement, Ms. Denk was granted
ten-year options under the Option Plan to purchase 30,000 shares of Common
Stock at a price of $5.00 per share. The options will vest in increments of
10,000 shares on each January 1st of 1997, 1998 and 1999, provided that Ms.
Denk remains employed on each such date. In the event of her termination for
cause, however, the Option Plan will result in the simultaneous termination
of all of Ms. Denk's then-unexercised options. Ms. Denk's employment
agreement also provides that, in the event of the termination without cause
of her employment before the then-effective expiration date of such
agreement, Ms. Denk will be entitled to receive severance pay in an amount
equal to eight months of her then-current annual base salary. In the event
her employment is terminated for cause, however, she will not be entitled to
receive any severance pay. Ms. Denk's employment agreement contains a
definition of "cause" substantially identical to that contained in Mr.
Bulman's employment agreement.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "Option Plan") was approved by
the Board of Directors and the requisite number of stockholders in February
1996. The Option Plan is designed to serve as an incentive for retaining
qualified and competent employees, directors and consultants. A total of
350,000 shares of Common Stock have been reserved for issuance under the
Option Plan.
So long as the Company is subject to the reporting requirements under the
Exchange Act (which it will be following the closing of this offering), the
Option Plan must be administered by members of the Board of Directors who are
"disinterested persons" within the meaning of that term under Rule
16b-3(c)(2)(i) promulgated by the Commission under the Exchange Act (such
persons are herein called the "Plan Administrators"). In February 1996, the
Board appointed Richard D. Bulman and Thomas Griffin to serve as the Plan
Administrators. Under the terms of the Option Plan, any Plan Administrator,
upon his initial appointment as such, is automatically granted nonstatutory
stock options exercisable for 15,000 shares of Common Stock. The Plan
Administrators are not permitted under the Option Plan to grant any options
to themselves.
Under the Option Plan, the Plan Administrators are authorized, in their
discretion, to grant options thereunder to all eligible employees of the
Company, including officers and directors (whether or not employees) of the
Company as well as to consultants to the Company. The Option Plan provides
for the granting of both (a) "incentive stock options" (as defined in Section
422 of the Internal Revenue Code) to employees (including officers and
employee directors) and (b) nonstatutory stock options to employees
(including officers and employee directors) and consultants. Options can be
granted under the Option Plan on such terms and at such prices as determined
by the Plan Administrators, except that: (i) in the case of incentive stock
options granted
48
<PAGE>
prior to the consummation of this offering, the per share exercise price of
such options must be $5.00 or more; and (ii) in the case of incentive stock
options granted after the consummation of this offering, the per share
exercise price of such options cannot be less than the fair market value of
the Common Stock on the date of grant. In the case of an incentive stock
option granted to a 10% stockholder (a "10% Stockholder"), the per share
exercise price cannot be less than 110% of such fair market value. To the
extent that the grant of an option results in the aggregate fair market value
of the shares with respect to which incentive stock options are exercisable
by a grantee for the first time in any calendar year to exceed $100,000, such
option will be treated under the Option Plan as a nonstatutory option.
Options granted under the Option Plan will become exercisable after the
vesting period or periods specified in each option agreement. Options are not
exercisable, however, after the expiration of ten years from the date of
grant (or five years from such date in the case of an incentive stock option
granted to a 10% Stockholder) and are not transferable other than by will or
by the laws of descent and distribution.
In March and May 1996, options to purchase an aggregate of 341,000 shares
of Common Stock at a purchase price of $5.00 per share were granted under the
Option Plan, including options to purchase 125,000, 15,000, 35,000, 20,000,
30,000, 10,000, 45,000 and 15,000 shares granted respectively to Richard L.
Bulman, Charles C. Johnston, Robert J. Riscica, Marvin H. Goldstein, Joanne
Denk, Bradley Dahl, Richard D. Bulman and Thomas Griffin. Subject to various
vesting periods, all of such options (once vested) will be exercisable until
March or May, 2006.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION
Section 145 of the DGCL contains provisions entitling the Company's
directors and officers to indemnification from judgments, fines, amounts paid
in settlement and reasonable expenses (including attorneys' fees) as the
result of an action or proceeding in which they may be involved by reason of
having been a director or officer of the Company. In its Certificate of
Incorporation, the Company has included a provision that limits, to the
fullest extent now or hereafter permitted by the DGCL, the personal liability
of its directors to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duties as directors. Under the DGCL
as currently in effect, this provision limits a director's liability except
where such director (i) breaches his duty of loyalty to the Company or its
stockholders, (ii) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (iii) authorizes payment of an
unlawful dividend or stock purchase or redemption as provided in Section 174
of the DGCL, or (iv) obtains an improper personal benefit. This provision
does not prevent the Company or its stockholders from seeking equitable
remedies, such as injunctive relief or rescission. If equitable remedies are
found not to be available to stockholders in any particular case,
stockholders may not have any effective remedy against actions taken by
directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware,
indemnify, and upon request shall advance expenses to, any director or
officer to the extent that such indemnification and advancement of expenses
is permitted under such law, as it may from time to time be in effect. In
addition, the By-Laws require the Company to indemnify, to the fullest extent
permitted by law, any director, officer, employee or agent of the Company for
acts which such person reasonably believes are not in violation of the
Company's corporate purposes as set forth in the Certificate. At present, the
DGCL provides that, in order to be entitled to indemnification, an individual
must have acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the Company's best interests.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information (based on information
obtained from the persons named below), as of the date of this Prospectus and
as adjusted to reflect the sale by the Company of the 1,400,000 shares of
Common Stock offered hereby, relating to the beneficial ownership of shares
of Common Stock by (i) each person or entity who is known by the Company to
own beneficially five percent or more of the outstanding Common Stock, (ii)
each of the Company's directors and (iii) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Shares Owned(2)
------------------------
Amount and Nature of Before After
Beneficial
Name and Address of Beneficial Owners(1) Ownership(2) Offering Offering
---------------------------------------------------- --------------------- ---------- ----------
<S> <C> <C> <C>
Richard L. Bulman .................................. 418,138(3) 26.45% 14.03%
Charles C. Johnston ................................ 298,136(4) 18.20% 9.81%
Lawrence Kaplan
c/o GroVest Inc.
150 Vanderbilt Motor Parkway
Hauppage, NY 11788 ................................ 88,514(5) 5.75% 3.01%
Richard D. Bulman .................................. 45,000(6) 2.84% 1.51%
Thomas Griffin ..................................... 15,000(7) * *
All directors and executive officers as a group
(8 persons) ......................................... 839,920(8) 47.76% 26.59%
</TABLE>
- ------
* Less than 1%.
(1) Unless otherwise indicated, the address for each named individual or
group is in care of Kideo Productions, Inc., 611 Broadway, Suite 523, New
York, New York 10012.
(2) Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them. A person is deemed to
be the beneficial owner of securities that can be acquired by such person
within 60 days from the date of this Prospectus upon the exercise of
options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants or
convertible securities that are held by such person (but not those held
by any other person) and which are exercisable within 60 days of the date
of this Prospectus have been exercised and converted. Percentages herein
assume a base of 1,538,985 shares of Common Stock outstanding prior to
this offering and a base of 2,938,985 shares of Common Stock outstanding
immediately after this offering, before any consideration is given to
outstanding options, warrants or convertible securities.
(3) Includes 41,667 shares of Common Stock subject to currently exercisable
options granted under the Option Plan. Does not include the Bulman
Options. See "Certain Transactions Bulman Options."
(4) Includes 83,975 shares of Common Stock issuable upon exercise of the
Johnston Warrants and 15,000 shares of Common Stock issuable upon
exercise of options granted under the Option Plan. See "Certain
Transactions Transactions with Johnston" and "Description of Securities
Johnston Warrants."
(5) Includes (i) 33,588 shares of Common Stock owned by G/V Capital Corp., a
company of which Mr. Kaplan is the President and sole stockholder; and
(ii) 14,551 shares of Common Stock owned by a pension plan for the
benefit of Mr. Kaplan and an associate of Mr. Kaplan (the "Pension
Plan"). Mr. Kaplan disclaims beneficial ownership of half of the share
amount listed in (ii) above, as he is one of two equal beneficiaries
under the Pension Plan. See "Certain Transactions Transactions in
Connection With the May 1995 Units Financing" and "Description of
Securities."
(6) Represents 45,000 shares of Common Stock issuable upon exercise of
options granted under the Option Plan.
(7) Represents 15,000 shares of Common Stock issuable upon exercise of
options granted under the Option Plan.
(8) Includes an aggregate of 135,667 shares of Common Stock issuable upon
exercise of options granted under the Option Plan and 83,975 shares of
Common Stock issuable upon exercise of the Johnston Warrants. See
"Certain Transactions" and "Description of Securities."
50
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH JOHNSTON
Charles C. Johnston, a director and principal stockholder of the Company
has been a director of the Company since June 1994, at which time he
purchased 53,681 shares of Common Stock from the Company, and the Company was
granted a right of first refusal to purchase his shares of Common Stock in
the event Mr. Johnson determines to sell, transfer or otherwise dispose of
such shares (other than to certain qualified transferees). Pursuant to a
letter agreement dated June 17, 1994, the Company also granted to Mr.
Johnston certain preemptive rights which will expire upon the consummation of
this offering.
In October 1994, Mr. Johnston and J&C Resources, a corporation of which
Mr. Johnston is the sole Stockholder, (together, "Johnston") invested an
aggregate of $300,000 in the Company, in consideration of which Johnston was
issued 3,226.085 shares of preferred stock of the Company. In March 1995,
Johnston (i) returned his 3,226.085 shares of preferred stock to the Company
for cancellation in exchange for a promissory note of the Company in the
principal amount of $300,000, and (ii) loaned the Company an additional
$100,000. The $400,000 in aggregate principal amount of these two Johnston
Notes accrued interest at a rate of 12% per annum and was secured by a pledge
of substantially all of the Company's assets (which security has since been
terminated). In addition, pursuant to the terms of the Johnston Notes, in May
1995 Johnston received the Johnston Warrants (Class A Warrants to purchase an
aggregate of 55,983 shares of Common Stock at $2.86 per share and Class B
Warrants to purchase an aggregate of 27,992 shares of Common Stock at $5.72
per share). In connection with this offering, Johnston and the Company have
agreed that the exercise price for all of these Johnston Warrants will, as of
the date of this Prospectus, become $3.60. The Johnston Notes were to have
matured in September 1995; however, prior to such time (in June 1995), and in
accordance with their terms, the $400,000 aggregate principal amount of the
Johnston Notes was converted into four of the units sold in the May 1995
Units Financing (an aggregate of 200 shares of Series A Preferred Stock and
$200,000 principal amount of Debentures). The $17,000 interest owed on the
Johnston Notes at the time of such conversion was paid to Mr. Johnston out of
the net proceeds of the 1996 Bridge Financing. In connection with the Pending
Recapitalization, all of Mr. Johnston's Series A Preferred Stock and
Debentures are being converted into an aggregate of 114,307 shares of Common
Stock. "Description of Securities -- Johnston Warrants."
In connection with the 1995 Pre-Bridge Financing, Johnston invested an
additional $100,000 in the Company, for which he received a 1995 Pre-Bridge
Note in the principal amount of $100,000 (the Company intends to use
approximately $107,500 of the proceeds from this offering to repay this note,
including estimated interest accrued thereon through and until such repayment
date) and 30,000 1995 Pre-Bridge Shares. These 30,000 shares are being
registered concurrently with this offering as part of the Selling
Stockholders' Shares. See "Selling Stockholders and Plan of Distribution."
Mr. Johnston is a limited partner in the Underwriter.
BULMAN OPTIONS
In connection with the May 1995 Units Financing, in March 1995 the Board
granted to Richard L. Bulman, the Chairman of the Board and President of the
Company, the Bulman Options to purchase from 34,618 shares of Common Stock
(if the minimum number of units being offered in that financing were sold) up
to a maximum of 45,003 shares of Common Stock (if, as ultimately occurred,
the maximum number of units being offered in that financing were sold). The
purchase price of the shares subject to such options is $3.57 per share. The
Bulman Options expire on December 31, 1999 and become exercisable only if the
Company reports audited earnings before income taxes of not less than
$880,000 for the fiscal year ending July 31, 1996. The Company expects to
report a net loss for that fiscal year.
TRANSACTIONS IN CONNECTION WITH THE MAY 1995 UNITS FINANCING
G/V Capital Corp. ("GVCC"), a company of which Lawrence Kaplan is the
President and sole stockholder, acted as the placement agent for the May 1995
Units Financing. As a result of the closings under the May 1995 Units
Financing, the Company paid as placement agent fees: (i) to GVCC, cash in the
amount of $90,000 and approximately 33,588 shares of Common Stock; and (ii)
to Mr. Kaplan, 11.625 shares of Series A Preferred Stock, a Debenture in the
principal amount of $11,625 and 1,889 shares of Common Stock. Mr. Kaplan had
pre-
51
<PAGE>
viously loaned the Company $50,000 in the December 1994 Bridge Financing.
Pursuant to an agreement between the Company and Mr. Kaplan, that loan was
converted into one-half of one of the units offered pursuant to the May 1995
Units Financing, and approximately $2,500 of interest then due on that loan
was paid out of the net proceeds from such financing. Mr. Kaplan also
invested an additional $60,000 in 0.6 units offered pursuant to the May 1995
Units Financing on the same terms as the other investors therein. As a result
of such transactions, Mr. Kaplan has become the beneficial owner of Common
Stock in an amount sufficient to make him a principal stockholder of the
Company.
1995 TECHNOLOGY ACQUISITION
In July 1995, the Company, through its wholly owned subsidiary
Kideo-Canada, acquired (the "Technology Acquisition") certain computer
hardware and software assets from V-Seion Multimedia Systems, Inc. (as the
"Seller" in such transaction), of which Bradley Dahl was then the sole
stockholder. As a result of the Technology Acquisition, Mr. Dahl became
employed by the Company as Vice President-Development. The purchase price
paid by the Company for such assets was approximately $144,000 and was paid
(i) by cash in the sum of approximately $37,000, (ii) partly through the
forgiveness of a loan made previously by Kideo-Canada to the Company in the
principal amount of $37,000, and (iii) partly through the transfer from
Kideo-Canada to the Seller of approximately 19,645 shares of Common Stock of
the Company, which shares were valued at approximately $70,000. In addition,
legal fees of approximately $48,000 incurred in connection with the
Technology Acquisition were capitalized in connection with that transaction.
TRANSACTIONS WITH MANAGEMENT
In January 1996, the Company obtained $125,000 in financing from two of
its executive officers (Robert J. Riscica, the Company's Chief Financial
Officer, and Marvin H. Goldstein, the Company's Vice President- Comptroller).
In connection with this 1996 Pre-Bridge Financing, Messrs. Riscica and
Goldstein purchased two and one-half units of the Company's securities, which
units were identical to the 1996 Bridge Units (except that, unlike the 1996
Bridge Shares, the 1996 Pre-Bridge Shares will not be required to be
registered under the Securities Act). As a result of the 1996 Pre-Bridge
Financing, the Company issued to Messrs. Riscica and Goldstein (i) $125,000
in aggregate principal amount of 1996 Pre-Bridge Notes and (ii) an aggregate
of 25,000 1996 Pre- Bridge Shares. The Company intends to use approximately
$129,000 of the proceeds from this offering to repay these 1996 Pre-Bridge
Notes (including estimated interest accrued thereon through and until such
repayment date) upon the consummation of this offering.
TRANSACTIONS WITH ADVERTISING AGENCY AFFILIATED WITH DIRECTOR
The Company from time to time has utilized advertising and related
services provided by Griffin Bacal, Inc. ("GBI"). Thomas Griffin, a director
of the Company, has been the Co-Chairman of GBI, which he founded in 1978,
for more than five years prior to the date hereof. From October 1994 through
January 1995, GBI had billed the Company approximately $79,000 for services
rendered, of which $54,000 has been paid.
Future transactions (if any) between the Company and any of its directors,
officers and/or 5% stockholders will continue to be on terms no less
favorable to the Company than could be obtained from independent third
parties and will be approved by a majority of the independent, disinterested
directors of the Company.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 15,000,000 shares of Common Stock, par
value $.0001 per share, and 5,000,000 shares of Preferred Stock, par value
$.01 per share. As of the date of this Prospectus, there are 1,538,985 shares
of Common Stock outstanding and no shares of preferred stock outstanding
(based on the assumed completion of the Pending Recapitalization
transactions).
52
<PAGE>
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share
held of record in the election of directors of the Company and in all other
matters to be voted on by the stockholders. There is no cumulative voting
with respect to the election of directors, with the result that the holders
of more than 50% of the shares voting for the election of directors can elect
all of the directors. Holders of Common Stock are entitled (i) to receive
such dividends as may be declared from time to time by the Board out of funds
legally available therefor and (ii) in the event of liquidation, dissolution
or winding up of the Company, to share ratably in all assets remaining after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the Common Stock. Holders of Common
Stock have no conversion rights or preemptive rights and are not subject to
further capital calls or assessments. There are no redemption or sinking fund
provisions applicable to the Common Stock. The rights of the holders of the
Common Stock are subject to any rights that may be fixed for holders of
preferred stock, when and if any preferred stock is issued. All of the
outstanding shares of Common Stock are fully paid and non-assessable. Upon
issuance, all of the 1,400,000 Shares offered hereby will be fully paid and
nonassessable. The Company's By-Laws provide that the holders of at least 10%
of its voting stock will be able to call special meetings of stockholders.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock
from time to time in one or more series, in all cases ranking senior to the
Common Stock with respect to payment of dividends and in the event of the
liquidation, dissolution or winding up of the Company. There are currently no
shares of preferred stock outstanding. The Board has the power, without
stockholder approval, to issue shares of one or more series of preferred
stock, at any time, for such consideration and with such relative rights,
privileges, preferences and other terms as the Board may determine
(including, but not limited to, terms relating to dividend rates, redemption
rates, liquidation preferences and voting, sinking fund and conversion or
other rights). The rights and terms relating to any new series of preferred
stock could adversely affect the voting power or other rights of the holders
of the Common Stock or could be utilized, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company.
JOHNSTON WARRANTS
Upon the consummation of this offering, there will be outstanding Class A
Warrants and Class B Warrants (which together constitute the Johnston
Warrants) to purchase an aggregate of 83,975 shares of Common Stock. All of
these warrants are beneficially owned by Charles C. Johnston, a director and
principal stockholder of the Company. Each Johnston Warrant is exercisable
for the purchase of one share of Common Stock at an exercise price of $3.60
per share. All of the Johnston Warrants will expire during the year 2000. In
addition, the Johnston Warrants are callable by the Company under certain
circumstances. The Company has also granted the holders of the Johnston
Warrants certain piggyback registration rights for the Common Stock issuable
upon exercise thereof. See " -- Registration Rights."
PUBLIC WARRANTS
Each Warrant offered hereby will entitle the registered holder thereof to
purchase one share of Common Stock, at a price of $4.00, subject to
adjustment in certain circumstances, at any time during the four year period
commencing on June 24, 1997. The Warrants will be separately transferable
immediately upon issuance.
The Warrants are redeemable by the Company, upon the consent of the
Underwriter, at any time commencing on June 24, 1997, upon notice of not less
than 30 days, at a price of $.10 per Warrant, provided that the closing bid
quotation of the Common Stock, for a period of 20 consecutive trading days
ending on the third day prior to the day on which the Company gives notice,
has been at least 150% (currently $6.00, subject to adjustment) of the then
effective exercise price of the Warrants. The holders of the Warrants will
have the right to exercise their Warrants until the close of business on the
date fixed for redemption.
The Warrants will be issued in registered form under a Warrant Agreement
by and among the Company, American Stock Transfer & Trust Company, as Warrant
Agent, and the Underwriter. Reference is made to the Warrant Agreement (which
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part) for a complete description of the terms and
conditions therein (the description herein contained being qualified in its
entirety by reference thereto).
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The exercise price and number of shares of Common Stock or other
securities issuable upon exercise of the Warrants are subject to adjustment
in certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.
However, such warrants are not subject to adjustment for issuances of Common
Stock at a price below the exercise price of the Warrants.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the certificate completed and executed
as indicated, accompanied by full payment of the exercise price (by certified
check payable to the Company) to the Warrant Agent for the number of Warrants
being exercised. The holders of Warrants do not have the rights or privileges
of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise (i) the
Company has filed a current prospectus with the Commission covering the
shares of Common Stock issuable upon exercise of such Warrant and (ii) such
shares have been registered or qualified, or have been deemed to be exempt
from registration or qualification, under the securities laws of the state of
residence of the holder of such Warrant. The Company will use its best
efforts to have all such shares so registered or qualified on or before the
first possible Warrant exercise date (i.e., the one-year anniversary of the
date of this Prospectus) and to maintain a current prospectus relating
thereto until the expiration date of the Warrants, subject to the terms and
conditions of the Warrant Agreement. While it is the Company's intention to
maintain such a current prospectus for such time period, there can be no
assurance that the Company will in fact be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a warrantholder exercises all Warrants then owned of record by
him, the Company will pay to such warrantholder, in lieu of the issuance of
any fractional share which is otherwise issuable, an amount in cash based on
the market value of the Common Stock on the last trading day prior to the
Warrant exercise date.
REGISTRATION RIGHTS
1995 Registration Rights Agreement
The Company has granted certain piggyback registration rights relating to
the shares of Common Stock to be issued in connection with the Pending
Recapitalization upon conversion of the Debentures and Series A Preferred
Stock (as well as those issued in payment of outstanding interest due on the
Debentures) and those issuable upon exercise of the Johnston Warrants,
representing an aggregate of 663,830 shares of Common Stock (collectively,
the "1995 Registrable Shares"), pursuant to an agreement between the holders
of such securities and the Company, dated May 12, 1995 (the "1995
Registration Rights Agreement").
In the event a registration is a primary registration on behalf of the
Company, the Company will use its best efforts to include in such
registration, subject to the agreement of the managing underwriter or
underwriters of the offering relating thereto (if any): (i) first, the
securities that the Company proposes to sell; (ii) second, those (a) 1995
Registrable Shares, (b) securities which are registrable pursuant to the
terms of an agreement, dated June 17, 1994 (the "Investor Rights Agreement"),
between the Company and certain stockholders (the "June Investor Shares"),
and (c) Bulman Shares (as hereinafter defined) which are requested by the
holders thereof to be included in such registration (pro rata among the
holders thereof); and (iii) third, other securities requested to be included
in such registration. In secondary, non-issuer registrations, the Company
will use its best efforts to include in such registration, subject to the
agreement of the managing underwriter or underwriters of the offering
relating thereto (if any): (X) first, those 1995 Registrable Shares, June
Investor Shares and Bulman Shares which are requested by the holders thereof
to be included in such registration (pro rata among the holders thereof); and
(Y) second, other securities requested to be included in such registration.
In connection with any underwritten piggyback registration, the holders of
the 1995 Registrable Shares have agreed to execute and deliver a "lock-up
agreement" with respect to any of their registrable securities included
therein for up to 90 days (or longer as the Company's underwriters may
request but not to exceed 180 days) after the effective date of the
registration statement relating to such underwritten offering.
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<PAGE>
Investor Rights Agreement
Under the Investor Rights Agreement, the Company agreed to register the
June Investor Shares (currently representing approximately 136,342 shares of
Common Stock) upon the demand of holders owning at least 20% of the June
Investor Shares then outstanding; provided that (among other conditions): (i)
no such demand registration is required to become effective prior to the
earlier of June 1, 1999 or within 90 days (or longer as the Company's
underwriters may request but not to exceed 180 days) after the effective date
of any registration statement initiated by the Company; and (ii) no more than
two such demand registrations are required to be effected. The Company also
agreed to cause a Form S-3 registration of the June Investor Shares upon
demand, but not more frequently than once every year, and to include the June
Investor Shares in certain piggyback registrations as provided in the
Investor Rights Agreement, which are subject to the priorities discussed
above concerning the 1995 Registration Rights Agreement. See "Shares Eligible
for Future Sale" and "Underwriting."
Bulman Registration Rights Agreement
Pursuant to an agreement between the Company and Richard L. Bulman, dated
January 1, 1995, the Company has agreed to cause a registration statement to
be filed with respect to the shares of Common Stock held by Mr. Bulman (the
"Bulman Shares") upon Mr. Bulman's demand made not more than once per year
during an eight year period ending January 1, 2003. In addition, Mr. Bulman
was granted piggyback registration rights relating to such shares, which are
subject to the priorities discussed above concerning the 1995 Registration
Rights Agreement. Mr. Bulman is currently the owner of 376,471 outstanding
shares of Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
Registration Rights of Gary Bilezikian
Pursuant to an agreement, dated October 26, 1993, between the Company and
Gary Bilezikian, a stockholder of the Company, the Company has granted Mr.
Bilezikian certain piggyback registration rights relating to his shares of
Common Stock if it proposes to file a registration statement under the
Securities Act. The Company is not obligated, however, to include any shares
of Common Stock held by Mr. Bilezikian either (i) in any registration
statement relating solely to the sale of securities to participants in a
Company stock plan or (ii) in any registration statement whose form does not
include substantially the same information as would be required to be
included in a registration statement covering the sale of shares of Common
Stock owned by Mr. Bilezikian. Mr. Bilezikian is currently the owner of
38,945 outstanding shares of Common Stock. See "Shares Eligible for Future
Sale" and "Underwriting."
V-Seion Registration Rights Agreement
Pursuant to a Registration Rights Agreement, dated as of July 14, 1995,
between the Company and V-Seion Multimedia Systems, Inc. ("V-Seion", which
was the seller of the assets acquired by the Company in the Technology
Acquisition), the Company granted V-Seion piggyback registration rights
relating to its shares of Common Stock (other than in connection with a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145(a) promulgated under the Securities Act is
applicable). If the registration proposed by the Company is to be an
underwritten offering of securities for the account of either the Company or
the holders of such securities, then the amount of shares which V-Seion will
be allowed to register can be limited, in the underwriter's discretion, by
certain relevant marketing factors. In the event that any shares of Common
Stock held by V-Seion are permitted by the underwriter to be included in such
a registration, V-Seion is prohibited from selling any of such shares to the
public for a period of 90 days (or such longer period, not to exceed 180
days, as the underwriter may request) from the effective date of such
registration. V-Seion is currently the owner of 19,645 outstanding shares of
Common Stock. See "Shares Eligible for Future Sale" and "Underwriting."
The March 1996 Shares
In March 1996, the Company issued 24,000 shares of Common Stock to legal
counsel to the Company in partial payment of outstanding legal fees. In
connection with such issuance, the Company did not grant (or agree to grant)
to its legal counsel any registration rights of any kind relating to such
shares.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and thus subject to Section 203 of
the DGCL ("Section 203"), which is generally viewed as an anti-takeover
statute. In general, Section 203 prohibits a publicly traded Dela-
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<PAGE>
ware corporation from engaging in any "business combination" (as defined)
with any "interested stockholder" (as defined) for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purpose of determining the number of shares outstanding those
shares owned (a) by persons who are directors and also officers and (b) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such
date, the business combination is approved by the board of directors and
authorized at an annual or special meetings of the stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3 % of the
outstanding voting stock which is not owned by the interested stockholder.
In general, Section 203 defines a "business combination" to include: (i)
any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition involving
the interested stockholder of 10% or more of the assets of the corporation;
(iii) (subject to certain exceptions) any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder; (iv) any transaction involving the corporation
which has the effect of increasing the proportionate share of the stock of
any class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of the benefit
of any loans, advances, guarantees, pledges or other financial benefits
provided by or through corporation. In general, Section 203 defines an
"interested stockholder" as (a) any entity or person beneficially owning 15%
or more of the outstanding voting stock of the corporation or (b) any entity
or person affiliated with or controlling or controlled by such entity or
person.
The existence of Section 203 would be expected to have the effect of
discouraging takeover attempts involving the Company, including attempts that
might result in a premium over the market price of the Common Stock (if it is
then publicly traded).
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Common Stock is
American Stock Transfer & Trust Company.
REPORTS TO STOCKHOLDERS
The Company intends to file, prior to the date of this Prospectus, an
application with the Commission to register the Shares and Warrants under the
provisions of Section 12(g) of the Exchange Act. The Company has agreed with
the Underwriter that the Company will use its reasonable best efforts to
continue to maintain such registration. Such registration will require the
Company to comply with periodic reporting, proxy solicitation and certain
other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have outstanding
2,938,985 shares of Common Stock. Of these outstanding shares, 1,690,000
shares of Common Stock (consisting of the 1,400,000 Shares offered hereby and
the 290,000 Selling Stockholders' Shares included in the Registration
Statement of which this Prospectus forms a part) have been registered under
the Securities Act and, accordingly, will be freely transferable without
restriction or further registration under the Securities Act, unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act ("Rule 144") described below; except that, in the
case of the 290,000 Selling Stockholders' Shares, the holders of such shares
have agreed that, without the Underwriter's prior written consent, such
holders will not sell or otherwise dispose of any shares of Common Stock in
any public market transaction (including pursuant to Rule 144) for the
12-month period following the date of this Prospectus.
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<PAGE>
All of the remaining 1,248,985 shares of Common Stock currently
outstanding (the "Restricted Common Stock") are "restricted securities" or
owned by "affiliates" (as those terms are defined in Rule 144) and thus may
not be sold publicly unless they are registered under the Securities Act or
are sold pursuant to Rule 144 or another exemption from registration. At
various times during the twelve months following the date of this Prospectus,
shares of Restricted Common Stock will become eligible for sale in the public
market pursuant to Rule 144. In addition, 1,235,234 shares of the Restricted
Common Stock are held by stockholders to whom the Company has granted certain
registration rights. In addition, the holders of the Johnston Warrants have
been granted certain registration rights related to the 83,975 shares of
Common Stock underlying such warrants. However, the holders of all of the
Restricted Common Stock and Mr. Johnston have agreed that, without the
Underwriter's prior written consent, they will not, for the 12-month period
following the date of this Prospectus (i) sell or otherwise dispose of any
shares of Common Stock in any public market transaction (including pursuant
to Rule 144) or (ii) exercise any rights held by such holders to cause the
Company to register any shares of Common Stock for sale pursuant to the
Securities Act.
The Underwriter also has certain demand and piggyback registration rights
with respect to the securities underlying the Underwriter's Warrants. The
Underwriter's Warrants will be exercisable at any time and from time to time,
in whole or in part, during the four-year period commencing one year
following the date of this Prospectus. In the event that all of the
Underwriter's Warrants (and the warrants to purchase Common Stock which
underlie the Underwriter's Warrants) were to be exercised, the holders of the
Underwriter's Warrants would become the owners of an aggregate of 280,000
shares of Common Stock, all of which would be subject to the registration
rights granted by the Company to the Underwriter in connection with the
issuance of the Underwriter's Warrants. See "Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company (as that term is defined under the Securities
Act), is entitled to sell, within any three-month period, a number of
restricted shares that have been beneficially owned for a least two years
which does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock or (ii) an amount equal to the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner of
sale, notice and the availability of current public information about the
Company. However, a person who is not deemed an affiliate and has
beneficially owned restricted shares for at least three years is entitled to
sell such shares without regard to the volume or other resale requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled
to sell such shares after the 90th day following the date of this Prospectus
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having
to comply with the public information, volume limitation or notice provisions
of Rule 144. Affiliates are subject to all Rule 144 restrictions after this
90-day period, but without a holding period.
Prior to this offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
shares of Common Stock, or the availability of such shares for sale, will
have on the market price of such securities prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices for the Common Stock
and could impair the Company's ability to raise capital through the sale of
its equity securities.
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter"), has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,400,000 Shares and 1,400,000 Warrants offered hereby from the Company. The
Underwriter is committed to purchase and pay for all of the Shares and
Warrants offered hereby if any of such securities are purchased. The Shares
and Warrants are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares and Warrants to the public at the public offering prices set forth on
the cover page of this Prospectus. The Underwriter may allow certain
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<PAGE>
dealers who are members of the National Association of Securities Dealers,
Inc. (the "NASD") concessions, not in excess of $.20 per Share $.004 per
Warrant, of which not in excess of $.10 per Share and $.002 per Warrant may in
turn be reallowed to other dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days following the date of this Prospectus, to purchase up to 210,000
additional Shares and/or 210,000 additional Warrants at the respective public
offering prices set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Underwriter may exercise this
option in whole or, from time to time, in part, solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the
Shares and/or Warrants offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the
securities offered hereby, including any securities sold pursuant to the
Underwriter's over-allotment option, $50,000 of which has been paid as of the
date of this Prospectus. The Company has also agreed to pay all expenses in
connection with qualifying the Shares and Warrants offered hereby for sale
under the laws of such states as the Underwriter may designate, including
expenses of counsel retained for such purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees, for
an aggregate of $140, warrants (the "Underwriter's Warrants") to purchase up
to 140,000 shares of Common Stock at an exercise price of $8.25 per share
(165% of the public offering price per share) and/or up to 140,000 warrants
(each exercisable to purchase one share of Common Stock at a price of $5.20
per share) at an exercise price of $.165 per warrant (165% of the public
offering price per Warrant). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year following the date of this
Prospectus, except to the officers and partners of the Underwriter and
members of the selling group, and are exercisable at any time and from time
to time, in whole or in part, during the four-year period commencing one year
following the date of this Prospectus (the "Warrant Exercise Term"). During
the Warrant Exercise Term, the holders of the Underwriter's Warrants are
given, at nominal cost, the opportunity to profit from a rise in the market
price of the Common Stock. To the extent that the Underwriter's Warrants are
exercised, dilution to the interests of the Company's stockholders will
occur. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected, since the holders of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Underwriter's
Warrants. Any profit realized by the Underwriter on the sale of the
Underwriter's Warrants, the underlying shares of Common Stock or the
underlying warrants, or the shares of Common Stock issuable upon exercise of
such underlying warrants, may be deemed additional underwriting compensation.
The Underwriter's Warrants contain a cashless exercise provision.
Subject to certain limitations and exclusions, the Company has agreed
that, upon the request of the holders of a majority of the Underwriter's
Warrants, the Company will (at its own expense), on one occasion during the
Warrant Exercise term, register the Underwriter's Warrants and the securities
underlying the Underwriter's Warrants under the Securities Act and that it
will include the Underwriter's Warrants and all such underlying securities in
any appropriate registration statement which is filed by the Company under
the Securities Act during the seven years following the date of this
Prospectus. In the event that all of the Underwriter's Warrants (and the
warrants to purchase Common Stock which underlie the Underwriter's Warrants)
were to be exercised, the holders of the Underwriter's Warrants would become
the owners of an aggregate of 280,000 shares of Common Stock, all of which
would be subject to the registration rights granted by the Company to the
Underwriter in connection with the issuance of the Underwriter's Warrants.
In connection with exercises of Warrants pursuant to a solicitation made
by the Underwriter which occur after the one-year anniversary of the date of
this Prospectus, the Company has agreed to pay to the Underwriter a fee of 5%
of the exercise price for each Warrant exercised; provided, however, that the
Underwriter will not be entitled to receive such compensation in Warrant
exercise transactions in which: (i) the market price of the Common Stock at
the time of exercise is lower than the exercise price of the Warrants; (ii)
the Warrants are held in any discretionary account; (iii) disclosure of
compensation arrangements is not made, in addition to the disclosure provided
in this Prospectus, in documents provided to holders of the Warrants at the
time of exercise;
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(iv) the holder of the Warrants has not confirmed in writing that the
Underwriter solicited such exercise; or (v) the solicitation of exercise of
the Warrants was in violation of Rule 10b-6 promulgated under the Exchange
Act. The Company has agreed not to solicit Warrant exercises other than
through the Underwriter, unless the Underwriter declines to make such
solicitation.
Rule 10b-6 promulgated under the Exchange Act may prohibit the Underwriter
from engaging in any market-making activities with regard to the Company's
securities for the period from nine business days (or such other applicable
period as Rule 10b-6 may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter may be
unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
The Company has agreed to retain the Underwriter as a financial consultant
for a period of two years following the consummation of this offering at an
annual fee of $30,000, the entire $60,000 being payable in full, in advance,
upon the consummation of this offering. The consulting agreement with the
Underwriter will not require it to devote a specific amount of time to the
performance of its duties thereunder. It is anticipated that these consulting
services will be provided by principals of the Underwriter and/or members of
the Underwriter's corporate finance department who, however, have not been
designated as of the date hereof. In addition, in the event that the
Underwriter originates a financing, merger, acquisition, joint venture or
other transaction to which the Company is a party, the Underwriter will be
entitled to receive a finder's fee in consideration for the origination of
such transaction.
All of the Company's current directors and officers, and substantially all
of its current securityholders, have agreed that, without the Underwriter's
prior written consent, for the 12-month period following the date of this
Prospectus, they will not sell or otherwise dispose of any shares of Common
Stock in any public market transaction (including pursuant to Rule 144) or
exercise any rights held by them to cause the Company to register any shares
of Common Stock for sale pursuant to the Securities Act.
The Underwriter has informed the Company that it does not expect sales of
the securities offered hereby to discretionary accounts to exceed 1% of the
securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock or the Warrants. Accordingly, the initial public offering prices of the
Shares and Warrants offered hereby and the terms of the Warrants have been
determined by negotiation between the Company and the Underwriter and are not
necessarily related to the Company's asset value, net worth or other
established criteria of value. Factors considered in determining such prices
and terms include the Company's financial condition and prospects, an
assessment of the Company's management, market prices of similar securities
of comparable publicly-traded companies, certain financial and operating
information of companies engaged in activities similar to those of the
Company and the general condition of the securities market.
Charles C. Johnston, a principal stockholder and director of the Company,
is a limited partner in the Underwriter.
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SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
An aggregate of up to 290,000 Selling Stockholders' Shares (comprised of
the 90,000 1995 Pre-Bridge Shares, the 150,000 1996 Bridge Shares and the
50,000 June 1996 Shares) may be offered and sold pursuant to this Prospectus
by the Selling Stockholders. The Company has agreed to register the Selling
Stockholders' Shares under the Securities Act concurrently with this offering
and to pay all expenses in connection therewith. The Selling Stockholders'
Shares have been included in the Registration Statement of which this
Prospectus forms a part. None of the Selling Stockholders' Shares may be sold
by the Selling Stockholders prior to 12 months following the date of this
Prospectus without the prior written consent of the Underwriter. Other than
Charles C. Johnston (who is a director and principal stockholder of the
Company and the sole stockholder of J&C Resources, Inc., one of the Selling
Stockholders, and who is also a limited partner in the Underwriter) and
Harvey Kohn (who was a director of the Company from June 1994 to March 1995),
none of the Selling Stockholders nor their affiliates has ever held any
position or office with the Company or ever had any other material
relationship with the Company. The Company will not receive any of the
proceeds from the sale of the Selling Stockholders' Shares by the Selling
Stockholders. The following table sets forth certain information with respect
to the Selling Stockholders.
<TABLE>
<CAPTION>
Percentage
Beneficial Beneficial
Beneficial Amount of Ownership of Ownership of
Ownership of Selling Shares of Common Shares of Common
Shares of Common Stockholders' Stock After Stock After
Selling Stockholders Stock Prior to Sale Shares Offered Offering(1) Offering (1)
-------------------------------------- ------------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Herbert Berman ....................... 20,000 20,000 -0- -0-
Isaac Berman ......................... 10,000 10,000 -0- -0-
Bodywell International ............... 50,000 50,000 -0- -0-
Ben Bollag ........................... 44,103(2) 15,000 29,103(2) *
Michael Bollag ....................... 73,206(3) 15,000 58,206(3) 1.98%
Robert S. Cohen ...................... 10,000 10,000 -0- -0-
Cowen & Company f/b/o Lewis Merenstein
IRA .................................. 10,000 10,000 -0- -0-
J&C Resources, Inc. .................. 298,136(4) 30,000 268,136(4) 8.83%
Lawrence Howard ...................... 25,000 25,000 -0- -0-
Robert Howard ........................ 25,000 25,000 -0- -0-
Harvey Kohn .......................... 37,572 7,500 30,072 1.02%
Helen Kohn ........................... 5,000 5,000 -0- -0-
Michael Miller ....................... 10,000 10,000 -0- -0-
Rahn & Bodmer ........................ 32,322 15,000 17,322 *
Michael Schachter .................... 10,000 10,000 -0- -0-
Arthur Steinberg ..................... 10,000 10,000 -0- -0-
Cary Sucoff .......................... 30,160 7,500 22,660 *
Ronit Sucoff ......................... 5,000 5,000 -0- -0-
Universal Partners, L.P. ............. 10,000 10,000 -0- -0-
</TABLE>
- ------
* Less than one percent.
(1) Assumes all of the Selling Stockholders' Shares are sold by the Selling
Stockholders.
(2) Includes 29,103 shares of Common Stock owned by The Sunshine Charitable
Trust, of which Ben Bollag is a trustee.
(3) Includes (i) 29,103 shares of Common Stock owned by The Sunshine
Charitable Trust, of which Michael Bollag is a trustee, and (ii) 29,103
shares of Common Stock owned by The Michael Bollag Charitable Remainder
Unitrust, of which Michael Bollag is the beneficiary until January 2009.
(4) Includes 83,975 shares of Common Stock issuable upon exercise of the
Johnston Warrants and 15,000 shares of Common Stock issuable upon
exercise of options granted under the Option Plan. The sole stockholder
of J&C Resources is Charles C. Johnston, who is a director and principal
stockholder of the Company and a limited partner in the Underwriter.
60
<PAGE>
The Selling Stockholders' Shares may be offered and sold from time to time
as market conditions permit in the over-the-counter market, or otherwise, at
prices and terms then prevailing or at prices relating to the then- current
market price, or in negotiated transactions. The Selling Stockholders' Shares
may be sold by one or more of the following methods, without limitation: (a)
a block trade in which a broker or 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; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) ordinary brokerage transactions and transactions in
which the broker solicits purchases; and (d) 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. Such brokers or dealers may receive
commissions or discounts from Selling Stockholders in amounts to be
negotiated. Such brokers and dealers and any other participating brokers or
dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Solovay Marshall & Edlin, P.C. ("SME"), New York, New York.
Certain legal matters will be passed upon for the Underwriter by Tenzer
Greenblatt LLP, New York, New York. On March 26, 1996, SME agreed to accept
from the Company, in lieu of cash and as partial payment for legal services
rendered prior to that date, 24,000 shares of Common Stock (valued by the
Company at that time as having a fair market value of $3.50 per share). The
Company issued such 24,000 shares to members and an employee of SME on March
27, 1996.
EXPERTS
The consolidated financial statements of Kideo Productions, Inc. and
Subsidiaries as of July 31, 1995, and for the period from November 1, 1993
(date operations commenced) to July 31, 1994 and for the year ended July 31,
1995, included in this Prospectus and in the Registration Statement have been
included herein in reliance upon the reports (which contain an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in Note 1 of the notes to the consolidated financial statements) of
Goldstein Golub Kessler & Company, P.C., independent certified public
accountants given upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (the
"Registration Statement", which term shall include all amendments, exhibits
and schedules thereto) on Form SB-2 under the Securities Act with respect to
the securities offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description
of the matter involved, and each such statement shall be deemed qualified in
its entirety by such reference. The Registration Statement may be inspected
and copied at prescribed rates at the public reference facilities of the
Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices 7 World Trade Center,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661.
61
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report ........................ F-2
Consolidated Financial Statements:
Balance Sheet .................................. F-3
Statement of Operations ........................ F-4
Statement of Shareholders' Deficiency .......... F-5
Statement of Cash Flows ........................ F-6 -- F-7
Notes to Consolidated Financial Statements ...... F-8 -- F-15
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors of
Kideo Productions, Inc.
We have audited the accompanying consolidated balance sheet of Kideo
Productions, Inc. and Subsidiaries as of July 31, 1995 and the related
consolidated statements of operations, shareholders' deficiency, and cash
flows for the period from November 1, 1993 (date operations commenced) to
July 31, 1994 and for the year ended July 31, 1995. 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 misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kideo
Productions, Inc. and Subsidiaries as of July 31, 1995 and the results of
their operations and their cash flows for the period from November 1, 1993
(date operations commenced) to July 31, 1994 and for the year ended July 31,
1995 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 of the notes to consolidated financial statements, the Company
sustained a loss for the period ended July 31, 1994 and for the year ended
July 31, 1995 and has a working capital deficiency at July 31, 1995. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
November 13, 1995, except for the first paragraph of
Note 8, as to which the date is January 5, 1996
F-2
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Pro Forma at
July 31, April 30, April 30,
1995 1996 1996
------------- ------------- --------------
(unaudited) (unaudited)
(Note 12)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash ................................................ $ 61,137 $ 56,553 $ 45,524
Accounts receivable (Note 1) ........................ 59,313 27,610 27,610
Prepaid expenses and other current assets (Note 7) .. 107,503 195,837 215,837
------------- ------------- --------------
Total current assets ........................... 227,953 280,000 288,971
Property and Equipment, net (Note 2) .................. 766,377 600,169 600,169
Deferred Offering Costs (Note 1) ...................... 325,348 325,348
Other Assets (Notes 1 and 3) .......................... 453,387 483,874 328,176
------------- ------------- --------------
Total Assets ................................... $ 1,447,717 $ 1,689,391 $ 1,542,664
============= ============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable .................................... $ 428,188 $ 589,012 $ 589,012
Accrued expenses .................................... 233,590 275,358 278,019
Obligations under capital leases -- current portion
(Notes 2 and 6) .................................. 144,171 172,961 172,961
Loans payable -- related parties (Note 4) ........... 61,472 61,872 --
Notes payable (Notes 7 and 10) ...................... -- 828,396 938,396
Unearned revenue (Note 1) ........................... 42,338 173,930 173,930
------------- ------------- --------------
Total current liabilities ...................... 909,759 2,101,529 2,152,318
Obligations under Capital Leases, net of current portion
(Notes 2 and 6) ..................................... 195,330 121,079 121,079
Long-term Debt (Notes 7 and 10) ....................... 956,250 1,000,000 --
------------- ------------- --------------
Total liabilities .............................. 2,061,339 3,222,608 2,273,397
------------- ------------- --------------
Commitments and Contingencies (Notes 1, 5 and 11)
Shareholders' Deficiency (Notes 1, 7, 8, 10 and 12):
Preferred stock -- $.01 par value; authorized
5,000,000 shares, issued and outstanding 956.25
shares (July 31, 1995), 1,048.672 shares (April 30,
1996) and -0- shares (pro forma), respectively
($1,048,672 aggregate liquidation preference at
April 30, 1996) .................................. 10 10 --
Common stock -- $.0001 par value; authorized
15,000,000 shares, issued and outstanding 616,891
shares (July 31, 1995), 915,563 shares (April 30,
1996) and 1,538,985 shares (pro forma), respectively 62 92 154
Additional paid-in capital .......................... 1,385,574 2,087,221 3,177,169
Accumulated deficit ................................. (1,999,268) (3,620,540) (3,908,056)
------------- ------------- --------------
Shareholders' deficiency ....................... (613,622) (1,533,217) (730,733)
------------- ------------- --------------
Total Liabilities and Shareholders' Deficiency . $ 1,447,717 $ 1,689,391 $ 1,542,664
============= ============= ==============
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-3
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from
November 1, 1993 Nine-month
(date operations Year ended period ended
commenced) to July 31, April 30,
July 31, 1994 1995 1995 1996
---------------- -------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Sales ........................................ $ 38,223 $ 521,186 $ 426,489 $ 669,734
Costs of sales (Note 1) ...................... 95,153 657,498 528,841 496,521
---------------- -------------- -------------- ---------------
Gross profit (loss) .......................... (56,930) (136,312) (102,352) 173,213
Operating expenses (including interest expense of
$118,485, $22,473 and $329,373 for the year ended
July 31, 1995 and the nine-month periods ended
April 30, 1995 and 1996, respectively) (Note 7) 348,059 1,442,261 1,049,503 1,761,519
---------------- -------------- -------------- ---------------
Net loss ..................................... $ (404,989) $(1,578,573) $(1,151,855) $ (1,588,306)
================ ============== ============== ===============
Pro forma financial information (unaudited) (Note
12):
Net loss ................................... -- $(1,578,573) $(1,151,855) $(1,588,306)
Pro forma adjustment for employment agreements -- (338,000) (257,000) (74,000)
---------------- -------------- -------------- ---------------
Pro forma net loss ......................... -- $(1,916,573) $(1,408,855) $(1,662,306)
================ ============== ============== ===============
Pro forma net loss per common share ........ -- $ (1.18) $ (.90) $ (1.01)
================ ============== ============== ===============
Weighted average number of common shares
outstanding (Note 1) .................... -- 1,571,450 1,571,450 1,571,450
================ ============== ============== ===============
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-4
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
Period from November 1, 1993 (date operations commenced) to July 31, 1994,
year ended July 31, 1995 and the nine month period ended April 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Deficiency
------ ------ ------ ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash ....... -- -- 544,060 $54 $ 409,341 -- $ 409,395
Net loss ................................ -- -- -- -- -- $ (404,989) (404,989)
-------- ------ ------- ---- ---------- ----------- ------------
Balance at July 31, 1994 ................ -- -- 544,060 54 409,341 (404,989) 4,406
Exercise of stock options (Note 8) ...... -- -- 19,272 2 47,448 -- 47,450
Issuance of preferred stock in connection
with private placement memorandum (Note 7) 956.25 $10 -- -- 737,311 -- 737,321
Issuance of common stock in satisfaction of
expenses in connection with private
placement memorandum (Note 7) .......... -- -- 33,914 3 121,291 -- 121,294
Issuance of common stock in connection with
acquisition of technology and software
(Note 1) ................................ -- -- 19,645 3 70,183 -- 70,186
Accrued dividends on preferred stock .... -- -- -- -- -- (15,706) (15,706)
Net loss ................................ -- -- -- -- -- (1,578,573) (1,578,573)
-------- ------ ------- ---- ---------- ----------- ------------
Balance at July 31, 1995 ................ 956.25 10 616,891 62 1,385,574 (1,999,268) (613,622)
(Unaudited):
Issuance of preferred stock in connection
with private placement memorandum
(Note 7) ........................... 43.75 -- -- -- 43,750 -- 43,750
Issuance of common stock in satisfaction
of expenses in connection with private
placement memorandum (Note 7) ...... -- -- 3,239 -- 6,751 -- 6,751
Issuance of common stock in connection with
October 1995 private placement (Note 7) -- -- 90,000 9 163,627 -- 163,636
Issuance of common stock in connection with
January 1996 private placement (Note 7) -- -- 25,000 2 58,012 -- 58,014
Issuance of common stock in partial payment
of interest on long-term debt ...... -- -- 6,433 1 23,028 -- 23,029
Issuance of preferred stock in satisfaction
of dividends ....................... 48.672 -- -- -- 48,672 -- 48,672
Issuance of common stock in connection with
February 1996 private placement
(Note 7) ........................... -- -- 150,000 15 273,810 -- 273,825
Issuance of common stock for legal expenses
in connection with the proposed initial
public offering (Note 8) ........... -- -- 24,000 3 83,997 -- 84,000
Accrued dividends on preferred stock .. -- -- -- -- -- (32,966) (32,966)
Net loss .............................. -- -- -- -- -- (1,588,306) (1,588,306)
--------- ------ ------- ---- ---------- ----------- ------------
Balance at April 30, 1996 ............. 1,048.672 $10 915,563 $92 $2,087,221 $(3,620,540) $ (1,533,217)
========= ====== ======= ==== ========== =========== ============
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-5
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
November 1, 1993 Nine-month
(date operations Year ended period ended
commenced) to July 31, April 30,
July 31, 1994 1995 1995 1996
---------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................. $(404,989) $(1,578,573) $(1,151,855) $(1,588,306)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ..... 31,694 147,397 100,383 245,250
Amortization of loan discount ..... -- -- -- 148,872
Amortization of deferred debt costs . -- -- -- 81,233
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable ................... (9,954) (49,359) (9,585) 31,703
(Increase) decrease in prepaid
expenses and other current assets -- (107,503) (217,651) 41,666
(Increase) decrease in deferred
production costs ............. (42,490) 21,245 -- --
Increase in other assets ........ (7,849) (378,412) (231,175) (94,002)
Increase in accounts payable .... 69,274 358,914 427,418 4,574
Increase in accrued expenses .... 29,210 188,674 291,742 110,503
Increase in unearned revenue .... -- 42,338 49,450 131,592
---------------- -------------- -------------- --------------
Net cash used in operating
activities ................... (335,104) (1,355,279) (741,273) (886,915)
---------------- -------------- -------------- --------------
Cash flows from investing activity --
purchase of property and equipment ... (92,756) (336,637) (246,887) (66,760)
---------------- -------------- -------------- --------------
Cash flows from financing activities:
Proceeds from (repayment of) loans
payable -- related parties ........ 68,138 (6,666) (6,000) 400
Proceeds from bridge notes ........... -- 1,050,000 1,100,000 1,175,000
Repayment of bridge notes ............ -- (75,000) -- --
Net proceeds from issuance of capital
stock ............................... 409,395 357,982 47,448 32,125
Proceeds from long-term debt ......... -- 468,750 -- 32,125
Principal payments of capital lease
obligations ....................... -- (91,686) (62,727) (45,461)
Payment of debt issue costs .......... -- -- -- (160,000)
Payment of deferred offering costs ... -- -- -- (85,098)
---------------- -------------- -------------- --------------
Net cash provided by financing
activities ........................ 477,533 1,703,380 1,078,721 949,091
---------------- -------------- -------------- --------------
Net increase (decrease) in cash ........ 49,673 11,464 90,561 (4,584)
Cash at beginning of period ............ -- 49,673 49,673 61,137
---------------- -------------- -------------- --------------
Cash at end of period .................. $ 49,673 $ 61,137 $ 140,234 $ 56,553
================ ============== ============== ==============
</TABLE>
(continued)
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-6
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
November 1, 1993 Nine month
(date operations Year ended period ended
commenced) to July 31, April 30,
July 31, 1994 1995 1995 1996
---------------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest ................................... -- $ 83,288 $ 22,473 $ 42,465
================ ============ =========== ===========
Income taxes ............................... -- $ 713 -- $ 3,931
================ ============ =========== ===========
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations for equipment
purchases .................................. -- $431,187 $431,187 --
================ ============ =========== ===========
Dividends accrued on preferred stock .......... -- $ 15,706 -- $ 32,966
================ ============ =========== ===========
Conversion of bridge notes into preferred stock -- $487,500 -- --
================ ============ =========== ===========
Conversion of bridge notes into long-term debt -- $487,500 -- --
================ ============ =========== ===========
Issuance of capital stock for software,
technology rights and intellectual property
($51,647 capitalized to property and
equipment) ................................. -- $ 70,186 -- --
================ ============ =========== ===========
Issuance of capital stock in satisfaction of
expenses ................................... -- $121,294 -- $ 84,000
================ ============ =========== ===========
Conversion of accrued expenses into long-term
debt ....................................... -- -- -- $ 11,625
================ ============ =========== ===========
Conversion of accrued expenses into capital
stock ...................................... -- -- -- $ 41,404
================ ============ =========== ===========
Conversion of dividends payable into preferred
stock ...................................... -- -- -- $ 48,672
================ ============ =========== ===========
Deferred offering costs accrued but not paid .. -- -- -- $ 156,250
================ ============ =========== ===========
Loan discounts associated with bridge notes ... -- -- -- $ 495,476
================ ============ =========== ===========
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-7
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE-MONTH PERIODS
ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CORPORATE STRUCTURE AND
PRINCIPAL BUSINESS ACTIVITY:
Kideo Productions, Inc. ("Kideo-Delaware"), a Delaware corporation, was
incorporated on June 24, 1994 and subsequently amended and restated its
certificate of incorporation on December 28, 1994. As of January 9, 1995,
Kideo-Delaware exchanged its common stock for all of Kideo-New York's (the
operating company incorporated in New York in 1993) outstanding common stock
whereby Kideo-New York became a wholly owned subsidiary of Kideo-Delaware. The
accompanying consolidated financial statements include the accounts of
Kideo-Delaware and its wholly owned subsidiaries, Kideo-New York and Kideo
Productions (Canada), Inc. (collectively the "Company"). Kideo Productions
(Canada), Inc. commenced operations in July 1995. All significant intercompany
transactions and balances have been eliminated. See Note 8 for stock split and
Note 12 for recapitalization.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred net losses of
$404,989, $1,578,573 and $1,588,306 for the period from the date operations
commenced (November 1, 1993) to July 31, 1994, the year ended July 31, 1995 and
the nine-month period ended April 30, 1996, respectively. In addition, the
Company had a working capital deficiency of $1,821,529, and total liabilities
exceeded its total assets by $1,533,217, as of April 30, 1996. These factors
indicate that the Company may be unable to continue as a going concern.
Management is seeking additional funds from the completion of an additional
private placement (see Note 10) and a proposed initial public offering ("IPO")
of the Company's common stock and warrants (see Note 12). The net proceeds are
expected to be used to meet the Company's working capital requirements.
Management believes that the successful completion of an additional private
placement (see Note 10) and of an IPO will enable it to continue as a going
concern during the 12-month period following the most recent balance sheet
presented. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company develops, produces and markets personalized children's
educational video tapes sold through direct sales, mail-order houses, children's
toy stores and various catalogs. The principal shareholder developed the initial
product line prior to the Company's commencement of operations. The Company is
devoted to the development of multimedia products using emerging technologies
with an emphasis on personalized products for children. The Company's sales are
seasonal in nature based, in part, on gift buying during the months of October
though December. The Company generally records an account receivable and a
corresponding liability for unearned revenue for video tape order kits shipped
to mail order houses and retail stores. The Company is entitled to collect the
original billed accounts receivable based upon the terms of sale to the mail
order houses and retail stores whether or not the video tape order kit is sold
to the ultimate consumer. No additional revenue is received by the Company upon
the sale of the video tape order kit by the mail order houses and retail stores
to the ultimate consumer. Revenue is recognized on the accrual basis when the
video tape is shipped to the ultimate consumer of the order kit and the
Company's obligation is satisfied. Deferred production costs consist of
capitalized costs related to the production and development of the storylines of
the Company's video tapes. These costs are charged to operations over a two-year
period. As of July 31, 1995, all amounts, totaling $21,245, have been charged to
operations. Legal and accounting fees, printing costs and other expenses
associated with the issuance of the Company's $1,000,000 subordinated debentures
(the "Debentures") (see Note 7) of $223,746 are being amortized over the term of
the Debentures. Amortization expense charged to operations for the year ended
July 31, 1995 and the nine-month period ended April 30, 1996 was $11,996 and
$56,052, respectively.
F-8
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CORPORATE STRUCTURE AND
PRINCIPAL BUSINESS ACTIVITY: - (Continued)
Certain technology rights, intellectual property and software related to the
production of video products, amounting to approximately $192,000 ($121,814 in
cash, legal costs and other items and $70,186 in common stock of the Company),
were acquired on July 17, 1995 and are being amortized over a three-year period
which commenced August 1, 1995 using the straight-line method. Depreciation and
amortization charged to operations for the nine-month period ended April 30,
1996 amounted to $48,039.
Depreciation of property and equipment is provided for by the accelerated and
straight-line methods over the estimated useful lives of the respective assets.
Deferred offering costs represent costs attributable to an IPO (see Note 12).
The Company intends to offset these costs against the proceeds from this
transaction. In the event that such offering is not completed, these costs will
be charged to operations.
To date, the Company has not had any significant warranty costs for repair or
replacement of its product. Based on current sales and historical experience,
warranty costs, if any, are charged to operations when incurred.
Advertising costs are charged to operations when the advertising first takes
place. Advertising expenses for the period ended July 31, 1994, the year ended
July 31, 1995 and the nine-month periods ended April 30, 1995 and 1996 were
$25,651, $182,149, $61,889 and $31,573, respectively.
As of July 31, 1995, the Company had a net operating loss carryforward for
both financial reporting and income tax purposes of approximately $1,981,000
available to offset future income through 2010. There were no material temporary
differences between the book bases and tax bases of assets and liabilities. This
resulted in a deferred income tax asset of approximately $891,000 for which the
Company recorded a full valuation allowance due to the uncertainty of future
realization of such losses. Utilization of the net operating loss carryforward
will be limited based on the ownership changes described in Notes 7, 8, 10 and
12.
The accompanying unaudited interim financial statements include all
adjustments (consisting only of those of a normal recurring nature) necessary
for a fair statement of the results of the interim periods.
Pro forma net loss per common share is calculated by dividing the pro forma
net loss by the weighted average number of common shares outstanding. Pro forma
net loss has been adjusted for interest expense on the convertible debt. For
purposes of this computation, shares of common stock, and shares of common stock
issuable upon the exercise of options or warrants to purchase common stock,
conversion of debt to common stock and conversion of preferred stock to common
stock have been included in the weighted average number of shares outstanding
from inception utilizing the treasury stock or if converted method, as
appropriate.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management affecting the
reported amounts of assets and liabilities and revenue and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is
effective for financial statements for fiscal years beginning after December 15,
1995. The Company does not believe the adoption of SFAS No. 121 will have a
material effect on its financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock- based Compensation," which is effective for
financial statements with fiscal years beginning after December 15, 1995.
Management has not yet determined what effect, if any, adoption of SFAS No. 123
will have on its financial position or results of operations.
F-9
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
2. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
July 31, April 30, Estimated
1995 1996 Useful Life
---------- ----------- -------------
<S> <C> <C> <C>
Video production equipment and related software . $862,466 $910,397 3 years
Furniture and fixtures ......................... 5,653 5,653 7 years
Office equipment ............................... 44,109 62,938 5 years
---------- ----------- -------------
912,228 978,988
Less accumulated depreciation .................. 145,851 378,819
---------- -----------
$766,377 $600,169
========== ===========
</TABLE>
Included in property and equipment as of July 31, 1995 and April 30, 1996
is approximately $431,000 of assets acquired under capital leases.
Accumulated depreciation on these assets as of July 31, 1995 and April 30,
1996 amounted to approximately $72,000 and $180,000, respectively. The
property held under these leases is collateral for the related capital lease
obligations described in Note 6.
3. OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1995 1996
---------- ----------
<S> <C> <C>
Deferred debt costs (Note 1) .................. $206,931 $155,698
Deposits on capital lease obligations (Note 6) . 186,000 186,000
Technology rights and intellectual property ... 50,349 38,067
Security deposits ............................. 10,107 14,109
Advance on production contract ................ 90,000
---------- ----------
$453,387 $483,874
========== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Loans payable -- related parties consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1995 1996
---------- -----------
<S> <C> <C>
Loan from a shareholder bearing interest at a rate of 6%. The Company
has issued 4 shares of common stock in lieu of interest. .......... $ 3,650 $ 3,650
Debt to a former director of the Company with no repayment terms and
whose payment has not been requested. ............................. 57,822 58,222
---------- -----------
$61,472 $61,872
========== ===========
</TABLE>
5. COMMITMENTS:
The Company is obligated under a noncancelable operating lease for office
space expiring in 1997. The lease is subject to escalation for the Company's
proportionate share of increases in real estate taxes and certain other
operating expenses. In addition, the Company rents additional office space on a
month-to-month basis at
F-10
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
5. COMMITMENTS: - (Continued)
a monthly rent of approximately $700, inclusive of utilities. Total rent
expense for the period ended July 31, 1994, the year ended July 31, 1995 and the
nine-month periods ended April 30, 1995 and 1996 amounted to $26,585, $42,512,
$34,059 and $41,169, respectively. Future approximate minimum rental payments
required are as follows:
<TABLE>
<CAPTION>
<S> <C>
Three-month period ending July 31, 1996 $14,000
Year ending July 31,
1997 ............................... 59,000
1998 ............................... 10,000
---------
$83,000
=========
</TABLE>
The Company has entered into employment contracts with five employees
expiring at various times through December 1998. The aggregate minimum
commitment for future salaries, excluding bonus, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Three-month period ending July 31, 1996 $127,000
Year ending July 31,
1997 ................................ 441,000
1998 ................................ 200,000
1999 ................................ 52,000
----------
$820,000
==========
</TABLE>
6. CAPITAL LEASE OBLIGATIONS:
During the year ended July 31, 1995, the Company entered into several capital
leases, totaling approximately $431,000, for the purchase of equipment. The
Company paid deposits of $186,000 (see Note 3) upon execution of the leases. The
obligations are due in monthly installments of principal and interest
aggregating $16,400, with interest rates ranging from 16% to 30%, through
December 1997.
Aggregate lease payments required under these leases at July 31, 1995 and
April 30, 1996 are as follows:
<TABLE>
<CAPTION>
July 31, April 30,
Year or period ending July 31, 1995 1996
----------------------------------- ---------- -----------
<S> <C> <C>
1996 .............................. $191,786 $ 84,212
1997 .............................. 167,087 167,087
1998 .............................. 84,250 84,250
---------- -----------
443,123 335,549
Less amounts representing interest . 103,622 41,509
---------- -----------
$339,501 $294,040
========== ===========
</TABLE>
7. BRIDGE NOTE FINANCING AND PRIVATE PLACEMENT OFFERING:
In September 1994, a group of investors loaned the Company an aggregate of
$250,000 ("September 1994 Financing") evidenced by signed promissory notes that
bear interest at 10% per annum. Upon the closing of the May 1995 Units Financing
described below, $175,000 of these notes was converted into 1.75 of the units
sold in the May 1995 Units Financing (comprised of preferred stock and
Debentures) and $75,000 was repaid. In
F-11
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
7. BRIDGE NOTE FINANCING AND PRIVATE PLACEMENT OFFERING: - (Continued)
addition, upon closing of the May 1995 Units Financing, warrants to purchase
up to 52,485 shares of common stock of the Company were issued to the lenders in
the September 1994 Financing. In connection with the Company's proposed IPO (see
Note 12), these warrants will be purchased for $88,000 by the Company and such
amount will be charged to operations during the year ending July 31, 1996.
In December 1994, the Company received $400,000 from additional investors
("December 1994 Financing") evidenced by signed promissory notes totaling
$420,000 including interest. Upon closing of the May 1995 Units Financing (as
described below), the $400,000 of notes was converted into four of the units
sold in the May 1995 Units Financing (comprised of preferred stock and
Debentures) and $20,000 of interest was paid to the lenders.
On October 14, 1994, an existing shareholder loaned $300,000 to the Company.
In March 1995, the shareholder loaned the Company an additional $100,000. These
loans ("Johnston Financing") bear interest at 12% per annum. Interest on the
Johnston Financing at the time of their conversion was not paid. The accrued
interest due this shareholder at April 30, 1996 amounted to approximately
$18,000. Upon the closing of the May 1995 Units Financing, the Johnston
Financing was converted into four of the units sold in the May 1995 Units
Financing (comprised of preferred stock and Debentures) and the shareholder
received warrants to purchase 83,975 shares of common stock at various exercise
prices. Subsequently, the shareholder and the Company have agreed that the
exercise price will be $3.60 per common share.
In 1995, the Company completed a private placement (the "May 1995 Units
Financing") of its securities which consisted of an offering of 20 units at
$100,000 per unit. Each unit consisted of 50 shares of convertible preferred
stock ("Preferred Stock") and a 10% convertible subordinated debenture in the
amount of $50,000 ("Debentures"). Both the Preferred Stock and the Debentures
will be convertible into common stock of the Company at an initial ratio of
279.9 shares of common stock for every 1 share of Preferred Stock and 279.9
shares for every $1,000 of Debentures. Subject to earlier conversion or
repayment, the Debentures will mature three years after their issuance. Interest
on the Debentures shall accrue at 10% per annum, 5% payable in cash and 5%
payable in either cash or common stock of the Company or some combination
thereof. The Preferred Stock has a liquidation value of $1,000 per share in the
event of the dissolution or liquidation of the Company. Dividends accrue at a
rate of 10% per annum payable semiannually, in cash or through the issuance of
additional shares of Preferred Stock or any combination thereof. The net
proceeds from the sale of the units were used to repay $75,000 of the September
1994 Financing and to meet the Company's working capital requirements. The
balance of the September 1994 Financing, as well as the December 1994 Financing
and the Johnston Financing, were converted into an aggregate of 9.75 of the 20
units sold in the May 1995 Units Financing. At July 31, 1995, the Company had
closed on 19.125 units (including the 9.75 units issued upon conversion of prior
financings). The Company closed on the remaining .875 units in October 1995.
In connection with the Company's proposed IPO (see Note 12) all of the
Preferred Stock and all of the Debentures will be converted into shares of
common stock of the Company. Upon conversion of the Debentures approximately
$156,000 of debt issue costs will be charged to operations.
During September and October 1995, the Company completed a $300,000 private
placement of its securities in connection with which it issued 90,000 shares of
common stock and $300,000 of 9% promissory notes (the "Fall 1995 Pre-Bridge
Financing") with interest payable semiannually. These notes are due and payable
upon the completion of a proposed IPO (see Note 12) or one year from the closing
date of the Fall 1995 Pre- Bridge Financing. In the accompanying unaudited April
30, 1996 financial statements, the Company recorded the common stock at an
estimated fair value of $1.818 per share and will record a related charge to
earnings for $163,636 during the period the notes remain outstanding. For the
nine-month period ended April 30, 1996, $81,818 was charged to operations.
F-12
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
7. BRIDGE NOTE FINANCING AND PRIVATE PLACEMENT OFFERING: - (Continued)
In January 1996, the Company issued 25,000 shares of common stock and
$125,000 of 9% promissory notes, with interest payable semiannually, to two of
its officers for aggregate proceeds of $125,000 ("January 1996 Pre-Bridge
Financing"). These notes are due and payable upon the completion of a proposed
IPO or one year from the closing date of the January 1996 Pre-Bridge Financing.
In the accompanying unaudited April 30, 1996 financial statements, the Company
recorded the common stock at an estimated fair value of $2.32 per share and will
record a related charge to earnings for $58,014 during the period the notes
remain outstanding. For the nine-month period ended April 30, 1996, $15,712 was
charged to operations.
In February 1996, the Company completed an additional private placement of
its securities (the "1996 Bridge Financing"). The private placement consisted of
15 units at a price of $50,000 per unit. Each unit consisted of 10,000 shares of
common stock and a $50,000 unsecured non-negotiable promissory note bearing
interest at 9% per annum. These notes are due and payable at the earlier of the
completion of a proposed IPO or one year from the closing date of the private
placement. In the accompanying unaudited April 30, 1996 consolidated financial
statements, the Company recorded the common stock at an estimated fair value of
$1.823 per share and will record a related charge to earnings for $273,825
during the period the notes remain outstanding. For the nine-month period ended
April 30, 1996, $51,342 was charged to operations. The Company received net
proceeds of $590,000 from this private placement and incurred debt issue costs
of $160,000 which are included in prepaid expenses and other current assets in
the accompanying unaudited consolidated financial statements. Debt issue costs
will be amortized over the period the notes remain outstanding. For the
nine-month period ended April 30, 1996 amortization of debt issue costs amounted
to approximately $30,000.
8. SHAREHOLDERS' EQUITY:
In January 1996, the Company's Board of Directors authorized an increase in
the number of shares of preferred stock from 100,000 to 5,000,000. In addition,
the Company's Board of Directors authorized an increase in the number of shares
of common stock from 400,000, $.01 par value, to 15,000,000, $.0001 par value,
and declared a stock split for which shareholders received 8.6545 shares of
common stock for each share of common stock previously owned. The transaction
described in this paragraph has been given retroactive effect in the
accompanying consolidated financial statements and related notes.
The Company has granted to a director/shareholder and another shareholder
certain preemptive rights to purchase additional shares of common stock to avoid
dilution of their ownership in the event of certain sales of securities. The
Company has the right to acquire all or a part of one of these shareholders'
outstanding shares (up to 38,945 shares) for a price of up to $150,000 plus the
fair value of outstanding options, warrants or other rights to purchase
securities of the Company.
In March 1995, options to purchase 19,272 shares of the Company were
exercised by certain shareholders for an aggregate price of $47,450.
On March 15, 1995, the Company entered into an agreement with the majority
shareholder of the Company granting him an option to purchase up to 45,003
additional shares of the Company's common stock at an exercise price of $3.57
per common share. The option may not be exercised unless the Company has
earnings before income taxes of not less than $880,000 for the year ending July
31, 1996, and the option shall expire on December 31, 1999.
In February 1996, the Board of Directors approved a stock option plan (the
"Plan"), under which 350,000 shares of common stock were reserved for future
issuance. The Plan provides for the sale of shares of common stock to employees
of the Company, including officers and directors (whether or not employees) as
well as to consultants to the Company. For stock options granted before the
closing of the Company's proposed IPO, the per share exercise price of such
options must be $5.00 or more, and for stock options granted after the closing
F-13
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
8. SHAREHOLDERS' EQUITY: - (Continued)
of the Company's proposed IPO, the per share exercise price of such options
cannot be less than the fair market value of the shares of common stock on the
date of grant, provided that the exercise price of any option granted to an
employee owning more than 10% of the outstanding common shares of the Company
may not be less than 110% of the fair market value of the shares of common stock
on the date of the option grant. The term of each option and the manner of
exercise is determined by the Plan's administrators, but options granted under
the Plan will become exercisable after the vesting period or periods specified
in each option agreement. However, options are not exercisable after the
expiration of 10 years from the date of grant (or 5 years from such date in the
case of an option granted to a 10% stockholder). Through May 1996, options to
purchase 341,000 shares of common stock at an exercise price of $5.00 per share
were granted under the Plan.
In March 1996, the Company issued 24,000 shares of common stock, valued by
the Company at $84,000 ($3.50 per share) at the time of issuance, for legal
services rendered in connection with the proposed IPO (see Note 12).
9. SIGNIFICANT CUSTOMER:
During the period ended July 31, 1994, the year ended July 31, 1995 and the
nine-month periods ended April 30, 1995 and 1996, approximately $14,000,
$220,000, $197,000 and $189,000, respectively, of the Company's sales were to
one customer.
10. SUBSEQUENT EVENT:
In June 1996, the Company completed an additional private placement of its
securities (the "June 1996 Financing"). The private placement consisted of two
units at a price of $100,000 per unit. Each unit consisted of 25,000 shares of
common stock and a $100,000 unsecured non-negotiable promissory note bearing
interest at 9% per annum. These notes are due and payable at the earlier of the
completion of a proposed IPO or February 23, 1997. The Company recorded the
common stock at an estimated fair value of $1.80 per share and will record a
related charge to earnings for $90,000 during the period the notes remain
outstanding. The Company received net proceeds of $180,000 from this private
placement.
11. LITIGATION:
The Company has applied for a registered trademark for the name "Kideo,"
however, this trademark has been previously registered by another party. On July
6, 1994, the Company began litigation against the successor to the original
owner of the trademark before the Trademark Trial and Appeals Board of the
United States Patent and Trademark Office. That proceeding is currently
suspended pursuant to a stipulation agreed upon by the Company and such
successor while they discuss possible settlement. There can be no assurance that
a settlement satisfactory to the Company can be reached. If a satisfactory
settlement is not obtained the Company will pursue the original proceeding, and
in the event that the Company does not prevail in the proceeding it does not
believe that its business will be adversely affected.
12. INITIAL PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS TO BALANCE SHEET
(UNAUDITED):
On March 12, 1996, the Company filed a Registration Statement on Form SB-2
under the Securities Act of 1933. The Registration Statement contemplates an
offering of 1,400,000 shares of common stock at an offering price of $5.00 per
share and 1,400,000 warrants at an offering price of $.10 per warrant. Each
warrant will entitle the holder to purchase one share of common stock at an
exercise price of $4.00 per share. The warrants will be exercisable for a
48-month period commencing 1 year from the effective date of the IPO.
F-14
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(information pertaining to the nine-month periods
ended April 30, 1995 and 1996 is unaudited)
12. INITIAL PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS TO BALANCE SHEET
(UNAUDITED): -- (CONTINUED)
The unaudited pro forma balance sheet as of April 30, 1996 gives effect to
certain transactions which have either occurred subsequent to April 30, 1996 or
will occur prior to or in connection with the consummation of the Company's
proposed IPO. The pro forma balance sheet does not give effect to the
consummation of the proposed IPO.
Transactions reflected as pro forma adjustments to the April 30, 1996 balance
sheet are as follows:
1. The application of $103,029 of proceeds from the 1996 Bridge Financing
(Note 7) for the repayment of an outstanding debt ($61,872) and certain
accrued interest ($41,157).
2. The charge to operations in connection with the Company's redemption of
the warrants issued to the lenders of the September 1994 Financing in May
1995 (see Note 7) for an aggregate redemption price of $88,000, which
redemption will occur upon the consummation of the proposed IPO.
3. The conversion of all of the outstanding Preferred Stock and all of the
outstanding Debentures (see Note 7) into 293,533 and 279,889 shares of
common stock, respectively, and the charge to operations upon conversion
of the Debentures for approximately $156,000 of unamortized debt issue
costs.
4. The receipt of net proceeds of $180,000 from the issuance of two units,
each unit consisting of 25,000 shares of common stock and a $100,000
unsecured promissory note in connection with the June 1996 Financing (see
Note 10). In addition, the adjustment includes the $90,000 unamortized
loan discount and $20,000 of deferred debt costs.
5. The increase in accrued expenses and accumulated deficit resulting from
recording dividends of $43,818 through April 30, 1996, payable June 1996,
on the Preferred Stock issued in the May 1995 Units Financing (see Note
7).
The pro forma financial information included in the statement of operations
reflects the operations of the Company as if the employment agreements described
in Note 5 had been entered into on August 1, 1994.
F-15
<PAGE>
[COLOR INSERTS]
[color photographs depicting the
packages of each of the Company's
four video products with a still
frame from each video showing
a child as depicted in that video]
Kideo Productions, Inc. develops, manufactures and
markets digitally personalized videos for children.
<PAGE>
=============================================================================
No dealer, salesperson or any other person has been authorized to give
information or make any representation in connection with this offering other
than as contained in this Prospectus, and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company, the Underwriter or the Selling Stockholders. This Prospectus does
not constitute (i) an offer to sell, or a solicitation of an offer to buy,
any security other than the securities offered by this Prospectus, or (ii) an
offer to sell, or a solicitation of an offer to buy, any securities by any
person in any jurisdiction in which such offer or solicitation is not
authorized or would be unlawful. Neither the delivery of this Prospectus nor
any sale hereunder shall, under any circumstances, create any implication
that the information herein is correct as of any time subsequent to the date
of this Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary .............................. 3
Risk Factors .................................... 11
Use of Proceeds ................................. 20
Dividend Policy ................................. 21
Dilution ........................................ 22
Capitalization .................................. 23
Selected Financial Data ......................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............ 26
Business ........................................ 32
Management ...................................... 43
Principal Stockholders .......................... 50
Certain Transactions ............................ 51
Description of Securities ....................... 52
Shares Eligible for Future Sale ................. 56
Underwriting .................................... 57
Selling Stockholders and Plan of Distribution ... 60
Legal Matters ................................... 61
Experts ......................................... 61
Additional Information .......................... 61
Index to Consolidated Financial Statements ...... F-1
</TABLE>
Until July 19, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
=============================================================================
<PAGE>
=============================================================================
1,400,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,400,000 Shares of Common Stock
[LOGO]
------
PROSPECTUS
------
Whale Securities Co., L.P.
June 24, 1996
=============================================================================
