<PAGE>
As filed with the Securities and Exchange Commission on May 9, 1996
Registration No. 333-2294
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
KIDEO PRODUCTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 7812 13-3729350
- ------------------------------------------------------------------------------
(State or other jurisdiction (Primary Standard (I.R.S. employer
of incorporation) Industrial Number) identification number)
611 Broadway, Suite 523
New York, New York 10012
(212) 505-6605
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
---------------------------
Richard L. Bulman, President
Kideo Productions, Inc.
611 Broadway, Suite 523
New York, New York 10012
(212) 505-6605
(Address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copies to:
Michael B. Solovay, Esq. Robert J. Mittman, Esq.
Lawrence J.Studnicky III, Esq. Tenzer Greenblatt LLP
Solovay Marshall & Edlin, P.C. The Chrysler Building
845 Third Avenue 405 Lexington Avenue
New York, New York 10022 New York, New York 10174
Telephone: (212) 752-1000 Telephone: (212) 885-5000
Facsimile: (212) 355-4608 Facsimile: (212) 885-5001
---------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering: [ ] __________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
CALCULATION OF ADDITIONAL REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Each Class of Amount to Price Per Offering Registration
Securities to be Registered be Registered Security(1) Price(1) Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per share,
to be sold by selling shareholders(2)............ 45,000 $ 5.00 $ 225,000 $ 77.59
- --------------------------------------------------------------------------------------------------------------------------------
Total Registration Fee(3)................................................................................... $ 77.59
================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Represents 45,000 shares owned by 3 stockholders of the Company which are
being registered for offer on a delayed basis pursuant to Rule 415.
(3) The Registration Fee being paid herewith is in addition to the registration
fee previously paid by the Company in the aggregate amount of $5,696.28.
<PAGE>
PRELIMINARY PROSPECTUS DATED MAY , 1996
SUBJECT TO COMPLETION
KIDEO PRODUCTIONS, INC.
1,200,000 Shares of Common Stock and Redeemable Warrants
to Purchase 1,200,000 Shares of Common Stock
As described below, an additional 240,000 shares of Common Stock are being
registered in connection with this offering on behalf of certain selling
stockholders; however, such shares will be offered by the selling stockholders
on a delayed basis and not as part of the underwritten offering.
Kideo Productions, Inc. (the "Company") is offering hereby 1,200,000 shares
(the "Shares") of the common stock of the Company (the "Common Stock") and
redeemable warrants to purchase 1,200,000 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
$5.00, subject to adjustment in certain circumstances, for a period of four
years commencing , 1997. The Warrants are redeemable by the Company,
upon the consent of the Underwriter, at any time commencing , 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 $7.50, 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 Company has applied to have the Common Stock and Warrants approved for
listing on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "KIDO" and
"KIDOW," respectively. That listing application is currently pending. 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 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."
This Prospectus also relates to the offer and sale by certain persons
(collectively, the "Selling Stockholders") of up to 240,000 shares of Common
Stock (collectively, the "Selling Stockholders' Shares") issued in connection
with two of 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 10 AND "DILUTION."
--------------------
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>
- --------------------------------------------------------------------------------------------------------------------------------
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................. $5.00 $.50 $4.50
- --------------------------------------------------------------------------------------------------------------------------------
Per Warrant................ $.10 $.01 $.09
- --------------------------------------------------------------------------------------------------------------------------------
Total(3)................... $6,120,000 $612,000 $5,508,000
- --------------------------------------------------------------------------------------------------------------------------------
</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 120,000 shares of Common Stock
and/or 120,000 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 $183,600
($211,140 if the Underwriter's over-allotment option is exercised in full),
estimated at $558,600. 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 180,000 additional
shares of Common Stock and/or 180,000 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 $7,038,000, $703,800 and $6,334,200, 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 , 1996.
--------------------
Whale Securities Co., L.P.
The date of this Prospectus is , 1996
<PAGE>
Kideo (TM)
[COLOR INSERTS]
[color photograph of child sitting in front of
television set holdng 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 180,000
additional shares of Common Stock and/or 180,000 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
partial-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 six months ended January 31, 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.
3
<PAGE>
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 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 1996,
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. Thereafter, 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.
4
<PAGE>
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 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," "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
5
<PAGE>
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."
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) 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) 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".
6
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Securities offered............................... 1,200,000 shares of Common Stock and Warrants to
purchase 1,200,000 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........................... 2,688,985 shares of Common Stock(1)(2)
Warrants(3)
Number to be outstanding
after this offering........................... 1,200,000 Warrants
Exercise terms................................ Exercisable for a period of four years commencing
, 1997, [one year following the date of this
Prospectus] each to purchase one share of Common Stock
at a price of $5.00 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............................... , 2001 [five years following the date of this
Prospectus].
Redemption.................................... Redeemable by the Company, upon the consent of the
Underwriter, at a redemption price of $.10 per Warrant, at
any time commencing , 1997 [one year
following the date of this Prospectus]; 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 $7.50, 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."
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Use of Proceeds.................................. The Company intends to apply the $4,949,400 estimated net proceeds
of this offering approximately as follows: $1,212,000 for the
repayment of the 1995 Pre-Bridge Financing, the 1996 Pre-Bridge
Financing, and the 1996 Bridge Financing (collectively, the "Bridge
Financings"); $1,120,000 for creative development; $800,000 for
marketing; $450,000 for the repayment of certain pre- existing
obligations; $360,000 for capital expenditures; and $1,007,400 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 indebtedness,
including to repayment of 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;
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.
Proposed Nasdaq symbols.......................... Common Stock-- KIDO
Warrants -- KIDOW
</TABLE>
- --------
(1) Includes (i) the 150,000 Bridge Shares and (ii) 24,000 shares of Common
Stock issued in March 1996 to legal counsel to the Company in partial
payment of outstanding legal fees (the "March 1996 Shares").
8
<PAGE>
(2) Does not include: (i) 1,200,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 240,000
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) 337,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options,
and 13,000 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 37,500 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.
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.
9
<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 Six-Month Period
(date operations Ended January 31,
commenced) Year Ended --------------------------------
to July 31, 1994 July 31, 1995 1995 1996
---------------- ------------- ----------- ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales...................................... $ 38,223 $ 521,186 $ 373,408 $ 560,512
Gross profit (loss)........................ $ (56,930) $ (136,312) $ (27,197) $ 194,339
Loss from operations....................... $(404,989) $(1,460,088) $(635,896) $ (792,570)
Interest expense........................... - $ 118,485 $ 10,814 $ 158,399
Net loss................................... $(404,989) $(1,578,573) $(646,710) $ (950,969)
Pro forma net loss(1)...................... - $(1,916,573) $(822,710) $(1,024,969)
Pro forma net loss per share(1)............ - $ (1.37) $ (.61) $ (.72)
Weighted average number of shares
outstanding................................ 1,347,450 1,347,450 1,347,450
Balance Sheet Data:
</TABLE>
<TABLE>
<CAPTION>
January 31, 1996 (unaudited)
-----------------------------------------------------------
July 31, 1995 Actual Pro Forma (2) As Adjusted(3)
------------- ------ ------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 61,137 $ 68,743 $ 467,914 $4,269,814
Working capital (deficit).................. $ (681,806) $(1,287,559) $(1,101,734) $3,288,508
Total assets............................... $1,447,717 $ 1,472,399 $ 1,901,559 $5,405,259
Total liabilities.......................... $2,061,339 $ 2,726,104(4)(5) $ 2,059,821(6)(7) $1,311,479
Stockholders' equity (deficiency).......... $ (613,622) $(1,253,705) $ (158,262)(8) $ 4,093,780(9)
</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 sale of 15 Bridge Units in February 1996 in
connection with the 1996 Bridge Financing (including the issuance of
$750,000 in principal amount of Bridge Notes and 150,000 Bridge Shares)
and the application of the $590,000 in net proceeds therefrom
(including an aggregate of $105,000 for the repayment of debt and
certain interest expenses); (ii) the issuance in March 1996 of the
24,000 March 1996 Shares; 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 and the redemption of certain outstanding warrants for
approximately $88,000. The adjustments in this note 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.
10
<PAGE>
(3) Gives effect to the sale of the 1,200,000 Shares and 1,200,000 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."
(4) Includes $136,364 allocated to the 1995 Pre-Bridge Notes and $40,909 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 $1,208 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. Does not include
any 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 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 $273,825 of the proceeds from the 1996 Bridge Financing
allocated to the issuance of the 150,000 Bridge Shares. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and
Capital Resources."
(8) 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 $174,000 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."
(9) Because the three Bridge Financings are being repaid upon the
consummation of this offering, "stockholders equity" includes the
recognition of a charge to operations of $122,727 of unamortized loan
discount associated with the 1995 Pre-Bridge Financing, $56,806 of
unamortized loan discount associated with the 1996 Pre-Bridge
Financing, and $273,825 of loan discount, as well as $160,000 of
deferred financing costs, associated with the 1996 Bridge Financing.
11
<PAGE>
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 $2,983,203 as of January 31, 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 six months ended January 31, 1996, the
Company had revenues of approximately $561,000 and a net loss of approximately
$951,000. 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 January 31, 1996, the Company had a
working capital deficit of $1,287,559 and, after giving effect to the Pro Forma
Adjustments, a pro forma working capital deficit of $1,101,734), 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.
12
<PAGE>
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, 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 $800,000 (16.2%) 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
13
<PAGE>
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 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 six months ended January 31, 1996, approximately 42% and
31%, 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 six months ended January 31, 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
14
<PAGE>
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 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
15
<PAGE>
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 proceeding 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 $1,007,400 (20.3%) 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 $1,662,000 (33.6%) 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 $3.49 (70%) 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
16
<PAGE>
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."
Control by Existing Stockholders; Significant Management Holdings. Upon
the consummation of this offering, the Company's existing stockholders will own
approximately 55% 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 23% of the outstanding shares of Common Stock (29%
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
17
<PAGE>
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 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 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 $7.50, 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
18
<PAGE>
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 2,688,985
shares of Common Stock, of which the 1,200,000 Shares offered hereby and,
subject to certain contractual restrictions with the Underwriter, the 240,000
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 substantial 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 $4,362,726
($2.93 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."
19
<PAGE>
Possible Delisting of Securities from Nasdaq. While the shares of
Common Stock and Warrants meet the current Nasdaq listing requirements and are
expected to be 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
special 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.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,200,000 Shares and
1,200,000 Warrants offered hereby (after deducting underwriting discounts and
commissions and other expenses of the offering) are estimated to be
approximately $4,949,400 ($5,748,060 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>
Repayment of Bridge Financings (1) ........................ $1,212,000 24.5%
Creative development (2)................................... 1,120,000 22.6
Marketing (3).............................................. 800,000 16.2
Repayment of certain pre-existing obligations (4).......... 450,000 9.1
Capital expenditures (5)................................... 360,000 7.3
Working capital and general corporate
purposes (6).............................................. 1,007,400 20.3
---------- ----
Total.............................................. $4,949,400 100.0%
========== ======
</TABLE>
(1) 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, and (iv) 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 $37,000. The $1,015,000 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."
(2) 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."
(3) 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."
(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."
21
<PAGE>
If the Underwriter's over-allotment option is exercised in full, the
Company will realize additional net proceeds of approximately $798,660. If the
1,200,000 Warrants offered hereby are exercised, the Company will realize
proceeds relating thereto of approximately $6,000,000, 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".
22
<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 January 31, 1996, the net tangible book value (deficit) of the
Company was ($1,563,842), or ($2.11) 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 January 31, 1996
would have been ($498,388), or ($.33) per share of Common Stock. After also
giving retroactive effect as of that date to the sale of the 1,200,000 Shares
and 1,200,000 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 January 31, 1996 would have been
$4,051,854, or $1.51 per share of Common Stock, representing an immediate
increase in net tangible book value of $1.84 per share to existing stockholders
and an immediate dilution of $3.49 (70%) 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>
<S> <C> <C>
Initial public offering price .................................................... $ 5.00
Net tangible book value before Pro Forma Adjustments........................... $(2.11)
Increase attributable to Pro Forma Adjustments................................. 1.78
--------
Pro forma net tangible book value before offering.............................. $ (.33)
Increase attributable to new investors......................................... 1.84
---------
Adjusted net tangible book value after offering................................... 1.51
--------
Dilution to new investors......................................................... $ 3.49
=========
</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>
Shares Purchased Total Consideration Average
---------------- ------------------- Price Per
Number Percent Amount Percent Share
--------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Existing shareholders 1,488,985 55.4% $3,087,323 34.0% $ 2.07
New investors 1,200,000 44.6% 6,000,000 66.0% $ 5.00
--------- ------ --------- ------
Total 2,688,985 100.0% $9,087,323 100.0%
========= ====== ========= ======
</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 $6,900,000 for 1,380,000 shares of Common Stock,
representing approximately 69% of the total consideration for 48% of the total
number of shares of Common Stock outstanding. See "Underwriting."
23
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization
of the Company as of January 31, 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 Financial Information"); and (iii) as
further adjusted to reflect, as of such date, the issuance of the 1,200,000
Shares and 1,200,000 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>
January 31, 1996
----------------------------------------------------------
Actual Pro Forma As Adjusted
--------- --------- ------------
<S> <C> <C> <C>
Short-term debt, including current maturities
on long-term debt $517,087(1)(2) $890,433(3) $168,791
======== ======== ========
Long-term debt and obligations under capital
leases, net of current maturities
$1,158,407 $158,407 $158,407
---------- -------- --------
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; 741,563 issued and outstanding (actual);
1,488,985 issued and outstanding (pro forma);
2,688,985 issued and outstanding (as adjusted)(4) 74 149 269
Additional paid-in capital 1,729,414 3,087,174 7,952,454
Accumulated deficit (2,983,203) (3,245,585) (3,858,943)
----------- ----------- -----------
Total stockholders' equity (deficiency) (1,253,705) (158,262)(5)(6) 4,093,780(7)
----------- --------- ----------
Total capitalization ($95,298) $145 $4,252,187
========= ===== ==========
</TABLE>
- -----------
(1) Includes $136,364 allocated to the 1995 Pre-Bridge Notes and $40,909 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."
24
<PAGE>
(2) Includes $66,986 allocated to the 1996 Pre-Bridge Notes and $1,208 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. Does not include
any 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 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, 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) Does not include (i) 1,200,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 240,000
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) 337,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options, and 13,000 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 37,500 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."
(5) Includes $273,825 of the proceeds from the 1996 Bridge Financing
allocated to the issuance of the 150,000 Bridge Shares. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
(6) 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, and the recognition of deferred financing costs
of approximately $174,000 associated with the conversion of $1,000,000
principal amount of the Debentures, in connection with the Pending
Recapitalization. See "Managements Discussion and Analysis of Financial
Condition and Results of Operation."
(7) Because the three Bridge Financings are being repaid upon the
consummation of this offering, "stockholders equity" includes the
recognition of a charge to operations of $122,727 of unamortized loan
discount associated with the 1995 Pre-Bridge Financing, $56,806 of
unamortized loan discount associated with the 1996 Pre-Bridge
Financing, and $273,825 of loan discount, as well as $160,000 of
deferred financing costs, associated with the 1996 Bridge Financing.
25
<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 January 31, 1995 and 1996 (including the pro forma data as of
January 31, 1996) and for the six-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 six months
ended January 31, 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, 1993 Six-Month Period
(the date operations Ended January 31,
commenced) Year Ended -----------------------------
to July 31, 1994 July 31, 1995 1995 1996
---------------- ------------- ----------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales...................................... $ 38,223 $ 521,186 $ 373,408 $ 560,512
Cost of sales.............................. $ 95,153 $ 657,498 $ 400,605 $ 366,173
Gross profit (loss)........................ $ (56,930) $ (136,312) $ (27,197) $ 194,339
Operating expenses......................... $ 348,059 $ 1,323,776 $ 608,699 $ 986,909
Loss from operations....................... $(404,989) $(1,460,088) $(635,896) (792,570)
Interest expense........................... - $ 118,485 $ 10,814 $ 158,399
Net loss................................... $(404,989) $(1,578,573) $(646,710) (950,969)
Pro forma net loss(1)..................... - $(1,916,573) $(822,710) $(1,024,969)
Pro forma net loss per share(1)............ - $ (1.37) $ (.61) $ (.72)
Weighted average number of shares
outstanding................................ 1,347,450 1,347,450 1,347,450
</TABLE>
<TABLE>
<CAPTION>
January 31, 1996 (unaudited)
--------------------------------
July 31, 1995 Actual Pro Forma (2)
------------- ------ -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $ 61,137 $ 68,743 $ 467,914
Working capital (deficit).................. $ (681,806) $(1,287,559) $(1,101,734)
Total assets............................... $1,447,717 $ 1,472,399 $ 1,901,559
Total liabilities.......................... $2,061,339 $ 2,726,104 $ 2,059,821
Stockholders' equity (deficiency).......... $ (613,622) $(1,253,705) $ (158,262)
</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 sale
of 15 Bridge Units in February 1996 in connection with the 1996 Bridge
Financing (including the issuance of $750,000 in principal amount of
Bridge Notes and 150,000 Bridge Shares) and the application of the
$590,000 in net proceeds therefrom (including $105,000 for the
repayment of debt and interest expenses); (ii) 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 and the redemption of certain outstanding warrants for
approximately $88,000; and (iii) the issuance in March 1996 of the
24,000 March 1996 Shares. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
26
<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 $2,983,200 as of
January 31, 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 six months ended January 31, 1996, the Company had revenues of
approximately $560,500 and a net loss of approximately $951,000. 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.
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<PAGE>
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.
Six Months Ended January 31, 1996 Compared to the Six Months Ended
January 31, 1995
Sales. Sales increased 50%, or $187,100, from $373,400 in the six
months ended January 31, 1995 to $560,500 in the six months ended January 31,
1996. Sales generated through catalogs increased by $94,400. Direct customer
orders increased by $60,900, and sales generated through retail outlets
accounted for the remaining $31,800 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 9%, or $34,400, from $400,600 in
the six months ended January 31, 1995 to $366,200 in the six months ended
January 31, 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 85%, or $525,800, to $1,145,300 in the six months ended January 31,
1996 from $619,500 in the six months ended January 31, 1995. Selling expenses
increased by $155,600, 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
$180,500 when compared to the six months ended January 31, 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 $189,700.
Interest accounts for $147,600 of this increase and is related to capitalized
leases on manufacturing equipment, interest on the Debentures and amortization
of original issue discount related to the Bridge Financings. Amortization of
original issue discount related to the Debentures was $42,100.
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.
28
<PAGE>
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 55% 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 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
January 31, 1996, the Company had a working capital deficit of $1,287,559 and,
after giving effect to the Pro Forma Adjustments, a pro forma working capital
deficit of $1,101,734. 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.
29
<PAGE>
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 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
30
<PAGE>
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 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
31
<PAGE>
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."
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-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.
32
<PAGE>
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.
33
<PAGE>
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 product,
the illustrated body of the child's character exhibits two-dimensional
partial-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 1996,
Kideo titles in which, for the first time, the two-dimensional
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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 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 1996, the Company intends to introduce several new Kideo
products 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
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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.
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
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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).
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.
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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?"
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
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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 six months ended January
31, 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 39%, respectively, thereof, sales of 1, 2,
3, Come Count with Me accounted for approximately 17% and 13%, respectively,
thereof, and sales of My Christmas Wish, the marketing of which commenced in
connection with the 1995 holiday season, accounted for approximately 14%
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 Kideo 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 1996, for example, the Company plans to
introduce new Kideo titles as part of a series of titles (the "Kideo Series")
that will feature the same cast of proprietary characters in each title. The
Company anticipates marketing three titles in this new Kideo Series during 1996,
with additional titles following during 1997.
The titles in the Company's planned Kideo 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 Kideo Series on a nearly continuous basis (whereas in the four
existing Kideos the personalized character appears far less frequently).
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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. Mr. Tibbs, Alexander G. Bear and
Counting Cat, for instance, could all be produced as plush stuffed-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.
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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 six months ended January 31, 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.
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 six months ended
January 31, 1996, catalogue sales accounted for approximately 61% and 67%
respectively of the Company's revenues. Sales through the Hammacher Schlemmer
catalogue, in particular, accounted for approximately 42% and 31%, 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
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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 six months
ended January 31, 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 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.
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Direct Sales
Direct sales to consumers accounted for approximately 31% and 21% of
the Company's revenues for the fiscal year ended July 31, 1995 and the six
months ended January 31, 1996, respectively (as compared to approximately 67%
and 15% 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 customer 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.
43
<PAGE>
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.
44
<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 April 1, 1996, the Company employed 16 full-time and three
part-time employees, including three in administration and finance, four in
marketing and sales, one in new product creation, five 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."
45
<PAGE>
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 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.
46
<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.
Name Age Position
---- --- --------
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 60 Secretary and Director
Charles C. Johnston 60 Director
Thomas Griffin 57 Director
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.
47
<PAGE>
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.
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.
48
<PAGE>
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 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.
49
<PAGE>
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 $28,000 in respect of the preceding fiscal
year (all of which represented salary in each case). Mr. Bulman also holds
options to purchase shares of Common Stock which were granted to him in
connection with the May 1995 Units Financing. See "Certain Transactions--Bulman
Options."
The following table summarizes the cash and other compensation paid by
the Company to Richard L. Bulman in respect of the fiscal year ended July 31,
1995:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------------------ Award
Name and Year Ended Securities
Principal Position July 31, Salary/$ Bonus/$ Underlying Options
- ------------------ ---------- --------- ------- -------------------
<S> <C> <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."
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."
50
<PAGE>
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
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.
51
<PAGE>
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.
52
<PAGE>
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 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.
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<PAGE>
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 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 1996, options to purchase an aggregate of 337,000 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 12, 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.
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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.
55
<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 1,200,000
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
Name and Address of Beneficial Owners(1) Beneficial Ownership(2) Offering Offering
---------------------------------------- ---------------------- -------- --------
<S> <C> <C> <C>
Richard L. Bulman....................................... 418,138(3) 27.32% 15.31%
Charles C. Johnston..................................... 298,136(4) 18.77% 10.69%
Lawrence Kaplan
c/o GroVest Inc.
150 Vanderbilt Motor Parkway
Hauppage, NY 11788..................................... 88,514(5) 5.94% 3.29%
Richard D. Bulman....................................... 45,000(6) 2.93% 1.65%
Thomas Griffin.......................................... 15,000(7) 1.00% *
All directors and executive officers as a group (8
persons)................................................ 839,920(8) 49.16% 28.88%
</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 1,488,985 shares of Common Stock outstanding prior to this
offering and a base of 2,688,985 shares of Common Stock outstanding
immediately after this offering, before any consideration is given to
outstanding options, warrants or convertible securities.
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<PAGE>
(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."
CERTAIN TRANSACTIONS
Transactions with Johnston
Charles C. Johnston 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."
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<PAGE>
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."
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 previously 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.
58
<PAGE>
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 1,488,985 shares of
Common Stock outstanding and no shares of preferred stock outstanding (based on
the assumed completion of the Pending Recapitalization transactions).
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
59
<PAGE>
Stock are fully paid and non-assessable. Upon issuance, all of the 1,200,000
Shares offered hereby will be fully paid and nonassessable. As of the date of
this Prospectus, the Company's By-Laws will 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 $5.00, subject to
adjustment in certain circumstances, at any time during the four year period
commencing on , 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 , 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 $7.50, 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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<PAGE>
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.
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<PAGE>
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.
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
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<PAGE>
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 the 24,000 March 1996 Shares 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 Delaware
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.
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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 2,688,985 shares of Common Stock. Of these outstanding shares,
1,440,000 shares of Common Stock (consisting of the 1,200,000 Shares offered
hereby and the 240,000 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
240,000 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.
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 registration rights with respect to the securities underlying 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
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<PAGE>
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 1,200,000 Shares and 1,200,000 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 dealers who are
members of the National Association of Securities Dealers, Inc. (the "NASD")
concessions, not in excess of $ per Share and $ per Warrant, of which not in
excess of $ per Share and $ 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 180,000
additional Shares and/or 180,000 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 $120, warrants (the "Underwriter's Warrants") to purchase up
to 120,000 shares of Common Stock at an exercise price of $6.75 per share (135%
of the public offering price per share) and/or up to 120,000 warrants (each
exercisable to purchase one share of Common Stock at a price of $6.50 per share)
at an exercise price of $.135 per warrant (135% of the public offering price per
Warrant). The Underwriter's Warrants may not be sold, transferred, assigned or
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<PAGE>
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 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; (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
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<PAGE>
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 240,000 Selling Stockholders' Shares (comprised
of the 90,000 1995 Pre-Bridge Shares and the 150,000 1996 Bridge 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 (a director and principal
stockholder of the Company and the sole stockholder of J&C Resources, Inc., one
of the Selling Stockholders) 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) 1.08%
Michael Bollag........................ 73,206(3) 15,000 58,206(3) 2.16%
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) 9.62%
Harvey Kohn........................... 37,572 7,500 30,072 1.12%
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.
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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, the 24,000 March 1996 Shares (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.
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KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
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-16
<PAGE>
GRAPHIC
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, January 31, January 31,
1995 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
(Note 12)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 61,137 $ 68,743 $ 467,914
Accounts receivable (Note 10) 59,313 102,250 102,250
Prepaid expenses and other current assets (Note 10) 107,503 109,145 229,516
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 227,953 280,138 799,680
Property and Equipment, net (Note 2) 766,377 676,644 676,644
Deferred Offering Costs (Note 1) 54,200 138,200
Other Assets (Notes 1 and 3) 453,387 461,417 287,035
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,447,717 $ 1,472,399 $ 1,901,559
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 428,188 $ 594,465 $ 554,836
Accrued expenses 233,590 252,101 210,944
Obligations under capital leases - current portion
(Notes 2 and 6) 144,171 168,791 168,791
Loans payable - related parties (Note 4) 61,472 61,672 -
Notes payable (Note 10) - 245,467 721,642
Unearned revenue (Note 1) 42,338 245,201 245,201
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 909,759 1,567,697 1,901,414
Obligations under Capital Leases, net of current portion
(Notes 2 and 6) 195,330 158,407 158,407
Long-term Debt (Note 7) 956,250 1,000,000 -
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 2,061,339 2,726,104 2,059,821
- ----------------------------------------------------------------------------------------------------------------------
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 (January 31,
1996) and -0- shares (pro forma), respectively ($1,048,672 aggregate
liquidation preference at January 31, 1996) 10 10 -
Common stock - $.0001 par value; authorized 15,000,000
shares, issued and outstanding 616,891 shares (July
31, 1995), 741,563 shares (January 31, 1996) and
1,488,985 shares (pro forma), respectively 62 74 149
Additional paid-in capital 1,385,574 1,729,414 3,087,174
Accumulated deficit (1,999,268) (2,983,203) (3,245,585)
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' deficiency (613,622) (1,253,705) (158,262)
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Deficiency $ 1,447,717 $ 1,472,399 $ 1,901,559
======================================================================================================================
</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 Six-month
(date operations Year ended period ended
commenced) to July 31, January 31,
July 31, 1994 1995 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Sales $ 38,223 $ 521,186 $ 373,408 $ 560,512
Costs of sales (Note 1) 95,153 657,498 400,605 366,173
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (56,930) (136,312) (27,197) 194,339
Operating expenses (including interest expense
of $118,485, $10,814 and $158,399 for the year ended
July 31, 1995 and the six-month periods ended
January 31, 1995 and 1996, respectively) (Note 10) 348,059 1,442,261 619,513 1,145,308
==================================================================================================================================
Net loss $ (404,989) $(1,578,573) $(646,710) $ (950,969)
==================================================================================================================================
Pro forma financial information (unaudited) (Note 12):
Net loss - $(1,578,573) $(646,710) $ (950,969)
Pro forma adjustment for employment agreements - (338,000) (176,000) (74,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Pro forma net loss - $(1,916,573) $(822,710) $(1,024,969)
==================================================================================================================================
Pro forma net loss per common share - $ (1.37) $ (.61) $ (.72)
==================================================================================================================================
Weighted average number of common
shares outstanding (Note 1) - 1,347,450 1,347,450 1,347,450
==================================================================================================================================
</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 six-month period ended January 31, 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 10) - - 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
Accrued dividends on preferred stock - - - - - (32,966) (32,966)
Net loss - - - - - (950,969) (950,969)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1996 1,048.672 $10 741,563 $74 $1,729,414 $(2,983,203) $ (1,253,705)
==================================================================================================================================
</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 Six-month
(date operations Year ended period ended
commenced) to July 31, January 31,
July 31, 1994 1995 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(404,989) $(1,578,573) $(646,710) $(950,969)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 31,694 147,397 62,532 164,952
Amortization of loan discount - - - 42,117
Amortization of deferred debt costs - - 11,996 37,368
Changes in operating assets and liabilities:
Increase in accounts receivable (9,954) (49,359) (68,560) (42,937)
(Increase) decrease in prepaid expenses and other current
assets - (107,503) (71,358) 37,987
(Increase) decrease in deferred production costs (42,490) 21,245 - -
Increase in other assets (7,849) (378,412) (344,476) (53,857)
Increase in accounts payable 69,274 358,914 224,627 99,950
Increase in accrued expenses 29,210 188,674 133,439 87,245
Increase in unearned revenue - 42,338 49,450 202,863
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (335,104) (1,355,279) (649,060) (375,281)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activity - purchase of property
and equipment (92,756) (336,637) (232,597) (66,760)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) loans payable -
related parties 68,138 (6,666) (6,000) 200
Proceeds from bridge notes - 1,050,000 950,000 425,000
Repayment of bridge notes - (75,000) - -
Net proceeds from issuance of capital stock 409,395 357,982 - 32,125
Proceeds from long-term debt - 468,750 - 32,125
Principal payments of capital lease obligations - (91,686) (29,220) (12,303)
Payment of deferred offering costs - - - (27,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 477,533 1,703,380 914,780 449,647
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 49,673 11,464 33,123 7,606
Cash at beginning of period - 49,673 49,673 61,137
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 49,673 $ 61,137 $ 82,796 $ 68,743
====================================================================================================================================
</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 Six-month
(date operations Year ended period ended
commenced) to July 31, January 31,
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 $ 10,814 $ 18,724
================================================================================================================================
Income taxes - $ 713 - $ 706
================================================================================================================================
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 - $ 221,650
================================================================================================================================
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 - - - $ 26,700
================================================================================================================================
Deferred debt costs accrued but not paid - - - $ 39,629
================================================================================================================================
</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 six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
1. SUMMARY OF Kideo Productions, Inc. ("Kideo-Delaware"), a Delaware
SIGNIFICANT corporation, was incorporated on June 24, 1994 and
ACCOUNTING subsequently amended and restated its certificate of
POLICIES, incorporation on December 28, 1994. As of January 9, 1995,
CORPORATE Kideo-Delaware exchanged its common stock for all of
STRUCTURE Kideo-New York's (the operating company incorporated in New
AND PRINCIPAL York in 1993) outstanding common stock whereby Kideo-New
BUSINESS York became a wholly owned subsidiary of Kideo-Delaware. The
ACTIVITY: 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 $950,969 for the period from the date operations
commenced (November 1, 1993) to July 31, 1994, the year
ended July 31, 1995 and the six-month period ended January
31, 1996, respectively. In addition, the Company had a
working capital deficiency of $1,287,559, and total
liabilities exceeded its total assets by $1,253,705, as of
January 31, 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.
F-8
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
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 six-month period ended
January 31, 1996 was $11,996 and $37,368, respectively.
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 six-month period
ended January 31, 1996 amounted to $32,025.
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 six-month periods ended January 31, 1995 and 1996 were
$25,651, $182,149, $40,594 and $30,340, 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.
F-9
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
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.
2. PROPERTY AND
EQUIPMENT: Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
July 31, January 31, 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 145,851 302,344
==================================================================================================
$766,377 $676,644
==================================================================================================
</TABLE>
Included in property and equipment as of July 31, 1995 and
January 31, 1996 is approximately $431,000 of assets
acquired under capital leases. Accumulated depreciation on
these assets as of July 31, 1995 and January 31, 1996
amounted to approximately $72,000 and $144,000,
respectively. The property held under these leases is
collateral for the related capital lease obligations
described in Note 6.
F-10
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
3. OTHER ASSETS: Other assets consist of the following:
July 31, January 31,
1995 1996
- --------------------------------------------------------------------------------
Deferred debt costs (Note 1) $206,931 $174,382
Deposits on capital lease obligations (Note 6) 186,000 186,000
Technology rights and intellectual property 50,349 41,926
Security deposits 10,107 14,109
Advance on production contract 45,000
================================================================================
$453,387 $461,417
================================================================================
4. RELATED PARTY Loans payable - related parties consist of the following:
TRANSACTIONS:
July 31, January 31,
1995 1996
- --------------------------------------------------------------------------------
Loan from a shareholder bearing interest at a
rate of 6%. The Company has issued .5 share
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 58,022
================================================================================
$61,472 $61,672
================================================================================
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 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 six-month periods ended
January 31, 1995 and 1996 amounted to $26,585, $42,512,
$21,139 and $25,583, respectively. Future approximate
minimum rental payments required are as follows:
Six-month period ending July 31, 1996 $28,000
Year ending July 31,
1997 59,000
1998 10,000
============================================================
$97,000
============================================================
F-11
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
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:
Six-month period ending July 31, 1996 $255,000
Year ending July 31,
1997 441,000
1998 200,000
1999 52,000
============================================================
$948,000
============================================================
6. CAPITAL LEASE During the year ended July 31, 1995, the Company entered
OBLIGATIONS: 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 January 31, 1996 are as follows:
July 31, January 31,
Year or period ending July 31, 1995 1996
------------------------------------------------------------
1996 $191,786 $128,674
1997 167,087 167,087
1998 84,250 84,250
------------------------------------------------------------
443,123 380,011
Less amounts representing interest 103,622 52,813
============================================================
$339,501 $327,198
============================================================
7. BRIDGE NOTE In September 1994, a group of investors loaned the Company
FINANCING AND an aggregate of $250,000 ("September 1994 Financing")
PRIVATE evidenced by signed promissory notes that bear interest at
PLACEMENT 10% per annum. Upon the closing of the May 1995 Units
OFFERING: 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 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.
F-12
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
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 January
31, 1996 amounted to approximately $17,000. 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 $174,000 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
F-13
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
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
January 31, 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 six-month period ended January 31, 1996, $40,909 was
charged to operations.
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 January 31, 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 six-month period ended January 31, 1996, $1,208 was
charged to operations.
8. SHAREHOLDERS' In January 1996, the Company's Board of Directors authorized
EQUITY: 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.
9. SIGNIFICANT During the period ended July 31, 1994, the year ended July
CUSTOMERS: 31, 1995 and the six-month periods ended January 31, 1995
and 1996, approximately $14,000, $220,000, $179,000 and
$173,000, respectively, of the Company's sales were to one
customer.
F-14
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
10. SUBSEQUENT In February 1996, the Company completed an additional
EVENTS: 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. 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. The Company
received net proceeds of approximately $590,000 from this
private placement. Deferred debt costs of $39,629 related to
the 1996 Bridge Financing is included in prepaid expenses
and other current assets as of January 31, 1996 in the
accompanying consolidated balance sheet (see Note 3).
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 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). In February 1996, options to
purchase 337,000 shares of common stock at an exercise price
of $5.00 per share were granted under the Plan.
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.
F-15
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information pertaining to the six-month periods
ended January 31, 1995 and 1996 is unaudited)
================================================================================
12. INITIAL PUBLIC On March 12, 1996, the Company filed a Registration
OFFERING AND Statement on Form SB-2 under the Securities Act of 1933. The
PRO FORMA Registration Statement contemplates an offering of 1,200,000
ADJUSTMENTS TO shares of common stock at an offering price of $5.00 per
BALANCE SHEET share and 1,200,000 warrants at an offering price of $.10
(unaudited): per warrant. Each warrant will entitle the holder to
purchase one share of common stock at an exercise price of
$5.00 per share. The warrants will be exercisable for a
48-month period commencing 1 year from the effective date of
the IPO.
The unaudited pro forma balance sheet as of January 31, 1996
gives effect to certain transactions which have either
occurred subsequent to January 31, 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
January 31, 1996 balance sheet are as follows:
1. The receipt of net proceeds of approximately $590,000
from the issuance of 15 units, each unit consisting of
10,000 shares of common stock and a $50,000 unsecured
promissory note in connection with the 1996 Bridge
Financing (see Note 10) and the application of $102,829
of such proceeds for the repayment of an outstanding
debt ($61,672) and certain accrued interest ($41,157).
In addition, the adjustment includes the $273,825
unamortized loan discount and $120,371 of deferred debt
costs.
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 $174,000
of unamortized debt issue costs.
4. The issuance of 24,000 shares of common stock to the
Company's counsel, 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.
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-16
<PAGE>
Kideo (TM)
[COLOR INSERTS]
[COLOR PHOTOGRAPHS OF CHILDREN
PICTURED IN THE STORY BOOKS]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
========================================================== ======================================================
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 [LOGO]
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 1,200,000 Shares of Common Stock
buy, any security other than the securities offered and
by this Prospectus, or (ii) an offer to sell, or a Redeemable Warrants to Purchase
solicitation of an offer to buy, any securities by any 1,200,000 Shares of Common Stock
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
Page
-----
Prospectus Summary...................................3
Risk Factors........................................12
Use of Proceeds.....................................21
Dividend Policy.....................................22 _______________
Dilution............................................23
Capitalization......................................24 PROSPECTUS
Selected Financial Data.............................26 _______________
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................27
Business............................................34
Management..........................................47
Principal Stockholders..............................56
Certain Transactions................................57
Description of Securities...........................59
Shares Eligible for Future Sale.....................64
Underwriting........................................65
Selling Stockholders and Plan
of Distribution...................................68
Legal Matters.......................................69
Experts.............................................69
Additional Information..............................69 Whale Securities Co., L.P.
Index to Consolidated Financial Statements.........F-1
Until , 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.
, 1996
============================================================== ======================================================
</TABLE>
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporations Law (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 full extent permitted by law, any
director, office, 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. 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 her or she reasonably believed to be in or not
opposed to the Company's best interests.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any charter, provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. See Item 28.
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Registrant (also herein called
the "Company") in connection with the issuance and distribution of the
securities being registered hereby (other than underwriting discounts and
commissions and the Underwriter's nonaccountable expense allowance) are set
forth in the table below. None of such expenses will be borne by the Selling
Stockholders.
SEC registration fee...................................... $5,696.28
NASD filing fee........................................... 2,151.93
Nasdaq listing fee ....................................... 10,000.00
Underwriter's Consulting Fee.............................. 60,000.00
Printing and engraving expenses........................... 85,000.00
Legal fees and expenses................................... 60,000.00*
Accounting fees and expenses.............................. 80,000.00
Transfer Agent's fees and expenses........................ 3,000.00
Blue Sky fees and expenses................................ 40,000.00
Miscellaneous............................................. 24,151.79
-----------
TOTAL.................................................. $375,000.00
===========
- --------------------
* Does not include 24,000 shares of Common Stock issued in partial payment
of legal fees, as described in the Prospectus under "Legal Matters."
Item 26. Recent Sales of Unregistered Securities
Within the past three years, the Registrant has issued securities
without registration under the Securities Act of 1933, as amended (the "Act"),
as follows:
In October 1993, the Registrant issued to Richard L. Bulman, the
Registrant's Founder, Chairman of the Board of Directors and President, 376,471
shares of Common Stock in consideration of the retirement of an outstanding loan
in the amount of $11,000.
In October 1993, the Registrant issued to an employee of the Company
38,945 shares of Common Stock as a negotiated payment for all services rendered
relating to the Registrant's proprietary artwork and storylines.
In October 1993, the Registrant issued to a private lender of the
Registrant 4,327 shares of Common Stock in lieu of interest payable in the
amount of $129.81.
On March 7, 1994, the Registrant issued an aggregate of 35,088 shares
of Common Stock to six private investors known to the Registrant for a total
consideration of $100,000.
II-2
<PAGE>
On March 31, 1994 the Registrant issued an aggregate of 12,982 shares
of Common Stock to five existing stockholders of the Registrant for a total
consideration of $30,000.
On June 2, 1994, the Registrant issued to a private investor known to
the Company 5,965 shares of Common Stock for a total consideration of $25,000.
On June 17, 1994, the Registrant issued 53,681 shares of Common Stock
to a private investor for a total consideration of $200,000. In connection with
such issuance this investor became a director of the Registrant.
In June and October 1994, and in connection with the above-mentioned
March and June transactions, the Registrant issued to two existing stockholders
of the Registrant an aggregate of 8,922 shares of Common Stock in lieu of
aggregate cash payments in the amount of $14,518 payable for investments
advisory services.
In November 1994, the Registrant issued 9,356 shares of Common Stock to
a private investor known to the Registrant for a total consideration of $26,000.
In March 1995, the Registrant issued an aggregate of 19,271 shares of
Common Stock to four existing stockholders of the Registrant for a total
consideration of $47,450.
During the period from May through October 1995, the Registrant issued
to 79 accredited investors, including a director/principal stockholder of the
Registrant, through a private placement (the "May 1995 Units Financing"), an
aggregate of 1,000 shares of Series A Preferred Stock and an aggregate of
$1,000,000 principal amount of Debentures. The Registrant received total
compensation of $2,000,000, consisting of cash in the amount of $1,025,000 and
the conversion of certain notes outstanding in the aggregate principal amount of
$975,000, including $200,000 in principal amount of notes owing to the
director/principal stockholder of the Registrant.
In connection with the May 1995 Units Financing, the Registrant paid a
placement fee to one of the investors in the May 1995 Units Financing and a
company controlled by such investor in the aggregate amount of $90,000 in cash,
35,477 shares of Common Stock, 11,625 shares of Series A Preferred Stock and a
Debenture in the principal amount of $11,625.
In July 1995, the Registrant issued to V-Seion Multimedia, Inc., a
company controlled by Bradley Dahl, 19,645 shares of Common Stock as a $70,000
partial payment for the acquisition of certain hardware and software assets. In
connection with such transaction, Mr. Dahl became an executive officer of the
Registrant.
In September and October 1995, the Registrant effectuated a private
placement to six accredited investors known to the Registrant, including a
director/principal stockholder of the Registrant whereby the Registrant issued
$300,000 in principal amount of notes and 90,000 shares of Common Stock. The
Registrant received total cash consideration of $300,000 (including $100,000
from the director/principal stockholder in exchange for a $100,000 principal
amount promissory note and 30,000 shares of Common Stock).
In January 1996, the Registrant issued to two executive officers of the
Registrant $125,000 in aggregate principal amount of promissory notes and an
aggregate of 25,000 shares of Common Stock. The Registrant received a total cash
consideration of $125,000.
In February 1996, the Registrant issued to eleven accredited investors
$750,000 in aggregate principal amount of promissory notes and an aggregate of
150,000 shares of Common Stock pursuant to a private placement (the "1996 Bridge
Financing"). The Registrant received total cash consideration in the gross
amount of $750,000. In connection with the 1996 Bridge Financing, Whale
Securities Co., L.P. ("Whale") acted as placement whereby Whale received an
aggregate commission of $75,000 in cash.
II-3
<PAGE>
On March 13, 1996, options to purchase an aggregate of 337,000 shares
of Common Stock at a purchase price of $5.00 per share were granted under the
1996 Stock Option Plan to 18 directors, officers and employees of the
Registrant. Subject to various vesting periods, all of such options (once
vested) will be exercisable until March 12, 2006. The Registrant received no
consideration for these options, and such options were issued without
registration because no sale occurred in connection with the issuance of the
options.
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.
Unless stated otherwise, at the times the above-mentioned securities
were issued, the foregoing persons represented to the Registrant that they were
acquiring the securities for purposes of investment and not with a view to
distribution, and appropriate legends were placed on the certificates
representing the securities so issued. In addition, the foregoing persons had
adequate access, through employment, business relationships, or otherwise to
information about the Registrant. Exemption from registration of such securities
is claimed under Section 4(2) of the Act since no public offering was involved
and the securities had been taken for investment purposes and not with a view to
distribution.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Certificate of Designations relating to the Series A Preferred Stock.
3.3 By-laws.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.3 Form of Public Warrant Agreement among the Registrant, Whale Securities Co., L.P. as
Underwriter and American Stock Transfer & Trust Company as Warrant Agent.
4.4* Form of Registrant's Public Warrant Certificate.
10.1 Investor Rights Agreement, dated June 17, 1994, between Registrant and investors who
purchased the June Investor Shares.
10.2 Form of Stock Purchase Agreement, dated March 7, 1994, between
Registrant and the investors named therein, relating to the
private placement of shares of Common Stock.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.3 Form of Stock Purchase Agreement, dated March 31, 1994,
between Registrant and the investors named therein, relating
to the private placement of shares of Common Stock.
10.4 Stock Purchase Agreement between Registrant and Richard Carney, dated May 10, 1994.
10.5 Stock Purchase Agreement between Registrant and Henry Fredericks, dated June 2, 1994.
10.6 Stock Purchase Agreement between Registrant and Charles Johnston, dated June 17, 1994.
10.7 Marketing Agreement between Registrant and Consumer Programs, Inc. dated November 3,
1994.
10.8 Equipment Lease Agreements between Registrant and National
Marketing Network, Inc., dated November 9, 1994, November 27,
1994 and December 8, 1994.
10.9 Equipment Lease Agreements between Registrant and Technilease, dated August 22, 1994
and October 3, 1994.
10.10 Equipment Lease Agreement between Registrant and Television Laboratories, Inc., dated
November 1994.
10.11 Promissory Note to Charles Johnston, dated March 2, 1995.
10.12 Registration Rights Agreement between Registrant and Richard L. Bulman, dated January
1, 1995.
10.13 Stock Option Agreement between Registrant and Richard L. Bulman, dated March 15, 1995.
10.14 Stock Escrow Agreement between V-Seion and 477250 B.C. Ltd. (the predecessor corporation
which subsequently changed its name to become Kideo-Canada), dated July 14, 1995.
10.15 Stock Transfer Restriction and Repurchase Agreement between 477250 B.C. Ltd. and V-
Seion, dated July 14, 1995.
10.16 Registration Rights Agreement between Registrant and V-Seion, dated July 14, 1995.
10.17 Asset Purchase Agreement between V-Seion Multimedia and 477250 B.C. Ltd., dated July
17, 1995.
10.18 Office Lease between Registrant and Cable Building Associates, dated September 28, 1995.
10.19 Employment and Stock Issuance Agreement between Registrant and Gary Bilezikian, dated
October 26, 1993.
10.20 Employment Agreement between 477250 B.C. and Bradley Dahl, dated July 14, 1995.
10.21* Employment Agreement between Registrant and Marvin Goldstein, dated January 1, 1996.
10.22* Employment Agreement between Registrant and Robert J. Riscica, dated January 1, 1996.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.23* Employment Agreement between Registrant and Richard L. Bulman, dated January 1, 1996.
10.24* Employment Agreement between Registrant and Joanne Denk, dated January 2, 1996.
10.25 Form of Class A Warrant.
10.26 Form of Class B Warrant.
10.27 Form of Debenture.
10.28 1996 Stock Option Plan.
10.29 Form of Stock Option Agreement.
10.30 Form of Consulting Agreement between the Registrant and Whale Securities Co., L.P. as
Underwriter.
10.31** Patent Application filed by Bradley Dahl, dated July 7, 1994.
10.32** Patent Application filed by the Registrant dated June 9, 1995.
21.1*** List of Registrant's Subsidiaries.
23.1*** Consent of Goldstein, Golub, Kessler & Co., P.C., Independent Certified Public Accountants.
23.2* Consent of Solovay Marshall & Edlin, P.C. (will be contained in such firm's opinion filed as
Exhibit 5.1).
24.1 No person has signed Amendment No. 1 to this Registration Statement under a power of
attorney. A power of attorney relating to the signing of amendments hereto is incorporated
in the signature pages of this Registration Statement.
</TABLE>
- ----------
* To be filed by amendment.
** To be filed by amendment in redacted form subject to a previously filed
request for confidential treatment pursuant to Rule 406 under the Act.
*** Filed herewith.
Item 28. Undertakings
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3)
of the Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the law or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
II-6
<PAGE>
Rule 424(b) if, in the aggregate, the changes in volume and price present no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement,
and
(iii) include any additional or changed material
information on the plan of distribution.
(b) For determining any liability under the Act, each post-effective
amendment shall be deemed to be a new Registration Statement of the securities
offered, and the offering of securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
this offering.
(2) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Company,
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(4) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(b) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of such securities at that time as the initial bona fide
offering of those securities.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, New York.
Dated: May 9, 1996
KIDEO PRODUCTIONS, INC.
By /s/ Richard L. Bulman
----------------------
Richard L. Bulman
President
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Richard L. Bulman, Robert J.
Riscica and Lawrence J. Studnicky III, or any of them, his true and lawful
attorney-in-fact and agent, with full power and substitution and
re-substitution, to sign in any and all capacities any and all amendments or
post-effective amendments to this Registration Statement on Form SB-2 and to
file the same with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting to such
attorneys-in-fact and agents, and each of them, full power and authority to do
all such other acts and execute all such other documents as they, or any of
them, may deem necessary or desirable in connection with the foregoing, as fully
as the undersigned might or could do in person, hereby ratifying and confirming
all that such attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ---------- ------ -----
<S> <C> <C>
/s/ Richard L. Bulman President and Chairman May 9, 1996
- -------------------------- of the Board
Richard L. Bulman
/s/ Robert J. Riscica Chief Financial Officer May 9, 1996
- -------------------------- (the Registrant's principal
Robert J. Riscica accounting officer)
/s/ Richard D. Bulman Secretary and Director May 9, 1996
- --------------------------
Richard D. Bulman
/s/ Charles C. Johnston Director May 9, 1996
- --------------------------
Charles C. Johnston
/s/ Thomas Griffin Director May 9, 1996
- --------------------------
Thomas Griffin
</TABLE>
II-8
<PAGE>
KIDEO PRODUCTIONS, INC.
REGISTRATION STATEMENT ON FORM SB-2
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description Page
- ------- ------------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Certificate of Designations relating to the Series A Preferred Stock.
3.3 By-laws.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.3 Form of Public Warrant Agreement among the Registrant, Whale Securities Co., L.P. as
Underwriter and American Stock Transfer & Trust Company as Warrant Agent.
4.4* Form of Registrant's Public Warrant Certificate.
10.1 Investor Rights Agreement, dated June 17, 1994, between Registrant and investors who
purchased the June Investor Shares.
10.2 Form of Stock Purchase Agreement, dated March 7, 1994, between
Registrant and the investors named therein, relating to the
private placement of shares of Common Stock.
10.3 Form of Stock Purchase Agreement, dated March 31, 1994,
between Registrant and the investors named therein, relating
to the private placement of shares of Common Stock.
10.4 Stock Purchase Agreement between Registrant and Richard Carney, dated May 10, 1994.
10.5 Stock Purchase Agreement between Registrant and Henry Fredericks, dated June 2, 1994.
10.6 Stock Purchase Agreement between Registrant and Charles Johnston, dated June 17, 1994.
10.7 Marketing Agreement between Registrant and Consumer Programs, Inc. dated November 3,
1994.
10.8 Equipment Lease Agreements between Registrant and National
Marketing Network, Inc., dated November 9, 1994, November 27,
1994 and December 8, 1994.
10.9 Equipment Lease Agreements between Registrant and Technilease, dated August 22, 1994
and October 3, 1994.
10.10 Equipment Lease Agreement between Registrant and Television Laboratories, Inc., dated
November 1994.
10.11 Promissory Note to Charles Johnston, dated March 2, 1995.
10.12 Registration Rights Agreement between Registrant and Richard L. Bulman, dated January
1, 1995.
10.13 Stock Option Agreement between Registrant and Richard L. Bulman, dated March 15, 1995.
10.14 Stock Escrow Agreement between V-Seion and 477250 B.C. Ltd. (the predecessor corporation
which subsequently changed its name to become Kideo-Canada), dated July 14, 1995.
10.15 Stock Transfer Restriction and Repurchase Agreement between 477250 B.C. Ltd. and V-
Seion, dated July 14, 1995.
10.16 Registration Rights Agreement between Registrant and V-Seion, dated July 14, 1995.
10.17 Asset Purchase Agreement between V-Seion Multimedia and 477250 B.C. Ltd., dated July
17, 1995.
10.18 Office Lease between Registrant and Cable Building Associates, dated September 28, 1995.
10.19 Employment and Stock Issuance Agreement between Registrant and Gary Bilezikian, dated
October 26, 1993.
10.20 Employment Agreement between 477250 B.C. and Bradley Dahl, dated July 14, 1995.
10.21* Employment Agreement between Registrant and Marvin Goldstein, dated January 1, 1996.
10.22* Employment Agreement between Registrant and Robert J. Riscica, dated January 1, 1996.
10.23* Employment Agreement between Registrant and Richard L. Bulman, dated January 1, 1996.
10.24* Employment Agreement between Registrant and Joanne Denk, dated January 2, 1996.
10.25 Form of Class A Warrant.
10.26 Form of Class B Warrant.
10.27 Form of Debenture.
10.28 1996 Stock Option Plan.
10.29 Form of Stock Option Agreement.
10.30 Form of Consulting Agreement between the Registrant and Whale Securities Co., L.P. as
Underwriter.
10.31** Patent Application filed by Bradley Dahl, dated July 7, 1994.
10.32** Patent Application filed by the Registrant dated June 9, 1995.
21.1*** List of Registrant's Subsidiaries.
23.1*** Consent of Goldstein, Golub, Kessler & Co., P.C., Independent Certified Public Accountants.
23.2* Consent of Solovay Marshall & Edlin, P.C. (will be contained in such firm's opinion filed as
Exhibit 5.1).
24.1 No person has signed Amendment No. 1 to this Registration Statement under a power of
attorney. A power of attorney relating to the signing of amendments hereto is incorporated
in the signature pages of this Registration Statement.
</TABLE>
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* To be filed by amendment.
** To be filed by amendment in redacted form subject to a previously filed
request for confidential treatment pursuant to Rule 406 under the Act.
*** Filed herewith.
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
Kideo Productions (Canada), Inc.
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Kideo Productions, Inc.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated November 13, 1995,
except for the first paragraph of Note 8 as to which the date is January 5,
1996, on 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
which appear in such Prospectus. We also consent to the reference to our firm
under the caption "Experts" in such Prospectus.
/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
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GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
May 9, 1996
