United States
Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
--------------------------------------------------
OR
|_| TRANSACTION REPORT PURSUANT TO 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number 0-28158
KIDEO PRODUCTIONS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3729350
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
611 Broadway, Suite 523, New York, New York 10012
- --------------------------------------------------------------------------------
(Address of principal executive office) (zip Code)
212-505-6605 FAX 212-505-2142
- --------------------------------------------------------------------------------
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months ( or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X .No .
As of December 22, 1997 3,682,128 shares of the issuer's common stock were
outstanding.
This report contains 11 pages.
<PAGE>
KIDEO PRODUCTIONS, INC.
FORM 10-QSB
INDEX
PART I Financial Information: Page
No.
Consolidated Balance Sheet-October 31,1997
and July 31, 1997........................................... 3
Consolidated Statement of Operations-three months ended
October 31, 1997 and 1996................................... 4
Consolidated Statement of Shareholders' Equity
three months ended October 31, 1997........................ 5
Consolidated Statement of Cash Flow-three months ended
October 31, 1997 and 1996................................... 6
Notes to the Consolidated Financial Statements................. 7
Management's Discussion and Analysis or Plan of Operation...... 8
PART II. Other Information.............................................. 11
Signatures..................................................... 11
2
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
at October 31, at July 31,
1997 1997*
-------------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 41 $ 164
Accounts receivable .......................................... 99 31
Inventory .................................................... 116 103
Prepaid expenses ............................................. 38 28
-------- --------
Total current assets ....................................... 294 326
Property and equipment, net ...................................... 429 507
Capitalized content costs, net ................................... 436 518
Other assets ..................................................... 120 137
-------- --------
Total assets ............................................... $ 1,279 $ 1,488
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................. $ 498 $ 475
Accrued expenses ............................................. 446 210
Capital leases, current portion .............................. 79 74
Unearned revenue ............................................. 380 233
-------- --------
Total current liabilities .................................. 1,403 992
Capital leases, long term portion ............................... 48 74
-------- --------
Total liabilities .......................................... 1,451 1,066
-------- --------
Shareholders' Equity
Preferred Stock: $.0001 par value; issuable in series:
authorized 5,000,000 shares, 750 shares issued and
outstanding at July 31, 1997 and -0- shares at October
31, 1997 .................................................... -- --
Common Stock, $.0001 par value; authorized 15,000,000 shares,
issued and outstanding 2,939,014 shares at July 31,1997 and
3,682,128 shares at October 31, 1997 ...................... -- --
Additional paid-in capital ................................... 9,866 9,591
Accumulated deficit .......................................... (10,038) (9,169)
-------- --------
Shareholders' (Deficiency) Equity .......................... (172) 422
-------- --------
Total liabilities and shareholders' equity ....................... $ 1,279 $ 1,488
======== ========
</TABLE>
* Derived from the Form 10-KSB
See accompanying notes.
3
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(Dollars in thousands except for per share amounts)
Three months ended
October 31, October 31,
1997 1996
----------- -----------
Sales ............................................ $ 101 $ 106
Cost of sales .................................... 229 175
----------- -----------
Gross profit (loss) ............................. (128) (69)
Selling expenses ................................. 390 445
General and administrative expenses .............. 343 528
----------- -----------
Loss from operations ............................. (861) (1,042)
Other income (expense), net ...................... (4) 29
----------- -----------
Net loss ......................................... $ (865) $ (1,013)
=========== ===========
Net loss per share ............................... $ (0.26) $ (0.34)
=========== ===========
Weighted average number of shares outstanding .... 3,348,746 2,939,014
=========== ===========
See accompanying notes
4
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 ................... 750 $ -- 2,939,014 $ -- 9,591 $ (9,169) $ 422
Conversion of preferred stock to common .... (750) -- 543,114 -- (25) (25)
Issuance of common stock in connection
with the September 1997 Johnston Financing 200,000 -- 300 300
Dividends on preferred stock ............... (4) (4)
Net loss ................................... (865) (865)
----------------------------------------------------------------------------
Balance at October 31, 1997 ................ (0) $ -- 3,682,128 $ -- $ 9,866 $ (10,038) $ (172)
============================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
October 31, October 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (865) $(1,013)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of operating assets .... 192 98
Effect of changes in operating assets and liabilities:
Accounts receivable ................................ (68) (52)
Inventory .......................................... (12) (100)
Prepaid expenses ................................... (11) (172)
Other assets ....................................... -- (36)
Accounts payable ................................... 22 144
Accrued expenses ................................... 225 (78)
Unearned revenue ................................... 148 296
------- -------
Net cash used in operating activities .................. (369) (913)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ..................... -- (284)
Increase in capitalized content costs .................. (15) (322)
------- -------
Net cash used in investing activities .................. (15) (606)
------- -------
Cash flows from financing activities:
Net proceeds from issuances of capital stock ........... 275 --
Proceeds from lease financing .......................... -- 73
Principal payments on capital leases ................... (14) (52)
------- -------
Net cash provided by financing activities .............. 261 21
------- -------
Net increase in cash ...................................... (123) (1,498)
Cash and cash equivalents at the beginning of the period .. 164 2,857
------- -------
Cash and cash equivalents at the end of the period ........ $ 41 $ 1,359
======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting of all normal
recurring adjustments, necessary for a fair statement of results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the three months ended October 31, 1997 are not necessarily indicative of
the results that may be expected for the fiscal year ending July 31, 1998.
The organization and the business of the Company, accounting policies
followed by the Company and other information are contained in the notes to the
Company's consolidated financial statements filed as part of the Company's
annual report for the fiscal year ended July 31, 1997 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
For comparability, certain October 31, 1996 amounts have been reclassified
where appropriate to conform to the financial statement presentation used at
October 31, 1997.
7
<PAGE>
KIDEO PRODUCTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The information set forth in "Management's Discussion and Analysis" below
includes "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and is subject to the safe harbor
created by that section. Readers are cautioned not to place undue influence on
these forward-looking statements, as they speak only as of the date hereof.
General
The Company was organized in August 1993 to develop, manufacture and market
personalized videos for children. The process of mass-producing individual
videos featuring a subject's likeness and spoken name was developed internally
by the Company. The Company claims proprietary rights in its technologies and
productions process. In April 1997, the Company was issued a U.S.
patent relating to its digital process (Patent No. 5,523,587).
Revenue Recognition
The Company's products are marketed directly to consumers and also through
catalogs and retail stores. All customer orders, regardless of their source, are
processed at the Company's manufacturing plant in New York City. Revenue is
recognized when the completed personalized video is shipped to the customer.
Results of Operations
The following discussion should be read in connection with the Company's
financial statements and notes thereto appearing elsewhere in this report.
Three month comparisons: Comparison of the quarter begun August 1, 1997 through
October 31, 1997, ("Current Quarter") against the quarter begun August 1, 1996
through October 31, 1996, ("Prior Quarter"):
Sales: The Company sold 3,595 personalized videos in the Current Quarter, as
compared to the Prior Quarter's sales of 4,009. Sales declined 5% to $101,000 in
the Current Quarter from $106,000 in the Prior Quarter. The direct to consumer
sales increased 5% to $61,000 in the Current Quarter from $55,000 in the Prior
Quarter due to direct marketing programs which included a national TV
advertising campaign and a "Kideo Catalogue". These programs were introduced
late in the Current Quarter and the Company expects to see related sales results
in the forthcoming period. The direct to consumer increase was offset by a 9%
decrease to $40,000 in catalogue and retail-sourced sales for the Current
Quarter.
The Company sells a plush version of Gregory Gopher, a proprietary
character, and a non- -personalized audiocassette featuring the sound track from
the Gregory Gopher videos. Sales of these ancillary products have not been
significant to date.
Cost of Sales: The Company's cost of sales increased $54,000 or 31% from
$175,000 in the Prior Quarter to $229,000 in the Current Quarter. The Current
Quarter increase was primarily due to an increase of $110,000 in amortization of
content development and promotional costs of Gregory & Me, offset by a $41,000
reduction in depreciation expense and $15,000 in non-recurring creative
expenses.
Selling expenses: Selling expenses decreased $55,000 or 12% in the Current
Quarter to $390,000 from $445,000 in the Prior Quarter. This decrease reflects a
reduction in sales related payroll and benefits of $74,000, catalog and
retail-sourced expenses of $26,000, outside services of $15,000 and a decrease
in shipping expenses of $10,000. These savings were offset by an increase of
$70,000 in marketing programs over the Prior Quarter. The Company's present
marketing programs include a national TV campaign and a "Kideo Catalog"
introduced late in the Current Quarter.
8
<PAGE>
General and administrative expenses: The Company's general and administrative
expenses decreased $185,000 or 35% to $343,000 in the Current Quarter from
$528,000 in the Prior Quarter. The primary causes for this decrease were in
non-recurring development expenses of $166,000 in the Current Quarter. Other
cost-effective savings by the Company during the current period were in payroll
and related payroll expense of $18,000 and infrastructure costs of $43,000.
These savings were offset by higher depreciation charges of $25,000 and higher
expenses associated with being a public company of $17,000.
Loss from operations: The loss from operations decreased $181,000 or 17% to
$861,000 in the Current Quarter from $1,042,000 in the Prior Quarter. In
response to unprofitable promotions spending in the prior periods, the Company
has implemented cost-saving measures that include across-the-board salary
reductions, reductions in shipping costs, headcount, benefits, and discretionary
spending. These actions were implemented in March and April 1997. The Company
continues this management policy as evidenced by the decreases in selling,
general and administrative expenses in the Current Quarter as compared to the
Prior Quarter.
Management is pursuing strategic marketing alliances with the intent to
reduce its financial risk in direct-to-consumer promotions and to develop a
broader based distribution for the Company's products. There can be no
assurances that these objectives will be achieved.
Other income (expense): The Current Quarter reflects lease interest expenses net
of interest income in that period. The Prior Quarter reflects an excess of
interest income from investments (Treasury bills, money market funds and
corporate commercial paper) over lease interest expenses.
Net Loss: The net loss in the Current Quarter was $865,000 or $0.26 loss per
share on 3,348,746 average shares of common stock outstanding, as compared to
the Prior Quarter net loss of $1,013,000, or $0.34 loss per share on 2,939,014
average shares of common stock outstanding.
Liquidity and Capital Resources
On September 26, 1997 The Company was advised by the Nasdaq Stock Market
that Nasdaq had deleted the Company's stock from listing in the Nasdaq SmallCap
Market. The Nasdaq decision was based in part upon the Company's having not met,
as reflected in its Form 10-QSB for the quarterly period ended April 30, 1997,
the "total assets" and "capital and surplus" requirements for continued listing
on the Nasdaq SmallCap Market. Despite the Company's submission of a plan for
achieving compliance with those requirements, the Nasdaq decision indicated that
the compliance panel lacked adequate confidence in the Company's ability to
sustain long term compliance.
The Company's capital requirements in connection with its development of
new product, manufacturing production infrastructure, acquiring licenses and
marketing activities have been and will continue to be significant. 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 development efforts and acquiring licenses), that the proceeds remaining
from the May 13, 1997 financing, and the September 16, 1997 financing (described
in the Company's July 31, 1997 10-KSB), 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 through January 31,
1998. The Company is currently in negotiation with existing stockholders with
respect to potential sources of capital financing which, if obtained, would
satisfy the Company's current financing requirements through July 31, 1998.
However, there can be no assurance that any additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all.
Balance sheet conditions which may be indicators of the Company's
liquidity would include the cash balance ($41,000 at October 31, 1997); working
capital (which was a deficiency of $1,109,000 at October 31, 1997); and the
shareholders' deficiency position (-$172,000 at October 31, 1997). Improvement
in these indicators has in the past been dependent on external sources of
financing, in the forms described in the Company's 10-KSB and through improving
operations. The Company's ability to internally generate liquidity in both the
short term and long term are continued revenue growth, gross
9
<PAGE>
margin improvement and the control of selling and general and administrative
expense. Operating cash flow adjusted for the non-cash expenses of depreciation
and amortization of content costs (resulting in negative operating cash flow of
$369,000 for the Current Quarter ended October 31, 1997), would provide an
indication of the financing needed to fund future operating activities. These
must be evaluated along with management's actions to increase its revenue
stream, increase the efficiency of its marketing efforts, and continue to
control the costs of its infrastructure as discussed above in "Results of
Operations."
Because the Company has operated at a loss since its inception and has not
generated sufficient revenue from its operations to fund its activities, it has,
to date, been substantially dependent on loans from its stockholders and private
and public offerings of its securities to fund its operations.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the litigation reported in the
Company's annual report on Form 10-KSB for the year ended July 31, 1997
as filed.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Kideo Productions, Inc.
Date: December 22, 1997 By: \s\ Richard L. Bulman
---------------------------
Richard L. Bulman
President & Chief Executive Officer
Date: December 22, 1997 By: \s\ Richard D. Bulman
---------------------------
Richard D. Bulman
Secretary & Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kideo
Productions, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 41
<SECURITIES> 0
<RECEIVABLES> 99
<ALLOWANCES> 0
<INVENTORY> 116
<CURRENT-ASSETS> 294
<PP&E> 903
<DEPRECIATION> 474
<TOTAL-ASSETS> 1,279
<CURRENT-LIABILITIES> 1,403
<BONDS> 48
0
0
<COMMON> 0
<OTHER-SE> (172)
<TOTAL-LIABILITY-AND-EQUITY> 1,279
<SALES> 101
<TOTAL-REVENUES> 101
<CGS> 229
<TOTAL-COSTS> 733
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (865)
<INCOME-TAX> 0
<INCOME-CONTINUING> (865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (865)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
