As filed with the Securities and Exchange Commission on July 10, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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)
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Copies to:
Lawrence J. Studnicky III, Esq.
Solovay Marshall & Edlin, P.C.
845 Third Avenue
New York, New York 10022
Telephone: (212) 752-1000
Facsimile: (212) 355-4608
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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 1993 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: |_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed
Last Maximum
Reported Aggregate Amount of
Title of Each Class of Amount to Sale Offering Registration
Securities to be Registered be Registered Price(1) Price Fee
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<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per (not
share(2)(3)...................... 1,780,000 $ 2.875 applicable) $ 1,764.66
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Total Registration Fee.................................................... $ 1,764.66
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(1) Last reported sale price as provided by Nasdaq for July 2, 1997.
(2) Represents shares owned by the Selling Stockholders of the Company, which
are being registered for offer on a delayed basis pursuant to Rule 415.
(3) Pursuant to Rules 416 and 457, there are also being registered such
indeterminable additional shares of Common Stock as may become issuable
pursuant to anti-dilution provisions and conversion price adjustment
provisions contained in the Certificate of Designations relating to the
Company's Series A 6% Convertible Participating Preferred Stock.
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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION--DATED JULY __, 1997
PROSPECTUS
KIDEO PRODUCTIONS, INC.
1,780,000 Shares of Common Stock
This Prospectus relates to the public offering by certain selling
stockholders (the "Selling Stockholders") of up to 1,780,000 shares (the
"Shares") of the Common Stock, par value $.0001 per share (the "Common Stock"),
of Kideo Productions, Inc., a Delaware corporation (the "Company"). None of the
Shares covered by this Prospectus have been sold prior to the date hereof.
The Company will not receive any proceeds from the sale of the Shares
offered hereby. The Company is bearing the costs of this Offering. See "Plan of
Distribution."
The Common Stock is listed on the Nasdaq SmallCap Market ("Nasdaq") under
the symbol KIDO. Prior to the consummation on June 24, 1996 of the Underwritten
Offering referenced herein, there had been no public market for the Common
Stock. There can be no assurance that an active market for the Common Stock will
exist or be sustained at any time after the date hereof. See "Price Range of
Securities and Dividend Policy."
The Company has informed the Selling Stockholders that the anti-
manipulative rules under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), including Rule 10b-3 and Regulation M, may apply to their
sales in the market and has furnished the Selling Stockholders with a copy of
these Rules. The Company also has informed the Selling Stockholders of the need
for delivery of copies of this Prospectus under certain circumstances.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE SHARES, CERTAIN OF WHICH ARE DESCRIBED UNDER THE CAPTION "RISK
FACTORS."
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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.
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, THE SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR
THE SELLING STOCKHOLDERS TO MAKE SUCH OFFER OR SOLICITATION.
The Shares have been registered on behalf of the Selling Stockholders. The
Shares may be offered by them pursuant to this Prospectus until __________,
1998, provided that this Prospectus is kept current in accordance with
applicable provisions of the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations of the Securities and Exchange Commission
(the "Commission") promulgated thereunder. The Company intends to maintain a
current prospectus covering the Shares through that date and, thereafter, until
at least the one year anniversary of the date of this Prospectus. See "Certain
Transactions--Registration Rights Agreement With Sellet."
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The Shares may be sold by the Selling Stockholders in transactions in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares directly to purchasers or to or through
underwriters or broker-dealers who may act as agents or principals. Such
underwriters or broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of the Shares for whom such underwriters or broker-dealers may act as
agent or to whom they sell as principal, or both (which compensation as to a
particular underwriters or broker-dealer might be in excess of customary
commissions). To the extent required, the specific amount of Shares to be sold,
the name of the Selling Stockholders, the respective purchase price and public
offering price, the names of any such agent, broker-dealer, or underwriter, and
any applicable commission or discount with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement.
The aggregate proceeds to the Selling Stockholders from the Shares will be
the purchase price of the Shares sold less the aggregate agents' or brokerage
commission and underwriters' discount, if any. The Selling Stockholders and any
broker-dealers, agents or underwriters that participate with the Selling
Stockholders in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and, under the
Securities Act, any commissions received by them and any profit on the resale of
the Shares purchased by them may be deemed to be underwriting commissions or
discounts.
The date of this Prospectus is July __, 1997.
<PAGE>
TABLE OF CONTENTS
Page
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Available Information...................................... 1
Certain Trademarks......................................... 1
The Underwritten Offering.................................. 2
The 1997 Financing......................................... 3
Prospectus Summary......................................... 5
Risk Factors............................................... 8
Price Range of Securities and Dividend Policy.............. 18
Capitalization............................................. 19
Selected Financial Data.................................... 20
Management's Discussion and Analysis of Financial
Condition and results of Operations...................... 21
Business................................................... 30
Management................................................. 41
Principal Stockholders..................................... 49
Selling Stockholders....................................... 51
Plan of Distribution....................................... 52
Certain Transactions....................................... 53
Description of Securities.................................. 55
Shares Eligible for Future Sale............................ 60
Legal Matters.............................................. 61
Experts.................................................... 61
Financial Statements....................................... F-1
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act with respect to the
Shares 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 items of which are contained in the exhibits
thereto as permitted by the rules and regulations of the Commission. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to herein 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 Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files periodic reports and other information
with the Commission.
The Registration Statement and the exhibits thereto, as well as such
periodic reports and other information filed with the Commission, may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of such material may be
obtained by mail at prescribed rates from the Public Reference Section of the
Commission at that same address. Such materials should also be available for
inspection and copying at the regional offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, New York, New York 10048.
The Company furnishes its stockholders with annual reports containing
financial statements which are examined and reported on, with an opinion
expressed, by an independent public accounting firm, as well as quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year. Requests for copies of such documents may be directed to
the Chief Financial Officer, Kideo Productions, Inc., 611 Broadway, Suite 523,
New York, New York 10012.
No dealer, salesman or other person has been authorized in connection with
this Offering to give any information or to make any representation other than
those contained in this Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any broker, dealer, agent or underwriter. Except where otherwise indicated,
this Prospectus speaks as of the effective date of the Registration Statement.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there have been no changes in the
affairs of the Company since the date hereof.
CERTAIN TRADEMARKS
Three federal trademark applications are currently pending in the United
States with respect to the name "Kideo," and corresponding trademark
applications have been filed in Australia, France, Germany, Japan, Spain and the
United Kingdom. A federal trademark application also is currently pending in the
United States with respect to the name "Gregory and Me." Third-party trademarks
appearing in this Prospectus are the property of their respective holders.
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THE UNDERWRITTEN OFFERING
On June 24, 1996, the Company completed an underwritten initial public
offering of 1,400,000 shares of Common Stock and redeemable warrants to purchase
1,610,000 shares of Common Stock (the "Warrants"), all of which were sold by the
Company (the "Underwritten Offering"). The initial public offering price was
$5.00 per share of Common Stock and $.10 per Warrant. Each Warrant entitles the
registered holder thereof to purchase, at any time from June 24, 1997 through
June 24, 2001, one share of Common Stock at a price of $4.00 per share, subject
to adjustment in certain circumstances (including in the event of a stock split
or dividend, recapitalization, reorganization, merger or consolidation of the
Company). The Common Stock and Warrants are listed on Nasdaq under the
respective symbols KIDO and KIDOW. See "Description of Securities--Common Stock"
and "--Public Warrants."
The Company sold 140,000 warrants to Whale Securities Co., L.P., as
underwriter of the Underwritten Offering (the "Underwriter") and its designees
(the "Underwriter's Warrants"). Each Underwriter's Warrant entitles the
registered holder thereof to purchase one share of Common Stock at an exercise
price of $8.25 per share (165% of the initial public offering price per share)
and/or one warrant (each exercisable to purchase one share of Common Stock at a
price of $5.20 per share) at an exercise price of $.165 per warrant (165% of the
initial public offering price per Warrant). The Underwriter's Warrants contain a
cashless exercise provision. In the event that all of the Underwriter's Warrants
(and the warrants to purchase Common Stock which underlie the Underwriter's
Warrants) were to be exercised, the holders of the Underwriter's Warrants would
become the owners of an aggregate of 280,000 shares of Common Stock. Pursuant to
an agreement between the Company and the Underwriter, the Underwriter's Warrants
and the securities underlying the Underwriter's Warrants have been registered
under the Securities Act and included by the Company in the Registration
Statement.
Commencing on June 24, 1997, the Underwriter's Warrants are exercisable
for a period of four years (the "Warrant Exercise Term"). In general, before
that date, the Underwriter's Warrants may not be sold, transferred, assigned or
hypothecated except to the officers and partners of the Underwriter and members
of the selling group formed by it to effectuate the Underwritten Offering.
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 Company has also granted certain
demand registration rights to the holders of the Underwriter's Warrants during
the four-year Warrant Exercise Period, and has granted certain piggyback
registration rights to such holders during the seven year period ending June 24,
2003.
In connection with the Underwritten Offering, the Company agreed to retain
the Underwriter as a financial consultant, for a two-year period ending June 24,
1998, at an annual fee of $30,000. The entire $60,000 fee was paid upon the
consummation of the Underwritten Offering. The consulting agreement with the
Underwriter does not require it to devote a specific amount of time to the
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performance of its duties thereunder. 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.
In connection with the qualification for sale under certain state
securities laws of the Common Stock and the Warrants at the time of the
Underwritten Offering, the Company consented to the denial of secondary trading
in its securities in the State of New Jersey. As a result of this action,
stockholders of the Company cannot sell shares of Common Stock or Warrants
through a broker-dealer whose office is located in New Jersey or to any New
Jersey resident, whether through a broker-dealer or not, unless such denial is
removed, of which there can be no assurance.
THE 1997 FINANCING
On May 9, 1997, the Company's Board of Directors, acting pursuant to the
authority granted under its Certificate of Incorporation, authorized the
creation of a series of the Company's Preferred Stock, par value $.0001 per
share (the (Preferred Stock"). The series so authorized is designated as the
Series A 6% Convertible Participating Preferred Stock (the "Series A Preferred
Stock") and consists of 4,000 shares, each share having a liquidation value of
$1,000. There is no Preferred Stock currently authorized for issuance by the
Company other than the Series A Preferred Stock.
On May 13, 1997, the Company consummated a private placement sale,
arranged by a placement agent, to Sellet Marketing Corp. ("Sellet") of 750
shares of Series A Preferred Stock (the "1997 Financing"). The shares were sold
at their liquidation value, for a total purchase price of $750,000. The Company
has used the net proceeds from the 1997 Financing as working capital for general
corporate purposes. As a result of such sale, and in accordance with the terms
of the Certificate of Designations relating to the Series A Preferred Stock (the
"Certificate of Designations") and the Certificate of Incorporation, the holders
of Common Stock will rank junior to holders of Series A Preferred Stock in the
event of any voluntary or involuntary liquidation, distribution or sale of
assets, dissolution or winding up of the Company.
The following is a summary of certain terms and conditions of the
Certificate of Designations and of the agreements pursuant to which the Company
effectuated the 1997 Financing. Subject to the satisfaction of certain closing
conditions contained in a Stock Purchase Agreement between the Company and
Sellet, the Company pursuant to such agreement will have the option to sell to
Sellet up to 1,250 additional shares of Series A Preferred Stock for aggregate
additional gross consideration of up to $1,250,000. Among those conditions are
the filing with the Commission (and the Commission's declaration of
effectiveness) of a registration statement providing for the sale under the
Securities Act of the shares of Common Stock into which the Series A Preferred
Stock issued and issuable to Sellet may be convertible.
Pursuant to a Registration Rights Agreement between the Company and
Sellet, the Company has registered under the Securities Act and included in the
Registration Statement 1,500,000 shares of Common Stock potentially underlying
(i) the 750 shares of Series A Preferred Stock currently issued to Sellet and
(ii) the 1,250 shares thereof potentially issuable to Sellet as described above.
See "Certain Transactions--Registration Rights Agreement With Sellet."
Pursuant to the Certificate of Designations, on July 12, 1997 the Series A
Preferred Stock became convertible at a holder's option into shares of Common
Stock. Sellet has agreed with the Company that Sellet will not effectuate a
conversion of shares of Series A Preferred Stock into Common Stock if, following
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such conversion, Sellet would be the holder of five percent or more of the
then-outstanding shares of Common Stock.
In addition, under the Certificate of Designations, the Company has the
right to cause a mandatory conversion of all outstanding shares of Series A
Preferred Stock at any time after the one-year anniversary of the date as of
which the Commission declares the Registration Statement to be effective (the
"Effective Date," which was August __, 1997). The Certificate of Designations
provides that the Series A Preferred Stock will initially be convertible
(subject to customary anti-dilution adjustments) into shares of Common Stock
based upon the ratio of (a) the total liquidation value (at $1,000 per preferred
share) of the preferred shares being converted, to (b) the then-effective
conversion price. The conversion price at any point in time will be 80% of the
prior three trading days' average of the closing bid price per share of Common
Stock (as reported by Nasdaq). The Certificate of Designations provides that
dividends on the Series A Preferred Stock are payable semi-annually on each July
31st and January 31st, commencing with July 31, 1998. The Company has the option
to pay any or all of the dividends through the issuance of additional shares of
Common Stock (utilizing the same conversion ratio as described above). See
"Description of Securities--Preferred Stock--Series A Preferred Stock."
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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, (ii) assumes no exercise of the Underwriter's Warrants, (iii)
assumes no exercise of options (the "Employee Options") outstanding under the
Company's 1996 Stock Option Plan (the "Option Plan"), (iv) gives pro forma
effect to the 1997 Financing as if that transaction had been consummated on
April 30, 1997, and (v) assumes no exercise by holders of Series A Preferred
Stock of the right to cause the conversion of shares thereof into Common Stock.
See Notes [8 and 12] of Notes to Consolidated Financial Statements.
The Company
In its approximately four year history, Kideo Productions, Inc. has
succeeded in developing proprietary technologies and production processes which
have made it a low-cost manufacturer of a revolutionary new type of home video
product: digitally personalized videos ("Kideos"). Since commercially launching
its first Kideos nationally in the spring of 1994, the Company has focused
primarily on producing proprietary Kideo titles for children aged two to seven.
In a Kideo, a child's face and spoken name are digitally placed by a PC-based
production system into a story template that has been 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. The Company currently markets
eight proprietary Kideo titles for children. With its existing Kideos targeting
the children's market, the Company has created -- and believes it dominates -- a
unique product niche in the home video market.
The Company claims proprietary rights in its technologies and production
process. In April 1997, the Company was issued a U.S. patent relating to its
digital personalization production process (Patent No. 5,623,587). The Company
believes that this patent could potentially have substantial value, since the
Company expects that businesses owning characters that are popular in the
children's home video and television markets will ultimately seek to exploit
those characters in digitally personalized audiovisual products.
Prior to 1997, the Company had marketed six Kideo titles (the "Original
Kideos"), which were created utilizing the first generation of the Company's
proprietary computerized production process. That production process resulted,
in general, in a videocassette product that might be likened to a "video
picturebook" - the child's personalized character appearing in an Original Kideo
is capable of only a very limited range of partial-motion animation.
In January 1997, the Company began marketing the first two titles in its
new series of Gregory and Me Kideos. The Company created these titles utilizing
a newly implemented proprietary production system. As a result of the improved
computerized production technologies employed by this system, in a Gregory and
Me title the child's personalized character can exhibit two-dimensional full-
motion animation and can be made to interact with both two-dimensional animated
versions and three-dimensional puppet versions of the Gregory and Me cast of
proprietary characters -- who in each title are led by Gregory Gopher. It is
this recently patented production process -- a sophisticated technological
system for the low cost, mass production of digitally personalized videos --
which the Company believes will provide it with a meaningful near-term
competitive advantage over new entrants into the emerging market for digitally
personalized
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home video products.
Each of the Original Kideos and Gregory and Me Kideos utilizes a
digitally- stored video story template that features content and characters
which are proprietary to the Company. The eight existing Kideo titles each has a
playing time of approximately 20 minutes and a suggested retail list price of
$29.95. The Company believes, however, that more than half of all Kideos sold by
its customers have been offered at an actual retail price of $34.95 or higher.
To date, substantially all Kideos sold have been purchased by U.S. consumers.
The Company historically has relied primarily on national catalogue retailers
(such as Hammacher Schlemmer and Spiegel) to market and sell its products. Since
the Underwritten Offering, however, the Company has increasingly been targeting
its marketing strategies towards direct-to-consumer advertising and the
development of relationships with established national distributors of
children's home video products.
The Company has recently determined to focus its near-term development
efforts for new Kideos increasingly upon the creation of titles featuring
licensed characters (instead of proprietary ones) that have proven popularity in
the children's home video market. In furtherance of that objective, the Company
is currently seeking out licensing, marketing and other arrangements with
companies that control those types of characters and/or that have the
demonstrated financial and operational capabilities to promote and distribute
children's home video products through a broad range of domestic distribution
channels, including retail outlets of various kinds. The Company, however, is
not seeking, or engaged in negotiations concerning, any arrangements that relate
to any merger, consolidation, purchase or sale transaction involving the
Company, any of its assets or any other business.
The Company's long-term business strategy is to become a premier market
leader, both domestically and internationally, in the development, manufacturing
and marketing -- to children and other consumers -- of a wide variety of
digitally personalized home video titles, other digitally personalized
audiovisual products, and related articles of merchandise (both personalized and
non- personalized). Included among the Company's product development goals are:
o to develop additional Kideo titles for children employing both
proprietary and licensed characters, including (i) series of titles
that -- like the Gregory and Me series and popular children's
television programs -- feature the same cast of recurring
characters, and (ii) titles for older children; and
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.
In addition, the Company will in general 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.
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
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herein 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.
The Offering
This Prospectus relates to the public offering by the Selling Stockholders
of up to 1,780,000 shares of Common Stock. None of the Shares covered by this
Prospectus have been sold prior to the date hereof. The Company will not receive
any proceeds from the sale of the Shares. The Company is bearing substantially
all of the costs of this Offering. The Shares may be offered by the Selling
Stockholders pursuant to this Prospectus until _____________, 1998, provided
that this Prospectus is kept current in accordance with applicable provisions of
the Securities Act and the rules and regulations of the Commission promulgated
thereunder. The Company intends to maintain a current prospectus covering the
Shares through that date and, thereafter, until at least the one year
anniversary of the date of this Prospectus. The Shares may be sold by the
Selling Stockholders in transactions in the over-the-counter market, in
negotiated transactions, or a combination of such methods of sale. See "Selling
Stockholders," "Plan of Distribution" and "Certain Transactions--Registration
Rights Agreement With Sellet."
The Common Stock is listed on the Nasdaq SmallCap Market under the symbol
KIDO. See "Price Range of Securities and Dividend Policy."
An investment in the Shares involves a high degree of risk. Prospective
investors should understand that they may sustain a total loss of their
investment and should carefully consider the factors described herein under
"Risk Factors."
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RISK FACTORS
The securities being offered hereby are highly speculative and involve a
high degree of risk, including but not limited to, those risk factors set forth
below, and therefore should not be purchased by anyone who cannot afford a loss
of his entire investment. Prior to making an investment in the Company, each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering.
Limited Operating History. Although the Company was organized in August
1993, it did not launch its initial line of Kideo products until the spring of
1994. In the approximately three years since then, the Company has sold only a
total of approximately 84,000 Kideos. 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 the fiscal year ended July 31, 1996 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. 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 approximately $8,497,000 as of April 30, 1997. For its fiscal year
ended July 31, 1996, the Company had revenues of approximately $761,000 and a
net loss of approximately $3,059,000, and, for the nine months ended April 30,
1997, the Company had revenues of approximately $1,063,000 and a net loss of
approximately $3,345,000. The Company expects that its net loss for the fiscal
year ending July 31, 1997 will 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; Need for
Additional Financing. The Company's capital requirements in connection with its
development and marketing activities have been and will continue to be
significant. Because the Company has operated at a loss since its inception and
is not generating sufficient revenues from its operations to fund its activities
(as of April 30, 1997, the Company had a working capital deficit of $1,024,000
and, after giving pro forma effect as of that date to the consummation of the
sale of all 2,000 shares of Series A Preferred Stock which could be sold
pursuant to the 1997 Financing, had pro forma working capital of $811,000), it
has to date been substantially dependent on loans from its stockholders and
private and public market sales of its securities to fund its operations. Most
recently, the Company undertook the 1997 Financing so as to obtain the working
capital that it required in order to continue its creative development
activities and fund its marketing plans, as well as its other working capital
requirements. (See also the discussion below entitled "--Possible Delisting of
Securities from Nasdaq".) Although the Company anticipates, based on its
currently proposed plans and
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assumptions relating to its operations (including assumptions regarding the
progress and timing of its new product development efforts), that the remaining
proceeds from the 1997 Financing, 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 until approximately
December 1997, 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 prove to be inaccurate, the Company could be required to
seek additional financing sooner than currently anticipated. Except for the 1997
Financing, the Company has no current arrangements with respect to, or potential
sources of, any additional financing, and it is not anticipated that existing
stockholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. Any inability to obtain additional financing when
needed would have a material adverse effect on the Company, 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 "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 or consumers.
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 historically has had, and
continues to be disadvantaged by, limited marketing experience and limited
financial, personnel and other resources to undertake extensive marketing and
advertising activities. Only after receiving the net proceeds of the
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Underwritten Offering did the Company enjoy any meaningful capabilities to
engage in any significant marketing and advertising activities. Since
consummating the Underwritten Offering in June 1996, the Company has devoted
approximately $1.2 million of the net proceeds therefrom to various types of
marketing tests and campaigns (primarily in connection with the development and
support of various forms of direct-to-consumer marketing, including
direct-response television and radio advertising). While revenues for the nine
months ended April 30, 1997 (approximately $1,063,000) were 59% higher than
revenues for the corresponding period of the prior fiscal year (approximately
$670,000), the Company's marketing activities did not generate revenues
sufficient to attain profitability. Developing increased market acceptance for
the Company's existing and proposed Kideo products will require substantial
marketing efforts and the expenditure of a significant amount of funds. If
current revenue levels are sustained for the near term, the Company does not
believe that it will have the capability to devote to those marketing efforts
funds of its own in amounts that will be sufficient to create broad consumer
awareness of the Company's products. The Company is therefore seeking out
marketing and other arrangements with companies that have the demonstrated
financial and operational capabilities to promote and distribute children's home
video products through a broad range of distribution channels. No assurance can
be given, however, that any of those arrangements (if concluded on terms
favorable to the Company, of which there can be no assurance) will materially
improve the Company's abilities to penetrate on a widescale basis the existing
children's video market or to position its products to appeal to mainstream
consumer markets. There in fact can be no assurance given that any marketing
efforts undertaken by the Company (or its future marketing partners, if any)
will result in any increased demand for the Company's products, or that any such
efforts will result in any significant increase in revenues. See
"Business--Marketing."
Dependence on Key Personnel. The success of the Company is largely
dependent on the abilities and continued personal efforts of its executive
officers, including especially those of Richard L. Bulman, the Company's
President and Chairman of the Board. All of the Company's current employment
agreements with its officers expire by December 1998. Any incapacity or
inability of Mr. Bulman or other of the Company's officers to perform their
services would have a material adverse effect on the Company. Moreover, other
than key man life insurance on the life of Mr. Bulman in the amount of
$2,000,000, the Company does not have (and does not intend to have) key man life
insurance on the lives of its officers or employees. The success of the Company
is also dependent on 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 existing 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."
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
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the Company's existing Kideos. The development and implementation of such new
technologies is a complex and uncertain process requiring high levels of skill
and innovation, as well as accurate anticipation of technological and market
trends, and there can be no assurance that the Company's efforts in this
direction will succeed. The Company's digitally personalized media products are
designed for a relatively new and largely untested market. Such a new market is
particularly susceptible to rapidly changing and evolving technologies and
industry standards. The introduction by the Company's existing or future
competitors of digitally personalized media products embodying superior
technologies or the emergence of new industry standards could exert adverse
price pressures on the Company's existing or future products or could render the
Company's technologies obsolete or its products unmarketable, any of which
occurrences would have a material adverse effect on the Company. See
"Business--Technology Overview," "--Potential Future Products" and
"--Competition and Industry Background."
Competition. The Company believes that the market for digitally
personalized video media -- although only in its development stages -- will
likely evolve into a highly competitive market. The Company is aware of only one
other company in this country that is currently producing and marketing
personalized video media products. However, there are numerous other companies
involved in video media production who could possibly enter the personalized
market segment in which the Company is doing business. Many of such companies
have substantially greater financial, technical, production, marketing and other
resources than those of the Company. In the case of an entity with such
resources, the Company does not believe that there currently are, or are likely
to be in the foreseeable future, prohibitive barriers to entry into the business
of developing and marketing digitally personalized media products. Accordingly,
the ability of the Company to compete will depend on its ability to complete
development of, and introduce into the marketplace in a timely manner, its
proposed products and technology, and to continually enhance and improve such
products and technology. There can be no assurance that the Company will be able
to compete successfully, that its existing or future competitors will not
develop technologies or products that render the Company's products and
technology obsolete or less marketable (or otherwise have a material adverse
effect upon the Company's operations), or that the Company will be able to
enhance successfully its proposed products or technology or to 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
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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
claims proprietary rights in its digital personalization production process. In
April 1997, the Company was issued a U.S. patent relating to its digital
personalization production process (Patent No. 5,623,587). None of the Company's
production technologies, however, are currently the subject of any issued
patents in any foreign jurisdiction, and there can be no assurance that any
foreign patents will be issued to the Company. Patents and patent applications,
like the ones issued to and filed by the Company, involve complex legal and
factual questions, and the scope and breadth of patent claims that may have
issued, or that may be allowed in the future, is inherently uncertain. As a
result, even when a patent is issued to a company, there can be no assurance as
to the degree or adequacy of protection that such patent may afford. There can
be no assurance, for instance, (i) that the U.S. patent issued to the Company
will be sufficiently broad to protect the Company's proprietary technology or
the processes to which such patent relates, or (ii) that this patent will not be
challenged, invalidated, designed around by others or otherwise circumvented.
There additionally can be no assurance that -- independently of any protection
afforded by any patents now or hereafter issued -- the steps taken by the
Company to protect its proprietary rights will be adequate to prevent the
misappropriation of its technology or the 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 of its patent rights, 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. Although the Company believes that its existing technologies and
implementations of such technologies do not infringe upon the rights of others,
it is possible that third parties may currently have, or may be granted in the
future, patents claiming products or processes that are necessary for or useful
to the development of the Company's technology, and that legal actions could be
brought against the Company asserting infringement. In addition, there can be no
assurance that products developed by the Company in the future will not infringe
the current or future patent rights of others, giving rise to infringement
claims against the Company. In the case of such infringement, the Company could,
under certain circumstances, be required to modify its products or to obtain a
third-party license in order to render the Company's technology or processes
non-infringing. Such thirty-party license might not be granted, or may not be
available to the Company on reasonable terms, either of which results could
materially adversely affect the Company's business and prospects. See
"Business--Intellectual Property Rights."
Possible Inability to Use or Register the Word "Kideo" as a Trademark. The
Company has adopted and used the word "Kideo" as its principal trademark for its
products and services. The Company has applied for registration of this
trademark in the United States, Australia, France, Germany, Japan, Spain and the
United Kingdom. There can be no assurance that the Company will be granted a
registered trademark of the word "Kideo" in any jurisdiction. In the United
States, another party had previously registered two allegedly similar trademarks
but had ceased using them and had filed for bankruptcy under Chapter 11. In July
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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 complete the formalities of a
settlement. In this settlement, the Successor has agreed to withdraw its
registration and a pending application to register the mark "Kideo" and to cease
using this mark in the United States. The settlement agreement has been
prepared, agreed to by both parties, and is in the process of being executed. If
for any reason the settlement agreement is not executed and delivered by the
Successor (which the Company currently considers unlikely), then the Company
would 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."
Market for the Company's Securities; Possible Price Volatility. There can
be no assurance that an active trading market for the Company's securities will
exist or be sustained at any time after the date hereof. Although the Common
Stock is listed on Nasdaq, no person or entity is required by Nasdaq or
otherwise obligated to make a market in the Common Stock. As a result, a
purchaser of the Shares may experience difficulty in selling his Shares. In
addition, the market prices of the Company's securities may from time to time be
highly volatile, as has been the case with the securities of other companies in
emerging growth businesses. Factors such as the Company's financial results, the
introduction of new products by the Company or its competitors, and factors
affecting the video industry generally may have a significant impact on the
market price of the Company's securities. 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
"Price Range of Securities and Dividend Policy."
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 terms of
financing agreements that may hereafter be entered into by the Company or by the
terms of any series of dividend-bearing Preferred Stock (such as the Series A
Preferred Stock) that may be issued by the Company. See "Price Range of
Securities and Dividend Policy" and "Description of Securities--Series A
Preferred Stock."
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Significant Management Holdings. As of the date of this Prospectus, the
Company's directors and officers as a group own an aggregate of approximately
23% of the outstanding shares of Common Stock (30% when beneficial ownership is
considered) and will thus 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 is 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 prohibits a public company
incorporate in Delaware 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 -- as was done in the case of the recent creation of the
Series A Preferred Stock. The Board of Directors is thus 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."
Certain Charter Provisions Having Anti-Takeover Effects. The Company's
Certificate of Incorporation includes provisions 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 Company's securities at a premium,
or otherwise adversely affect the market price of the Company's securities. At
the next annual meeting of stockholders, for example, the Company's Board of
Directors will be classified into three classes of directors, with each class
serving a staggered three-year term. The Certificate of Incorporation also
provides that stockholder action may only be effected at a duly called meeting
of stockholders and not by a written consent in lieu of a meeting. These
provisions could make it more difficult for stockholders to effect certain
corporate actions that might facilitate a proposed acquisition of the Company
(e.g., the replacement of directors of the Company) and might 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
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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."
State Registration Required for Sale of Shares. An investor may purchase
Shares only if those Shares are qualified for sale, or are exempt from
registration or qualification, under the applicable state securities laws of the
State in which the prospective purchaser resides. The Company has not registered
or qualified the Shares under any state securities laws and, unless the sale of
Shares to a particular investor is exempt from registration or qualification
under applicable state securities laws, that sale may not be effected until
those Shares have been so registered or qualified.
Shares Eligible for Future Sale; Registration Rights. As of the date of
this Prospectus, the Company has 2,939,014 shares of Common Stock outstanding,
of which shares the following were registered as part of the Underwritten
Offering and, accordingly, are freely tradeable without restriction or further
registration under the Securities Act: (i) 1,400,000 shares of Common Stock sold
in the public market pursuant to the Underwritten Offering; and (ii) 290,000
shares of Common Stock which were registered in connection with the Underwritten
Offering on behalf of certain selling stockholders of the Company. All of the
remaining shares of Common Stock are "restricted securities" (as that term is
defined in Rule 144 under the Securities Act), and as such they may be sold only
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. From and after June 24, 1997, however, substantially all of
these restricted securities are either eligible for sale in the public market
pursuant to Rule 144 or are 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 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" and "Plan of
Distribution."
Effect of Outstanding Convertible Securities. As of the date of this
Prospectus, there are outstanding: (i) currently exercisable Warrants to
purchase an aggregate of 1,610,000 shares of Common Stock at a price of $4.00
per share; (ii) fully vested Employee Options to purchase an aggregate of
235,340
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shares of Common Stock at prices ranging from $3.1875 to $5.00 per share; (iii)
currently exercisable Underwriter's Warrants to purchase an aggregate of 140,000
shares of Common Stock at a price of $8.25 per share; (iv) currently exercisable
Common Stock purchase warrants (which underlie the Underwriter's Warrants) to
purchase an aggregate of 140,000 shares of Common Stock at a price of $5.20 per
share; (v) 750 shares of Series A Preferred Stock, which are currently
convertible into Common Stock upon the terms specified in the Certificate of
Designations; (vi) certain currently exercisable warrants (issued in October
1996 to an independent contractor to the Company) to purchase an aggregate of
20,000 shares of Common Stock at a price of $5.00 per share; and (vii) certain
currently exercisable warrants (which are beneficially held by Charles C.
Johnston, a director and principal stockholder of the Company) to purchase an
aggregate of 83,975 shares of Common Stock at a price of $3.60 per share. If any
of these convertible securities are exercised for or converted into their
underlying Common Stock equivalents, then the percentage ownership of persons
then holding shares of Common Stock will be diluted, and subsequent sales in the
public market of such underlying Common Stock could adversely affect the
prevailing market prices for the Common Stock. See "Management--1996 Stock
Option Plan" and "Description of Securities."
Possible Delisting of Securities from Nasdaq. Based upon its actual balance
sheet at April 30, 1997 (without giving any pro forma effect to the 1997
Financing), the Company failed to meet Nasdaq's maintenance requirements for
continued listing on the Nasdaq SmallCap Market. The Company fell short of the
required level of $2 million in total assets (reporting total assets at April 30
of approximately $1.6 million) and fell short of the required level of $1
million of capital and surplus (i.e., total stockholders' equity) (reporting
total stockholders' equity at April 30 of approximately $240,000). The Company
undertook the 1997 Financing in part so as to remedy those failures to meet the
Nasdaq SmallCap Market maintenance requirements. After giving pro forma effect
as of April 30, 1997 to the sale of 2,000 shares of Series A Preferred Stock
pursuant to the 1997 Financing (resulting in net proceeds to the Company of
approximately $1,835,000, after the deduction of estimated issuance costs of
$165,000), the Company's pro forma total assets as of that date were
approximately $3.4 million and its pro forma capital and surplus (or total
stockholders' equity) as of that date were approximately $2.1 million (of which
$1,130,000 will be received after the date of this prospectus). There can be no
assurance, however, that the Company in the future will continue to meet
Nasdaq's maintenance requirements for continued listing on the Nasdaq SmallCap
Market. At the present time, continued listing on the Nasdaq SmallCap Market
generally requires that: (i) the Company maintain at least $2,000,000 in total
assets and $1,000,000 in capital and surplus (Nasdaq has proposed eliminating
these requirements in favor of a proposed requirement that an issuer have net
tangible assets of at least $2 million or a market capitalization of at least
$35 million or net income in two its last three years of at least $500,000);
(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
(Nasdaq has proposed increasing these requirements to, respectively, 500,000
shares and $1 million); (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
at any time is unable to satisfy the then-applicable Nasdaq maintenance
requirements, its securities may be delisted from Nasdaq. There can be no
assurance that the Company's financial condition and results of operations will
improve to the extent that the Company will not, in the future, require an
additional infusion of equity capital in order to continue to satisfy Nasdaq's
maintenance requirements. (See the discussion above under "--Significant Capital
Requirements; Working Capital Deficit; Need for Additional Financing.") In such
event, trading (if any) in the Common Stock 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,
16
<PAGE>
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.
Additional Risks Relating to Delisting and 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, an institution with
assets in excess of $5,000,000 or an individual with net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). 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 equity
financing obtained by the Company in connection with the Underwritten Offering
and certain private financings completed prior thereto resulted 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.
17
<PAGE>
PRICE RANGE OF SECURITIES AND DIVIDEND POLICY
The Common Stock and Warrants are listed on Nasdaq under the respective
symbols KIDO and KIDOW. The following table sets forth the range of the high and
low bid information (as provided by Nasdaq) of these listed securities for the
period from June 24, 1996 (the effective date of the Underwritten Offering)
through June 20, 1997. Such information may reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not reflect actual
transactions.
Common Stock Warrants
------------ --------
Low Bid High Bid Low Bid High Bid
------- -------- ------- --------
FISCAL 1996:
4th Quarter (from 7/31/96) 2-1/8 5-3/8 3/8 1-1/2
FISCAL 1997:
1st Quarter 2-3/4 4-1/8 1/2 1-1/8
2nd Quarter 2 3-1/2 3/8 7/8
3rd Quarter 2-3/4 4-1/8 3/8 1
4th Quarter (to 6/20/97) 3-1/4 4-3/8 9/16 1-1/16
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 at any time after the date hereof
may depend upon whether, at that time, it has satisfied in full its obligations
to pay all dividends then accrued but unpaid on any then-outstanding shares of
Series A Preferred Stock (the dividends on which may be paid by the Company, at
its option, wholly or partly in cash and/or shares of Common Stock). 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 additional series of Preferred Stock that may be issued. See
"Description of Securities--Preferred Stock".
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of April 30, 1997: (i) on an actual basis; and (ii) on a pro
forma basis, giving effect as of such date to the consummation of the 1997
Financing. All amounts are in thousands of dollars.
April 30, 1997
--------------
Actual Pro Forma
------ ---------
Short-term portion of capitalized leases obligations $ 95 $ 95
======= =======
Long-term portion of capitalized lease obligations $ 90 $ 90
Stockholders' Equity:
Preferred Stock, $.0001 par value, issuable in series:
5,000,000 shares authorized; no shares issued and
outstanding (actual); 2,000 shares of Series A
Preferred -- --
Stock issued and outstanding (pro forma)
Common Stock, $.0001 par value: 15,000,000 shares
authorized; 2,939,014 shares issued and outstanding
(actual and pro forma) -- --
Additional paid-in capital (actual) 8,737 8,737
Additional paid-in capital, arising from issuance of
2,000 shares of Series A Preferred Stock (pro forma) -- 1,835(1)
Accumulated deficit (8,497) (8,497)
------- -------
Total Stockholders' Equity 240 2,075
------- -------
Total Capitalization $ 330 $ 2,165
======= =======
- ----------
(1) Gives pro forma effect to the issuance, pursuant to the 1997 Financing, of
2,000 shares of Series A Preferred Stock in exchange for $2,000,000, less
$165,000 of issuance costs.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the years and periods presented
below is derived from the Company's consolidated financial statements. The
financial data for the two fiscal years ended July 31, 1996 is derived from the
Company's audited consolidated financial statements and related notes included
elsewhere in this Prospectus. The data as of April 30, 1996 and 1997 (including
the pro forma data as of April 30, 1997) and for the nine-month periods then
ended is derived from the Company's unaudited financial statements included
elsewhere in this Prospectus, which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for the nine months ended April 30, 1997 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
following data should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." All amounts are in thousands of dollars, except per share amounts
and number of shares.
<TABLE>
<CAPTION>
Statement of Operations Data:
Nine months Nine months
ended ended
Year Ended Year Ended April 30, April 30,
--------------------------
July 31,1995 July 31,1996 1996 1997
--------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 521 $ 761 $ 670 $ 1,063
Gross profit (136) 124 173 (36)
Net loss (1,579) (3,059) (1,588) (3,345)
Pro forma net loss(1) (1,917) (3,133) (1,662) n/a
Pro forma net loss per share(2) $ (1.18) $ (1.75) $ (1.01) n/a
Net loss per share n/a n/a n/a $ (1.14)
{Pro forma}weighted average shs.(2) {1,571,450} {1,666,017} {1,571,450} 2,939,014
</TABLE>
Balance Sheet Data: April 30,1997 April 30,1997
-----------------------------------
July 31,1996 Actual Pro formas(3)
------------------------------------------------
(unaudited) (unaudited)
Cash and cash equivalents $ 2,857 $ 36 $ 1,871
Working capital (deficit) 2,390 (1,024) 811
Total assets 4,368 1,602 3,437
Long-term obligations 80 90 90
Total liabilities 782 1,362 1,362
Stockholders' equity $ 3,586 $ 240 $ 2,075
- --------------------
(1) Gives effect to certain executive employment agreements as of the
beginning of each period presented.
(2) Reflects the pro forma net loss, adjusted further by the interest savings
from the assumed conversion of certain convertible debt at the beginning
of each period presented. Weighted average shares outstanding assumes all
pre-IPO issuances of Common Stock and all conversions into Common Stock of
a previously-authorized series of Preferred Stock and of certain
convertible debt were made as of the beginning of the periods presented.
(3) Gives pro forma effect to the issuance, pursuant to the 1997 Financing, of
2,000 shares of Series A Preferred Stock in exchange for $2,000,000, less
$165,000 of issuance costs ($1,130,000 in net proceeds from such issuance
will be received after the date of this prospectus).
20
<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 digitally 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" below). The Company claims proprietary rights in
its technologies and production process. In April 1997, the Company was issued a
U.S. patent relating to its digital personalization production process (Patent
No. 5,623,587).
The Company has incurred substantial operating losses since its inception,
resulting in an accumulated deficit of approximately $8,497,000 as of April 30,
1997. For its fiscal year ended July 31, 1996, the Company had revenues of
approximately $761,000 and a net loss of approximately $3,059,000, and, for the
nine months ended April 30, 1997, the Company had revenues of approximately
$1,063,000 and a net loss of approximately $3,345,000. The Company expects that
its net loss for the fiscal year ending July 31, 1997 will 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 the fiscal year ended July 31, 1996
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. The consolidated financial statements do not include any
adjustments that might result from the outcome of such uncertainty.
In June 1996 the Company consummated the Underwritten Offering (see
"Initial Public Offering" below), raising net proceeds of approximately
$5,560,000 through the issuance of 1,400,000 shares of Common Stock and
1,610,000 Warrants. In connection with the Underwritten Offering (sometimes
called the "IPO"), all outstanding shares of a previously-authorized series of
Preferred Stock (the "Retired Preferred Stock") were automatically converted
into an aggregate of 293,533 shares of Common Stock, and $1,000,000 in principal
amount of the Company's 10% Convertible Subordinated Debentures due 1998 (the
"Debentures") was converted into 279,889 shares of Common Stock.
The information set forth below includes "forward-looking statements"
within the meaning of Section 21E of the Exchange Act and is subject to the safe
harbor created by that section. Readers are cautioned not to place undue
reliance on these forward-looking statements, as they speak only as of the date
hereof.
Revenue Recognition
The Company's products are marketed directly to consumers and also through
mail-order 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 conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Prospectus.
21
<PAGE>
Nine Months Ended April 30, 1997 Compared
to the Nine Months Ended April 30, 1996
Sales. During the nine months ended April 30, 1997 (the "Current Period"),
the Company shipped 40,914 personalized videos, an increase of 43% over the
28,695 units shipped during the nine months ended April 30, 1996 (the "Prior
Period"). During the Current Period, the Company released four new personalized
video titles. Mystery of the Missing King and Space Ace are animated titles that
were released in October 1996 with direct mail and telemarketing programs. In
January 1997, the Company released its first personalized videos combining live-
action and animation sequences: Gregory & Me: See What I Can Do! and Gregory &
Me: My Amazing Animal Adventure. Both titles feature Gregory Gopher and his
friends, proprietary characters developed by the Company. In the Current Period,
these four titles doubled the Company's video product offerings to eight
proprietary titles. The Company in the Current Period also released a plush
version of Gregory Gopher and a non-personalized audio cassette featuring the
sound track from the videos. Sales of these ancillary products were not
significant in the period. The newly released videos accounted for 30% of the
total sales volume in the Current Period.
Sales increased 59% to $1,063,000, and include a 304% increase (to
$643,000) in direct-to-consumer sales. This increase reflects the cumulative
results of the Company's direct marketing activities during the Current Period,
which were undertaken utilizing proceeds from the Underwritten Offering. These
direct marketing activities included direct mail, telemarketing, radio, print
and television advertising. The Company believes that its direct-to-consumer
sales benefitted also from a higher level of consumer awareness resulting from
television and print exposure of the Company and its products, including
television exposure on the Oprah Winfrey Show, EXTRA, Managing with Lou Dobbs,
and articles on the Company published by The New York Times, Gannett Newspapers,
Newsweek, and Equity Magazine.
Catalog and retail-sourced sales fell 19% to $413,000. A volume decline in
the retail channel primarily reflects Prior Period marketing programs that were
not rolled out in the Current Period. The number of catalogs offering the
Company's products increased from 16 in the Prior Period to 36 in the Current
Period. Revenues from this source, however, remained level with the Prior Period
due to several factors. The timing of the release of the new Gregory & Me titles
did not permit their inclusion in Christmas catalogs. Additionally, one of the
Company's first and largest customers had been given an exclusive right to sell
the Gregory & Me titles in the catalog channel, which limited their exposure.
That exclusive right has expired at the end of 1996. Since the balance of the
Company's catalog trade was limited to the first four titles of the Original
Kideos, there was some price erosion in this channel.
A write-off of production equipment accounted for $226,000 for the Current
Period. The Company provided for the disposal of certain production equipment
during the second quarter of its current fiscal year. This equipment was written
off after the successful completion of tests which established that older Kideo
titles could be produced using the Company's new, more efficient production
equipment.
Gross Margin. The Company's gross margin fell to negative 3% of sales in
the Current Period from 26% in the Prior Period. Unit selling prices improved by
approximately 10% due to the shift in sales mix from catalog-sourced sales
(wholesale pricing) to direct-to-consumer sales (retail pricing). Unit sales in
the Current Period were 43% higher than in the Prior Period. However, these
positive results were offset by increases in fixed costs related primarily to an
expansion of production capacity (depreciation, rent, supervision, utilities).
In addition, gross margin was negatively affected by amortization of Gregory &
22
<PAGE>
Me content development costs and by the one-time write-off of production
equipment described above.
Selling Expenses. The Company's selling expenses increased 246% in the
Current Period, to $1,852,000, from $536,000 in the Prior Period, reflecting
principally the costs of marketing the new Gregory & Me titles through
television, radio, print, direct mail, and telemarketing campaigns. Retail
marketing programs pursued during the Prior Period in the amount of $125,000
were not recurring in the Current Period. See "Risk Factors--Limited Marketing
Capabilities."
General and Administrative Expenses. The Company's general and
administrative expenses increased 83% in the Current Period, to $1,477,000, from
$805,000 in the Prior Period. Research and development expenses increased
$230,000 during the Current Period, to $344,000, from $114,000 in the Prior
Period. The remainder of inter-period change relates primarily to (i) the higher
expenses associated with being a public company (legal, stockholder reporting
and insurance account for $246,000) and (ii) higher infrastructure costs
(payroll, benefits, depreciation on leasehold improvements and online services
account for $296,000).
Loss from Operations. Loss from operations increased 188% in the Current
Period, to $3,365,000, from $1,168,000 in the Prior Period, reflecting the above
changes. Most notably, the cost of launching the new Gregory & Me titles on
radio and television exceeded the revenues derived. One of the benefits of the
launch, however, was that the Company built a substantial database of leads
derived from people calling an 800 number for free Kideo order kits. The Company
intends to use cost-effective means to convert those leads into orders during
the remainder of the current fiscal year and into the Christmas season.
Management is pursuing strategic marketing alliances with third parties, with
the intention of reducing the Company's financial risk in direct-to-consumer
advertising programs. There can be no assurances that these objectives will be
achieved.
The loss from operations includes operating investments in infrastructure,
including space expansion, operating systems, research and development, and
management. In response to unprofitable advertising expenditures, the Company
has implemented cost-saving measures that include across-the-board salary and
benefit reductions, reductions in shipping costs, employee layoffs, and
reductions in discretionary spending. These actions were implemented during
March and April, 1997.
Other Income (Expense). The Current Period reflects an excess of interest
income from investments (Treasury bills, money market funds and corporate
commercial paper) over lease interest expenses. The Prior Period reflects lease
interest expenses only; there was no interest income in that period.
Nonrecurring Items. Nonrecurring items relate to interest charges,
amortization of original issue discount related to certain of the Company's pre-
IPO private financings, and amortization of the issuance costs of certain debt
securities that either were repaid out of proceeds from the Underwritten
Offering or were converted into Common Stock upon the closing of that offering.
Net Loss. The net loss for the Current Period was $3,345,000, or $1.14 per
share on 2,939,000 average shares of Common Stock outstanding, as compared to a
net loss for the Prior Period of $1,662,000, or $1.01 per share on 1,571,000
average shares of Common Stock outstanding.
23
<PAGE>
Fiscal Year Ended July 31, 1996 Compared
to the Fiscal Year Ended July 31, 1995
Sales. For the fiscal year ended July 31, 1996 (the "1996 Fiscal Year"),
approximately 32,100 Kideos were produced and sold, representing an increase of
51% over the approximately 21,300 Kideos sold during the fiscal year ended July
31, 1995 (the "1995 Fiscal Year").
Sales increased by 46% (or $239,700), from $521,200 for the 1995 Fiscal
Year to $760,900 in the 1996 Fiscal Year. Catalogue-sourced sales accounted for
$139,200 of the increase. Orders from consumers grew 27%, accounting for an
increase of $44,000 to $204,100 for the 1996 Fiscal Year. Retail-sourced sales
increased 128%, to $100,500 for the 1996 Fiscal Year from $44,000 in the 1995
Fiscal Year. The increase in sales for the 1996 Fiscal Year is attributable to
the Company's representation in several nationally and regionally recognized
catalogs, including, most notably, Hammacher Schlemmer, which accounted for 26%
of the Company's total sales for the year, as compared to 42% for the 1995
Fiscal Year. Several direct marketing initiatives in print and direct mail, as
well as a higher level of consumer awareness of the Company's products, drove
the growth in direct sales. The Company's sales are highly seasonal, with 49% of
orders placed during the October-December period in the 1995 Fiscal Year and 58%
in the 1996 Fiscal Year.
Cost of Sales. Cost of sales decreased 3%, or $20,800, from $657,500 in
the 1995 Fiscal Year to $636,700 in the 1996 Fiscal Year. Increases in material
cost (resulting principally from increased order volume) were more then offset
by reduced consulting fees, savings in amortization of storylines and lower
direct payroll costs.
Selling Expenses. Selling expenses increased 10%, or $69,500, from
$667,700 in the 1995 Fiscal Year to $737,200 for the 1996 Fiscal Year. Volume-
related increases in catalogue commissions and packaging materials were offset
by lower advertising expenses in the 1996 Fiscal Year.
General and Administrative Expenses. General and administrative expenses
increased $480,700, from $656,100 in the 1995 Fiscal Year to $1,136,800 in the
1996 Fiscal Year. The primary causes of this increase were in development
expenses related to enhancing the technology used to personalize videos, costs
incurred in connection with the Company's customer and production databases, and
additional staffing to accommodate increased business. The development and
database expenses are expected to be ongoing as the Company expands its title
offerings and production volume.
Interest and Nonrecurring Items. Nonrecurring items for the 1996 Fiscal
Year were $1,221,000. The nonrecurring items are for interest and Debenture
amortization of $307,000 upon the conversion of the Debentures, interest and
amortization of original issue discount of $826,000 related to certain of the
Company's private financings undertaken before the Underwritten Offering, and
the redemption of 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.
These items were paid at or prior to the consummation of the Underwritten
Offering.
A decrease in interest expense of $30,000, from $118,000 for the 1995
Fiscal Year to $88,000 in the 1996 Fiscal Year, was due to reclassification of
Debenture interest to nonrecurring expenses for the 1996 Fiscal Year.
Liquidity and Capital Resources
24
<PAGE>
In June 1996 the Company consummated the Underwritten Offering (see
"Initial Public Offering" below), raising net proceeds of approximately
$5,560,000 through the issuance of 1,400,000 shares of Common Stock and
1,610,000 Warrants. In connection with the Underwritten Offering, all
outstanding shares of the Retired Preferred Stock were automatically converted
into an aggregate of 293,533 shares of Common Stock, and $1,000,000 in principal
amount of Debentures was converted into 279,889 shares of Common Stock.
The Company's working capital increased $3,071,000, to $2,389,000 at July
31, 1996, from a deficiency of $682,000 at July 31, 1995. The increase in
working capital was primarily due to the IPO net proceeds of $5,560,000, offset
by the net loss at July 31, 1996 of $3,059,000.
The Company used $2,306,000 for operating activities. This resulted from
the net loss of $3,059,000, offset by $1,315,000 in non-cash charges for
depreciation and amortization, and the use of $562,000 to build working capital
exclusive of cash and cash equivalents.
In the 1996 Fiscal Year, the Company's financing activities included
$64,000 from the issuance of Debentures and shares of the Retired Preferred
Stock, which was offset by the repayment of (i) $61,000 of indebtedness to
related parties and (ii) $1,375,000 in interim bridge financing indebtedness,
which had been issued anticipation of the IPO and was repaid upon the IPO
closing. The Company paid $112,000 against its long term capital leases and paid
a $60,000 cash dividend on the Retired Preferred Stock.
The Company invested $108,000 in property and equipment during the 1996
Fiscal Year.
The Company's capital requirements in connection with its development of
new product, infrastructure 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 product development efforts), that
the proceeds remaining from the 1997 Financing, 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 until
approximately December 1997. In the event the Company's plans change or its
assumptions change or prove to be inaccurate, however, the Company could be
required to seek additional financing sooner than currently anticipated. The
Company has no current arrangements with respect to, or potential sources of any
additional financing, and it is not anticipated that existing stockholders will
provide any portion of the Company's future financing requirements.
Consequently, there can be no assurance that any additional financing will be
available to the Company when needed, on commercially reasonable terms, or at
all.
Because the Company has operated at a loss since its inception and has not
generated sufficient 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. These financings
are described below.
During the current fiscal year ending July 31, 1997, the Company adopted
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. The Company has
elected to continue the accounting set forth in pre-existing pronouncements and
to provide the necessary pro forma disclosures. The Company does not expect that
the application of these financial accounting and reporting standards will have
a material effect on its financial condition or results of operations for the
25
<PAGE>
fiscal year ending July 31, 1997.
During its next fiscal year ending July 31, 1999, the Company will adopt
SFAS No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS"), replacing the presentation
of currently required primary EPS with a presentation of basic EPS. The pro
forma effect of the application of this statement to the nine months ended April
30, 1996 is immaterial. When adopted, the Company will be required to restate
its EPS data for all prior periods presented. The Company does not expect the
impact of the adoption of this statement to result in material changes to its
previously reported EPS amounts.
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 were redeemed for an aggregate redemption price of approximately
$88,000 in June 1996, following consummation of the IPO.
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 (described below).
December 1994 Financing
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In December 1994, the Company borrowed an aggregate principal amount of
$400,000 from eight accredited investors participating in a private placement of
the Company's promissory notes, which notes were to be repaid in an amount equal
to 105% of the principal amount borrowed on the earlier of (i) the consummation
of a subsequent private placement generating net proceeds to the Company in
excess of $950,000, and (ii) May 15, 1995 (the "December 1994 Financing"). The
net proceeds of the December 1994 Financing were used for working capital
purposes. As a result of an agreement made in March 1995 among the Company and
the lenders of the December 1994 Financing, in May 1995 (in connection with the
initial closing of the May 1995 Unit Financing) the $400,000 principal amount of
the December 1994 Financing was converted into four of the units sold in the May
1995 Units Financing, and the December 1994 lenders were paid interest equal to
5% of their original investment in the December 1994 Financing.
May 1995 Units Financing
During the period from May through October 1995, the Company consummated a
series of sales of units of its Debentures and shares of the Retired 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 the Retired 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. Upon the June 1996 consummation of the IPO, all outstanding
shares of the Retired Preferred Stock of the Company were automatically
converted into an aggregate of 293,533 shares of Common Stock, and $1,000,000 in
principal amount of Debentures was converted into 279,889 shares of Common
Stock.
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 bore interest at the rate of 9% per
annum and were to be repaid 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 used approximately $320,000 of
the IPO proceeds to repay all of the 1995 Pre-Bridge Notes. In addition, the
90,000 1995 Pre-Bridge Shares were registered by the Company, concurrently with
the IPO, for resale by their holders.
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
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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 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") were not registered concurrently with the IPO). 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 used approximately $129,000 of the
IPO proceeds to repay all of the 1996 Pre-Bridge Notes.
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 the IPO 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
of the IPO, 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 used approximately $767,000 of the
IPO proceeds to repay all of the Bridge Notes. The 150,000 Bridge Shares were
registered by the Company, concurrently with the IPO, for resale by their
holders.
June 1996 Financing
In June 1996, the Company completed the sale of two units (the "June
Bridge Units") to two private investors (the "June 1996 Financing"), each June
1996 Unit consisting of (i) an unsecured 9% promissory note of the Company in
the principal amount of $100,000, due and payable on the earlier of the
consummation of the IPO and February 23, 1997 (subject to extension, under
certain circumstances, to February 23, 1998) (each, a "June 1996 Note") and (ii)
25,000 shares of Common Stock (the "June 1996 Shares"), at a price of $100,000
per June 1996 Unit. The Company received gross proceeds of $200,000 from the
sale of the June 1996 Units. After the payment of $20,000 in placement fees to
the Underwriter, who acted as placement agent for the Company with respect to
the sale of the June 1996 Units, the Company received net proceeds of $180,000
in connection with the June 1996 Financing. The Company's sale of the two June
1996 Units resulted in the Company's issuance of a total of $200,000 in
principal amount of June 1996 Notes and 50,000 June 1996 Shares. Upon the
consummation of the IPO, the Company used $201,200 of the proceeds to repay all
of the June 1996 Notes, including interest. The 50,000 June 1996 Shares were
registered by the Company, concurrently with the IPO, for resale by their
holders.
Initial Public Offering
In January 1996, the Company's Board of Directors authorized an increase
in the number of shares of preferred stock from 100,000 to 5,000,000. In
addition, the Company's Board of Directors authorized an increase in the number
of shares of Common Stock from 400,000 shares, par value $.01 per share, to
15,000,000 shares, par value $.0001 per share, and declared a stock split
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pursuant to which stockholders received 8.6545 shares of Common Stock for each
share of Common Stock previously owned.
In June 1996, the Company consummated the Underwritten Offering of
1,400,000 shares of Common Stock at an offering price of $5.00 per share and
1,610,000 Warrants at an offering price of $.10 per Warrant. The net proceeds to
the Company were approximately $5,560,000 after deducting issuance costs of
$1,601,000, which were charged to equity.
Upon the closing of the IPO, the Company repaid $1,375,000 principal
amount of bridge note financings and converted the outstanding Debentures into
279,889 shares of Common Stock. In addition, all outstanding shares of the
Retired Preferred Stock were converted into 293,533 shares of Common Stock. A
more detailed summary of the Underwritten Offering begins on page ii of this
Prospectus.
1997 Financing
A summary of this transaction begins on page 3 of this Prospectus under
"The 1997 Financing." The Company has used the approximately $705,000 in net
proceeds from the May 1997 sale of the initial 750 shares of Series A Preferred
Stock which can be sold pursuant to the 1997 Financing as working capital for
general corporate purposes.
Change in Accountants
On August 29, 1996, the Company engaged Arthur Andersen LLP as the
independent accountant to audit the Company's financial statements.
On that same date, the Company dismissed Goldstein Golub Kessler &
Company, P.C. ("GGK"), the independent accountant previously engaged by the
Company to audit its financial statements. The decision to change accountants
was approved by the Company's Board of Directors.
The report of GGK on the Company's consolidated financial statements for
its fiscal year ended July 31, 1995 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
From August 1, 1994 through the date of GGK's dismissal, there were no
disagreements with GGK on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreements, if not resolved to GGK's satisfaction, would have caused GGK to
make reference to the subject matter thereof in connection with its report. From
August 1, 1994 through the date of GGK's dismissal, there were no "reportable
events" as that term is used in Item 304(a)(1)(v) of Regulation S-K under the
Exchange Act.
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BUSINESS
General
In its approximately four year history, Kideo Productions, Inc. has
succeeded in developing proprietary technologies and production processes which
have made it a low-cost manufacturer of a revolutionary new type of home video
product: digitally personalized videos ("Kideos"). Since commercially launching
its first Kideos nationally in the spring of 1994, the Company has focused
primarily on producing proprietary Kideo titles for children aged two to seven.
In a Kideo, a child's face and spoken name are digitally placed by a PC-based
production system into a story template that has been 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. The Company currently markets
eight proprietary Kideo titles for children. With its existing Kideos targeting
the children's market, the Company has created -- and believes it dominates -- a
unique product niche in the home video market.
The Company claims proprietary rights in its technologies and production
process. In April 1997, the Company was issued a U.S. patent relating to its
digital personalization production process (Patent No. 5,623,587). The Company
believes that this patent could potentially have substantial value, since the
Company expects that businesses owning characters that are popular in the
children's home video and television markets will ultimately seek to exploit
those characters in digitally personalized audiovisual products.
Prior to 1997, the Company had marketed six Kideo titles (the "Original
Kideos"), which were created utilizing the first generation of the Company's
proprietary computerized production process. That production process resulted,
in general, in a videocassette product that might be likened to a "video
picturebook" - the child's personalized character appearing in an Original Kideo
is capable of only a very limited range of partial-motion animation.
In January 1997, the Company began marketing the first two titles in its
new series of Gregory and Me Kideos. The Company created these titles utilizing
a newly implemented proprietary production system. As a result of the improved
computerized production technologies employed by this system, in a Gregory and
Me title the child's personalized character can exhibit two-dimensional full-
motion animation and can be made to interact with both two-dimensional animated
versions and three-dimensional puppet versions of the Gregory and Me cast of
proprietary characters -- who in each title are led by Gregory Gopher. It is
this recently patented production process -- a sophisticated technological
system for the low cost, mass production of digitally personalized videos --
which the Company believes will provide it with a meaningful near-term
competitive advantage over new entrants into the emerging market for digitally
personalized home video products.
Each of the Original Kideos and Gregory and Me Kideos utilizes a
digitally- stored video story template that features content and characters
which are proprietary to the Company. The eight existing Kideo titles each has a
playing time of approximately 20 minutes and a suggested retail list price of
$29.95. The Company believes, however, that more than half of all Kideos sold by
its customers have been offered at an actual retail price of $34.95 or higher.
To date, substantially all Kideos sold have been purchased by U.S. consumers.
The Company historically has relied primarily on national catalogue retailers
(such as Hammacher Schlemmer and Spiegel) to market and sell its products. Since
the Underwritten Offering, however, the Company has increasingly been targeting
its marketing strategies towards direct-to-consumer advertising and the
development of relationships with established national distributors of
children's home video products.
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Operating Strategy
The Company has recently determined to focus its near-term development
efforts for new Kideos increasingly upon the creation of titles featuring
licensed characters (instead of proprietary ones) that have proven popularity in
the children's home video market. In furtherance of that objective, the Company
is currently seeking out licensing, marketing and other arrangements with
companies that control those types of characters and/or that have the
demonstrated financial and operational capabilities to promote and distribute
children's home video products through a broad range of domestic distribution
channels, including retail outlets of various kinds. The Company, however, is
not seeking, or engaged in negotiations concerning, any arrangements that relate
to any merger, consolidation, purchase or sale transaction involving the
Company, any of its assets or any other business.
The Company's long-term business strategy is to become a premier market
leader, both domestically and internationally, in the development, manufacturing
and marketing -- to children and other consumers -- of a wide variety of
digitally personalized home video titles, other digitally personalized
audiovisual products, and related articles of merchandise (both personalized and
non- personalized). Included among the Company's product development goals are:
o to develop additional Kideo titles for children employing both
proprietary and licensed characters, including (i) series of titles
that -- like the Gregory and Me series and popular children's
television programs -- feature the same cast of recurring
characters, and (ii) titles for older children; and
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.
In addition, the Company will in general 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.
Technology Overview
The 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 an analog 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. In the future, the Company's current production
technologies will enable it to manufacture Kideos in DVD and other digital
formats.
The three older titles of those comprising the Original Kideos -- 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
recently patented digital personalization 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
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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. During the second half of 1996, the Company ceased
producing the three older Original Kideos on the TVL system and began
manufacturing them using the digital personalization production process in use
currently by the Company.
The fourth of the Original Kideo titles is My Christmas Wish. First
introduced to the market in the latter half of 1995, this title was the first
Kideo to be produced by the Company utilizing a newly-implemented system for the
production of digitally personalized videos. 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 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.).
In January 1997, the Company introduced to the market the first two titles
of the Gregory and Me series of Kideos - See What I Can Do! and My Amazing
Animal Adventure. In creating these two titles, the Company utilized some of the
more advanced production capabilities afforded by its new digital
personalization production process. As a result, in the first two Gregory and Me
Kideos, the illustrated body of the child's personalized character exhibits
two-dimensional full-motion animation (instead of merely partial-motion
animation) and is able to interact with both two-dimensional animated versions
and three-dimensional puppet versions of the Gregory and Me cast of proprietary
characters.
The Company's ultimate objective for the evolution of its digital
personalization production process, however, is to create a manufacturing 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 exhibit two dimensional or three dimensional full-motion animation
in both 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). 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 Company's current digital personalization production process 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. See "Certain Transactions--1995 Technology Acquisition."
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The new production system (which is based upon the use of affordable, networked
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 its production technologies and
processes. In April 1997, the Company was issued a U.S. patent relating to its
digital personalization production process (Patent No. 5,623,587). The Company
believes that this patent could potentially have substantial value, since the
Company expects that businesses owning characters that are popular in the
children's home video and television markets will ultimately seek to exploit
those characters in digitally personalized audiovisual products.
The Company first used its current digital personalization production
process in the development of My Christmas Wish. As a result, this title became
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. To date, however, the
Company has not made use in any Kideo titles of the capability to achieve
partial animation of the personalized facial image of the child's character. It
is anticipated that this feature improvement will first be implemented at some
time during 1998 in connection with a new title in the Gregory and Me series or
in a future title featuring popular children's characters licensed from others
(the development of which cannot be assured).
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 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 has been reduced
by approximately 50% when compared with the time required for these
procedures using the defunct TVL system.
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 was capable of producing during the same shift.
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 third-party fulfillment centers. The components used in the
production of Kideos (e.g., Pcs, commercially available multimedia production
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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 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 the Company's new production system, 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.
The Existing Kideo Titles
The six Original Kideo titles (Mr. Tibbs & the Great Pet Search; My
Alphabet; 1,2,3, Come Count With Me; My Christmas Wish; Mystery of the Missing
King; and Space Ace ) and the first two Gregory and Me titles (See What I Can
Do! and My Amazing Animal Adventure) all feature characters developed by the
Company - respectively, Mr. Tibbs, Alexander G. Bear, Counting Cat, the
Company's own version of Santa Claus and, in each Gregory and Me title, a cast
of animal characters consisting of Gregory Gopher (the "host" of each title),
Cyrus, Shelly, Ziggy and Zag. Each video story lasts for approximately 20
minutes.
Each of the eight Kideo titles now being marketed 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 My Amazing Animal Adventure, the child at one point sees her
personalized character riding in a canoe with a three-dimensional puppet version
of Gregory Gopher, who calls her attention - addressing her by name - to various
animals they are passing on the river.
In addition to the child's face appearing throughout his or her
personalized Kideo, the child's name is spoken in various appropriate places on
the Kideo soundtrack. The Company maintains an extensive digital archive of the
audio recordings of the spoken first names of all of its child-customers. The
archive is updated on a regular basis as new Kideo orders are received which
require the recording and insertion of a name not then in the Company's
database. In its Kideo order kits and other marketing materials, the Company
makes a commitment to its potential customers to produce a Kideo in which any
specified name of a child will be spoken on the Kideo to that child's
personalized character. The child's name is also printed on the outside cover of
each tape (which is packaged in a white vinyl album cover), as well as on the
label of the tape itself. The tape shells come in assorted bright colors.
Each of the existing Kideo titles currently has a suggested retail list
price of $29.95. The Company believes, however, that more than half of all
Kideos sold to date by its customers have been offered at an actual retail price
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of $34.95 or higher, and the Company is considering raising its suggested retail
list price to $34.95 in the near future.
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), that it will have the financial and other
capabilities required to commercialize such new products, or that any of such
products, if commercialized, will be successfully marketed by the Company or
contribute materially to the Company's future revenues or profits (if any).
Near-Term Product Development Goals
From among the many conceivable new product opportunities envisioned by
the Company, it currently intends, in the short- to near-term, to continue to
direct its product development efforts towards the market segment that it
believes it has largely created and accordingly knows best -- the home-consumer
market for digitally personalized products that are essentially videos in nature
(as opposed to, for example, computer games or other computer software titles).
For the near future, the Company also intends to focus its efforts primarily on
the continued expansion of the Kideo concept and product line.
The Gregory and Me Series. The Company believes that, in the short term,
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
continue to seek to develop and produce new titles for release as part of the
Gregory and Me series, and it will seek to exploit Gregory Gopher and the rest
of the series cast in merchandise and other entertainment media.
The two titles that now comprise the Gregory and Me series are being
produced utilizing the Company's recently-patented digital personalization
production process, and the cast of proprietary characters appearing throughout
this new series appear at different times as two-dimensional animated characters
and three-dimensional live action puppet-based characters. The child's
personalized character interacts with these other characters in various
entertaining environments. The illustrated body of the child's personalized
character exhibits two-dimensional full-motion animation. In addition, in the
two Gregory and Me Kideos the child's personalized character appears throughout
each title on a nearly continuous basis (whereas in the four Original Kideos the
personalized character appears far less frequently).
Kideo Related Merchandise. By using 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 currently is marketing a plush toy
version of Gregory Gopher as well as an audio cassette containing the songs that
are sung by Gregory Gopher, Cyrus, Shelly, Ziggy and Zag in See What I Can Do
and My Amazing Animal Adventure.
Kideos Featuring Popular Licensed Characters. Although the Company
historically has focused on the development and exploitation of its proprietary
content, it has not ignored potential opportunities to expand its line of Kideos
to include titles featuring licensed characters that are popular in the
children's market. Since the Company's successful implementation of its new
production process in the manufacturing of the Gregory and Me titles and the
U.S. Patent Examiner's grant of the patent claims relating to aspects of that
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production process, the Company has increasingly devoted management resources to
the development in the near-term of Kideo titles featuring licensed characters.
In furtherance of that development objective, the Company is currently seeking
out licensing, marketing and other arrangements with companies that control
those types of characters and/or that have the demonstrated financial and
operational capabilities to promote and distribute children's home video
products through a broad range of domestic distribution channels, including
retail outlets of various kinds. In a Kideo title featuring licensed characters,
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 Big Bird).
To date, however, the Company has not entered into any definitive
agreements 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.
In pursuing these product development goals, the Company is not seeking,
or engaged in negotiations concerning, any arrangements that relate to any
merger, consolidation, purchase or sale transaction involving the Company, any
of its assets or any other business.
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.
Marketing
General
Over the approximately two 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 1996 Fiscal Year, 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 historically been the primary distribution outlet for Kideos. More
recently, however, direct- to-consumer sales have increased substantially, as
the Company has explored and tested various types of direct marketing campaigns
(including television, radio and direct mail). The Company currently is seeking
to expand its sales and marketing efforts by increasing its distribution
channels, including by pursuing
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strategic marketing alliances with third parties.
Catalogue Sales
During the 1996 Fiscal Year, catalogue sales accounted for approximately
60% of the Company's revenues. Sales through the Hammacher Schlemmer catalogue,
in particular, accounted for approximately 26% 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.
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 1996
Christmas holiday season, for example, Kideos appeared for the first time in the
Sears 1996 Wish Book. Since the start of the 1996 Fiscal Year (August 1, 1995),
the number of nationally distributed catalogues in which Kideos were marketed
increased from 14 at the start of such year to approximately 36 currently. For
the foreseeable future, the Company will continue to target major catalogues as
potential new marketing outlets for Kideos.
Retail Distribution
To date, sales of Kideos through retail toy stores and other retailers
have not been a significant source of revenues. For the 1996 Fiscal Year, sales
of Kideos through retail outlets accounted for approximately 13% of the
Company's revenues. 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. There 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 -- including any of its recent efforts
to obtain licensing, marketing and other arrangements with companies that
control popular children's market characters and/or that have the ability to
distribute children's home video products through a broad range of retail and
other domestic distribution channels. See "Risk Factors--Limited Marketing
Capabilities."
Direct Sales
Direct sales to consumers accounted for approximately 27% of the Company's
revenues for the 1996 Fiscal Year (as compared to approximately 31% of revenues
for the prior fiscal year). During the nine months ended April 30, 1997, the
Company experienced a 304% increase (to $643,000) in direct-to-consumer sales as
compared to the corresponding period in the prior fiscal year. The Company
believes that this increase reflects the cumulative results of the Company's
direct marketing activities (including television and radio advertising and
direct mail campaigns) undertaken by utilizing proceeds from its June 1996 IPO.
Before the consummation of the IPO, the high costs of developing a broad-based
direct marketing capability had prevented the Company from engaging in
meaningful direct marketing activities.
The Company believes that its direct-to-consumer sales benefitted also
from a higher level of consumer awareness resulting from television and print
exposure of the Company and its products, including television exposure on the
Oprah Winfrey Show, EXTRA, Managing with Lou Dobbs, and articles on the Company
published by The New York Times, Gannett Newspapers, Newsweek, and Equity
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Magazine.
The Company strongly believes that, over the long term, if sufficient
funds are available for this purpose, direct sales efforts could ultimately
become the Company's largest distribution channel. While the Company cannot
predict which types of direct marketing activities may ultimately prove
successful in producing increased sales of Kideos, it anticipates that the
development and implementation of various types of direct marketing capabilities
will continue to consume a substantial portion of the Company's marketing
expenditures in the short to near term.
If current revenue levels are sustained for the near term, however, the
Company does not believe that it will have the capability to devote to its
marketing efforts funds of its own in amounts that will be sufficient to create
broad consumer awareness of the Company's products. The Company accordingly is
pursuing strategic marketing alliances with third parties, with the intention of
reducing its financial risk in direct-to-consumer advertising programs. There
can be no assurances that these objectives will be achieved. See "Risk
Factors--Limited Marketing Capabilities."
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.
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.
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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 recently
patented digital personalization production process 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.
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
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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 April 1997, the Company was issued a U.S. patent relating to its
digital personalization production process (Patent No. 5,623,587). None of the
Company's intellectual property rights, however, are currently the subject of
any issued patents in any foreign jurisdiction. The Company believes that this
patent could potentially have substantial value, since the Company expects that
businesses owning characters that are popular in the children's home video and
television markets will ultimately seek to exploit those characters in digitally
personalized audiovisual products.
Patents and patent applications, like the ones issued to and filed by the
Company, involve complex legal and factual questions, and the scope and breadth
of patent claims that may have issued, or that may be allowed in the future, is
inherently uncertain. As a result, even when a patent is issued to a company,
there can be no assurance as to the degree or adequacy of protection that such
patent may afford.
Three federal trademark applications are currently pending in the United
States with respect to the name "Kideo," and corresponding trademark
applications have been filed in Australia, France, Germany, Japan, Spain and the
United Kingdom. However, since one or more other parties may have rights to this
trademark (in this country and/or overseas), 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. A federal trademark application
also is currently pending in the United States with respect to the name "Gregory
and Me."
The Company also claims proprietary rights in its personalized sticker
books. In April 1997, the Company filed a U.S. patent application covering the
sticker books themselves and the process for making the personalized sticker
books.
Employees
As of June 20, 1997, the Company employed 20 full-time employees and one
part-time employee, including four in administration and finance, one in
marketing and sales, one in new product creation, five in production, two in
shipping, and eight 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.
Legal Proceedings
The Company has adopted and used the word "Kideo" as its principal
trademark for its products and services. The Company has applied for
registration of this trademark in the United States, Australia, France, Germany,
Japan, Spain and the United Kingdom. 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
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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 complete
the formalities of a settlement. In this settlement, the Successor has agreed to
withdraw its registration and a pending application to register the mark "Kideo"
and to cease using this mark in the United States. The settlement agreement has
been prepared, agreed to by both parties, and is in the process of being
executed. The Company does not anticipate any reason why the settlement
agreement would not be executed and delivered by the Successor.
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.
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. The Company
currently has authorized five directors (pursuant to a resolution adopted by the
Board in accordance with the Certificate of Incorporation). There are no
vacancies on the Board.
Name Age Position
Richard L. Bulman 32 Chairman of the Board and President
Robert J. Riscica 45 Vice President-Chief Financial
Officer and Treasurer
Marvin H. Goldstein 50 Vice President-Controller
Bradley Dahl 37 Vice President-Development
Richard D. Bulman 62 Secretary and Director
Charles C. Johnston 62 Director
Thomas Griffin 59 Director
Michael B. Solovay 38 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
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(McDonalds). From February 1990 to April 1991, Mr. Bulman managed his own
marketing consulting firm, Richard Bulman Consulting, in Milan, Italy, where he
had responsibility for developing international marketing and advertising
campaigns for a broad range of clients including multinational corporations such
as Montedison and Instrumentation Laboratories. From December 1988 to February
1990, Mr. Bulman was Advertising Manager for 7 Days Magazine in New York.
Richard L. Bulman is the son of Richard D. Bulman, a director of the Company.
Robert J. Riscica was engaged as the Company's Chief Financial Officer in
December 1995. For approximately the ten preceding years, he served in a variety
of executive positions with various companies owned or controlled by Ronald O.
Perelman's holding company, MacAndrews & Forbes Group Incorporated, including
as: Executive Vice President, Operations, Marvel Entertainment Group
(1992-1995); Chief Financial Officer, Marvel Entertainment Group (1990-1992);
and Director, Special Projects, MacAndrews & Forbes Group Incorporated
(1985-1990). Mr. Riscica has been licensed as a certified public accountant in
the State of New York since 1978.
Marvin H. Goldstein was the Chief Financial Officer of the Company from
June 1994 until December 1995, when Mr. Riscica was engaged to fill that
position and Mr. Goldstein became Vice President-Controller. Mr. Goldstein also
has been a partner of Golden Pearl Associates, a real estate management firm
that owns, manages and operates various business interests since 1980. In
addition, from August 1979 to December 1993, Mr. Goldstein owned and operated
Hermans Haberdashery Co. Inc., a retail clothing firm, and prior to that time he
was with the accounting firm of Grant Thornton for approximately four years and
was a partner at William Greene & Co., CPAs for approximately five years. Mr.
Goldstein has been licensed as a certified public accountant in the State of New
York since 1972.
Bradley Dahl has served as the Company's Vice President of Development
since July 1995. Prior to being employed by the Company, Mr. Dahl served as the
Creative Director of Interactive Videosystems, Inc. from January 1993 to April
1995, where he market tested and developed certain technologies (later acquired
by the Company) relating to the mass production of digitally personalized video
products. Prior to his employment at Interactive Videosystems, Mr. Dahl was,
from May 1992 to January 1993, a product developer for Serius Imaging and, from
May 1990 to May 1992, an Account Representative at Impex Controls Ltd., a
company that develops computer-based network control systems for institutions
such as hospitals and prisons. From January 1984 to May 1990, Mr. Dahl was the
President of Alphatel Videotex Directories Ltd., which developed, marketed and
operated digital video multimedia local area networked systems for large
corporations and government agencies.
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
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1994. Mr. Johnston has served as the Chairman of the Board of the Computer
Systems and Services Business Unit of Teleglobe, Inc. of Montreal, Canada since
November 1989. He was previously founder, Chief Executive Officer and Chairman
of the Board of ISI Systems, Inc., a provider of specialty data processing
services and software which was acquired by Teleglobe, Inc. in 1989. Mr.
Johnston has also served as Chairman and Chief Executive Officer of Ventex
Technologies, a company involved in the design and sale of electronic
transformers for the neon lighting industry. Mr. Johnston serves on the Board of
Directors of I.D. Matrix of Clearwater, Florida, Wordenglass & Electric, Inc.
and Spectrum Signal Processing of Vancouver, Canada, and is a trustee of
Worcester Polytechnic Institute.
Thomas Griffin has served as a director of the Company since February
1996. Mr. Griffin has been the Co-Chairman of Griffin Bacal, Inc., an
advertising agency that he founded in 1978, for more than five years prior to
the date hereof. Griffin Bacal focuses on the advertising and marketing of
entertainment products and services for children and adults. Mr. Griffin is also
the founder, and since 1978 has been Co-Chairman, of Sunbow Entertainment, Inc.,
a company that produces and distributes animated and live action dramatic
television programming for children. Mr. Griffin also has been serving as a
director of both DDB Needham Worldwide since July 1994 and the Eastern Region of
the American Association of Advertising Agencies from 1994 to 1996.
Michael B. Solovay has served as a director of the Company since July 1996
and as an Assistant Secretary since February 1996. Since January 1992, Mr.
Solovay has been a partner in the law firm of Solovay Marshall & Edlin (which
has acted as legal counsel to the Company since October 1995). For approximately
five years prior to that time, Mr. Solovay had been an associate attorney in the
law firm of Skadden Arps Slate Meagher & Flom.
All directors will hold office until the annual meeting of stockholders to
be held during 1997 (the "1997 Annual Meeting") and until their successors are
duly elected and qualified. The Certificate of Incorporation provides that, at
the 1997 Annual Meeting, the terms of office of the directors will be divided
into three classes, designated Class I, Class II and Class III. At the 1997
Annual Meeting, Class I directors (consisting initially of Thomas Griffin and
Michael B. Solovay) will be elected for a term expiring at the annual meeting of
stockholders to be held in 1998, 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 1999, 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 2000. At each
annual meeting of stockholders beginning with the 1998 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 that, until June 24, 2001, if so requested by the
Underwriter, it will 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.
The Company has obtained key man life insurance on the life of Richard L.
Bulman in the amount of $2,000,000.
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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 1996 Fiscal Year, the executive officers in the aggregate were
paid approximately $395,000, and only one executive officer (Richard L. Bulman)
received aggregate cash compensation in excess of $100,000. Richard L. Bulman,
the Chairman of the Board and President, received cash compensation during the
1996 Fiscal Year totaling approximately $118,000 and cash compensation totaling
approximately $88,000 and $28,000 for the fiscal years respectively ended July
31, 1995 and 1994 (all of which represented salary in each case). Based upon the
foregoing, Mr. Bulman is the only executive officer of the Company who qualifies
as a "Named Executive Officer" for purposes of the disclosure set forth below
under this discussion entitled "Executive Compensation."
The following table summarizes the cash and other compensation paid by the
Company to Richard L. Bulman in respect of the 1996 Fiscal Year.
Summary Compensation Table
Annual Compensation Long Term
Compensation
Award
-----
-----------------------------------
Securities
Name and Year Ended Underlying
Principal Position July 31, Salary Bonus Options
- ------------------ -------- ------ ----- -------
Richard L. Bulman,
Chairman and President 1995 $ 88,000 0 45,003(1)
1996 $118,000 0 125,000(2)
- ----------
(1) Represents non-plan options granted in connection with the May 1995 Units
Financing. By their terms, these options expired as of July 31, 1996 by
reason of the Company failing to achieve the level of pre-tax earnings
required in order for the options to become exercisable.
(2) Represents options granted under the 1996 Stock Option Plan described
further below.
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The following table sets forth all grants of options to purchase Common
Stock which had been awarded to Richard L. Bulman before the end of the 1996
Fiscal Year.
Individual Option Grants During Prior Fiscal Years
Number of
Securities Percent of Total Exercise
Underlying Options Granted or Base
Options to Employees in Price Expiration
Granted Fiscal Year ($/share) Date
------- ----------- --------- ----
Richard L. Bulman:
1995 Fiscal Year 45,003(1) 100% $ 3.57 Expired
1996 Fiscal Year 125,000(1) 36.7% $ 5.00 3/13/06
- ----------
(1) See the notes to the immediately preceding table.
The following table sets forth information concerning outstanding options
to purchase Common Stock held by Richard L. Bulman as of the end of the 1996
Fiscal Year. Mr. Bulman did not exercise any options during the 1996 Fiscal
Year.
Option Exercises During 1996 Fiscal Year
and Fiscal Year-End Option Values
Value of
Number of Unexercised In-
Unexercised the-Money
Options at Options at
Shares 7/31/96: 7/31/96:
Acquired on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
-------- -------- ------------- -------------
Richard L. Bulman 0 0 41,667 No exercisable
exercisable; or unexercisable
83,333 options were in-
unexercisable the-money at
7/31/96
Employment Agreement With Named Executive Officer
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 entitled to
receive a base salary of $125,000 for 1996, which is subject to annual increases
determined at the Board's discretion (but not less than the annual increase in
the cost of living). Mr. Bulman is also eligible to receive a discretionary
annual bonus in respect of each of the fiscal years ending July 31, 1996 and
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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. No discretionary annual bonus was awarded to Mr.
Bulman in respect of the 1996 Fiscal Year.
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.
1996 Stock Option Plan
The 1996 Stock Option Plan was approved by the Board of Directors and the
requisite number of stockholders in March 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 has been since the closing of the Underwritten Offering),
the Option Plan must be administered by members of the Board of Directors who
are "disinterested persons" within the meaning of that term under Rule
16b-3(c)(2)(i) promulgated by the Commission under the Exchange Act (such
persons are herein called the "Plan Administrators"). In February 1996, the
Board appointed Richard D. Bulman and Thomas Griffin to serve as the Plan
Administrators. Under the terms of the Option Plan, any Plan Administrator, upon
his initial appointment as such, is automatically granted nonstatutory stock
options exercisable for 15,000 shares of Common Stock. The Plan Administrators
are not permitted under the Option Plan to grant any options to themselves.
Under the Option Plan, the Plan Administrators are authorized, in their
discretion, to grant options thereunder to all eligible employees of the
Company, including officers and directors (whether or not employees) of the
Company as well as to consultants to the Company. The Option Plan provides for
the granting
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<PAGE>
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
the Underwritten 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 that 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 addition, except in the case of an employee's
death, options held by any employee are not exercisable following the third
month after the date on which the employee's employment by the Company has
terminated.
In March and May 1996, options to purchase an aggregate of 341,000 shares
of Common Stock at a purchase price of $5.00 per share were granted under the
Option Plan, including options to purchase 125,000, 15,000, 35,000, 20,000,
30,000, 10,000, 45,000 and 15,000 shares granted respectively to Richard L.
Bulman, Charles C. Johnston, Robert J. Riscica, Marvin H. Goldstein, Joanne Denk
(who is no longer employed by the Company), Bradley Dahl, Richard D. Bulman and
Thomas Griffin. Subject to various vesting periods, all of such options (once
vested) will be exercisable until March or May, 2006. 7,000 of such options have
since been forfeited as a result of employee resignations.
In September 1996, options to purchase an aggregate of 10,000 shares of
Common Stock at a purchase price of $3.1875 per share were granted under the
Option Plan to two new employees of the Company. Subject to vesting periods,
these options (once vested) will be exercisable until September, 2006. In April
1997, options to purchase an aggregate of 3,000 shares of Common Stock at a
purchase price of $3.625 per share were granted under the Option Plan to one new
employee of the Company. Subject to vesting periods, these options (once vested)
will be exercisable until April, 2007.
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)
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authorizes payment of an unlawful dividend or stock purchase or redemption as
provided in Section 174 of the DGCL, or (iv) obtains an improper personal
benefit. This provision does not prevent the Company or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against actions
taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as it may from time to time be in effect. In addition, the By-Laws
require the Company to indemnify, to the fullest extent permitted by law, any
director, officer, employee or agent of the Company for acts which such person
reasonably believes are not in violation of the Company's corporate purposes as
set forth in the Certificate. At present, the DGCL provides that, in order to be
entitled to indemnification, an individual must have acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the Company's
best interests.
Director and Officer Indemnification Agreements
Pursuant to a Board resolution adopted before the consummation of the IPO,
the Company in November 1996 entered into indemnification agreements (the
"Indemnification Agreements") with each of the following persons (being all of
the Company's current directors and executive officers): Richard L. Bulman,
Charles C. Johnston, Thomas Griffin, Richard D. Bulman, Michael B. Solovay,
Robert J. Riscica, Marvin H. Goldstein, and Bradley Dahl. Under an
Indemnification Agreement, the Company (among other things) is obligated to (i)
indemnify and hold harmless the director or officer in question to the full
extent permitted or authorized by the DGCL and (ii) under circumstances, advance
monies to that person in order to cover expenses incurred in connection with a
pending or threatened indemnifiable claim. The Indemnification Agreements are
given effect retroactive to June 24, 1996, the date on which the Commission
declared the registration statement relating to the Underwritten Offering to be
effective. The Board of Directors authorized and directed the Company to enter
into these agreements based in part upon the Board's determination that these
agreements would enhance the Company's ability to continue to attract and retain
individuals of the highest quality to serve as its directors and officers. The
Company is not aware of any pending or threatened claim against any of the
Company's directors or executive officers for which indemnification may be
sought.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information (based on information
obtained from the persons named below), as of June 24, 1997, 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. The Common Stock is
the only class of the Company's equity securities constituting voting
securities. As no executive officer, other than Richard L. Bulman, received cash
compensation during the 1996 Fiscal Year exceeding $100,000, Mr. Bulman is the
only executive officer qualifying as a "Named Executive Officer" for purposes of
this table. With respect to beneficial ownership of Warrants, see note 9 below.
The Company is not a party to any arrangements, or aware of any arrangements
among any of its stockholders or involving any of them and third parties, which
may result in a change of control of the Company.
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owners(1) Ownership(2) Shares(2)
- ----------------------- ------------ ---------
Richard L. Bulman ......................... 459,805(3) 15.21%
Charles C. Johnston ....................... 298,136(4) 9.81%
Richard D. Bulman ......................... 46,000(5) 1.56%
Michael B. Solovay ........................ 3,800 *
Thomas Griffin ............................ 23,000(6) *
Sellet Marketing Corp. .................... XXX,XXX(7)
Whale Securities Co., L.P. ................ 280,000(8) 8.70%
All directors and executive officers
as a group (8 persons) .................... 972,386(9) 30.17%
- ----------
(1) Unless otherwise indicated in the notes below, 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 after June 10, 1997 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 after June 15, 1997 have been
exercised and converted. Before any consideration is given to outstanding
options, warrants or convertible securities, the percentages herein are
based upon there being 2,939,014 shares of Common Stock outstanding as of
June 10, 1997. An asterisk (*) indicates less than 1%.
(3) Includes 83,334 shares of Common Stock subject to currently exercisable
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<PAGE>
options granted under the Option Plan.
(4) Includes (i) 15,000 shares of Common Stock subject to currently
exercisable options granted under the Option Plan and (ii) 83,975 shares
of Common Stock issuable upon exercise of the Johnston Warrants, which are
currently exercisable.
(5) Includes 45,000 shares of Common Stock subject to currently exercisable
options granted under the Option Plan.
(6) Includes 15,000 shares of Common Stock subject to currently exercisable
options granted under the Option Plan.
(7) Sellet Marketing Corp. ("Sellet") is a British Virgin Islands corporation
having a principal office at 111 Arlosorov Street, Tel Aviv, Israel. The
750 shares of Series A Preferred Stock owned by Sellet will be convertible
at its option into Common Stock commencing July 12, 1997. If the 750
shares of Series A Preferred Stock owned by Sellet had been converted as
of July 31, 1997, then, based upon the average closing bid price of the
Common Stock on July 28, 29 and 30, those 750 shares would have been
converted into ______ shares of Common Stock, representing __% of the
__________ shares of Common Stock that would have been outstanding giving
effect to such conversion. Sellet has agreed with the Company that Sellet
will not effectuate a conversion of shares of Series A Preferred Stock
into Common Stock if, following such conversion, Sellet would be the
holder of five percent or more of the then-outstanding shares of Common
Stock.
(8) The address for Whale Securities Co., L.P. ("Whale") is 650 Fifth Avenue,
New York, NY 10019. The 280,000 shares of Common Stock represent the
shares that would be issued if all of the Underwriter's Warrants (and the
warrants to purchase Common Stock which underlie the Underwriter's
Warrants) were to be exercised (said securities being exercisable from and
after June 24, 1997). As of the date hereof, all of the Underwriter's
Warrants are held of record by Whale for the account of certain
undesignated equity owners and employees thereof. These shares do not
include any shares of Common Stock that may be held in any customer
account by, or any trading account of, Whale.
(9) Includes (i) an aggregate of 135,667 shares of Common Stock subject to
currently exercisable options granted under the Option Plan and (ii)
83,975 shares of Common Stock issuable upon exercise of the Johnston
Warrants. Except as stated in the next sentence, as of June 10, 1997 no
director or executive officer of the Company was the beneficial owner of
any Warrants, and no record holder of Warrants was the beneficial owner of
five percent or more of the outstanding Warrants. As of June 24, 1997, the
following directors and executive officers were the beneficial owners of
the indicated Warrants, representing in each case less than one percent of
the outstanding Warrants: Richard D. Bulman, 1,000 Warrants; Thomas
Griffin, 8,000 Warrants; and Robert J. Riscica, 30,000 Warrants.
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<PAGE>
SELLING STOCKHOLDERS
The following table provides certain information with respect to the
Common Stock held by each Selling Stockholder as of June 10, 1997, assuming
that, as of such date, (i) all of the Underwriter's Warrants (and the warrants
underlying them) had been exercised, (ii) the maximum amount of 2,000 shares of
Series A Preferred Stock potentially issuable pursuant to the 1997 Financing had
been issued and sold to Sellet, and (iii) all of such Series A Preferred Stock
had been converted into a maximum amount of 1,500,000 shares of Common Stock.
The actual maximum amount of shares of Common Stock into which those 2,000
preferred shares might be converted cannot be known at this time, as the
conversion price per share of Common Stock on any future date will be dependent
upon the Common Stock's average closing bid price on the three immediately
preceding Nasdaq trading days. See "Description of Securities--Preferred
Stock--Series A Preferred Stock." Except as otherwise disclosed herein under
"Underwritten Offering" and "Certain Transactions--Registration Rights Agreement
With Sellet," none of the Selling Stockholders has had any position, office or
material relationship with the Company or any of its affiliates within the past
three years (other than as a result of his or its ownership of securities of the
Company). The Selling Stockholders are under no obligation to sell all or any of
the Shares offered hereby, nor are they obligated to sell any Shares immediately
under this Prospectus. The Company will not receive any proceeds from any sales
of any Shares by the Selling Stockholders.
<TABLE>
<CAPTION>
Shares
Beneficially Owned Shares Registered
------------------ in Connection Shares Offered
with this Pursuant to this
Selling Shareholder Number Percentage Prospectus Prospectus
------------------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sellet Marketing Corp. 1,500,000 33.79% 1,500,000 1,500,000
Whale Securities Co., L.P. 280,000 8.70% 280,000 280,000
TOTAL 1,780,000 37.72% 1,780,000 1,780,000
</TABLE>
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<PAGE>
PLAN OF DISTRIBUTION
The Shares offered pursuant to this Prospectus are being offered on behalf
of the Selling Stockholders, and the Company will not receive any proceeds from
this Offering. The Shares may be offered by the Selling Stockholders pursuant to
this Prospectus until _______, 1998, provided that this Prospectus is kept
current in accordance with applicable provisions of the Securities Act, and the
rules and regulations of the Commission promulgated thereunder. The Company
intends to maintain a current prospectus covering the Shares offered hereby
through that date and, thereafter, until at least the one year anniversary of
the date of this Prospectus. See "Certain Transactions--Registration Rights
Agreement With Sellet."
The sale of the Shares by the Selling Stockholders may be effected in
transactions in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale. The Shares may be sold at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares directly to purchasers or through
underwriters or broker-dealers who may act as agents or principals. Such
underwriters and broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders or the
purchasers of the Shares for whom such underwriters or broker-dealers may act as
agent or to whom they sell as principal, or both (which compensation as to a
particular underwriter or broker-dealer may be in excess of customary
compensation). Introducing brokers may act as broker-dealer on behalf of one or
more of the Selling Stockholders in connection with the offering of certain of
the Shares by Selling Stockholders. A Selling Stockholder and any underwriter or
broker-dealer who acts in connection with the sale of the Shares hereunder may
be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on any
resale of the Shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Shares may not simultaneously engage in
market-making activities with respect to such Shares for a period of nine
business days prior to the commencement of such distribution, except under
certain limited circumstances. In addition to, and without limiting the
foregoing, the Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
rules and regulations thereunder (including Rule 10b-3 and Regulation M), which
provisions may limit the timing of purchases and sales of any of the Shares by
the Selling Stockholders and any other such stockholders.
The Company has agreed to pay substantially all of the expenses incident
to the registration, offering and sale of the Shares to the public, excluding
the commissions or discounts of underwriters, broker-dealers or agents. See
"Certain Transactions--Registration Rights Agreement with Sellet."
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<PAGE>
CERTAIN TRANSACTIONS
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.
Transactions with Director Charles C. Johnston
Charles C. Johnston, a principal stockholder of the Company, has been a
director of the Company since June 1994, at which time he purchased 53,681
shares of Common Stock from the Company, and the Company was granted a right of
first refusal to purchase his shares of Common Stock in the event Mr. Johnson
determines to sell, transfer or otherwise dispose of such shares (other than to
certain qualified transferees).
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
contemplation of the IPO, Johnston and the Company agreed that the exercise
price for all of these Johnston Warrants would become $3.60 as of the effective
date of the IPO. 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 1995 Pre-Bridge Financing, Johnston invested an
additional $100,000 in the Company, for which Johnston received a 1995
Pre-Bridge Note in the principal amount of $100,000 (the Company utilized
approximately $107,500 of the proceeds from the IPO to repay this note) and
30,000 1995 Pre- Bridge Shares. These 30,000 shares were registered under the
Securities Act of 1933 concurrently with the IPO, together with shares of Common
Stock registered by the Company on behalf of certain other stockholders.
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
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<PAGE>
through the transfer from Kideo-Canada to the Seller of approximately 19,645
shares of Common Stock of the Company, which shares were valued at approximately
$70,000. In addition, legal fees of approximately $48,000 incurred in connection
with the Technology Acquisition were capitalized in connection with that
transaction.
Transactions With Executive Officers
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 1996 Bridge Units (except that, unlike the 1996 Bridge Shares,
the 1996 Pre- Bridge Shares were not required to be registered under the
Securities Act of 1933). 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 utilized approximately $129,000 of the proceeds
from the IPO to repay these 1996 Pre-Bridge Notes.
Registration Rights Agreement With Sellet
In connection with the 1997 Financing, the Company and Sellet in May 1997
entered into a Registration Rights Agreement. The Company, as required
thereunder, has registered under the Securities Act and included in the
Registration Statement 1,500,000 shares of Common Stock potentially underlying
(i) the 750 shares of Series A Preferred Stock currently issued to Sellet and
(ii) the 1,250 shares thereof potentially issuable to Sellet as described herein
under "The 1997 Financing." The agreement obligates the Company to maintain a
current prospectus covering the Shares being offered under this Prospectus by
Sellet until the earliest of (a) May 13, 1999, (b) the date when Sellet may sell
under Rule 144 all of the shares of Common Stock acquired by it pursuant to the
conversion of Series A Preferred Stock, and (c) the date when Sellet no longer
owns any of such shares of Common Stock. The agreement also affords Sellet
certain piggyback registration rights with respect to such shares of Common
Stock. The agreement requires the Company to pay all of the expenses incident to
the registration, offering and sale of such shares to the public, excluding the
commissions or discounts of underwriters, broker-dealers or agents. See "Certain
Transactions--Registration Rights Agreement With Sellet."
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<PAGE>
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 2,939,014 shares of
Common Stock outstanding and 750 shares of Series A Preferred Stock outstanding.
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.
As a result of the creation of the Series A Preferred Stock and the
issuance of shares of that series pursuant to the 1997 Financing, and in
accordance with the terms of the Certificate of Designations and the Certificate
of Incorporation, the holders of Common Stock will rank junior to holders of
Series A Preferred Stock in the event of any voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or winding up of the
Company.
Holders of Common Stock have no conversion rights or preemptive rights and
are not subject to further capital calls or assessments. There are no redemption
or sinking fund provisions applicable to the Common Stock. The rights of the
holders of the Common Stock are subject to any rights that may be fixed for
holders of Preferred Stock, when and if any Preferred Stock is issued. All of
the outstanding shares of Common Stock are fully paid and non-assessable. The
Company's By-Laws provide that the holders of at least 10% of its voting stock
will be able to call special meetings of stockholders.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock
from time to time in one or more series, in all cases ranking senior to the
Common Stock with respect to payment of dividends and in the event of the
liquidation, dissolution or winding up of the Company. There is no Preferred
Stock currently authorized for issuance by the Company other than the Series A
Preferred Stock. 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.
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<PAGE>
Series A Preferred Stock
On May 9, 1997, the Company's Board of Directors, acting pursuant to the
authority granted under its Certificate of Incorporation, authorized the
creation of a series of Preferred Stock designated as the Series A 6%
Convertible Participating Preferred Stock (the "Series A Preferred Stock"). The
Series A Preferred Stock consists of 4,000 shares, each share having a
liquidation value of $1,000, 750 shares of which are outstanding as of the date
of this Prospectus. All of such outstanding shares are fully paid and
non-assessable.
Except as may be required by law, the holders of the Series A Preferred
Stock are not entitled under the Certificate of Designations to vote in the
election of directors of the Company or in any other matters to be voted on by
holders of the Common Stock. Holders of the Series A Preferred Stock have no
preemptive rights and are not subject to further capital calls or assessments.
There are no redemption or sinking fund provisions applicable to the Series A
Preferred Stock. The rights of the holders of the Series A Preferred Stock are
subject, without requiring any series or class vote, to any rights that may be
fixed for holders of any other series of Preferred Stock (when and if issued)
which ranks on a parity with the Series A Preferred Stock as to dividends or
distributions made upon dissolution, liquidation and winding up of the Company.
However, without the consent of the registered holders of at least fifty percent
of the then-outstanding shares of Series A Preferred Stock, no class or series
of equity securities of the Company may be authorized or issued which would rank
senior to the Series A Preferred Stock as to the payment of dividends or
distributions of any kind.
Pursuant to the Certificate of Designations, on July 12, 1997 the Series A
Preferred Stock became convertible at a holder's option into shares of Common
Stock. Sellet has agreed with the Company that Sellet will not effectuate a
conversion of shares of Series A Preferred Stock into Common Stock if, following
such conversion, Sellet would be the holder of five percent or more of the
then-outstanding shares of Common Stock.
In addition, under the Certificate of Designations, the Company has the
right to cause a mandatory conversion of all outstanding shares of Series A
Preferred Stock at any time after the one-year anniversary of the Effective Date
of the Registration Statement. The Certificate of Designations provides that the
Series A Preferred Stock will initially be convertible (subject to customary
anti-dilution adjustments) into shares of Common Stock based upon the ratio of
(a) the total liquidation value (at $1,000 per preferred share) of the preferred
shares being converted, to (b) the then-effective conversion price. The
conversion price at any point in time will be 80% of the prior three trading
days' average of the closing bid price per share of Common Stock (as reported by
Nasdaq). The Certificate of Designations provides that dividends on the Series A
Preferred Stock are payable semi-annually on each July 31st and January 31st,
commencing with July 31, 1998. The Company has the option to pay any or all of
the dividends through the issuance of additional shares of Common Stock
(utilizing the same conversion ratio as described above).
Johnston Warrants
There are currently outstanding certain 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 initial exercise price of $3.60 per share. The
exercise price is subject to adjustment in certain circumstances (including in
the event of a stock split or dividend, recapitalization, reorganization, merger
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<PAGE>
or consolidation of the Company). 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" further below.
Public Warrants
Each Warrant offered pursuant to the Underwritten Offering entitles the
registered holder thereof to purchase one share of Common Stock, at a price of
$4.00, subject to adjustment in certain circumstances, at any time during the
four year period following June 24, 1997. The Warrants are redeemable by the
Company, upon the consent of the Underwriter, at any time following June 24,
1997, upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the Common Stock, for a period of 20
consecutive trading days ending on the third day prior to the day on which the
Company gives notice, has been at least 150% (currently $6.00, subject to
adjustment) of the then effective exercise price of the Warrants. The holders of
the Warrants will have the right to exercise their Warrants until the close of
business on the date fixed for redemption. The Warrants were 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) for a complete description of the terms and conditions
therein.
Other Warrants
In October 1996, the Company issued a warrant to purchase Common Stock to
an executive and owner of the company that acted as an independent contractor to
the Company in connection with the development, scripting and filming of the
animation and live-action sequences for the first two Gregory & Me titles. This
warrant, which is currently exercisable, entitles the holder to purchase an
aggregate of 20,000 shares of Common Stock, at an initial exercise price of
$5.00 per share, until October 30, 2001. The exercise price is subject to
adjustment in certain circumstances (including in the event of a stock split or
dividend, recapitalization, reorganization, merger or consolidation of the
Company).
A summary description of the Underwriter's Warrants is set forth on page 2
of this Prospectus under the "The Underwritten Offering."
Registration Rights
All of the Company's current directors and officers, and substantially all
persons who were its securityholders before the consummation of the Underwritten
Offering, have agreed that, without the Underwriter's prior written consent,
they will not exercise before June 24, 1997 any rights held by them to cause the
Company to register any shares of Common Stock for sale pursuant to the
Securities Act.
1995 Registration Rights Agreement
The Company has granted certain piggyback registration rights relating to
the shares of Common Stock held by the persons who invested in the May 1995
Units Financing and the shares of Common Stock issuable upon exercise of the
Johnston Warrants, which together represent 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").
57
<PAGE>
In the event a registration is a primary registration on behalf of the
Company, the Company will use its best efforts to include in such registration,
subject to the agreement of the managing underwriter or underwriters of the
offering relating thereto (if any): (i) first, the securities that the Company
proposes to sell; (ii) second, those (a) 1995 Registrable Shares, (b) securities
which are registrable pursuant to the terms of an agreement, dated June 17, 1994
(the "Investor Rights Agreement"), between the Company and certain stockholders
(the "June Investor Shares"), and (c) Bulman Shares (as hereinafter defined)
which are requested by the holders thereof to be included in such registration
(pro rata among the holders thereof); and (iii) third, other securities
requested to be included in such registration. In secondary, non-issuer
registrations, the Company will use its best efforts to include in such
registration, subject to the agreement of the managing underwriter or
underwriters of the offering relating thereto (if any): (X) first, those 1995
Registrable Shares, June Investor Shares and Bulman Shares which are requested
by the holders thereof to be included in such registration (pro rata among the
holders thereof); and (Y) second, other securities requested to be included in
such registration.
In connection with any underwritten piggyback registration, the holders of
the 1995 Registrable Shares have agreed to execute and deliver a "lock-up
agreement" with respect to any of their registrable securities included therein
for up to 90 days (or longer as the Company's underwriters may request but not
to exceed 180 days) after the effective date of the registration statement
relating to such underwritten offering.
Investor Rights Agreement
Under the Investor Rights Agreement, the Company agreed to register the
June Investor Shares (representing 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."
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."
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.
58
<PAGE>
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."
V-Seion Registration Rights Agreement
Pursuant to a Registration Rights Agreement, dated as of July 14, 1995,
between the Company and V-Seion Multimedia Systems, Inc. ("V-Seion", which was
the seller of the assets acquired by the Company in the Technology Acquisition),
the Company granted V-Seion piggyback registration rights relating to its shares
of Common Stock (other than in connection with a registration effected solely to
implement an employee benefit plan or a transaction to which Rule 145(a)
promulgated under the Securities Act is applicable). If the registration
proposed by the Company is to be an underwritten offering of securities for the
account of either the Company or the holders of such securities, then the amount
of shares which V-Seion will be allowed to register can be limited, in the
underwriter's discretion, by certain relevant marketing factors. In the event
that any shares of Common Stock held by V-Seion are permitted by the underwriter
to be included in such a registration, V-Seion is prohibited from selling any of
such shares to the public for a period of 90 days (or such longer period, not to
exceed 180 days, as the underwriter may request) from the effective date of such
registration. V-Seion is currently the owner of 19,645 outstanding shares of
Common Stock. See "Shares Eligible for Future Sale."
Registration Rights Related to Underwriter's Warrants
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.
Pursuant to the request of the holders of a majority of the Underwriter's
Warrants, the Company has registered the 280,000 shares of Common Stock
underlying the Underwriter's Warrants (and the warrants underlying the same)
under the Registration Statement of which this Prospectus is a part.
Sellet Registration Rights Agreement
See the summary description of this agreement above under "Certain
Transactions--Registration Rights Agreement With Sellet."
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
59
<PAGE>
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purpose of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meetings of the
stockholders, and not by written consent, by the affirmative vote of at least
66-2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
In general, Section 203 defines a "business combination" to include: (i)
any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the corporation; (iii)
(subject to certain exceptions) any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through corporation. In
general, Section 203 defines an "interested stockholder" as (a) any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation or (b) any entity or person affiliated with or controlling or
controlled by such entity or person.
The existence of Section 203 would be expected to have the effect of
discouraging takeover attempts involving the Company, including attempts that
might result in a premium over the market price of the Common Stock (if it is
then publicly traded).
Transfer Agent, Warrant Agent and Registrar
The transfer agent, warrant agent and registrar for the Common Stock is
American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has 2,939,014 shares of
Common Stock outstanding, of which shares the following were registered as part
of the Underwritten Offering and, accordingly, are freely tradeable without
restriction or further registration under the Securities Act: (i) 1,400,000
shares of Common Stock sold in the public market pursuant to the Underwritten
Offering; and (ii) 290,000 shares of Common Stock which were registered in
connection with the Underwritten Offering on behalf of certain selling
stockholders of the Company.
All of the remaining 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 under the Securities Act) 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. From and after
June 24, 1997, however, substantially all of these restricted securities are
either eligible for sale in the public market pursuant to Rule 144 or are
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. A total of 1,235,234 shares of the Restricted Common Stock are
held by stockholders to
60
<PAGE>
whom the Company has granted registration rights.
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 one year which does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) an amount equal to the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. However, a person
who is not deemed an affiliate and has beneficially owned restricted shares for
at least two years is entitled to sell such shares without regard to the volume
or other resale requirements.
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.
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. On March
26, 1996, SME agreed to accept from the Company, in lieu of cash and as partial
payment for legal services rendered before that date, 24,000 shares of Common
Stock (valued by the Company at that time as having a fair market value of $3.50
per share). The Company issued such 24,000 shares to members and an employee of
SME on March 27, 1996.
EXPERTS
The consolidated financial statements of Kideo Productions, Inc. and
Subsidiaries as of July 31, 1995, and for the year then ended included in this
Prospectus and in the Registration Statement have been included herein in
reliance upon the report of Goldstein Golub Kessler & Company, P.C., independent
certified public accountants, given upon the authority of said firm as experts
in accounting and auditing.
The audited consolidated financial statements for the year ended July 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in its report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which includes 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.
61
<PAGE>
KIDEO PRODUCTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports
Report of Arthur Andersen LLP..................................... F-2
Report of Goldstein Golub Kessler & Company, P.C.................. F-3
Financial Statements:
Balance Sheet,
July 31, 1995 and 1996...................................... F-4
Statement of Operations,
Years Ended July 31, 1995 and 1996.......................... F-5
Statement of Shareholders' (Deficiency) Equity,
Years Ended July 31, 1995 and 1996.......................... F-6
Statement of Cash Flows,
Years Ended July 31, 1995 and 1996.......................... F-7
Statement of Cash Flows, Supplemental Information
Years Ended July 31, 1995 and 1996.......................... F-8
Notes to Financial Statements........................................... F-9
Consolidated Balance Sheet - April 30, 1997 (unaudited)................. F-17
Consolidated Statement of Operations - nine months ended
April 30, 1997 and 1996 (unaudited)............................... F-18
Consolidated Statement of Cash Flow - nine months ended
April 30, 1997 and 1996 (unaudited)............................... F-19
Notes to the Consolidated Financial Statements (unaudited).............. F-20
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kideo Productions, Inc.:
We have audited the accompanying consolidated balance sheet of Kideo
Productions, Inc. and Subsidiary (a Delaware Corporation) as of July 31, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kideo Productions,
Inc. and Subsidiary as of July 31, 1996, and the results of their operations and
their cash flows for the year then ended 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 the consolidated financial statements, the Company sustained losses for
the years ended July 31, 1996 and 1995. This matter raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to this matter are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen, LLP.
New York, New York
September 27, 1996
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders 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 year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 year then ended in conformity with generally
accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
November 13, 1995, except for the first
paragraph of Note 6, as to which the date
is January 5, 1996
F-3
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
at July 31, at July 31,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 61,137 $ 2,857,097
Accounts receivable .................................... 59,313 94,572
Prepaid expenses ....................................... 107,503 139,720
----------- -----------
Total current assets ................................. 227,953 3,091,389
Property and equipment, net .............................. 766,377 558,034
Other assets ............................................. 453,387 718,288
=========== ===========
Total assets ......................................... $ 1,447,717 $ 4,367,711
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................... $ 428,188 $ 58,988
Accrued expenses ....................................... 233,590 270,532
Capital leases, current portion ........................ 144,171 147,173
Loans from related parties ............................. 61,472 --
Unearned revenue ....................................... 42,338 225,131
----------- -----------
Total current liabilities ............................ 909,759 701,824
Capital leases, long term portion ........................ 195,330 80,318
Long-term debt ........................................... 956,250 --
----------- -----------
Total liabilities .................................... 2,061,339 782,142
----------- -----------
Commitments and Contingencies (Notes 4, 5 & 11)
Shareholders' (Deficiency) Equity
Preferred Stock, $.01 par value; authorized
5,000,000 shares, issued and outstanding 956.25
at July 31, 1995 and -0- shares at July 31, 1996 ..... 10 --
Common Stock, $.0001 par value; authorized
15,000,000 shares, issued and outstanding 616,891
at July 31, 1995 and 2,939,014 shares at July 31, 1996 62 294
Additional paid-in capital ............................. 1,385,574 8,737,136
Accumulated deficit .................................... (1,999,268) (5,151,861)
----------- -----------
Shareholders' (Deficiency) Equity ................... (613,622) 3,585,569
=========== ===========
Total liabilities and shareholders' (deficiency) equity .. $ 1,447,717 $ 4,367,711
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended
July 31, July 31,
1995 1996
----------- -----------
<S> <C> <C>
Sales ................................................. $ 521,186 $ 760,870
Cost of sales ......................................... 657,498 636,738
----------- -----------
Gross profit (loss) .................................. (136,312) 124,132
Selling expenses ...................................... 667,700 737,171
General and administrative expenses ................... 656,076 1,136,752
----------- -----------
Loss from operations .................................. (1,460,088) (1,749,791)
----------- -----------
Interest expense ...................................... 118,485 88,149
Nonrecurring expenses related to debt extinguished
in connection with the Initial Public Offering ...... -- 1,221,060
----------- -----------
Net loss .............................................. $(1,578,573) $(3,059,000)
=========== ===========
Pro forma financial information (unaudited)
Net Loss ............................................ $(1,578,573) $(3,059,000)
Pro forma adjustment for employment agreements ...... (338,000) (74,000)
----------- -----------
Pro forma net loss .................................. $(1,916,573) $(3,133,000)
=========== ===========
Pro Forma net loss per share .......................... $ (1.18) $ (1.75)
=========== ===========
Pro Forma weighted average number of shares outstanding 1,571,450 1,666,017
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-5
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
Additional Shareholders'
Preferred Stock Common Stock Paid-in Accumulated (Deficiency)
Shares Amount Shares Amount Capital Deficit Equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994 ................... -- $ -- $ 544,060 $ 54 $ 409,341 $ (404,989) $ 4,406
-------------------------------------------------------------------------------------
Exercise of stock options .................. -- -- 19,272 2 47,448 47,450
Issuance of preferred stock in connection
with May 1995 Units Financing ............ 956,250 $ 10 -- -- 737,311 737,321
Issuance of common stock in satisfaction
of expenses in connection with the
May 1995 Units Financing ................. -- -- 33,914 3 121,291 121,294
Issuance of common stock in connection
with acquisition of technology and
software ................................. -- -- 19,645 3 70,183 70,186
Dividends on preferred stock ............... -- -- -- -- -- (15,706) (15,706)
Net loss ................................... -- -- -- -- -- (1,578,573) (1,578,573)
-------------------------------------------------------------------------------------
Balance at July 31, 1995 ................... 956,250 10 616,891 62 1,385,574 (1,999,268) (613,622)
-------------------------------------------------------------------------------------
Issuance of preferred stock in connection
with the May 1995 Units Financing ........ 43,750 -- -- -- 43,750 43,750
Issuance of common stock in satisfaction
of expenses in connection with the
May 1995 Units Financing ................. -- -- 3,239 -- 6,751 6,751
Issuance of common stock in connection
with October 1995 private placement ...... -- -- 90,000 9 163,627 163,636
Issuance of common stock in connection
with January 1996 private placement ...... -- -- 25,000 2 58,012 58,014
Issuance of common stock in partial
payment of interest on debt issued
in the May 1995 Units Financing .......... -- -- 6,462 1 23,028 23,029
Issuance of preferred stock in satisfaction
of dividends on preferred stock issued
in the May 1995 Units Financing .......... 48,672 -- -- -- 48,672 48,672
Issuance of common stock in connection
with the February 1996 private placement . -- -- 150,000 15 273,810 273,825
Issuance of common stock for legal costs
in connection with the Company's
initial public offering .................. -- -- 24,000 3 83,997 84,000
Issuance of common stock in connection
with the June 1996 private placement ..... -- -- 50,000 5 89,995 90,000
Issuance of common stock in connection
with the the initial public offering ..... -- -- 1,400,000 140 5,398,813 5,398,953
Issuance of warrants in connection with the
initial public offering .................. -- -- -- -- 161,154 161,154
Conversion of preferred stock to common .... (1,048,672) (10) 293,533 29 (19) --
Conversion of debentures to common ........ -- -- 279,889 28 999,972 1,000,000
Dividends on preferred stock ............... -- -- -- -- -- (93,593) (93,593)
Net loss ................................... -- -- -- -- -- (3,059,000) (3,059,000)
-------------------------------------------------------------------------------------
Balance at July 31, 1996 ................... -- -- 2,939,014 $ 294 $ 8,737,136 $(5,151,861) $ 3,585,569
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended
July 31,1995 July 31,1996
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(1,578,573) $(3,059,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of operating assets .... 147,397 333,324
Amortization of loan discount ........................ -- 585,475
Amortization of deferred debt costs .................. -- 396,491
Effect of changes in operating assets and liabilities:
Accounts receivable ................................ (49,359) (35,259)
Prepaid expenses and other current assets .......... (86,258) (32,218)
Other assets ....................................... (378,412) (488,751)
Accounts payable ................................... 358,914 (369,698)
Accrued expenses ................................... 188,674 180,616
Unearned revenue ................................... 42,338 182,793
----------- -----------
Net cash used in operating activities .................. (1,355,279) (2,306,227)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ..................... (336,637) (108,061)
----------- -----------
Cash flows from financing activities:
Proceeds from bridge notes ............................. 1,050,000 1,375,000
Net proceeds from issuances of capital stock ........... 357,982 5,592,232
Proceeds from long term debt ........................... 468,750 32,125
Repayment of loans payable - related parties ........... (6,666) (61,472)
Repayment of bridge notes .............................. (75,000) (1,375,000)
Principal payments on capital leases ................... (91,686) (112,010)
Debt issuance costs incurred ........................... -- (180,000)
Dividends paid on preferred stock ...................... -- (60,627)
----------- -----------
Net cash provided by financing activities .............. 1,703,380 5,210,248
----------- -----------
Net increase in cash ..................................... 11,464 2,795,960
Cash and cash equivalents at the beginning of the period 49,673 61,137
----------- -----------
Cash and cash equivalents at the end of the period ....... $ 61,137 $ 2,857,097
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-7
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
Year ended Year ended
July 31, 1995 July 31, 1996
------------- -------------
<S> <C> <C>
Cash payments for interest ............................... $ 83,288 $ 89,303
Cash payments for income taxes ........................... 713 3,931
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations for equipment purchases ...... 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 common stock for software,technology rights,
and intellectual property ............................ 70,186 --
Issuance of capital stock in satisfaction of expenses .. 121,294 84,000
Conversion of accrued expenses into long term debt ..... -- 11,625
Conversion of accrued expenses into capital stock ...... -- 41,404
Conversion of dividends payable into preferred stock ... -- 48,672
Original issue discounts associated with bridge
financings ........................................... -- 545,875
Conversion of long term debt into common stock ......... -- 1,000,000
Conversion of preferred stock into common stock ........ -- 1,048,672
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-8
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CORPORATE STRUCTURE AND PRINCIPAL
BUSINESS ACTIVITY:
Business and Organization
Kideo Productions, Inc. ("Kideo-Delaware"), a Delaware corporation, was
incorporated on June 24, 1994 and subsequently amended and restated its
certificate of incorporation on December 28, 1994. As of January 9, 1995,
Kideo-Delaware exchanged its common stock for all of Kideo-New York's (the
operating company incorporated in New York in 1993) outstanding common stock
whereby Kideo-New York became a wholly owned subsidiary of Kideo-Delaware. The
accompanying consolidated financial statements include the accounts of
Kideo-Delaware and its wholly owned subsidiaries, Kideo-New York and Kideo
Productions (Canada), Inc. (collectively the "Company"). Kideo Productions
(Canada), Inc. commenced operations in July 1995. All significant intercompany
transactions balances have been eliminated.
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 purchases made during the months of
October through December.
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
$1,578,573 and $ 3,059,000 for the years ended July 31, 1995 and July 31, 1996,
respectively. Management believes that its current working capital together with
anticipated revenues from operations and its current cash balances will be
sufficient to fund the operations of the Company for at least one year from the
date of these financial statements.
Revenue Recognition
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. Revenue is recognized on the accrual basis when the
video tape is shipped to the ultimate consumer.
Capitalization Content Costs
Capitalized costs consist of deferred production costs related to the
production and development of the storylines of the Company's video tapes. The
Company's policy is to amortize production costs over the anticipated revenue
stream of the title, which it currently estimates to be two years. Management
continually evaluates its policy as sales of each title are made.
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 year ended July 31,
1996 amounted to $64,051.
Advertising Costs
Advertising costs are charged to operations when the advertising first
takes place. Advertising expenses for the years ended July 31, 1995 and 1996
were $182,149 and $96,889 respectively.
F-9
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation
Depreciation of property and equipment is provided for principally by the
straight-line method over the estimated useful lives of the respective assets.
Amortization of Debt Issuance Costs
Debt issuance costs are amortized over the life of the debt or at the time
of prepayment of the debt. See Note 7 for discussion of debt issuance costs
amortized upon the consummation of the IPO.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", which requires that the tax
effect of temporary differences between the recorded carrying values and the
adjusted tax basis of assets and liabilities be reflected in the financial
statements at the tax rate at which the differences are expected to reverse. At
July 31, 1995 and 1996, there were no material temporary differences between the
book basis and tax basis of the Company's assets and liabilities.
As of July 31, 1996, the Company had a net operating loss carryforward for
both financial reporting and income tax purposes of approximately $5,038,000
available to offset future income through 2011. This resulted in a deferred
income tax asset of approximately $2,267,000 for which the Company recorded a
full valuation allowance due to the uncertainty of future realization of such
losses. Based on the ownership changes arising from the initial public offering,
utilization of the net operating loss carry-forward will be limited.
Pro Forma Net Loss Per Share
Historical net earnings have been adjusted to give effect to employment
contracts entered into during 1996, as if those contracts had been in effect
from the beginning of each period presented.
For the year ended July 31, 1995, pro forma net loss per share is
determined by the weighted average number of shares of Common Stock outstanding
during the periods presented. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83 ("SAB 83"), Common Stock issued in connection
with bridge financings, the Convertible Preferred Stock ("Preferred Stock"), the
Convertible Subordinated Debentures ("Debentures") and warrants issued during
the twelve months preceding the Initial Public Offering (see Note 6) at prices
below the Initial Public Offering price have been included for all periods
presented as if the shares were converted into Common Stock at the beginning of
each period, even though they were antidilutive.
For the year ended July 31, 1996, pro forma net loss per share is
determined using the weighted average number of shares of Common Stock
outstanding during the period, which is based upon: (i) Accounting Principals
Board Opinion No. 15, "Earnings per Share", for the period after April 30, 1996,
and (ii) SAB 83 for the period August 1995 through April 30, 1996, which
includes the Common Stock issued in connection with the bridge financings, the
Preferred Stock and the Debentures, as outstanding for the entire year and the
warrants issued during the twelve months preceding the Initial Public Offering
at prices below the Initial Public Offering price as outstanding through March
31, 1995. Historical loss per share data has not been presented as such
information is not meaningful.
Warranty Costs
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.
Estimates
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, liabilities, revenue and expenses and
the disclosed amounts of contingent assets and liabilities. Actual results could
differ from those estimates.
F-10
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassification
For comparability, certain 1995 amounts have been reclassified where
appropriate to conform to the financial statement presentation used in 1996.
New Accounting Pronouncements
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:
July 31, July 31, Estimated
1995 1996 Useful Life
-------- --------- -----------
Video production equipment
and related software ............... $ 862,466 $ 930,861 3 years
Furniture and fixtures ............. 5,653 5,653 7 years
Office equipment ................... 44,109 62,938 5 years
Leasehold improvements ............. -- 20,836 3 years
-------- ---------
912,228 1,020,288
Less accumulated depreciation ...... 145,851 462,254
-------- ---------
$766,377 $ 558,034
======== =========
Included in property and equipment at July 31, 1995 and at July 31, 1996
is approximately $431,000 of assets acquired under capital leases. Accumulated
depreciation on these assets as of July 31, 1995 and July 31, 1996 amounted to
approximately $72,000 and $216,000 respectively. The property held under these
leases is collateral for the related capital lease obligations described in
Note 5.
3. OTHER ASSETS:
Other assets consist of the following:
July 31 July 31,
1995 1996
-------- --------
Debt issuance costs ................................ $206,931 $ --
Deposits on capital lease obligations .............. 186,000 194,965
Technology rights and intellectual property ........ 50,349 33,837
Security deposits .................................. 10,107 17,231
Capitalized content costs .......................... -- 472,255
-------- --------
$453,387 $718,288
======== ========
F-11
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized content costs include the development, scripts, characters, props,
filming and post production of new Kideo titles.
4. COMMITMENTS:
The Company leases 8,600 square feet of space under several noncancelable
operating leases for office, manufacturing and warehouse space. These leases are
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 $750.
Total rent expense for the years ended July 31, 1995 and 1996 amounted to
$42,512 and $69,654, respectively. Future approximate minimum rental payments
required are as follows:
Year ending July 31,
1997 ....................................... $101,202
1998 ....................................... 99,596
1999 ....................................... 16,800
--------
$217,598
========
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:
Year ending July 31,
1997 ....................................... $435,000
1998 ....................................... 230,000
1999 ....................................... 72,917
--------
$737,917
========
5. CAPITAL LEASE OBLIGATIONS:
During the year ended July 31, 1995, the Company entered into several
capital leases, totaling approximately $431,000, for the purchase of equipment.
The Company paid deposits of $186,000 upon execution of the leases. The
obligations are due in monthly installments of principal and interest
aggregating $13,940 with interest rates ranging from 16% to 30%, through
December 1997.
Aggregate lease payments required under these leases at July 31, 1995 and
July 31, 1996 are as follows:
Year ending July 31, 1995 1996
- --------------------- -------- --------
1996 ........................................... $191,786 $ --
1997 ........................................... 167,087 167,087
1998 ........................................... 84,250 84,250
-------- --------
443,123 251,337
Less amounts representing interest ............. 103,622 23,846
-------- --------
$339,501 $227,491
======== ========
6. SHAREHOLDERS' EQUITY:
In January 1996, the Company's Board of Directors authorized an increase
in the number of shares of preferred stock from 100,000 to 5,000,000. In
addition, the Company's Board of Directors authorized an increase in the number
of shares of common stock from 400,000, $.01 par value, to 15,000,000, $.0001
par value, and
F-12
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 July 31,
1995 financial statements and related notes.
On June 25, 1996, the Company consummated an initial public offering of
1,400,000 common shares at an offering price of $5.00 per share and 1,610,000
warrants at an offering price of $.10 per warrant. The net proceeds to the
Company were $ 5,560,000 after deducting issuance costs of $ 1,601,000, which
were charged to equity. Each warrant entitles the holder to purchase one share
of common stock at an exercise price of $4.00 per share. The warrants will be
exercisable for a 48-month period commencing one year from the effective date of
the initial public offering.
Upon the closing of the offering, the Company repaid $1,375,000 principal
amount of bridge note financings. Included in the bridge note financings were
payments to two officers for $125,000 and $300,000 to a director of the Company.
In addition the Company converted the outstanding principal amount of $1,000,000
subordinated debentures into 279,889 shares of common stock and the 1,048.672
shares of outstanding preferred stock were converted into 293,533 shares of
common stock. Additional loans of $61,472 in the aggregate were repaid to a
shareholder and a former director out of the proceeds of the offering.
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.
In March 1995, the Company entered into an agreement with the majority
shareholder of the Company granting 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 then fair market value). The option may not be exercised
unless the Company has earnings before income taxes of not less than $880,000
for the year ending July 31, 1996, and the option shall expire on December 31,
1999.
In March 1996, the Company issued 24,000 shares of common stock, valued by
the Company at $84,000 ($3.50 per share) at the time of the issuance, for legal
services rendered in connection with the IPO.
7. NON RECURRING CHARGES RELATED TO THE SECURITIES RETIRED UPON THE IPO
The Statement of Operations for the year ended July 31, 1996 reflects $
1,221,060 of expenses related to financings that were either retired or
converted into common shares in connection with the IPO. This consists of the
following:
Amortization of debt issuance costs
outstanding from July 31, 1995 ................... $ 206,931
Amortization of debt issuance costs incurred
in connection with bridge financings
that closed during the year ended
July 31, 1996 ...................................... 189,560
Amortization of original issue discount
arising from the allocation of
a portion of bridge financing proceeds
to shareholder's equity, where shares of
common stock were issued in addition
to bridge notes issued at par value ................ 585,475
Interest incurred on debt retired from IPO
proceeds or converted to common shares ............. 151,094
Redemption of certain warrants ........................... 88,000
----------
$1,221,060
==========
F-13
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BRIDGE NOTE FINANCINGS AND PRIVATE PLACEMENT OFFERING:
The financing transactions described below were completed during the
fiscal years ended July 31, 1995 and 1996. With the exception of warrants to
purchase 83,975 shares of common stock, all notes, debentures and preferred
shares were either redeemed, or converted into common stock before the IPO, or
at the closing of the IPO.
In September 1994, the Company borrowed an aggregate of $250,000 from a
group of investors ("the Group") ("September 1994 Financing") evidenced by
signed promissory notes bearing interest at 10% per annum. Upon the closing of
the May 1995 Units Financing described below, $175,000 of these notes were
converted into 1.75 of the units sold in the May 1995 Units Financing 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 Group in the September 1994 Financing. In connection with the
Company's proposed initial public offering, these warrants were purchased for
$88,000 by the Company. The purchase of these warrants was charged to operations
during the year ending July 31, 1996.
The Company borrowed an aggregate of $400,000 from a shareholder in
October 1994 and March 1995. The borrowings ("Johnston Financing") bear interest
at 12% per annum and in May 1995 were converted into four of the units sold in
the May 1995 Units Financing (comprised of preferred stock and Debentures). In
connection with this financing 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 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.
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
were convertible into common stock of the Company at a ratio of 279.9 shares of
common stock for every 1 share of Preferred Stock or $1,000 face value of
Debentures outstanding. Interest on the Debentures accrued at 10% per annum, 5%
payable in cash and 5% payable in either cash or common stock of the Company or
some combination thereof. Dividends accrued 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 (Fiscal 1996).
In connection with the Company's initial public offering, all the
Preferred Stock and all of the Debentures were converted into shares of common
stock of the Company.
During 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 with interest payable semiannually. These
notes were paid upon the completion of the Company's initial public offering.
The Company recorded the common stock at an estimated fair value of $1.818 per
share and recorded a related charge to earnings for $163,636 during the period
the notes remained outstanding.
F-14
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 were paid from the proceeds of the Company's initial
public offering. The Company recorded the common stock at an estimated fair
value of $2.32 per share and recorded a related charge to earnings for $58,014
during the period the notes remained outstanding.
In February 1996, the Company completed an additional private placement of
its securities (the "1996 Bridge Financing"). The private placement consisted of
15 units at a price of $50,000 per unit. Each unit consisted of 10,000 shares of
common stock and a $50,000 unsecured non-negotiable promissory note bearing
interest at 9% per annum. These notes were paid from the proceeds of the
Company's initial public offering. The Company recorded the common stock at an
estimated fair value of $1.823 per share and recorded a related charge to
earnings for $273,825 during the period the notes remained outstanding. The
Company received net proceeds of $590,000 after incurring issuance costs of
$160,000, which were charged to earnings during the period the notes were
outstanding.
In June 1996, the Company completed an additional private placement of its
securities (the "June Bridge Financing"). The private placement consisted of 2
units at a price of $100,000 per unit. Each unit consisted of 25,000 shares of
common stock and a $100,000 unsecured non-negotiable promissory note bearing
interest at 9% per annum. These notes were paid from the proceeds of the
Company's initial public offering. The Company recorded the common stock at an
estimated fair value of $1.80 per share and recorded a related charge to
earnings for $90,000 during the period the notes remained outstanding. The
Company received net proceeds of $180,000 after incurring issuance costs of
$20,000, which were charged to earnings during the period the notes were
outstanding.
9. STOCK OPTION PLAN
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 initial public offering, 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 initial public offering, the
per share exercise price of such options cannot be less than the fair market
value of the shares of common stock on the date of grant, provided that the
exercise price of any option granted to an employee owning more than 10% of the
outstanding common shares of the Company may not be less than 110% of the fair
market value of the shares of common stock on the date of the option grant. The
term of each option and the manner of exercise is determined by the Plan's
administrators, but options granted under the Plan will become exercisable after
the vesting period or periods specified in each option agreement. However,
options are not exercisable after the expiration of 10 years from the date of
grant (or 5 years from such date in the case of an option granted to a 10%
stockholder). Through July 31, 1996, options to purchase 334,000 shares of
common stock at an exercise price of $5.00 per share were granted under the
Plan.
10. SIGNIFICANT CUSTOMER:
During the years ended July 31, 1995 and 1996, approximately $220,000 and
$201,000, respectively, of the company's sales were to one customer.
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
F-15
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-16
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
at April
30,
1997
--------------
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 35,809
Accounts receivable ........................... 44,492
Inventory ..................................... 112,169
Prepaid expenses .............................. 55,366
--------------
Total current assets ....................... 247,836
Property and equipment, net ....................... 581,684
Capitalized content costs, net .................... 615,486
Other assets ...................................... 156,674
--------------
Total assets ............................... $ 1,601,680
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................. $ 506,745
Accrued expenses .............................. 256,884
Capital leases, current portion ............... 95,142
Unearned revenue .............................. 412,781
--------------
Total current liabilities .................. 1,271,552
Capital leases, long term portion ................. 89,987
--------------
Total liabilities .......................... 1,361,539
--------------
Shareholders' Equity
Common Stock, $.0001 par value; authorized
15,000,000 shares, issued and outstanding
2,939,014 shares at April 30, 1997 ............ 294
Additional paid-in capital .................... 8,737,136
Accumulated deficit ........................... (8,497,289)
--------------
Shareholders' (Deficiency) Equity ............ 240,141
--------------
Total liabilities and shareholders' equity . $ 1,601,680
==============
See accompanying notes.
F-17
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Nine months ended
April 30, April 30,
1997 1996
-------------------------
Sales ........................ $ 1,063,190 $ 669,734
Cost of sales ................ 873,336 496,521
Write off of production
equipment.................... 226,118 --
-------------------------
Gross profit (loss) ......... (36,264) 173,213
Selling expenses ............. 1,851,995 536,063
General and administrative
expenses .................... 1,476,670 805,291
-------------------------
Loss from operations ......... (3,364,929) (1,168,141)
Other income (expense),
net .......................... 19,501 (70,368)
Non recurring expenses
related to:
Debt extinguished in
connection with the
Initial Public Offering .. -- (349,797)
-------------------------
Net loss ..................... $(3,345,428) $(1,588,306)
=========================
Pro forma financial
information
Net loss ................. N/A $(1,588,306)
Pro forma adjustments
for:
Employment agreements .. N/A (74,000)
--------------------------
Pro forma net loss ....... N/A $(1,662,306)
=========================
Additional pro forma
adjustment for earnings
per share calculation:
Interest on debt
assumed to be
converted .............. N/A 75,000
Pro forma net loss used
in earnings per share --------------------------
calculation ............ N/A $(1,587,306)
=========================
Net loss per share ........... $ (1.14)
============
Pro forma net loss per share.. $ (1.01)
===========
Weighted average number of
shares outstanding .......... 2,939,014
============
Pro forma weighted average
number of shares outstanding 1,571,450
===========
See accompanying notes
F-18
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine months ended
April 30, April 30,
1997 1996
--------------------------
Cash flows from operating activities:
Net loss ........................................ $(3,345,428) $(1,588,306)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization of operating
assets ........................................ 509,582 245,250
Amortization of loan discount .................. 148,872
Amortization of deferred debt costs ............ 81,233
Write off of equipment ......................... 226,118
Changes in operating assets and liabilities:
Accounts receivable ......................... 50,080 31,703
Inventory ................................... (95,131)
Prepaid expenses and other current assets ... 67,316 41,666
Other assets ................................ (89,292) (94,002)
Accounts payable ............................ 447,757 4,574
Accrued expenses ............................ (13,648) 110,503
Unearned revenue ............................ 187,650 131,592
--------------------------
Net cash used in operating activities ..... (2,054,996) (886,915)
--------------------------
Cash flows from investing activities:
Purchase of property and equipment ............ (563,929) (66,760)
Increase in capitalized content costs ......... (345,595)
--------------------------
Net cash used in investing activities ....... (909,524) (66,760)
--------------------------
Cash flows from financing activities:
Proceeds from bridge notes .................... 1,175,000
Net proceeds from issuances of capital stock .. 32,125
Proceeds from long term debt .................. 32,125
Proceeds from lease financing ................. 207,102
Loans payable - related parties ............... 400
Principal payments on capital leases .......... (249,464) (45,461)
Security deposits applied to capital leases ... 185,594
Pymnet of debt issue costs .................... (160,000)
Payment of deferred offering costs ............ (85,098)
--------------------------
Net cash provided by financing activities ... 143,232 949,091
--------------------------
Net increase (decrease) in cash ................... (2,821,288) (4,584)
Cash and cash equivalents at the beginning of the
period ........................................... 2,857,097 61,137
--------------------------
Cash and cash equivalents at the end of the
period ........................................... $ 35,809 $ 56,553
==========================
See accompanying notes.
F-19
<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General
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
principals 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 and nine months ended April 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending July 31,
1997.
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, 1996 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
For comparability, certain April 30, 1996 amounts have been reclassified
where appropriate to conform to the financial statement presentation used at
April 30, 1997.
2. New Accounting Pronouncements
During fiscal 1997, the Company has adopted Statement of Financial
Accounting Standard ("SFAS") No. 123,"Accounting for Stock-Based Compensation".
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Company has elected to continue the
accounting set forth in pre-existing pronouncements and to provide the necessary
pro-forma disclosures. The Company does not expect a material effect on its
financial position or results of operations for the year ending July 31, 1997.
The Company will adopt SFAS No. 128, "Earnings Per Share" during fiscal
1998. This statement establishes standards for computing and presenting earnings
per share (EPS), replacing the presentation of currently required primary EPS
with a presentation of basic EPS. The pro forma effect of this statement for the
nine-month period ended April 30, 1997 is immaterial. When adopted, the Company
will be required to restate its EPS data for all prior periods presented. The
Company does not expect the impact of the adoption of this statement to be
material to previously reported EPS amounts.
3. Subsequent Events
On May 9, 1997, the Company authorized the creation of a series of the
Company's Preferred Stock, par value $.0001 per share. The series is designated
as the Series A 6% Convertible Participating Preferred Stock ("Series A
Preferred Stock"), and consists of 4,000 shares, each having a liquidation value
of $1,000.
On May 13, 1997, the Company consummated a private placement sale of 750
shares of the Series A Preferred Stock. The shares were sold at their
liquidation value, for a total purchase price of $750,000.
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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.
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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) are
set forth in the table below. None of such expenses will be borne by the Selling
Stockholders.
SEC registration fee ..................................... $ 1,764.66
Nasdaq listing fee ....................................... 7,500.00
Printing expenses ........................................ 1,000.00
Legal fees and expenses .................................. 22,000.00
Accounting fees and expenses ............................. 15,000.00
TOTAL .................................. $ 47,264.66
=============
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:
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
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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.
On March 26, 1996, SME agreed to accept from the Registrant, 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 Registrant issued such 24,000 shares
to members and an employee of SME on March 27, 1996.
On May 24, 1996, options to purchase an aggregate of 4,000 shares of
Common Stock at a purchase price of $5.00 per share were granted under the 1996
Stock Option Plan to a consultant of the Registrant. Subject to various vesting
conditions, all of such options (once vested) will be exercisable until May 24,
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 June 3, 1996, the Registrant issued to two accredited investors
$200,000 in aggregate principal amount of promissory notes and an aggregate of
50,000 shares of Common Stock pursuant to a private placement (the "June 1996
Financing"). The Registrant received total cash consideration in the gross
amount of $200,000. In connection with this financing, Whale (the Underwriter of
the Underwritten Offering) received an aggregate commission of $20,000 in cash.
On October 30, 1996, the Registrant issued a warrant to purchase 20,000
shares of Common Stock at a price of $5.00 per share to an executive and owner
of a company that had acted as an independent contractor to the Registrant. See
the discussion in the Prospectus under "Description of Securities-Other
Warrants." The Registrant received no separate consideration for this warrant
(apart from the services rendered by such independent contractor), and such
warrant was issued without registration because no sale occurred in connection
with its issuance.
In March, May and September of 1996 and in April of 1997, the Registrant
granted options to purchase shares of its Common Stock to participants in its
1996 Stock Option Plan. See the discussion in the Prospectus under
"Management-1996 Stock Option Plan." 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.
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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
Except for Exhibits 3.4, 4.5, 4.6, 5.1, 10.32, 10.33, 10.34, 10.35, 16.1,
23.1 and 23.2 hereto, all Exhibits to this Registration Statement referenced
below (i) were previously filed as Exhibits to the Company's Registration
Statement on Form SB-2 (reg. no. 333-2294), declared effective by the Commission
on June 24, 1996 (the "1996 Registration Statement"), and (ii) are accordingly
incorporated herein by reference. The Company's Commission file number is
0-28158.
Any Exhibit marked below with an asterisk (*) indicates a contract or
compensatory plan or arrangement relating to the Company's management. Any
Exhibit marked below with a double asterisk (**) indicates an Exhibit to be
filed by amendment. Any Exhibit marked below with a number symbol (#) indicates
an Exhibit filed herewith.
No. Description
3.1 Certificate of Incorporation. Previously filed as Exhibit 3.1 to the 1996
Registration Statement.
3.2 By-laws, as amended and restated as of May 24, 1996. Previously filed as
Exhibit 3.3 to the 1996 Registration Statement.
3.3 Certificate of Amendment to the Company's Certificate of Incorporation, as
filed with the Delaware Secretary of State on May 24, 1996. Previously
filed as Exhibit 3.4 to the 1996 Registration Statement.
3.4 Certificate of Designations of Series A 6% Convertible Participating
Preferred Stock. Previously filed as Exhibit 3.1 to the Company's Report
on Form 8-K, dated May 27, 1997, and incorporated herein by reference.
4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to the
1996 Registration Statement.
4.2 Form of Warrant Agreement between the Company and Whale Securities Co.,
L.P., including Form of Warrant Certificate. Previously filed as Exhibit
4.2 to the 1996 Registration Statement.
4.3 Form of Public Warrant Agreement among the Company, Whale Securities Co.,
L.P. and American Stock Transfer & Trust Company as Warrant Agent.
Previously filed as Exhibit 4.3 to the 1996 Registration Statement.
4.4 Form of Redeemable Warrant. Previously filed as Exhibit 4.4 to the 1996
Registration Statement.
4.5 Form of certificate representing shares of Series A 6% Convertible
Participating Preferred Stock. Previously filed as Exhibit 4.1 to the
Company's Report on Form 8-K, dated May 27, 1997, and incorporated herein
by reference.
4.6# Warrant issued on October 30, 1996.
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<PAGE>
5.1** Opinion of Solovay Marshall & Edlin, P.C.
10.1 Investor Rights Agreement, dated June 17, 1994, between the Company and
the investors named therein. Previously filed as Exhibit 10.1 to the 1996
Registration Statement.
10.2 Form of Stock Purchase Agreement, dated March 7, 1994, between the Company
and the investors named therein, relating to a private placement of shares
of Common Stock. Previously filed as Exhibit 10.2 to the 1996 Registration
Statement.
10.3 Form of Stock Purchase Agreement, dated March 31, 1994, between the
Company and the investors named therein, relating to a private placement
of shares of Common Stock. Previously filed as Exhibit 10.3 to the 1996
Registration Statement.
10.4 Stock Purchase Agreement between the Company and Richard Carney, dated May
10, 1994. Previously filed as Exhibit 10.4 to the 1996 Registration
Statement.
10.5 Stock Purchase Agreement between the Company and Henry Fredericks, dated
June 2, 1994. Previously filed as Exhibit 10.5 to the 1996 Registration
Statement.
10.6 Stock Purchase Agreement between the Company and Charles Johnston, dated
June 17, 1994. Previously filed as Exhibit 10.6 to the 1996 Registration
Statement.
10.7 Marketing Agreement between the Company and Consumer Programs, Inc. dated
November 3, 1994. Previously filed as Exhibit 10.7 to the 1996
Registration Statement.
10.8 Equipment Lease Agreements between the Company and National Marketing
Network, Inc., dated November 9, 1994, November 27, 1994 and December 8,
1994. Previously filed as Exhibit 10.8 to the 1996 Registration Statement.
10.9 Equipment Lease Agreements between the Company and Technilease, dated
August 22, 1994 and October 3, 1994. Previously filed as Exhibit 10.9 to
the 1996 Registration Statement.
10.10 Equipment Lease Agreement between the Company and Television Laboratories,
Inc., dated November 1994. Previously filed as Exhibit 10.10 to the 1996
Registration Statement.
10.11 Promissory Note to Charles Johnston, dated March 2, 1995. Previously filed
as Exhibit 10.11 to the 1996 Registration Statement.
10.12 Registration Rights Agreement between the Company and Richard L. Bulman,
dated January 1, 1995. Previously filed as Exhibit 10.12 to the 1996
Registration Statement.
10.13 Stock Option Agreement between the Company and Richard L. Bulman, dated
March 15, 1995. Previously filed as Exhibit 10.13 to the 1996 Registration
Statement.
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. Previously filed as Exhibit 10.14 to
the 1996 Registration Statement.
10.15 Stock Transfer Restriction and Repurchase Agreement between 477250 B.C.
Ltd. and V-Seion, dated July 14, 1995. Previously filed as Exhibit 10.15
to the 1996 Registration Statement.
10.16 Registration Rights Agreement between the Company and V-Seion, dated July
14, 1995. Previosly
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filed as Exhibit 10.16 to the 1996 Registration Statement.
10.17 Asset Purchase Agreement between V-Seion Multimedia and 477250 B.C. Ltd.,
dated July 17, 1995. Previously filed as Exhibit 10.17 to the 1996
Registration Statement.
10.18 Office Lease between the Company and Cable Building Associates, dated
September 28, 1995. Previously filed as Exhibit 10.18 to the 1996
Registration Statement.
10.19*Employment and Stock Issuance Agreement between the Company and Gary
Bilezikian, dated October 26, 1993. Previously filed as Exhibit 10.19 to
the 1996 Registration Statement.
10.20* Employment Agreement between 477250 B.C. and Bradley Dahl, dated July 14,
1995. Previously filed as Exhibit 10.20 to the 1996 Registration
Statement.
10.21*Amended and Restated Employment Agreement between the Company and Marvin
Goldstein, dated as of January 1, 1996. Previously filed as Exhibit 10.21
to the 1996 Registration Statement.
10.22*Amended and Restated Employment Agreement between the Company and Robert
J. Riscica, dated as of January 1, 1996. Previously filed as Exhibit 10.22
to the 1996 Registration Statement.
10.23*Amended and Restated Employment Agreement between the Company and Richard
L. Bulman, dated as of January 1, 1996. Previously filed as Exhibit 10.23
to the 1996 Registration Statement.
10.24*Amended and Restated Employment Agreement between the Company and Joanne
Denk, dated as of January 2, 1996. Previously filed as Exhibit 10.24 to
the 1996 Registration Statement.
10.25*Form of Class A Warrant (Charles Johnston, a director of the Company, is
currently the only holder of any Class A Warrants).
10.26*Form of Class B Warrant (Charles Johnston, a director of the Company, is
currently the only holder of any Class B Warrants).
10.27* 1996 Stock Option Plan. Previously filed as Exhibit 10.28 to the 1996
Registration Statement.
10.28* Form of Stock Option Agreement. Previously filed as Exhibit 10.29 to the
1996 Registration Statement.
10.29 Form of Consulting Agreement between the Company and Whale Securities Co.,
L.P. Previously filed as Exhibit 10.30 to the 1996 Registration Statement.
10.30 Patent Application filed by Bradley Dahl, dated July 7, 1994. Previously
filed as Exhibit 10.31 to the 1996 Registration Statement pursuant to a
granted request for confidential treatment.
10.31 Patent Application filed by the Company dated June 9, 1995. Previously
filed as Exhibit 10.32 to the 1996 Registration Statement pursuant to a
granted request for confidential treatment.
10.32 Form of Stock Purchase Agreement, dated as of May 13, 1997, between the
Company and Sellet Marketing Corp. ("Sellet"). Previously filed as Exhibit
10.1 to the Company's Report on Form 8-K, dated May 27, 1997, and
incorporated herein by reference.
10.33 Form of Registration Rights Agreement, dated as of May 13, 1997, between
the Company and Sellet. Previously filed as Exhibit 10.2 to the Company's
Report on Form 8-K, dated May 27, 1997, and
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incorporated herein by reference.
10.34 Form of Joint Escrow Instructions, dated as of May 13, 1997, between the
Company and Krieger & Prager, as Escrow Agent. Previously filed as Exhibit
10.3 to the Company's Report on Form 8-K, dated May 27, 1997, and
incorporated herein by reference.
10.35 Form of Indemnification Agreement, dated as of November 12, 1996 and made
retroactively effective as of June 24, 1996, between the Company and each
of the following persons (being all of its current directors and executive
officers): Richard L. Bulman, Charles C. Johnston, Thomas Griffin, Richard
D. Bulman, Michael B. Solovay, Robert J. Riscica, Marvin H. Goldstein, and
Bradley Dahl. Previously filed as Exhibit 10.1 to the Company's Report on
Form 10-QSB relating to the quarter ended July 31, 1997 (dated March 14,
1997) and incorporated herein by reference.
16.1 Letter of Goldstein, Golub, Kessler & Co., P.C., Independent Certified
Public Accountants, relating to a change of the Company's certifying
accountant. Previously filed as an exhibit to the Company's Report on Form
8-K, dated September 6, 1996, and incorporated herein by reference.
21.1 List of the Company's subsidiaries. Previously filed as Exhibit 21.1 to
the 1996 Registration Statement.
23.1# Consent of Arthur Andersen LLP, Independent Certified Public Accountants.
Filed herewith.
23.2# Consent of Goldstein Golub Kessler & Company, P.C., Independent Certified
Public Accountants. Goldstein Golub Kessler & Company, P.C. Filed
herewith.
24.1 No person has signed 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 hereof.
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 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
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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.
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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: July 8, 1997
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:
Signature Title Date
- --------- ----- ----
/s/ Richard L. Bulman President and Chairman July 8, 1997
- ----------------------- of the Board
Richard L. Bulman
/s/ Robert J. Riscica Chief Financial Officer July 8, 1997
- ----------------------- (the Registrant's principal
Robert J. Riscica accounting officer)
/s/ Richard D. Bulman Secretary and Director July 8, 1997
- -----------------------
Richard D. Bulman
/s/ Charles C. Johnston Director July 8, 1997
- -----------------------
Charles C. Johnston
/s/ Michael B. Solovay Director July 8, 1997
- -----------------------
Michael B. Solovay
/s/ Thomas Griffin Director July 8, 1997
- -----------------------
Thomas Griffin
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EXHIBIT 4.6
THIS WARRANT CERTIFICATE AND THE SHARES TO BE ISSUED UPON ITS
EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED
FOR SALE, SOLD OR TRANSFERRED UNLESS REGISTERED
UNDER THE ACT, OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE.
WARRANT CERTIFICATE
Dated: October 30, 1996
Warrant to Purchase up to
20,000 shares of Common Stock of
KIDEO PRODUCTIONS, INC.
VOID AFTER 5:00 P.M., NEW YORK CITY TIME
ON OCTOBER 30, 2001
1. General. KIDEO PRODUCTIONS, INC., a Delaware corporation (the
"Company"), hereby certifies that Robert J. Marty and his successors, assigns,
heirs, administrators and executors (the "Holder"), is entitled to purchase from
the Company at any time after October 30, 1996 and before 5:00 P.M. New York
City time on October 30, 2001, up to twenty thousand (20,000) shares of the
Company's Common Stock, par value $.0001 per share (the "Stock"), at the price
of five dollars ($5.00) per share (the "Exercise Price", subject to adjustment
as provided herein).
2. Exercise of Warrants. In order to exercise the rights to purchase Stock
evidenced by this Warrant Certificate, the Holder must, subject to Section 6
below, present and surrender this Warrant Certificate (together with a duly
executed Purchase Form in the form attached hereto) at the principal office of
the Company. This Warrant Certificate may be exercised with respect to all of
the Stock subject hereto or any portion thereof.
3. Rights and Obligations of the Holder. The Holder shall not, by virtue
hereof, be entitled to any rights of a stockholder in the Company, either at law
or in equity. The rights of the Holder are limited to those expressed herein and
the Holder, by his acceptance hereof, agrees to be bound by and comply with all
the provisions of this Warrant Certificate. In addition, the Holder agrees that
the Company may deem and treat the person in whose name this Warrant Certificate
is registered as the absolute, true and lawful owner for all purposes
whatsoever.
4. Authorization; Reservation of Common Stock.
(a) The Company covenants that this Warrant Certificate is duly
and validly authorized and issued and free from all stamp-taxes, liens and
charges with respect to the delivery or purchase hereof.
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The Company agrees at all times to reserve and keep available an authorized
number of shares of its Stock sufficient to permit the exercise in full of this
Warrant Certificate.
(b) The Company covenants that all shares of Stock delivered upon
exercise of this Warrant Certificate will, upon delivery, be duly and validly
authorized and issued, fully-paid and non-assessable, and free from all
stamp-taxes, liens and charges with respect to the purchase thereof.
5. Disposition of the Warrant and Stock. The Holder hereby agrees and
represents that: (i) this Warrant Certificate and the Stock issuable upon
exercise are being acquired for the Holder's account and not with a view to or
in connection with any offering or distribution; and (ii) no public distribution
of this Warrant Certificate or the Stock will be made in violation of the
provisions of the Securities Act of 1933, as amended (the "Act") or the
provisions of applicable state laws. The Holder further agrees that if any
transfer or distribution of this Warrant Certificate or any of the Stock
issuable hereunder is proposed to be made, such action shall be taken only after
submission to the Company's counsel, to the effect that the proposed
distribution will not be in violation of the Act or any applicable sate law. It
shall be a condition to the transfer of any rights set forth in this Warrant
Certificate that any transferee thereof deliver to the Company his or its
written agreement to accept and be bound by all of the terms and conditions of
this Warrant Certificate. The Holder is responsible for any transfer taxes due
as a result of any transfer of this Warrant Certificate.
6. Exercise of This Warrant Certificate.
(a) Exercise Price; No Fractional Shares. The Exercise Price shall
be a price per share of Stock equal to five dollars ($5.00), subject to
adjustment as set forth in Section 7 below. All calculations of shares of Stock
to be issued in connection with any exercise hereunder shall be rounded to the
nearest whole share.
(b) Exercise Procedure.
(1) Payment for Shares. On a date determined by the Company,
which shall in no event be later than five (5) days after the Company's receipt
of the surrendered Warrant Certificate and Purchase Form, the Holder shall
deliver to the Company, at the Company's principal executive office, a certified
or bank cashier's check payable to the Company in the amount of the Exercise
Price then in effect multiplied by the number of shares of Stock being
purchased.
(2) Effective Date of Exercise. Each exercise will be deemed
to have been effected as of the close of business on the later of (i) the date
that the Purchase Form is received by the Company and (ii) the date on which
this original Warrant Certificate is returned to the Company for cancellation,
and, if applicable, reissuance at the principal office of the Company at 611
Broadway, Suite 523, New York, New York 10012. At such time as such exercise has
been effected, the person (or entity) or persons (or entities) in whose name or
names any certificate(s) for shares of Stock are to be issued upon such exercise
will be deemed to have become the holder or holders of record of the shares of
Stock represented thereby.
(c) Delivery of Certificates. As soon as practicable after an
exercise has been effected (but in any event within five (5) business days), the
Company will deliver to the Holder:
(1) a certificate or certificates representing the number of
shares of Stock issuable by reason of such exercise in such name(s) and such
denomination(s) as the Holder has specified; and
(2) a new Warrant Certificate which shall (i) entitle the
Holder to purchase the number of shares of Stock as to which the original
Warrant Certificate was not exercised, (ii) reflect any changes to the Exercise
Price which have theretofore been effectuated and (iii) otherwise be in form and
substance identical to that delivered by the Holder to the Company for said
exercise.
II-11
<PAGE>
(d) Closure of Issuer Books. The Company will not close its books
against the transfer of this Warrant Certificate or of Stock issued or issuable
upon exercise hereof in any manner which interferes with the timely exercise of
Warrant Certificates.
(e) Payment of Taxes. The Company will pay all taxes and other
governmental charges (other than taxes measured by the revenue or income of the
Holder) that may be imposed in respect of the issue or delivery of shares of
Stock upon exercise of this Warrant Certificate; provided, however, that the
Holder shall pay any such taxes or charges which are due because shares of Stock
are issued in a name other than the Holder's.
(f) Notices of Record Date. In the event of (i) any taking by the
Company of a record of the holders of any class or series of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution or (ii) any reclassification or recapitalization
of the capital stock of the Company, any merger or consolidation of the Company,
or any transfer of all or substantially all the assets of the Company to any
other corporation, entity or person, or any voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company, the
Company shall mail to the Holder, at least twenty (20) days' prior to the record
date specified therein (the "Notice Period"), a notice specifying (A) the date
on which any such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution, (B) the date on
which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (C) the time, if any is to be fixed, as to when the holders of record of
Stock (or other securities) shall be entitled to exchange their shares of Stock
(or other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up. During the Notice Period, the Holder shall have the
exercise rights provided elsewhere in this Warrant Certificate.
7. Exercise Price Adjustments. The Exercise Price shall be subject to
adjustment from time to time as set forth below. No adjustment in the Exercise
Price shall be made unless the adjustment would require an increase or decrease
of at least one cent ($0.01) in the Exercise Price. Any adjustments that are not
made shall be carried forward and taken into account in any subsequent
adjustment.
(a) Adjustment for Certain Dividends and Distributions of Stock.
In case the Company shall at any time after the date hereof pay a dividend in
shares of Stock or make a distribution in shares of Stock, then upon such
dividend or distribution the Exercise Price in effect immediately prior to such
dividend or distribution shall forthwith be reduced to a price determined by
dividing:
(1) an amount equal to the total number of shares of Stock
outstanding
immediately prior to such dividend or distribution multiplied by the Exercise
Price in effect immediately prior to such dividend or distribution, by
(2) the total number of shares of Stock outstanding
immediately after such dividend or distribution.
For the purposes of any computation to be made in accordance with the provisions
of this subparagraph (a), the following provisions shall be applicable: Stock
issuable by way of dividend or other distribution on any capital stock of the
Company shall be deemed to have been issued immediately after the opening of
business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution.
(b) Adjustment for Stock Splits and Combinations. In case the
Company shall at any time subdivide or combine the outstanding Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination to the nearest one cent. Any
such adjustment shall become effective at the time such subdivision or
combination shall become effective.
II-12
<PAGE>
(c) Other Provisions Relating to Stock Splits and Combinations. In
the event that the number of outstanding shares of Stock is increased by a stock
dividend payable in Stock or by a subdivision of the outstanding Stock, then,
from and after the time at which the adjusted Exercise Price becomes effective
pursuant to this Section 7 by reason of such dividend or subdivision, the number
of shares of Stock issuable upon the exercise of this Warrant Certificate shall
be increased in proportion to such increase in outstanding shares. In the event
that the number of shares of Stock outstanding is decreased by a combination of
the outstanding Stock, then, from and after the time at which the adjusted
Exercise Price becomes effective pursuant to this Section 7 by reason of such
combination, the number of shares of Stock issuable upon the exercise of this
Warrant Certificate shall be decreased in proportion to such decrease in the
outstanding shares of Stock.
(d) Reorganization, Mergers, Consolidations or Sales of Assets.
(1) In case of any reorganization or reclassification of the
outstanding Stock (other than a change in par value, or from par value to no par
value, or as a result of a subdivision or combination), or in case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding Stock), or in case of any sale or conveyance to another corporation
of the property of the Company as an entirety or substantially as an entirety,
the Holder shall thereafter have the right to purchase the kind and amount of
shares of Stock and other securities and property receivable upon such
reorganization, reclassification, consolidation, merger, sale or conveyance by a
holder of the number of shares of Stock which the Holder shall then be entitled
to purchase; and such adjustments shall apply with respect to all such changes
occurring between the date of this Warrant Certificate and the date of exercise
hereof.
(2) If, as a result of an adjustment made pursuant to
Section 7(d)(1) above, the Holder shall become entitled to purchase any
securities other than shares of Stock, then thereafter the number of such
securities so purchasable upon exercise hereof and the Exercise Price for such
securities shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Stock contained in Sections 7(a) through 7(c) above.
(e) Liquidating Dividends. Subject to the provisions of this
Section 7, in case the Company shall, at any time prior to the exercise of this
Warrant Certificate, make any distribution of its assets to holders of its Stock
as a liquidating or a partial liquidating dividend, then the Holder, if he shall
exercise this Warrant Certificate after the record date for the determination of
those holders of Stock entitled to such distribution of assets as a liquidating
or partial liquidating dividend, shall be entitled to receive for the Exercise
Price per Warrant, in addition to each share of Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith) which would have been payable to the
Holder had he been the holder of record of the Stock receivable upon exercise
hereof on the record date for the determination of those entitled to such
distribution.
(f) Dissolution and Winding Up. In case of the dissolution,
liquidation Or winding up of the Company, all rights under this Warrant
Certificate shall terminate on a date fixed by the Company, such date to be no
earlier than ten (10) days prior to the effectiveness of such dissolution,
liquidation or winding up and not later than five (5) days prior to such
effectiveness. Notice of such termination of purchase rights shall be given to
the person or entity last registered as the Holder hereof (as the same shall
appear on the books of the Company) by registered mail at least thirty (30) days
prior to such termination date.
(g) Subscriptions for Additional Stock. In case the Company shall,
at any time prior to the expiration of this Warrant Certificate and prior to the
exercise hereof, offer to the holders of its Stock any rights to subscribe for
additional shares of any class of the Company, then the Company shall give
written
II-13
<PAGE>
notice thereof to the Holder not less than thirty (30) days prior to the date on
which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription. The right of the Holder
to participate in such offer of subscription shall terminate if this Warrant
Certificate shall not be exercised on or before the date of such closing of the
books or such record date.
(h) Miscellaneous Adjustment Provisions.
(1) Any adjustment pursuant to the aforesaid provisions of
this Section 7 shall be made on the basis of the number of shares of Stock which
the Holder would have been entitled to acquire by the exercise of this Warrant
Certificate immediately prior to the event giving rise to such adjustment.
(2) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Section 7, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section.
8. Survival. The various rights and obligations of the Holder and the
Company as set forth in Sections 5 and 6 hereof shall survive the exercise or
surrender of this Warrant Certificate or the surrender of this Warrant
Certificate.
9. Certain Covenants of Holder. The Company's issuance of this Warrant
Certificate was subject to the prior consent of Whale Securities Co., L.P.
("Whale"). Whale has consented to such issuance on the condition that the Holder
agrees, by his execution hereof, to be bound by the succeeding provisions of
this Section 9.
(a) Lock-Up Agreement. During the Lock-Up Period (as defined
below) the Holder will not, without obtaining Whale's prior consent, transfer,
convey, sell or in any other manner dispose of any securities of the Company
(other than shares of the Company's Common Stock acquired by such holder through
public market purchases), including this Warrant Certificate and the Stock
issuable hereunder. The "Lock-Up Period" means the period commencing on the date
hereof and expiring on June 24, 1997. Notwithstanding the foregoing, the Holder
shall be permitted to dispose of any of the aforesaid securities of the Company
in a private transaction to any proposed transferee who, prior to the
consummation of such dispositions, has agreed in writing to be bound by the
terms set forth in this Lock-Up Agreement.
(b) Voting Agreement. If, at any time during the period ending on
June 24, 2001, Whale shall exercise the right granted to it by the Company to
designate a person to serve on the Company's Board of Directors, then the Holder
shall vote all of the securities held by him which are entitled to vote in the
election of directors at issue in favor of the election to the Board of the
person so designated by Whale.
10. Mutilated or Missing Warrant Certificates. In case this Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Company will,
upon request, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution of the Warrant Certificate lost, stolen or destroyed, a new Warrant
Certificate of like tenor and representing an equivalent right or interest, but
only upon receipt of (i) evidence satisfactory to the Company of such loss,
theft or destruction and (ii) indemnity in favor of and satisfactory to the
Company. Applicants for such substitute Warrant Certificate shall also comply
with such other reasonable regulations and pay such reasonable charges as the
Company may prescribe.
11. Notices. All notices, requests, consents and other communications
relating hereto shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified
II-14
<PAGE>
mail, postage prepaid, return receipt requested, as follows: (i) if to the
Holder, at the address of the Holder as shown on the Company's books; and (ii)
if to the Company, at 611 Broadway, Suite 523, New York, New York, 10012,
Attention: Chief Financial Officer.
12. Governing Law; Jurisdiction. This Warrant Certificate shall be
governed by and construed in accordance with the laws of the State of New York,
without reference to principles of conflicts of law. In respect of any action or
proceeding arising out of or relating to this Warrant Certificate or instituted
hereunder or based upon any document subsequently delivered pursuant hereto, the
Company and I each irrevocably (i) consents to the jurisdiction of any state or
federal court located within New York County, New York, and (ii) waives any
objection to venue, or to the inconvenience of the forum, of any such court.
13. Binding Effect. This Warrant Certificate shall be binding upon and
inure to the benefit of the Company and the Holder. Nothing in this Warrant
Certificate is intended or shall be construed to confer upon any other person
any right, remedy or claim, in equity or at law, or to impose upon any other
person any duty, liability or obligation.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed as of the date first above written.
KIDEO PRODUCTIONS, INC.
By /s/ Richard L. Bulman
---------------------
Richard L. Bulman
President
II-15
<PAGE>
PURCHASE FORM
------------, -----
KIDEO PRODUCTIONS, INC.
611 Broadway
Suite 523
New York, NY 10012
The undersigned hereby irrevocably elects to exercise the attached Warrant
Certificate to the extent of ______ shares of common stock of Kideo Productions,
Inc., par value $.0001 per share, and hereby makes payment of $__________ in
payment of the purchase price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
---------------------------------------------------------------------
(Please typewrite or print in block letters)
DELIVER SECURITIES TO:
Address:
-------------------
-------------------
-------------------
Holder:
--------------------------------------------------
[Signature of Holder of Warrant
Certificate, if an individual]
Holder:
--------------------------------------------------
By:
-----------------------------------------------
Its:
----------------------------------------
[Signature of Holder of Warrant
Certificate, if a corporation,
partnership or other entity]
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Form SB-2 Registration Statement.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
New York, New York
July 7, 1997
II-17
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Kideo Productions, Inc.
We hereby consent to the use in the Prospectus constituting a part of the
Registration Statement on Form SB- 2 of our report dated November 13, 1995,
except for the first paragraph of Note 6, 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 year ended July 31, 1995 which
appear in such Prospectus. We also consent to the reference to our firm under
the captions "Change in Accountants" and "Experts" in such Prospectus.
/s/ Goldstein Golub Kessler & Company, P.C.
- -------------------------------------------
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
July 7, 1997
II-18
