United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended Janaury 31, 1998
---------------------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-28158
KIDEO PRODUCTIONS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3729350
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
611 Broadway, Suite 523, New York, New York 10012
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
212-505-6605 FAX 212-505-2142
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months ( or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X .No .
As of March 16, 1998 3,694,628 shares of the issuer's common stock were
outstanding.
This report contains 16 pages.
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KIDEO PRODUCTIONS, INC.
FORM 10-QSB
INDEX
PART I Financial Information: Page
No.
Consolidated Balance Sheet-January 31, 1998 (unaudited)
and July 31, 1997 (audited)............................... 3
Consolidated Statement of Operations-three and six months
ended January 31,1998 and 1997 (unaudited)................ 4
Consolidated Statement of Shareholders' Equity
Six months ended January 31, 1998 (unaudited)............. 5
Consolidated Statement of Cash Flow-six months ended
January 31, 1998 and 1997 (unaudited)..................... 6
Notes to the Consolidated Financial Statements.............. 7
Management's Discussion and Analysis or Plan of Operation... 9
PART II. Other Information........................................... 13
Signatures.................................................. 16
2
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KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
at January 31, at July 31,
1998 1997*
---------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 7 $ 164
Accounts receivable financing escrow ............. 310 -
Accounts receivable trade ........................ 48 31
Inventory ........................................ 124 103
Prepaid expenses ................................. 61 28
---------------------
Total current assets ........................... 550 326
Property and equipment, net .......................... 355 507
Capitalized content costs, net ....................... 615 518
Deferred debt expense ................................ 690 -
Other assets ......................................... 103 137
---------------------
Total assets ................................... $ 2,313 $ 1,488
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................. $ 789 $ 475
Accrued expenses ................................. 300 210
Capital leases, current portion .................. 78 74
Unearned revenue ................................. 345 233
---------------------
Total current liabilities ...................... 1,512 992
Convertible notes payable-long term .................. 620 -
Capital leases, long term portion .................... 28 74
---------------------
Total liabilities .............................. $ 2,160 $ 1,066
---------------------
Shareholders' Equity
Preferred Stock: $.0001 par value; issuable
in series: authorized 5,000,000 shares, 750
shares issued and outstanding at
July 31, 1997 and -0- shares at January
31, 1998 ......................................... -- --
Common Stock, $.0001 par value; authorized
15,000,000 shares, issued and outstanding
2,939,014 shares at July 31, 1997 and
3,694,628 shares at January 31, 1998 ............. -- --
Additional paid-in capital ....................... 10,551 9,591
Accumulated deficit .............................. (10,398) (9,169)
---------------------
Shareholders' (Deficiency) Equity ............... 153 422
---------------------
Total liabilities and shareholders' equity ..... $ 2,313 $ 1,488
=====================
</TABLE>
* Derived from the Form 10-KSB
See accompanying notes.
3
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KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(Dollars in thousands except for per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Sales .............................. $ 492 $ 655 $ 593 $ 761
Cost of sales ...................... 284 435 513 611
Write off of production equipment .. -- 226 -- 226
----------- ----------- ----------- -----------
Gross profit (loss) ............... 208 (6) 80 (76)
Selling expenses ................... 253 809 643 1,254
General and administrative expenses 311 508 654 1,036
----------- ----------- ----------- -----------
Loss from operations ............... (356) (1,323) (1,217) (2,366)
Other income (expense), net ........ (4) 2 (8) 30
--------------------------------------------------------
Net loss ........................... $ (360) $ (1,321) $ (1,225) $ (2,336)
========================================================
Net loss per share ................. $ (0.10) $ (0.45) $ (0.35) $ (0.79)
Effect of SFAS No 128 .............. -- -- -- --
--------------------------------------------------------
Net loss per share restated ........ $ (0.10) $ (0.45) $ (0.35) $ (0.79)
========================================================
Weighted average number of shares
outstanding .................... 3,637,264 2,939,014 3,481,829 2,939,014
========================================================
</TABLE>
See accompanying notes
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KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 .................. 750 $ -- 2,939,014 $ -- $ 9,591 $ (9,169) $ 422
Conversion of preferred
stock to common .......................... (750) -- 543,114 -- (25) -- (25)
Issuance of common stock
in connection with the
September 1997 Johnston Financing ........ 200,000 -- 300 -- 300
Dividends on preferred stock .............. (4) (4)
Discount to fair market value
of the January 1998, convertible
notes payable on the conversion
to common stock .......................... 465 465
Issuance of warrants in connection
with the Janaury 1998, Financing ......... 198 198
Issuance of common stock in lieu
of commission in connection
with the Janaury 1998, Financing ......... 12,500 -- 22 22
Net loss .................................. (1,225) (1,225)
-----------------------------------------------------------------------
Balance at Janauary 31, 1998 .............. (0) $ -- 3,694,628 $ -- $10,551 $(10,398) $ 153
=======================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
KIDEO PRODUCTIONS, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(Dollars in thousands except per share amounts)
Six months ended
January 31, January 31,
1998 1997
--------------------
Cash flows from operating activities:
Net loss ............................................ $(1,225) $(2,335)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of operating assets .. 383 317
Write off of equipment ............................. -- 226
Changes in operating assets and liabilities:
Accounts receivable ............................... (327) 8
Inventory ......................................... (21) (103)
Prepaid expenses and other current assets ......... (33) 2
Other assets ...................................... -- (89)
Accounts payable .................................. 434 186
Accrued expenses .................................. 70 (111)
Unearned revenue .................................. 112 200
--------------------
Net cash used in operating activities ............ (607) (1,699)
--------------------
Cash flows from investing activities:
Purchase of property and equipment .................. (3) (553)
Increase in capitalized content costs ............... (291) (346)
--------------------
Net cash used in investing activities .............. (294) (899)
--------------------
Cash flows from financing activities:
Net proceeds from issuances of capital stock ........ 275 --
Proceeds from long term debt ........................ 500 --
Proceeds from lease financing ....................... -- 207
Principal payments on capital leases ................ (31) (66)
--------------------
Net cash provided by financing activities .......... 744 141
--------------------
Net increase (decrease) in cash ...................... (157) (2,457)
Cash and cash equivalents at the beginning of the
period .............................................. 164 2,857
--------------------
Cash and cash equivalents at the end of the period ... $ 7 $ 400
====================
See accompanying notes
6
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KIDEO PRODUCTIONS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting of all normal
recurring adjustments, necessary for a fair statement of results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the six months ended January 31, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 31, 1998.
The organization and the business of the Company, accounting policies
followed by the Company and other information are contained in the notes to the
Company's consolidated financial statements filed as part of the Company's
annual report for the fiscal year ended July 31, 1997 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
For comparability, certain January 31, 1997 amounts have been reclassified
where appropriate to conform to the financial statement presentation used at
January 31, 1998.
2 Earnings Per Share
For the periods ended January 31, 1998, the Company adopted Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." In accordance with
the requirements of SFAS No. 128, Basic EPS was computed by dividing net loss
after adjustment for preferred dividend requirements, by the weighted average
number of shares outstanding. Diluted EPS was computed by dividing net loss
after adjustments for preferred dividend requirements, by the weighted average
number of shares outstanding. This excludes the antidilutive effect of
outstanding equity instruments. SFAS No. 128 requires presentation of both Basic
EPS and Diluted EPS on the face of the statement of operations. Earnings per
share amounts for the same prior-year period are restated to conform with the
provisions of SFAS No. 128.
A reconciliation of the Basic EPS and Diluted EPS computations for net
earnings (loss) follows:
Six Months Three Months
Ended
January 31, 1998
--------------------------
Basic Earnings Per Share
- ------------------------
Net loss as reported $(1,225,276) $ (360,267)
Less: Dividends on preferred Stock (4,769) (4,769)
--------------------------
Net loss attributable to common stock $(1,230,045) $ (365,036)
==========================
Weighted average number of shares 3,481,829 3,637,264
--------------------------
Net loss per share $ (0.35) $ (0.10)
==========================
Diluted Earnings Per Share
- --------------------------
Net loss as reported $(1,225,276) $ (360,267)
Less: Dividends on preferred Stock (4,769) (4,769)
--------------------------
Net loss attributable to common stock $(1,230,045) $ (365,036)
==========================
Weighted average number of shares 3,481,829 3,637,264
Convertible debt -- --
Stock options -- --
Stock warrants -- --
--------------------------
Diluted weighted average number of shares 3,481,829 3,637,264
--------------------------
Diluted net loss per share $ (0.35) $ (0.10)
==========================
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Six Months Three Months
Ended
January 31, 1997
--------------------------
Basic Earnings Per Share
- ------------------------
Net loss as reported $(2,335,110) $(1,321,810)
Less: Dividends on preferred Stock -- -
--------------------------
Net loss attributable to common stock $(2,335,110) $(1,321,810)
==========================
Weighted average number of shares 2,939,014 2,939,014
--------------------------
Net loss per share $ (0.79) $ (0.45)
==========================
Diluted Earnings Per Share
- --------------------------
Net loss as reported $(2,335,110) $(1,321,810)
Less: Dividends on preferred Stock -- -
--------------------------
Net loss attributable to common stock $(2,335,110) $(1,321,810)
==========================
Weighted average number of shares 2,939,014 2,939,014
Convertible debt -- --
Stock options -- --
Stock warrants -- --
--------------------------
Diluted weighted average number of shares 2,939,014 2,939,014
--------------------------
Diluted net loss per share $ (0.79) $ (0.45)
==========================
Six Months Three Months
Ended
January 31, 1997
--------------------------
Per share amounts
-----------------
Primary EPS as reported $ (0.79) $ (0.45)
Effect of SFAS No 128 -- --
--------------------------
Basic EPS as restated $ (0.79) $ (0.45)
==========================
Fully diluted EPS as reported $ (0.79) $ (0.45)
Effect of SFAS No 128 -- --
--------------------------
Diluted EPS as restated $ (0.79) $ (0.45)
==========================
3 January 1998, Financing
The Company issued a convertible note and warrant purchase agreement in
the aggregate amount of $620,000, bearing interest at the rate of 10% per annum,
due April 15, 1999 and warrants to purchase a total of 640,000 shares of its
Common Stock, par value $.0001per share, to certain investors and advisors. The
Company has included on its balance sheet deferred debt expense of $690,000, in
connection with this transaction, of which $465,000 is attributed to a
beneficial conversion feature recorded with the issuance of the convertible
debt. The deferred debt expense will be amortized over the life of the notes as
required.
4 Subsequent Event
On February 20, 1998 273,000 options previously issued to employees and
directors with a weighted average exercise price of $4.95 were repriced at
$2.50. This revaluation did not alter or amend any other provision of the
optionee's original option agreement, including vesting period and option term.
8
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KIDEO PRODUCTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The information set forth in "Management's Discussion and Analysis" below
includes "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and is subject to the safe harbor
created by that section. Readers are cautioned not to place undue influence on
these forward-looking statements, as they speak only as of the date hereof.
General
The Company was organized in August 1993 to develop, manufacture and market
personalized videos for children. The process of mass-producing individual
videos featuring a subject's likeness and spoken name was developed internally
by the Company. The Company claims proprietary rights in its technologies and
productions process. In April 1997, the Company was issued a U.S. patent
relating to its digital process (Patent No. 5,523,587).
Revenue Recognition
The Company's products are marketed directly to consumers and also through
catalogs and retail stores. All customer orders, regardless of their source, are
processed at the Company's manufacturing plant in New York City. Revenue is
recognized when the completed personalized video is shipped to the customer.
Results of Operations
The following discussion should be read in connection with the Company's
financial statements and notes thereto appearing elsewhere in this report.
Six month comparisons: Comparison of the six month fiscal period begun August 1,
1997 through January31, 1998, ("Current Period") against the six month fiscal
period begun August 1, 1996 through January 31, 1997, ("Prior Period"):
Sales: Sales declined 22% to $593,000 in the Current Period from $761,000 in the
Prior Period. The direct to consumer sales declined 1% to $405,000 in the
Current Period from $409,000 in the Prior Period. The catalogue and retail sales
declined $163,000 or approximately 46% to $189,000 for the Current Period. This
is attributed to the fact that in the Current Period there were no new product
releases as compared to the Prior Period when the Company had launched new
proprietary products and titles.
Due to the decline in vender-based orders, the ratio of direct tape sales
increased to 52% for the Current Period as compared to 45% in the Prior Period,
improving the average sales price per tape to $27.73 for the Current Period as
compared to $24.28 in the Prior Period.
The Company sells a plush version of Gregory Gopher, a proprietary
character, and a non-personalized audiocassette featuring the sound track from
the Gregory Gopher videos. Sales of these ancillary products have not been
significant to date.
Cost of Sales: The Company had a gross profit of 13% or $80,000 for the Current
Period as compared to a loss in the Prior Period of ($76,000). Continued
inventory controls and improved manufacturing process, combined with a decrease
in volume, have reduced the cost of raw materials and direct labor, generating
savings of $28,000 and $73,000 respectively. Depreciation expense declined
$103,000 in the Current Period due to the retirement of manufacturing equipment
in the Prior Period; however, this reduction was offset by an increase of
$147,000 in amortization of content costs in the Current Period. Royalties and
other fixed costs of sales showed savings of $19,000 and $34,000 for the Current
Period.
Selling expenses: Selling expenses decreased $611,000 or 49% in the Current
Period to $643,000 from $1,254,000 in the Prior Period. Promotional and media
expenses decreased by $238,000 in the Current Period as
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a result of spending cut backs by the Company. Additional decreases reflect
reductions in sales related payroll and benefits of $196,000, catalog and
retail-sourced expenses of $31,000, outside services of $33,000 and a decrease
in shipping expenses of $71,000. The Company's present marketing programs
include a "Kideo Catalog" and a Kideo products promotion on the Home Shopping
Network, introduced late in the Current Period.
General and administrative expenses: The Company's general and administrative
expenses decreased $382,000 or 37% to $654,000 in the Current Period from
$1,036,000 in the Prior Period. The primary causes for this decrease were in
non-recurring development expenses of $192,000 and payroll and related payroll
expenses of $82,000 in the Current Period. Other cost-effective savings by the
Company during the Current Period were in insurance of $17,000, expenses
associated with being a public company of $15,000 and infrastructure costs of
$57,000. These savings were offset by higher depreciation charges of $21,000.
Loss from operations: The loss from operations decreased $1,149,000 or 49% to
$1,217,000 in the Current Period from $2,366,000 in the Prior Period. In
response to unprofitable promotions spending in the prior periods, the Company
has implemented cost-saving measures that include across-the-board salary
reductions, reductions in shipping costs, headcount, benefits, and discretionary
spending. The Company continues this management policy as evidenced by the
decreases in selling, general and administrative expenses in the Current Period
as compared to the Prior Period.
Other income (expense): The Current Period reflects lease interest expenses net
of interest income in that period. The Prior Period reflects an excess of
interest income from investments (Treasury bills, money market funds and
corporate commercial paper) over lease interest expenses.
Net Loss: The net loss in the Current Period was $1,225,000 or $0.35 loss per
share on 3,481,829 average shares of common stock outstanding, as compared to
the Prior Period net loss of $2,336,000, or $0.79 loss per share on 2,939,014
average shares of common stock outstanding.
Three-month comparison: Comparison of the quarter begun November 1, 1997 through
January 31, 1998, ("Current Quarter") against the quarter begun November 1, 1996
through January 31, 1997, ("Prior Quarter"):
Sales: Sales declined 25% to $492,000 in the Current Quarter from $655,000 in
the Prior Quarter. The direct to consumer sales decreased 3% to $344,000 in the
Current Quarter from $354,000 in the Prior Quarter. The catalogue and
retail-sourced sales for the Current Quarter decreased 51% or $154,000 to
$148,000. This is attributed to the fact that in the Current Quarter there were
no new product releases as compared to the Prior Quarter when the Company had
launched new proprietary products and titles.
Due to the decline in vender-based orders, the ratio of direct tape sales
as compared to vendor tape sales was 61% in the Current Quarter versus 46% for
the Prior Quarter improving the average sales price per tape to $$27.86 for the
Current Quarter as compared to $23.97 for the Prior Quarter.
The Company sells a plush version of Gregory Gopher, a proprietary
character, and a non- -personalized audiocassette featuring the sound track from
the Gregory Gopher videos. Sales of these ancillary products were 3% for the
Current Quarter or $17,000 and have not been significant to date.
Cost of Sales: The Company had a gross profit of 42% or $208,000 in the Current
Quarter as compared to a loss of ($6,000) in the Prior Quarter. Cost of sales
decreased 35% or $151,000 to $284,000 in the Current Quarter. Continued
inventory controls, purchasing of raw materials, improved manufacturing process
combined with the decrease in sales have created savings of $27,000 in raw
material purchases and $68,000 in direct labor. Additional savings in the
Current Quarter included royalties of $17,000, depreciation of $62,000 and fixed
costs of sales of $24,000, which were offset by increases of $37,000 in
amortization for content costs and $10,000 for ancillary merchandise.
Selling expenses: Selling expenses decreased $556,000 or 69% in the Current
Quarter to $253,000 from $809,000 in the Prior Quarter. This decrease reflects a
reduction in marketing programs and promotions of $310,000, sales related
payroll and benefits of $122,000, catalog and retail-sourced expenses of
$23,000, outside services of $17,000 and a decrease in shipping expenses of
$53,000. These savings reflect spending cut backs by
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the Company. The Company's present marketing programs include a "Kideo Catalog"
and a Kideo products promotion on the Home Shopping Network, introduced late in
the Current Period.
General and administrative expenses: The Company's general and administrative
expenses decreased $197,000 or 39% to $311,000 in the Current Quarter from
$508,000 in the Prior Quarter. The primary causes for this decrease were in
payroll and related payroll expense of $67,000 and non-recurring development
expenses of $26,000 in the Current Quarter. Other cost-effective savings by the
Company during the Current Quarter were in expenses associated with being a
public company of $46,000 and all over infrastructure costs.
Loss from operations: The loss from operations decreased $967,000 or 73% to
$356,000 in the Current Quarter from $1,323,000 in the Prior Quarter. In
response to unprofitable promotions spending in the prior periods, the Company
has implemented cost-saving measures that include across-the-board salary
reductions, reductions in shipping costs, headcount, benefits, and discretionary
spending. The Company continues this management policy as evidenced by the
decreases in selling, general and administrative expenses in the Current Quarter
as compared to the Prior Quarter.
Management is pursuing strategic marketing alliances with the intent to
reduce its financial risk in direct-to-consumer promotions and to develop a
broader based distribution for the Company's products. There can be no
assurances that these objectives will be achieved.
Other income (expense): The Current Quarter reflects lease interest expenses net
of interest income in that period. The Prior Quarter reflects an excess of
interest income from investments (Treasury bills, money market funds and
corporate commercial paper) over lease interest expenses.
Net Loss: The net loss in the Current Quarter was $360,000 or $0.10 loss per
share on 3,637,264 average shares of common stock outstanding, as compared to
the Prior Quarter net loss of $1,321,000, or $0.45 loss per share on 2,939,014
average shares of common stock outstanding.
Impact of Recent Accounting Pronouncements
During the Current Period the Company has adopted SFAS No. 128, "Earnings
Per Share." This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of previously required
primary EPS with a presentation of basic EPS and diluted EPS. Earnings per share
amounts for the same prior-year periods have been restated to conform with the
provisions of SFAS No. 128. The adoption of this statement did not result in
material changes to the previously reported EPS amounts.
Liquidity and Capital Resources
Net cash used by operations of $607,000 for the Current Period ended
January 31, 1998 improved 64% or $1,092,000 from the Prior Period use of
$1,699,000. The Company invested $294,000 in the Current Period, of which
$291,000 was in capital content of the newly licensed BARNEY Kideo in the
Current Period as compared to $899,000 invested in the Prior Period. Additional
funds were generated by the issuance in October 1997 of capital stock for gross
proceeds of $300,000 and the January 1998 Financing activities for gross
proceeds of $500,000 (described in Part II of this Filing).
The working capital for the Current Period has a deficiency of ($962,000)
as compared to ($666,000) for the Prior Period. Improvement in these indicators
has in the past been dependent on external sources of financing, in the forms
described in the Company's 10-KSB and through improving operations. The
Company's ability to internally generate liquidity in both the short term and
long term are continued revenue growth, gross margin improvement and the control
of selling and general and administrative expense. These must be evaluated along
with management's actions to increase its revenue stream, increase the
efficiency of its marketing efforts, and continue to control the costs of its
infrastructure as discussed above in "Results of Operations."
11
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The Company's cash and capital requirements in connection with its
development of new product, manufacturing production infrastructure, acquiring
licenses and marketing activities have been and will continue to be significant.
The Company anticipates, based on its currently proposed plans and assumptions
relating to its operations (including assumptions regarding the progress and
timing of its new development efforts and acquiring licenses), that the proceeds
remaining from the January 1998 Financing (described in Part II of this Filing),
together with anticipated revenues from operations and its current cash and cash
equivalent balances, will be sufficient to fund the Company's operations and
capital requirements through April 30, 1998. 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. To date the recent financings the Company has
under taken have been costly. There can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all.
Subsequent Event
On February 20, 1998, 273,000 options previously issued to employees and
directors with a weighted average exercise price of $4.95 were repriced at
$2.50. This revaluation did not alter or amend any other provision of the
optionee's original option agreement, including vesting period and option term.
12
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the litigation reported in
the Company's annual report on Form 10-KSB for the year ended July
31, 1997 as filed.
Item 2. Changes in Securities
(a) & (b) The Company's common stock, par value $.0001 per share
(the "Common Stock"), is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934.
The January 1998 Financing
On January 30, 1998, the Company entered into a Note and Warrant Purchase
Agreement (the "1998 Purchase Agreement") with Benjamin and Michael Bollag (the
"Bollags") pursuant to which, among other things, the Company: (a) sold for
$500,000 (i) an aggregate of $500,000 principal amount of 10% convertible
promissory notes (the "January 1998 Notes") and (ii) warrants to purchase
500,000 shares of Common Stock (the "January 1998 Warrants"); (b) entered into a
security agreement, dated January 30, 1998 (the "Security Agreement") with the
Bollags, pursuant to which the Company granted the Bollags a security interest
in all of the assets of the Company as security for performance by the Company
under the January 1998 Notes; (c) agreed to register all of the shares of Common
Stock into which the January 1998 Notes may be converted and for which the
January 1998 Warrants may be exercised; and (d) agreed that if the Company
determined to sell securities prior to the repayment in full of the January 1998
Notes, it would first offer the Bollags the opportunity to purchase such
securities. The transactions consummated pursuant to the 1998 Purchase Agreement
are referred to herein as the "January 1998 Financing."
The following is a summary of certain terms of the January 1998 Notes and
the January 1998 Warrants.
January 1998 Notes
The January 1998 Notes were issued on January 30, 1998, bear interest at
the rate of 10% per annum, payable quarterly commencing April 30, 1998, and are
due on demand of the holder thereof at any time on or after April 15, 1999.
An "Event of Default" shall occur under the January 1998 Notes if the
Company shall, among other things, fail to pay interest or principal when due or
fail to perform any material agreement, or materially breach any representation
or warranty under, the 1998 Purchase Agreement or the Security Agreement. Upon
an Event of Default, the entire indebtedness and accrued interest may become
immediately due and payable.
Any amount outstanding under the January 1998 Notes may be prepaid subject
to the following limitations:
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(a) All interest accrued through the date of prepayment must be paid;
(b) The amount of such prepayment may not exceed net operating income
(excluding any non-cash expenses) generated by the Company from
January 30, 1998 through the date of prepayment;
(c) If, while the January 1998 Notes are outstanding, the Company sells
shares of Common Stock or securities convertible into or exercisable
for Common Stock, subject to certain exceptions, only twenty (20%)
percent of the January 1998 Notes may be prepaid; and
(d) The Company shall forfeit the right to prepay one-third of the
principal amount of the January 1998 Notes if such amount is not
prepaid on or before October 15, 1998 and one-third of the principal
amount of the January 1998 Notes if such amount is not prepaid on or
before January 15, 1999. That portion of the principal amount that
is not prepaid on or before October 15, 1998, if any, is referred to
as the "October Tranche" and that portion of the principal amount
that is not prepaid on or before January 15, 1999, if any, is
referred to as the "January Tranche." That portion of the remaining
principal amount that is not paid on or before the date April 15,
1999, if any, is referred to as the "Final Tranche."
If all or any part of the January 1998 Notes are outstanding on or after
April 15, 1999, then the Company may, upon 30 days prior written notice, pay
such amount, subject to the right of the holders thereof to convert their
January 1998 Notes into Common Stock during the period following their receipt
of notice and prior to repayment.
The January 1998 Notes may be converted, in whole or in part, into shares
of Common Stock after the following dates: (a) October 15, 1998, with respect to
the October Tranche, if any; (b) January 15, 1999, with respect to the January
Tranche, if any; and (c) April 16, 1999 with respect to the Final Tranche, if
any. The number of shares of the Common Stock to be received upon conversion
shall be determined as by dividing the principal amount of that portion of the
January 1998 Notes being converted by $1.00, subject to certain adjustments (the
"Conversion Price").
January 1998 Warrants
The January 1998 Warrants were issued on January 30, 1998 and entitle the
holders thereof to purchase through January 30, 2003 an aggregate of 500,000
shares of Common Stock at a price of $1.00 per share as follows: one-third of
the January 1998 Warrants become exercisable following May 1, 1998; an
additional one-third become exercisable on July 15, 1998; and the balance
become exercisable on October 15, 1998. The exercise price is subject to
adjustment
14
<PAGE>
in certain circumstances (including in the event of a stock split or dividend,
recapitalization, reorganization, merger, consolidation or sale of assets of the
Company or the issuance by the Company of shares of Common Stock (or securities
convertible into or exercisable for shares of Common Stock) at a price less than
the exercise price of the January 1998 Warrants.
Agreement with KSH Investment Group, Inc.
The Company delivered to KSH Investment Group, Inc. ("KSH") 12,500 shares
of Common Stock (the "KSH Shares") in consideration of KSH arranging the January
1998 Financing and agreed to register the KSH Shares.
Agreement with Charles C. Johnston
Prior to the closing of the January 1998 Financing, Charles C. Johnston, a
director of the Company, agreed to lend the Company on a short-term basis
$500,000. In consideration of such agreement, on March 9, 1998 the Company
issued to Mr. Johnston warrants to purchase 20,000 shares of Common Stock (the
"1998 Johnston Warrants") for $1.00 per share and agreed to register the shares
of Common Stock for which the 1998 Johnston Warrants may be exercised. The
Johnston Warrants are exercisable at any time after January 31, 1999 through
March 8, 2003 and contain other terms identical to the January 1998 Warrants.
Agreement with Solovay Marshall & Edlin, P.C.
Prior to the closing of the January 1998 Financing, Solovay Marshall &
Edlin, P.C. ("SME"), the Company's outside legal counsel (of which Michael B.
Solovay, a director of the Company, is a shareholder) agreed to: (a) allow the
Company to continue to defer payment of legal fees and expenses owing as of
December 31, 1997 in the amount of $160,000; and (b) forgive the payment by the
Company of an additional $36,282.13 in legal fees owed to SME. In consideration
of such agreement, the Company agreed to pay SME $40,000 by March 15, 1998 and,
on February 2, 1998, issued: (i) to SME, a note (the "SME Note") in the amount
of $120,000 and containing other terms identical to the January 1998 Notes; and
(ii) to certain shareholders and employees of SME, warrants to purchase an
aggregate of 120,000 shares of Common Stock (the "SME Warrants") for $1.00 per
share. The Company also agreed to register the shares of Common Stock for which
the SME Warrants may be exercised. The SME Warrants are exercisable at any time
after January 31, 1999 through February 2, 2003 and contain other terms
identical to the January 1998 Warrants.
15
<PAGE>
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Kideo Productions, Inc.
Date: March 16, 1997 By: \s\ Richard L. Bulman
----------------------------
Richard L. Bulman
President & Chief Executive Officer
Date: March 16, 1997 By: \s\ Richard D. Bulman
----------------------------
Richard D. Bulman
Secretary & Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kideo
Productions, Inc. and is qualified in it's entirety by reference to such
financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 48
<ALLOWANCES> 0
<INVENTORY> 124
<CURRENT-ASSETS> 550
<PP&E> 905
<DEPRECIATION> 550
<TOTAL-ASSETS> 2,313
<CURRENT-LIABILITIES> 1,512
<BONDS> 648
0
0
<COMMON> 0
<OTHER-SE> 153
<TOTAL-LIABILITY-AND-EQUITY> 2,313
<SALES> 593
<TOTAL-REVENUES> 593
<CGS> 513
<TOTAL-COSTS> 1,297
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,225)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,225)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,225)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
