United States
Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3729350
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
611 Broadway, Suite 523, New York, New York 10012
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
212-505-6605
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(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months ( or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of December 14, 1998, 3,775,886 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
This report contains 11 pages
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<PAGE>
KIDEO PRODUCTIONS, INC.
FORM 10-QSB
INDEX
Page
PART I. Financial Information: No.
Consolidated Balance Sheet as of October 31,1998
and July 31, 1998.............................................. 3
Consolidated Statement of Operations for the three months ended
October 31, 1998 and 1997...................................... 4
Consolidated Statement of Shareholders' Equity
three months ended October 31, 1998............................ 5
Consolidated Statement of Cash Flows for the three months ended
October 31, 1998 and 1997...................................... 6
Notes to the Consolidated Financial Statements................... 7
Management's Discussion and Analysis or Plan of Operation........ 8
PART II. Other Information................................................ 11
Signatures....................................................... 11
2
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
at October 31, at July 31,
1998 1998*
-------------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (including restricted cash of $75,000
at October 31, 1998 and July 31, 1998) ............................... $ 195 82
Accounts receivable .................................................... 515 92
Inventory .............................................................. 38 53
Prepaid expenses ....................................................... 158 169
-------- --------
Total current assets ................................................. 906 396
Property and equipment, net .............................................. 194 220
Capitalized content costs, net ........................................... 361 387
Other assets ............................................................. 130 68
-------- --------
Total assets ........................................................ $ 1,591 $ 1,071
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................................... $ 718 $ 736
Accrued expenses ....................................................... 495 348
Capital leases, current portion ........................................ 46 49
Unearned revenue ....................................................... 1,743 1,028
Convertible notes payable ($453,000 net of $248,000 discount at
October 31, 1998 and $620,000 net of $372,000 of discount
at July 31, 1998) .................................................... 205 248
-------- --------
Total current liabilities ............................................ 3,207 2,409
Capital leases, long term portion ........................................ 10 10
-------- --------
Total liabilities .................................................... 3,217 2,419
-------- --------
Shareholders' Equity
Common Stock, $.0001 par value; authorized 15,000,000 shares, issued
outstanding 3,775,886 shares at October 31, 1998
and July 31,1998 ..................................................... -- --
Additional paid-in capital ............................................. 10,551 10,551
Accumulated deficit .................................................... (12,177) (11,899)
-------- --------
Shareholders' (deficiency) equity ................................... (1,626) (1,348)
-------- --------
Total liabilities and shareholders' equity ............................... $ 1,591 $ 1,071
======== ========
</TABLE>
* Derived from the Form 10-KSB.
See accompanying notes.
3
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(Dollars in thousands except for per share amounts)
Three months ended
October 31, October 31,
1998 1997
---------- -----------
Sales ........................................ $ 1,148 $ 101
Cost of sales ................................ 529 238
---------- -----------
Gross profit (loss) ......................... 619 (137)
Selling expenses ............................. 426 381
General and administrative expenses .......... 315 343
---------- -----------
Loss from operations ......................... (122) (861)
Other (expense) income, net .................. (156) (4)
---------- -----------
Net loss ..................................... $ (278) $ (865)
========== ===========
Basic and diluted loss per share ............. $ (0.07) $ (0.26)
========== ===========
Weighted average number of shares outstanding:
Basic and diluted .......................... 3,775,886 3,348,746
========== ===========
See accompanying notes
4
<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
-------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1998 .......... -- $ -- 3,775,886 $ -- $10,551 $(11,899) $(1,348)
Net loss........................... (278) (278)
---------------------------------------------------------------------------------------
Balance at October 31, 1998........ -- $ -- 3,775,886 $ -- $10,551 $(12,177) $(1,626)
=======================================================================================
</TABLE>
See accompanying notes.
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<PAGE>
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
October 31, October 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (278) $ (865)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of operating assets .......... 220 192
Effect of changes in operating assets and liabilities:
Accounts receivable ...................................... (423) (68)
Inventory ................................................ 15 (12)
Prepaid expenses ......................................... 11 (11)
Other assets ............................................. (67) --
Accounts payable ......................................... (18) 22
Accrued expenses ......................................... 156 225
Unearned revenue ......................................... 715 148
-------- -------
Net cash provided by (used in) operating activities .......... 331 (369)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment ........................... (39) --
Increase in capitalized content costs ........................ -- (15)
-------- -------
Net cash used in investing activities ........................ (39) (15)
-------- -------
Cash flows from financing activities:
Net proceeds from issuances of capital stock ................. -- 275
Payment on convertible notes payable ........................ (167) --
Principal payments on capital leases ......................... (12) (14)
-------- -------
Net cash provided by (used in) financing activities .......... (179) 261
-------- -------
Net increase in cash ........................................... 113 (123)
Cash and cash equivalents at the beginning of the period ...... 82 164
-------- -------
Cash and cash equivalents at the end of the period ............. $ 195 $ 41
======== =======
</TABLE>
See accompanying notes.
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KIDEO PRODUCTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting of all normal
recurring adjustments, necessary for a fair statement of results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the three months ended October 31, 1998 are not necessarily indicative of
the results that may be expected for the fiscal year ending July 31, 1999.
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, 1998 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
For comparability, certain October 31, 1997 amounts have been reclassified
where appropriate to conform to the financial statement presentation used at
October 31, 1998.
In February 1997, FASB issued Statement No. 128, "Earnings Per Share"
which is effective for periods ending after December 15, 1997. The Company
adopted SFAS No. 128 for the year ending July 31, 1998 and has restated its
weighted-average shares for all the prior periods presented.
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KIDEO PRODUCTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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
mail-order catalogs, retail and television shopping networks sales. All customer
orders, regardless of their source, are processed at the Company's manufacturing
plant in New York City.
The Company generally records an account receivable and a corresponding
liability for unearned revenue for personalized product order kits shipped to
television shopping networks, mail order houses, catalogs and other retail
vendors. Revenue is recognized on the accrual basis when the personalized
product is shipped to the ultimate consumer.
Results of Operations
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto appearing elsewhere in this report.
Three month comparisons: Comparison of the quarter begun August 1, 1998 through
October 31, 1998, ("Current Quarter") against the quarter begun August 1, 1997
through October 31, 1997, ("Prior Quarter"):
Sales: Sales increased 1037% in the Current Quarter to $1,148,000 as compared to
$101,000 in the Prior Quarter. Sales gains were seen from all sources across the
board. Direct to the consumer tape sales were up 480% or $282,000 in the Current
Quarter as compared to $59,000 in the Prior Quarter. Catalog and retail-sourced
tape sales increased 178% to $108,000 in the Current Quarter as compared to
$69,000 in the Prior Quarter. Tape sales on the shopping networks (electronic
sales) for the Current Quarter were $555,000 and represented 48% of total income
for the period; this marketing channel first debuted in the latter part of the
fiscal year ended July 31, 1998. The increased tape sales were primarily
comprised of the Company's newly licensed Barney tape, "My Party With Barney."
Personalized book and sticker sales, which premiered in the fourth quarter of
the fiscal year ended July 31, 1998, were $102,000 and $42,000, respectively in
the Current Quarter accounting for 9% and 4% of the Current Quarter revenue.
Sales of ancillary products of the Company's proprietary characters were less
then 1% and have not been significant to date.
Cost of Sales: The Company has reclassified certain selling expenses to cost of
goods sold for both the Current and Prior Quarters, in order to better reflect
cost of goods sold. The Company had a gross profit of 54% or
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$619,000 in the Current Quarter as compared to a gross loss of $137,000 in the
Prior Quarter. Continued inventory controls, improved manufacturing process and
increases in volume have reduced the cost of raw materials and direct labor.
Fixed costs decreased $57,000 or 28% in the Current Quarter as compared to the
Prior Quarter. These reductions were in content amortization costs of $84,000
and depreciation of $14,000 and were partially offset by creative costs of
$17,000 and payroll related expenses of $22,000, which are the direct result of
volume increases. Royalty expense for the Current Quarter was $116,000 or 10% of
sales, which is primarily due to the sale of Barney licensed products.
Selling expenses: Selling expenses increased $45,000 or 12% for the Current
Quarter from $381,000 in the Prior Quarter. The increase was mostly due to
volume related expenses in shipping of $91,000, commission of $15,000, prepaid
kit expenses of $37,000 and customer service related expenses of $28,000. These
increases were partially offset by a reduction in media and promotional costs of
$121,000.
General and administrative expenses: The Company's general and administrative
expenses decreased $28,000 or 8% to $315,000 in the Current Quarter from
$343,000 in the Prior Quarter. The primary causes for these cost effective
savings in the Current Quarter were reductions in shareholder reporting expenses
of $28,000, professional fees of $20,000, insurance of $11,000 and depreciation
of $10,000. These savings were partially offset by increases in product
development of $21,000, related payroll expense of $7,000 and overall
infrastructure expenses due to company growth of $13,000.
Loss from operations: The loss from operations decreased $739,000 or 86% to
$122,000 in the Current Quarter from $861,000 in the Prior Quarter. The Company
continues the management policy of cost effective saving as evidenced by the
decreases in selling, general and administrative expenses in the Current Quarter
as compared to the Prior Quarter.
Management continues to pursue strategic marketing alliances with the intent of
reducing its financial risk in direct-to-consumer promotions and to develop a
broader based distribution for the Company's products as evidenced by the
Current Quarters results. There can be no assurances that these objectives will
continue to be achieved.
Other (expense) income: The Current Quarter reflects amortization of discount
and deferred debt expense of the convertible debt along with debt and lease
interest expenses. The Prior Quarter reflects an excess of lease interest over
interest income.
Net Loss: The net loss in the Current Quarter was $278,000 or $0.07 basic and
diluted loss per share on 3,775,886 average shares of common stock outstanding,
as compared to the Prior Quarter net loss of $865,000, or $0.26 basic and
diluted loss per share on 3,348,746 average shares of common stock outstanding.
Liquidity and Capital Resources
The Company had a positive cash flow from operations of $331,000 for the Current
Quarter as compared to a net cash use of $339,000 in the Prior Quarter. In
addition, the Company invested $39,000 in equipment in the Current Quarter. The
Company used $179,000 for repayment of debt.
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 newly licensed-character development efforts, like those
involving the Barney and Disney characters), that anticipated revenues from
operations and its current cash and cash equivalent balances will be sufficient
to fund the Company's operations and capital requirements for the foreseeable
future. 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 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.
9
<PAGE>
Balance sheet conditions which may be indicators of the Company's liquidity
would include the unrestricted cash balance along with the accounts receivable
of approximately $635,000 at October 31, 1998, as compared July 31, 1998 of
approximately $99,000.; working capital which was a deficiency of approximately
$2,301,000 at October 31, 1998, as compared to a deficiency of approximately
$2,013,000 at July 31, 1998; and the stockholders' deficiency of approximately
$1,626,000 at October 31, 1998, as compared to a deficiency of approximately
$1,348,000 at July 31, 1998. The improving cash balances do not necessarily
preclude the Company's need for additional capital. Although there can be no
assurances, the Company believes that its current vendor relationships as well
as its licensing agreements with Disney and Barney will generate revenues
sufficient to fund its operations. The unearned income of approximately
$1,743,000 listed as a current liability at October 31, 1998 represents sales
revenue on future orders.
Operating factors which would afford an evaluation of the Company's ability to
internally generate liquidity in both the short term and long term would include
the revenue growth rate (1037% over the Prior Quarter), the 54% gross margin
generated from operating activities and the rate of selling, general and
administrative expense spending relative to the revenue generated. Operating
cash flow as evidenced by earnings adjusted for the non-cash expenses of
depreciation, amortization of content costs and non-cash write-offs (providing
$331,000 from operating activities for the Current Quarter) would provide an
indication of management's ability to fund future operating activities; these
factors must be evaluated along with management's actions to increase its
revenue stream, increase the efficiency of its marketing efforts, and control
the costs of its infrastructure as discussed above.
The Company's material commitments and plans for capital expenditures at the
present time are driven by order volume. Currently, the Company's sales volume
can be met with existing production equipment, and increases in volume can be
met by adding additional shifts with existing equipment. Capital expansion for
additional production equipment will be driven by increases in sales volume and
will be funded by such revenues and any available equipment financing
agreements.
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.
Year 2000 Compliance
The Company's database and present accounting system are year 2000 compliant.
The Company does not anticipate any material additional costs with regard to its
year 2000 compliance. The year 2000 issue is not expected to effect the systems
of various entities with which the Company interacts. However, there can be no
assurance that the systems of other companies on which the Company relies will
be timely converted, or that a failure by another company's system to be year
2000 compliant would not have a material adverse effect on the Company.
New Accounting Announcements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and display for comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No.130 is
effective for financial statements for periods beginning after December 15, 1997
and requires comparative information for earlier years to be restated. The
effects of this statement are immaterial to the Company's financial statements.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the litigation reported in the
Company's annual report on Form 10-KSB for the year ended July 31, 1998 as
filed.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27- Financial Data Schedule
(b) No reports on form 8-K were filed during the quarter for which this
report is filed.
Signatures
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Kideo Productions, Inc.
Date: December 14, 1998 By: /s/ Richard L. Bulman
------------------------------------
Richard L. Bulman
President & Chief Executive Officer
(Principal Executive Officer)
Date: December 14, 1998 By: /s/ Richard D. Bulman
------------------------------------
Richard D. Bulman
Secretary & Chief Financial Officer
(Principal Financial Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements contained in the October 31, 1998 quarterly
report on Form 10-QSB of Kideo Productions, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 195
<SECURITIES> 0
<RECEIVABLES> 515
<ALLOWANCES> 0
<INVENTORY> 38
<CURRENT-ASSETS> 406
<PP&E> 656
<DEPRECIATION> 762
<TOTAL-ASSETS> 1,591
<CURRENT-LIABILITIES> 3,207
<BONDS> 46
0
0
<COMMON> 0
<OTHER-SE> (1,626)
<TOTAL-LIABILITY-AND-EQUITY> 1,591
<SALES> 1,148
<TOTAL-REVENUES> 1,148
<CGS> 509
<TOTAL-COSTS> 741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> (278)
<INCOME-TAX> 0
<INCOME-CONTINUING> (278)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (278)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
