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, 1999
----------------
|_| 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
611 Broadway, Suite 523, New York, New York 10012
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(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 November 30, 1999, 4,038,945 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
This report contains 14 pages
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<PAGE>
KIDEO PRODUCTIONS, INC.
FORM 10-QSB
INDEX
PART I Financial Information: Page
No.
Consolidated Balance Sheets as of October 31, 1999 (unaudited)
and July 31, 1999..................................................3
Consolidated Statements of Operations for the three months ended
October 31, 1999 and 1998 (unaudited)..............................4
Consolidated Statements of Shareholders (Deficiency) Equity for
the three months ended October 31, 1999 (unaudited)................5
Consolidated Statements of Cash Flows for the three months ended
October 31, 1999 and 1998 (unaudited)..............................6
Notes to the Consolidated Financial Statements (unaudited)...........7
Management's Discussion and Analysis or Plan of Operations...........8
PART II. Other Information...................................................12
Signatures..........................................................13
2
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
at October 31, at July 31,
1999 1999*
-------------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents, (including restricted cash
of $75,000 in 1999 and 1998) .............................. $ 108 $ 86
Accounts receivable, net .................................... 132 112
Inventory ................................................... 41 49
Prepaid expenses and other current assets ................... 119 132
-------- --------
Total current assets ...................................... 400 379
Property and equipment, net ................................... 133 152
Capitalized content costs, net ................................ 172 195
Other assets .................................................. 141 151
-------- --------
Total assets .............................................. $ 846 $ 877
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable ............................................ $ 823 $ 876
Accrued expenses ............................................ 470 401
Capital leases, current portion ............................. 1 8
Unearned revenue ............................................ 618 684
Convertible notes payable, ($1,700,001 net of $119,333
of discount at October 31, 1999; and $1,400,001 net
of $139,000 of discount at July 31, 1999) ................. 1,581 1,261
-------- --------
Total current liabilities ................................. 3,493 3,230
Capital leases, long term portion ............................. 3 4
-------- --------
Total liabilities ......................................... 3,496 3,234
-------- --------
Shareholders' Deficit
Common Stock, $.0001 par value; authorized 15,000,000 shares,
issued and outstanding 4,032,553 shares at October 31,1999
and 3,775,886 shares at July 31, 1999 ..................... -- --
Additional paid-in capital .................................. 11,324 11,118
Accumulated deficit ......................................... (13,974) (13,475)
-------- --------
Shareholders' Deficit ..................................... (2,650) (2,357)
-------- --------
Total liabilities and shareholders' deficit ................... $ 846 $ 877
======== ========
</TABLE>
*Derived from the Form 10-KSB
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollars in thousands except per share amounts)
Three months ended
October 31, October 31,
1999 1998
----------- -----------
Sales ........................................ $ 660 $ 1,148
Cost of sales ................................ 284 529
----------- -----------
Gross profit ................................. 376 619
Selling expenses ............................. 205 426
General and administrative expenses .......... 377 315
----------- -----------
Loss from operations ......................... (206) (122)
----------- -----------
Other (expense), net ......................... (293) (156)
----------- -----------
Net loss ..................................... $ (499) $ (278)
=========== ===========
Net loss per share: Basic and Diluted ........ $ (0.13) $ (0.07)
=========== ===========
Weighted average number of shares outstanding:
Basic and Diluted .......................... 3,901,433 3,775,886
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
KIDEO PRODUCTIONS, INC.AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
(unaudited)
(Dollas in thousands except per share amounts)
<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, 1999 ........................ (0) $ -- 3,775,886 $ -- $11,118 $(13,475) $(2,357)
---------------------------------------------------------------------------------
Discount to fair market value of the August 1999,
convertible notes payable on the conversion to
common stock .................................. -- -- -- -- 173 -- 173
Issuance of warrants in connection
with the August 1999, Financing ............... -- -- -- -- 30 -- 30
Issuance of warrants for commission in
connection with the August 1999, Financing .... -- -- -- -- 3 -- 3
Conversion of warrants to common stock .......... -- -- 256,667 -- --
Net loss ........................................ -- -- -- -- -- (499) (499)
---------------------------------------------------------------------------------
Balance at October 31, 1999 ..................... (0) $ -- 4,032,553 $ -- $11,324 $(13,974) $(2,650)
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
KIDEO PRODUCTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended
October 31,1999 October 31,1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(499) $(278)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of operating assets .... 42 91
Amortization of loan discount and deferred debt costs 82 129
Discount on issuance of convertible notes issued ..... 173 --
Effect of changes in operating assets and liabilities:
Accounts receivable ................................ (20) (423)
Inventory .......................................... 8 15
Prepaid expenses and other current assets .......... 12 11
Other assets ....................................... (13) (67)
Accounts payable ................................... (53) (18)
Accrued expenses ................................... 69 156
Unearned revenue ................................... (66) 715
----- -----
Net cash (used in) provide by operating activities ..... (265) 331
----- -----
Cash flows from investing activities:
Purchase of property and equipment ..................... -- (39)
----- -----
Net cash used in investing activities .................. -- (39)
----- -----
Cash flows from financing activities:
Proceeds from convertible debt, net .................... 294 --
Principal payments on convertible debt ................. -- (167)
Principal payments on capital leases ................... (7) (12)
----- -----
Net cash provided by (used in) financing activities .... 287 (179)
----- -----
Net increase in cash ..................................... 22 113
Cash and cash equivalents at the beginning of the period 86 82
----- -----
Cash and cash equivalents at the end of the period ....... $ 108 $ 195
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
KIDEO PRODUCTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1.
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, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 2000.
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, 1999 on Form 10-KSB. This quarterly report
should be read in conjunction with such annual report.
Note 2.
On August 27, 1999, the Company entered into a Note and Warrant Purchase
Agreement. In consideration for $300,000, the Company issued, (1) a convertible
note having a principal amount of $300,000 due at various times through August
31, 2000 and (2) warrants to purchase an aggregate of 300,000 shares of Common
Stock of the Company, exercisable through August 31, 2004 at an exercise price
of $.80 per share. The fair market value of the warrants were treated as
additional discount on the issuance of the note and accordingly are netted
against the principal amount outstanding and amortized over the life of the
debt. The discount of the beneficial conversion feature of the notes was
expensed at issuance. The Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission to register the underlying
securities of this agreement and such registration statement was declared
effective on November 30, 1999.
Note 3.
On September 17, 1999, in a cashless conversion of warrants to purchase 550,000
shares of Common Stock, the Company issued 256,667 shares of Common Stock to
certain shareholders.
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<PAGE>
KIDEO PRODUCTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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). Since its inception the
Company has expanded its personalized product line to include books, stickers
and calendars featuring licensed and proprietary characters in some products.
The Company has incurred substantial operating losses since its inception,
resulting in an accumulated deficit of approximately $13,974,000 as of October
31, 1999. The Company believes that it will continue to operate at a loss until
such time as when its operations generate sufficient revenues to cover its
costs. The report of independent public accountants on the Company's
consolidated financial statements for the fiscal year ended July 31, 1999
contains an explanatory paragraph stating that the Company's consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern, while noting that the Company's recurring losses from
operations and net working capital deficiency raise substantial doubt about its
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result should the Company be unable to
continue as a going concern.
On September 26, 1997, Nasdaq advised the Company that the Company's Common
Stock and Warrants had been delisted from the Nasdaq SmallCap Market. The Nasdaq
decision was based upon the Company's failure to meet the "total assets" and
"capital and surplus" requirements for continued listing on the Nasdaq SmallCap
Market.
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.
Revenue Recognition
The Company develops, produces and markets personalized children's educational
video tapes and books featuring licensed and proprietary characters. These
products, along with personalized stickers, posters and calendars are currently
being sold through television shopping networks, various catalogs, direct sales
and e-commerce. 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.
Our business is seasonal in nature, with a large portion of our net sales
occurring in the second quarter as a result of the holiday shopping season.
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 period August 1, 1999 through
October 31, 1999, ("Current Quarter") against the period begun August 1, 1998
through October 31, 1998 ("Prior Quarter"):
Sales: Sales decreased 43% in the Current Quarter to $660,000 as compared to
$1,148,000 in the Prior Quarter. Direct to consumer sales decreased in the
Current Quarter 28% to $321,000 while vendor-based sales (catalog, mail order
houses and television shopping networks) decreased 52% to $337,000. Sales
decreased in all
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categories primarily do to the lack of current promotions on the shopping
networks and direct to the consumer TV advertising as compared to the Prior
Quarter that had such promotions for the then newly licensed Barney tape.
Personalized tape sales were down 41% to $590,000 in the Current Quarter as
compared to $1,003,000 in the Prior Quarter and accounted for 89% of total
sales. Direct to consumer tape sales decreased 23% from the Prior Quarter to
$263,000 and vendor-based tape sales decreased 51% from the Prior Quarter to
$327,000.
Personalized book and sticker sales were $48,000 and $15,000, respectively in
the Current Quarter as compared to $102,000 and $42,000 in the Prior Quarter.
Sales of ancillary products have not been significant to date.
Cost of Sales: The Company had a gross profit of 57% or $376,000 in the Current
Quarter as compared to 54% in the Prior Quarter. Continued inventory controls,
improved manufacturing process and lower volumes reduced the cost of raw
materials and direct labor. Fixed costs decreased $37,000 or 25% in the Current
Quarter as compared to the Prior Quarter. These reductions were in depreciation
of $21,000, payroll and related expenses of $16,000, manufacturing expenses of
$8,000, content amortization costs of $4,000 and creative expenses of $4,000.
These decreases were partially offset by an increase in facility expense of
$18,000. Royalty expense decreased in the Current Quarter by 29% or $116,000 to
$83,000, which is directly attributed to the reduced sales volume.
Selling expenses: Selling expenses decreased $221,000 or 52% to $205,000 for the
Current Quarter from $426,000 in the Prior Quarter. The decreases, mostly due to
volume related expenses, were in shipping of $57,000, commission of $19,000, and
prepaid kit expenses of $24,000. Media and promotional expenses related to
direct-sales decreased $136,000 in the Current Quarter as compared to the Prior
Quarter. These decreases were partially offset by an increase in customer
service related expenses of $22,000.
General and administrative expenses: The Company's general and administrative
expenses increased $62,000 or 20% to $377,000 in the Current Quarter from
$315,000 in the Prior Quarter. Increases in related payroll and payroll expenses
of $6,000 and overall infrastructure expenses of $36,000 for rent and telephone
were due to Company expansion. Website expenses and maintenance increased
$25,000 as the Company continues to develop its new website. Professional
expenses increased $32,000 as a direct result of the Company's continuing need
for additional financings. These increases were offset by decreases in product
development of $23,000 and depreciation of $14,000.
Operating loss: The loss from operations was $206,000 in the Current Quarter as
compared to an operating loss in the Prior Quarter of $122,000.
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. There can be no
assurances that these objectives will continue to be achieved.
Other (expense): The Current Quarter reflects an expense of $293,000 which is
primarily due to amortization of discount and deferred debt expense of the
convertible debt in regard to the May 1999 and August 1999, Financings along
with debt and lease interest expenses over interest income.
Net loss: The net loss in the Current Quarter was $499,000 or $0.13 basic and
diluted loss per share on 3,901,433 average shares of common stock outstanding,
as compared to the Prior Period net loss of $278,000 or $0.07 basic and diluted
loss per share on 3,775,866 average shares of common stock outstanding.
9
<PAGE>
Liquidity and Capital Resources
The Company's net cash used in operations for the Current Quarter was $265,000
as compared to $331,000 provided by operations in the Prior Quarter. There were
no investments in capital projects or content costs by the Company in the
Current Quarter. In August 1999, the Company closed an additional $300,000 of
financing with the proceeds being used for working capital.
The Company's capital requirements in connection with its development of new
product, infrastructure and marketing activities have been and continue to be
significant. The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that anticipated revenues from
operations and its current cash and cash equivalent balances, may not be
sufficient to fund the Company's operations and capital requirements for the
foreseeable future. The Company is currently seeking additional financing. 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.
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.
August 1999 Financing
On August 27, 1999, the Company entered into a Note and Warrant Purchase
Agreement (the "August 1999 Financing"). In consideration for $300,000 the
Company issued, (1) a convertible note having a principal amount of $300,000 due
at various times through August 31, 2000 and (2) warrants to purchase an
aggregate of 300,000 shares of Common Stock of the Company, exercisable through
August 31, 2004 at an exercise price of $.80 per share. The fair market value of
the warrants were treated as additional discount on the issuance of the note and
accordingly are netted against the principal amount outstanding and amortized
over the life of the debt. The discount resulting from the beneficial conversion
feature of the note was expensed at issuance. The funds were applied towards
prior payables and working capital. The Company filed a Registration Statement
on Form S-3 with the Securities and Exchange Commission to register the
underlying securities of this agreement and such registration statement was
declared effective on November 30, 1999.
Year 2000 Compliance
The failure of our internal systems, or any material third-party systems, to be
Year 2000 compliant could have a material and adverse effect on our business,
results of operations and financial condition. We reviewed Year 2000 readiness
disclosure statements prepared by the United States Postal Service, our mail
carrier, and Pitney Bowes, which maintains our postage equipment, and they are
Year 2000 compliant.
To date, we have not incurred any material costs in identifying or evaluating
Year 2000 compliance issues. However, we may fail to discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the fulfillment and operational facilities that
support our business are not Year 2000 compliant, we would be unable to deliver
products or services to our customers. In addition, we cannot assure you that
third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which would be time-consuming
and expensive. If we are unable on a timely basis to fix or replace third-party
software, hardware or services
10
<PAGE>
that could result in lost revenues, increased operating costs and other business
interruptions, this could have a material and adverse effect on our business,
results of operations and financial condition. Moreover, the failure to
adequately address Year 2000 compliance issues in our software, hardware or
systems could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend.
In addition, there can be no assurance that governmental agencies, utility
companies, third-party service providers and others outside our control will be
Year 2000 compliant. The failure by these entities to be Year 2000 compliant
could result in a systematic failure beyond our control, such as a prolonged
telecommunications or electrical failure, which could also prevent us from
delivering our product or providing services to our customers.
11
<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, 1999 as
filed.
Item 2. Changes in Securities and Use of Proceeds
On August 27, 1999, the Company entered into a Note and Warrant Purchase
Agreement (the "Purchase Agreement") with White Ridge Investments, Ltd.
(the "Purchaser"). Pursuant to the Purchase Agreement, the Company agreed
to sell, and the Purchaser agreed to buy, for consideration of $300,000 in
cash, (1) a convertible note having a principal amount of $300,000 due at
various times through August 31, 2000 and (2) warrants to purchase an
aggregate of 300,000 shares of common stock of the Company, par value
$.0001 per share (the "Common Stock"), exercisable through August 31, 2004
at an exercise price of $0.80 per share.
The notes bear interest at the rate of 10% per annum and are convertible
into shares of Common Stock at $.80 per share (a total of 375,000 shares
of the Common Stock). Payment under the notes is secured by all of the
assets of the Company.
The notes and warrants were issued by the Company without registration
pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
The Company has filed a registration statement with respect to the shares
of Common Stock underlying (1) the notes and warrants sold pursuant to the
Purchase Agreement, (2) warrants issued as a fee in connection with the
Purchase Agreement and (3) other warrants issued as a result of consulting
agreements.
Gerard, Klauer, Mattison & Co. acted as placement agent for the Company in
connection with the transactions described above and received warrants to
purchase 3,000 shares of the Common Stock at an exercise price of $.80 per
share.
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.
12
<PAGE>
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, 1999 By: /s/ Richard L. Bulman
------------------------------------
Richard L. Bulman President & Chief Executive Officer
(Principal Executive Officer)
Date: December 14, 1999 By: /s/ Richard D. Bulman
------------------------------------
Richard D. Bulman
Secretary & Chief Financial Officer (Principal Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kideo
Productions, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 108
<SECURITIES> 0
<RECEIVABLES> 132
<ALLOWANCES> 0
<INVENTORY> 41
<CURRENT-ASSETS> 400
<PP&E> 1,019
<DEPRECIATION> 886
<TOTAL-ASSETS> 846
<CURRENT-LIABILITIES> 3,493
<BONDS> 9
0
0
<COMMON> 0
<OTHER-SE> (2,650)
<TOTAL-LIABILITY-AND-EQUITY> 846
<SALES> 660
<TOTAL-REVENUES> 660
<CGS> 284
<TOTAL-COSTS> 582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293
<INCOME-PRETAX> 0
<INCOME-TAX> (499)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (499)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
