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 January 31, 1997
OR
|_| TRANSACTION REPORT PURSUANT TO 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-28158
KIDEO PRODUCTIONS, INC.
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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 FAX 212-505-2142
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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 March 14, 1997 there were 2,939,014 shares of the issuer's common stock
outstanding.
1
KIDEO PRODUCTIONS, INC.
FORM 10-QSB
INDEX
Page
No.
PART I. Financial Information
Consolidated Balance Sheet-January 31, 1997
and July 31, 1996 .......................................... 3
Consolidated Statement of Operations-three and six
months ended January 31, 1997 and 1996 ..................... 4
Consolidated Statement of Cash Flow-three and six months ended
January 31, 1997 and 1996 .................................. 5
Notes to the Consolidated Financial Statements ................ 6
Management's Discussion and Analysis or Plan of Operation ..... 7
PART II. Other Information ............................................ 10
Signatures ................................................... 11
Exhibit 10.1 ................................................. 12
2
KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
at January 31, at July 31,
1997 1996*
----------------------------
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 400,419 $ 2,857,097
Accounts receivable ........................... 86,976 94,572
Inventory ..................................... 120,245 17,038
Prepaid expenses .............................. 120,724 122,682
---------------------------
Total current assets ........................ 728,364 3,091,389
Property and equipment, net ........................ 649,201 558,034
Capitalized content costs, net ..................... 712,668 431,861
Other assets ....................................... 359,283 286,427
---------------------------
Total assets ................................ $ 2,449,516 $ 4,367,711
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................. $ 245,415 $ 58,988
Accrued expenses .............................. 159,536 270,532
Capital leases, current portion ............... 244,182 147,173
Unearned revenue .............................. 425,352 225,131
---------------------------
Total current liabilities ................... 1,074,485 701,824
Capital leases, long term portion .................. 124,572 80,318
---------------------------
Total liabilities ........................... 1,199,057 782,142
---------------------------
Shareholders' Equity
Common Stock, $.0001 par value;
authorized 15,000,000 shares,
issued and outstanding 2,939,014 shares
at January 31, 1997 and July 31, 1996 ......... 294 294
Additional paid-in capital .................... 8,737,136 8,737,136
Accumulated deficit ........................... (7,486,971) (5,151,861)
---------------------------
Shareholders' (Deficiency) Equity ............ 1,250,459 3,585,569
---------------------------
Total liabilities and shareholders' equity .. $ 2,449,516 $ 4,367,711
============================
* Derived from the Form 10-KSB
See accompanying notes.
3
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three months ended Six months ended
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
------------------------------- --------------------------
Sales ................................ $ 655,429 $ 433,641 $ 761,230 $ 560,512
Cost of sales ........................ 435,211 232,689 610,664 366,173
--------------------------- --------------------------
Gross profit (loss) ................. 220,218 201,157 150,566 194,339
Selling expenses ..................... 809,353 214,243 1,253,725 414,989
General and administrative expenses .. 734,334 321,962 1,262,380 529,811
--------------------------- --------------------------
Loss from operations ................. (1,323,469) (335,048) (2,365,539) (750,461)
Other income (expense), net .......... 1,659 (44,019) 30,429 (54,939)
Non recurring expenses related to:
Debt extinguished in connection
with the Initial Public Offering -- (93,936) -- (145,569)
--------------------------- --------------------------
Net loss ............................. $ (1,321,810) $ (473,003) $(2,335,110) $ (950,969)
=========================== ==========================
Pro forma financial information
Net loss ........................ N/A $ (473,003) N/A $ (950,969)
Pro forma adjustments for:
Employment agreements ......... N/A (10,000) N/A (74,000)
Interest on debt assumed to be
converted ..................... N/A 25,000 N/A 50,000
--------------------------- --------------------------
Pro forma net loss for the period N/A $ (458,003) N/A $ (974,969)
=========================== ==========================
Net loss per share ................... $ (0.45) $ (0.79)
============= ============
Pro forma net loss per share ......... $ (0.34) $ (0.72)
=========== ===========
Weighted average number of shares
outstanding ................... 2,939,014 2,939,014
============= ============
Pro forma weighted average number
of shares outstanding ........... 1,347,450 1,347,450
============ ===========
See accompanying notes
4
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six months ended
January 31, January 31,
1997 1996
------------------------
Cash flows from operating activities:
Net loss ......................................... $(2,335,110) $(950,969)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of operating assets 317,391 164,952
Amortization of loan discount ................... 42,117
Amortization of deferred debt costs ............. 37,368
Write off of equipment .......................... 226,118
Changes in operating assets and liabilities:
Accounts receivable ............................ 7,596 (42,937)
Inventory ...................................... (103,207)
Prepaid expenses and other current assets ...... 1,958 37,987
Other assets ................................... (89,268) (53,857)
Accounts payable ............................... 186,427 99,950
Accrued expenses ............................... (110,996) 87,245
Unearned revenue ............................... 200,221 202,863
-------------------------
Net cash used in operating activities ....... (1,698,870) (375,281)
-------------------------
Cash flows from investing activities:
Purchase of property and equipment ............... (553,476) (66,760)
Increase in capitalized content costs ............ (345,595)
-------------------------
Net cash used in investing activities ......... (899,071) (66,760)
-------------------------
Cash flows from financing activities:
Proceeds from bridge notes ....................... 425,000
Net proceeds from issuances of capital stock ..... 32,125
Proceeds from long term debt ..................... 32,125
Proceeds from lease financing .................... 207,102
Loans payable - related parties .................. 200
Principal payments on capital leases ............. (65,839) (12,303)
Payment of deferred offering costs ............... (27,500)
-------------------------
Net cash provided by financing activities ..... 141,263 449,647
-------------------------
Net increase (decrease) in cash ....................... (2,456,678) 7,606
Cash and cash equivalents at
the beginning of the period ........................... 2,857,097 61,137
-------------------------
Cash and cash equivalents at the end of the period .... $ 400,419 $ 68,743
=========================
See accompanying notes.
5
KIDEO PRODUCTIONS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The interim financial data is uanudited; however, in the opinion of
management, the interim data includes all adjustments, consisting of all normal
recurring adjustments necessary for a fair statement of results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the three and six months ended January 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending July 31,
1997.
The organization and the business of the Company, accounting policies
followed by the Company and other information are contained in the notes to the
Company's consolidated financial statements filed as part of the Company's
annual report for the fiscal year ended July 31, 1996 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
For comparability, certain July 31, 1996 amounts have been reclassified
where appropriate to conform to the financial statement presentation used at
January 31, 1997.
6
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 reliance on
these forward-looking statements as they speak only as of the date hereof.
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
Six months ended January 31, 1997 and 1996
Sales
For the six months ended January 31, 1997, approximately 31,700
personalized videos were shipped as compared to 23,900 personalized videos for
the six months ended January 31, 1996, representing an increase of 7,800
personalized videos, or 33%.
Sales for the six months ended January 31, 1997 were $761,200; an increase
of 36%, or $200,700, from $560,500 recorded for the six months ended January 31,
1996. Retail and catalogue sales were down $93,100 to $349,800 for the six
months ended January 31, 1997 as compared to $442,900 for the six months ended
January 31, 1996. Direct sales increased 248% , or $291,300, from $117,500 in
the six months ended January 31, 1996 to $408,800 in six months ended January
31, 1997. The increase in direct sales was principally due to several direct
marketing initiatives in print, direct mail, radio and telemarketing, as well as
a higher level of consumer awareness resulting from television and newspaper
exposure of the Company and its products during the six-month period. This
exposure includes the Oprah Winfrey Show, EXTRA, Managing With Lou Dobbs and
articles on the Company and its product in numerous newspaper and magazines such
as Gannett Newspapers, NEWSWEEK and Equity Magazine.
Cost of Sales
Cost of sales increased $244,500, from $366,200 for the six months ended
January 31, 1996 to $610,700 for the six months ended January 31, 1997.
Incremental fixed expenses for rent on added manufacturing space in the current
period, depreciation on additional equipment, the hiring of a manufacturing
manager, additional expenditures in producing two new video titles and
amortization of content creation costs of new programs comprised $227,900 of
this increase. Direct labor and royalties increased due to the increase in
volume.
Selling Expenses
Selling expenses increased $838,700, from $415,000 in the six months ended
January 31, 1996 to $1,253,700 for the same period ended January 31, 1997.
Marketing and promotional programs accounted for approximately $631,900 of the
increase, of which $128,800 were related to launch costs for two new video
titles: "Gregory and Me, See What I Can Do" and "Gregory and Me, My Amazing
Animal Adventure ". Shipping costs increased due to the increase in volume and
in higher rates incurred to meet holiday deadlines. Payroll costs related to
direct marketing and sales support increased as the Company built its
infrastructure to accommodate a high volume of business. These cost increases
were offset by volume-related decreases in packaging for lower retail sourced
sales and lower commissions to catalogue and retail representatives.
7
General and Administrative Expenses
General and administrative expenses increased $732,600, from $529,800 in
the six months ended January 31, 1996 to $1,262,400 in the corresponding period
ended January 31, 1997. The primary causes of this increase were in development
expenses related to enhancing the technology used to personalize videos, costs
incurred in connection with the Company's customer and production databases,
increased staffing and increased professional fees. Product development expense
increased $226,300 as compared to the same period for the previous year. One of
the benefits derived from this expense was the adaptation of four of the
Company's older video titles to new production systems, which run more
efficiently. After a testing phase, the production of the Company's full line of
titles using the new production system was implemented in January, 1997.
Accordingly, a write-down in the amount of $226,000 for older less efficient
equipment was recorded upon the completion of this testing phase. This equipment
will be retired in the coming months.
For the six months ended January 31, 1997 the Company realized $30,400 of
interest, dividend, and miscellaneous income net of interest expense, mostly
related to its cash and cash equivalent deposits. Interest expense and other non
recurring debt expense decreased for the six months ended January 31, 1997 as
compared to the six months ended January 31, 1996 due to the repayment of both
long term debt and interim financing arrangements.
Three months ended January 31, 1997 and 1996
Sales
For the quarter ended January 31, 1997 approximately 27,600 personalized
videos were shipped as compared to 19,100 personalized videos for the quarter
ended January 31, 1996, resulting in an increase of 8,500 units, or 45%.
Sales for the quarter ended January 31, 1997 were $655,400; an increase of
51%, or $221,800, from $433,600 in the quarter ended January 31, 1996. Retail
and catalogue sales were $292,200 at January 31, 1997 down $48,500 for the
quarter as compared to $347,700 for the quarter ended January 31, 1996.
Direct-to-consumer sales increased 311% , to $353,700. This increase was due to
several direct marketing initiatives in print, direct mail and radio, as well as
a higher level of consumer awareness resulting from television and newspaper
exposure of the Company and its products during the quarter.
Cost of Sales
Cost of sales increased from $232,700 for the three months ended
January 31, 1996 to $435,200 for the three months ended January 31, 1997.
Incremental fixed expenses for rent on additional manufacturing space in the
current period, depreciation on additional equipment, the hiring of a
manufacturing manager and the amortization of content creation costs related to
new video titles released in November and December comprised $167,800 of this
increase. Direct labor and royalties increased with the increase in volume.
Selling Expenses
Selling expenses increased $595,200, from $214,200 in the quarter ended
January 31, 1996 to $809,400 for the quarter ended January 31, 1997. Marketing
and promotional programs accounted for approximately $393,500 of the increase,
of which $128,800 were related to launch costs of two new video titles; "Gregory
and Me: See what I Can Do" and "Gregory and Me: My Amazing Animal Adventure".
Payroll costs related to direct marketing and sales support increased as the
Company built its infrastructure and expanded its order processing capabilities
in response to the higher volume of orders received during the
8
Christmas holiday season. These cost increases of $149,100 were offset by
volume-related decreases in packaging for lower retail-based sales and lower
commissions to catalogue and retail representatives.
General and Administrative Expenses
General and administrative expenses increased $412,300, from $322,000 in
the quarter ended January 31, 1996 to $734,300 in the quarter ended January 31,
1997. The primary causes of this increase were in development expenses related
to enhancing the technology used to personalize videos, costs incurred in
connection with the Company's customer and production databases, increased
staffing and increased professional fees. Product development expense increased
$57,000 as compared to the same period for the previous year. One of the
benefits derived from this expense was the adaptation of four of the Company's
older video titles to new production systems, which run more efficiently. After
a testing phase, the production of the Company's full line of titles using the
new production system was implemented in January, 1997. Accordingly, a write-s
down of $226,000 for older less efficient equipment was recorded upon the
completion of this testing phase. This equipment will be retired in the coming
months.
For the quarter ended January 31, 1997, the Company realized $1,700 of
interest, dividend, and miscellaneous income net of interest expense, mostly
related to its cash and cash equivalent deposits. Interest expense decreased due
to repayment of long term debt.
Liquidity and Capital Resources
The Company's working capital decreased $2,735,700, from $2,389,600 at July
31, 1996 to a deficiency of $(346,100) at January 31, 1997. This resulted from a
net operating loss of $2,335,100 offset by $543,500 in non-cash charges for
depreciation, amortization and the write off of equipment and the use of
$186,400 to build working capital exclusive of cash and cash equivalents. An
additional $899,000 was spent on the purchase of property, equipment and
capitalized content creation cost. Long term leases from capital equipment
loans, net of principal payments, provided $141,300 of working capital.
The Company's capital requirements in connection with its 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
marketing, that the Company's working capital, together with anticipated
revenues from operations and its current cash balances, may not be sufficient to
fund the Company's operations and capital requirements to July 31, 1997.
The Company is actively seeking sources of financing and is currently in
discussion with several investors to provide working capital that the Company
believes will be sufficient to sustain its operations through at least July 31,
1997. The Company has not entered into any agreements with any potential
investors relating to providing funding to the Company, and there can be no
assurance the the Company will be able to do so. If additional funding were
obtained in the form of equity financing, such a financing could involve
substantial dilution to the interests of the Company's existing shareholders. A
failure to obtain additional funding would have a material adverse effect on the
Company, including possibly requiring the Company to curtail significantly or to
cease its operations.
9
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, 1996
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
Pursuant to a resolution of the Board of Directors adopted prior
to the closing of the Company's June 1996 initial public offering (the "IPO"),
the Company on November 12, 1996 entered into indemnification agreements (the
"Indemnification Agreements") with each the following persons (being all of the
Company's directors and executive officers): Richard L. Bulman, Charles C.
Johnston, Thomas Griffin, Richard D. Bulman, Michael B. Solovay, Robert J.
Riscica, Marvin H. Goldstein, Joanne Denk, and Bradley Dahl. The Indemnification
Agreements are given effect retroactive to June 24, 1996, the date on which the
Securities and Exchange Commission declared the registration statement relating
to the IPO to be effective.
The Board of Directors authorized and directed the Company to enter into
the Indemnification Agreements based in part upon the Board's determination that
the Indemnification Agreements will enhance the Company's ability to continue to
attract and retain individuals of the highest quality and ability to serve as
its directors and officers.
The form of the Indemnification Agreement is attached as an Exhibit to this
Report.
The Company is not aware of any pending or threatened claim against any of
the Company's directors or officers for which indemnification may be sought.
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-B.
Exhibit
Number Description
------ -----------
10.1 Form of Indemnification Agreement, dated as of November 12, 1996
and made retroactively effective as of June 24, 1996,
entered into between the Company and each of the following
persons (being all of its directors and executive officers):
Richard L. Bulman, Charles C. Johnston, Thomas Griffin,
Richard D. Bulman, Michael B. Solovay, Robert J. Riscica,
Marvin H. Goldstein, Joanne Denk, and Bradley Dahl.
(b) 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 14, 1997 By: \S\ Richard L. Bulman
----------------------------------------
Richard L. Bulman
President & Chief Executive Officer
Date: March 14, 1997 By: \S\ Robert J. Riscica
----------------------------------------
Robert J. Riscica
Vice President & Chief Financial Officer
11