United States
Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-QSB
Amendment Number 1
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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.
- --------------------------------------------------------------------------------
(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 FAX 212-505-2142
- --------------------------------------------------------------------------------
(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 June 16, 1997 2,939,014 shares of the issuer's common stock were
outstanding.
1
KIDEO PRODUCTIONS, INC.
FORM 10-QSB
INDEX
PART I Financial Information: Page
No.
Consolidated Balance Sheet-April 30, 1997
and July 31, 1996........................................ 3
Consolidated Statement of Operations-three and nine
months ended April 30, 1997 and 1996...................... 4
Consolidated Statement of Cash Flow-nine months ended
April 30, 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........................................... 11
Signatures.................................................. 12
2
KIDEO PRODUCTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
at April at July
30, 31,
1997 1996*
--------------------------
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 35,809 $ 2,857,097
Accounts receivable ........................... 44,492 94,572
Inventory ..................................... 112,169 17,038
Prepaid expenses .............................. 55,366 122,682
--------------------------
Total current assets ....................... 247,836 3,091,389
Property and equipment, net ....................... 581,684 558,034
Capitalized content costs, net .................... 615,486 431,861
Other assets ...................................... 156,674 286,427
--------------------------
Total assets ............................... $ 1,601,680 $ 4,367,711
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................. $ 506,745 $ 58,988
Accrued expenses .............................. 256,884 270,532
Capital leases, current portion ............... 95,142 147,173
Unearned revenue .............................. 412,781 225,131
--------------------------
Total current liabilities .................. 1,271,552 701,824
Capital leases, long term portion ................. 89,987 80,318
--------------------------
Total liabilities .......................... 1,361,539 782,142
--------------------------
Shareholders' Equity
Common Stock, $.0001 par value; authorized
15,000,000 shares, issued and outstanding
2,939,014 shares at July 31,1996 and
April 30, 1997 ................................ 294 294
Additional paid-in capital .................... 8,737,136 8,737,136
Accumulated deficit ........................... (8,497,289) (5,151,861)
--------------------------
Shareholders' (Deficiency) Equity ............ 240,141 3,585,569
--------------------------
Total liabilities and shareholders' equity . $ 1,601,680 $ 4,367,711
==========================
* Derived from the Form 10-KSB
See accompanying notes.
3
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three months ended Nine months ended
April 30, April 30, April 30, April 30,
1997 1996 1997 1996
------------------------ -------------------------
Sales ........................ $ 301,960 $ 109,222 $ 1,063,190 $ 669,734
Cost of sales ................ 262,672 130,348 873,336 496,521
------------------------ -------------------------
Gross profit (loss) ......... 39,288 (21,126) 189,854 173,213
Selling expenses ............. 598,270 121,074 1,851,995 536,063
General and administrative
expenses .................... 440,408 275,480 1,702,788 805,291
------------------------ -------------------------
Loss from operations ......... (999,390) (417,680) (3,364,929) (1,168,141)
Other income (expense),
net .......................... (10,928) (15,429) 19,501 (70,368)
Non recurring expenses
related to:
Debt extinguished in
connection with the
Initial Public Offering .. -- (204,228) -- (349,797)
------------------------ -------------------------
Net loss ..................... $(1,010,318) $(637,337) $(3,345,428) $(1,588,306)
======================== =========================
Pro forma financial
information
Net loss ................. N/A $(637,337) N/A $(1,588,306)
Pro forma adjustments
for:
Employment agreements .. N/A N/A N/A (74,000)
-----------------------------------------------------
Pro forma net loss ....... N/A $(637,337) N/A $(1,662,306)
======================== =========================
Additional pro forma
adjustment for earnings
per share calculation:
Interest on debt
assumed to be
converted .............. N/A 25,000 N/A 75,000
Pro forma net loss used
in earnings per share -----------------------------------------------------
calculation ............ N/A $(612,337) N/A $(1,587,306)
======================== =========================
Net loss per share ........... $ (0.34) $ (1.14)
============ ============
Pro forma net loss per share.. $ (0.39) $ (1.01)
=========== ===========
Weighted average number of
shares outstanding .......... 2,939,014 2,939,014
============ ============
Pro forma weighted average
number of shares outstanding 1,571,450 1,571,450
=========== ===========
See accompanying notes
4
KIDEO PRODUCTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Nine months ended
April 30, April 30,
1997 1996
--------------------------
Cash flows from operating activities:
Net loss ........................................ $(3,345,428) $(1,588,306)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization of operating
assets ........................................ 509,582 245,250
Amortization of loan discount .................. 148,872
Amortization of deferred debt costs ............ 81,233
Write off of equipment ......................... 226,118
Changes in operating assets and liabilities:
Accounts receivable ......................... 50,080 31,703
Inventory ................................... (95,131)
Prepaid expenses and other current assets ... 67,316 41,666
Other assets ................................ (89,292) (94,002)
Accounts payable ............................ 447,757 4,574
Accrued expenses ............................ (13,648) 110,503
Unearned revenue ............................ 187,650 131,592
--------------------------
Net cash used in operating activities ..... (2,054,996) (886,915)
--------------------------
Cash flows from investing activities:
Purchase of property and equipment ............ (563,929) (66,760)
Increase in capitalized content costs ......... (345,595)
--------------------------
Net cash used in investing activities ....... (909,524) (66,760)
--------------------------
Cash flows from financing activities:
Proceeds from bridge notes .................... 1,175,000
Net proceeds from issuances of capital stock .. 32,125
Proceeds from long term debt .................. 32,125
Proceeds from lease financing ................. 207,102
Loans payable - related parties ............... 400
Principal payments on capital leases .......... (249,464) (45,461)
Security deposits applied to capital leases ... 185,594
Pymnet of debt issue costs .................... (160,000)
Payment of deferred offering costs ............ (85,098)
--------------------------
Net cash provided by financing activities ... 143,232 949,091
--------------------------
Net increase (decrease) in cash ................... (2,821,288) (4,584)
Cash and cash equivalents at the beginning of the
period ........................................... 2,857,097 61,137
--------------------------
Cash and cash equivalents at the end of the
period ........................................... $ 35,809 $ 56,553
==========================
See accompanying notes.
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 nine months ended April 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending July 31,
1997.
The organization and the business of the Company, accounting policies
followed by the Company and other information are contained in the notes to the
Company's consolidated financial statements filed as part of the Company's
annual report for the fiscal year ended July 31, 1996 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
For comparability, certain July 31, 1996 amounts have been reclassified
where appropriate to to conform to the financial statement presentation used at
April 30, 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 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. In October 1996 a U.S. patent application covering various
aspects of the Company's digital personalization production process was allowed
by the Patent Examiner.
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.
Nine month comparisons. Comparison of the nine month fiscal period begun August
1, 1996 through April 30, 1997("Current Period") against the nine month fiscal
period begun August 31, 1995 through April 30, 1996 ("Prior Period"):
Sales: The Company shipped 40,914 personalized videos in the Current Period, an
increase of 43% over the 28,695 units shipped in the Prior Period. During the
Current Period, the Company released four new personalized video titles. Mystery
of the Missing King, and Space Ace are animated titles that were released in
October, 1996 with direct mail and telemarketing programs. In January, 1997, the
Company released the first live-action and animation personalized videos,
Gregory & Me: See What I Can Do! and Gregory & Me: My Amazing Animal Adventure.
Both titles feature Gregory Gopher and his friends, proprietary characters
developed by the Company. In the current nine month period, these four titles
effectively doubled Kideo's offerings to eight proprietary titles. The Company
also released a plush version of Gregory Gopher and a non-personalized audio
cassette featuring the sound track from the videos. Sales of these ancillary
products were not significant in the period. The newly released videos accounted
for 30% of the total sales volume in the Current Period.
Sales increased 59% to $1,063,000, and include a 304% increase to $643,000 in
direct-to-consumer sales. This increase reflects the cumulative results of the
Company's direct marketing activities in the first nine months including direct
mail, telemarketing, radio, print and television advertising, as well as a
higher level of consumer awareness resulting from television and print exposure
of the Company and its products. This exposure includes the Oprah Winfrey Show,
EXTRA, Managing with Lou Dobbs and articles on the Company published by The New
York Times, Gannett Newspapers, NEWSWEEK, and Equity Magazine.
Catalog and retail-sourced sales fell 19% to $413,000. A volume decline in the
retail channel primarily reflects Prior Period marketing programs that were not
rolled out in the Current Period. The number of catalogs offering Kideo products
has increased from 16 in the Prior Period to 36 currently. Revenues from this
source, however, are level with the Prior Period due to several factors. The
timing of the release of the new Gregory & Me titles did not permit their
inclusion in Christmas catalogs. Additionally, one of the Company's first and
largest customers had been given an exclusive right to sell the Gregory & Me
titles in the catalog channel, which limited
7
their exposure. That exclusive right has expired. Since the catalog trade was
limited to the four original titles, there was some price erosion in this
channel.
Gross margin fell to 18% of sales in the Current Period from 26% in the Prior
Period. Unit selling prices improved approximately 10% due to the shift in sales
mix from catalog-sourced sales (wholesale pricing) to direct-to-consumer sales
(retail pricing) Unit sales improved 43%. However, these positive results were
offset by increases in fixed costs related to an expansion of production
capacity (depreciation, rent, supervision, utilities). In addition, gross margin
was negatively affected by amortization of Gregory & Me content development
costs.
Selling expenses increased 246% to $1,852,000 from $536,000 in the Prior Period,
reflecting the costs of marketing the new Gregory & Me titles through TV, radio,
print, direct mail, and telemarketing. Retail marketing programs initiated in
the Prior Period in the amount of $125,000 were not recurring in the Current
Period.
General & administrative expenses increased 116% to $1,703,000 from $805,000 in
the Prior Period. The Company provided for the disposal of certain production
equipment during the second quarter in the amount of $226,000. This equipment
was written off after the successful completion of tests allowing for the
production of older Kideo titles on new, more efficient equipment. Research and
development expenses increased $230,000 during the period, from $114,000 to
$344,000. The remainder of interperiod change relates primarily to the higher
expenses associated with being a public company (legal, shareholder reporting
and insurance accouint for $246,000); and higher infractructure costs (payroll,
benefits, depreciation on leasehold improvements and online services account for
$296,000).
Loss from operations increased 188% to $3,365,000 from $1,168,000, reflecting
the above changes. Most notably, the cost of launching the new Gregory & Me
titles on radio and TV exceeded the revenues derived. One of the benefits of the
launch was that the Company built a substantial database of leads derived from
people calling an 800 number for free order kits. The Company intends to use
cost-effective means to convert those leads into orders during the remainder of
the fiscal year ending July 31, 1997, and into the Christmas season. Management
is pursuing strategic marketing alliances with the intent to reduce its
financial risk in direct-to-consumer promotions. There can be no assurances that
these objectives will be achieved.
The loss from operations includes operating investments in infrastructure,
including space expansion, operating systems, research & development, and
management. In response to unprofitable promotions spending, the Company has
implemented cost-saving measures that include across-the-board salary
reductions, reductions in shipping costs, headcount, benefits, and discretionary
spending. These actions were implemented in March and April, 1997.
Other income (expense): The Current Period reflects an excess of interest income
from investments (Treasury bills, money market funds and corporate commercial
paper) over lease interest expenses. The Prior Period reflects lease interest
expenses only; there was no interest income in that period.
Nonrecurring expenses relate to interest, amortization of debt discount and
issuance costs on securities that were extinguished from a portion of the
proceeds of the Company's initial public offering.
Net Loss in the period was $3,345,000, or $1.14 per share on 2,939,000 average
shares outstanding, vs. $1,662,000, or $1.01 per share on 1,571,000 average
shares outstanding.
8
Three month comparisons: Comparison of the third fiscal quarter begun February
1, 1997 through April 30, 1997, ("Current Quarter") against the third fiscal
quarter begun February 1, 1996 through April 30, 1996, ("Prior Quarter"):
Sales: The Company shipped 9,472 personalized videos in the Current Quarter, an
increase of 100% over the Prior Quarter's shipments of 4,726. Sales increased
177% to $302,000 from $109,000 due to television and radio promotions during the
current quarter. The direct-to-consumer channel, which returns higher per unit
revenues, accounted for the entire increase.
Gross Margin improved to 13% of sales in the Current Quarter, compared with a
negative gross margin of -19% in the Prior Quarter. Unit selling prices
increased as the sales mix shifted to direct-to-consumer sales, which yield a
higher, retail price than sales to catalogs and retailers, where the Company
realizes a wholesale price. Higher sales volume also contributed to margin
improvement, as the incremental sales, less the cost of labor and materials,
allowed for better absorption of fixed manufacturing costs. Fixed manufacturing
costs increased in the Current Quarter due to amortization of the Gregory & Me
titles (in the Current Period only), and higher rent, supervision and utility
costs due to the expansion of the Company's production capacity from the levels
of the Prior Quarter.
Selling expenses increased 394% in the Current Quarter to $598,000 from $121,000
in the Prior Quarter, reflecting the cost of direct mail, radio and TV promotion
during the period.
General and administrative expenses increased 60% to $440,000 from $275,000 in
the Prior Quarter, reflecting higher professional fees in support of the
Company's initiatives in the areas of patents & trademarks, new business
development, finance, and regulatory reporting.
Loss from operations increased 139% to $999,000 from $418,000 in the Prior
Quarter. Most notably, the cost of launching the new Gregory & Me titles on
radio and TV exceeded the revenues derived. One of the benefits of the launch
was that the Company built a substantial database of leads derived from people
calling an 800 number for free order kits. The Company intends to use
cost-effective means to convert those leads into orders during the remainder of
the fiscal year ending July 31, 1997, and into the Christmas season. 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.
The loss from operations includes operating investments in infrastructure,
including space expansion, operating systems, research & development, and
management. In response to unprofitable promotions spending, the Company has
implemented cost-saving measures that include across-the-board salary
reductions, reductions in shipping costs, headcount, benefits, and discretionary
spending. These actions were implemented in March and April, 1997.
Nonrecurring expenses in the Prior Quarter relate to interest, amortization of
debt discount and issuance costs on securities that were extinguished from a
portion of the proceeds of the Company's initial public offering.
Net Loss in the Current Quarter was $1,010,000, or $0.34 per share on 2,939,000
average shares outstanding, vs. $637,000, or $0.39 per share on 1,571,000
average shares outstanding.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant. The Company's cash and cash equivalents declined from $2,857,000 at
the fiscal year end, July 31, 1996 to $36,000 at the end of the third fiscal
quarter, (April 30, 1997), a decrease of $2,821,000 . Cash used in operations
was $2,055,000, representing the net loss of $3,345,000, net of non-cash charges
of $736,000, and a net non-cash decrement of working capital. The Company
expended $910,000 on the purchase of equipment and on capitalized content costs,
and raised $143,000 from leasing transactions. At April 30, 1997, current
liabilities exceeded current assets by $1,023,000.
On May 13, 1997 the Company closed on the first tranche of a $2,000,000 private
placement of a newly authorized series of preferred stock, designated as the
Series A 6% Convertible Participating Preferred Stock ("Preferred Stock"). The
initial tranche was for $750,000, with subsequent tranches to be received as
follows:
9
$500,000 thirty days after the effectiveness of a registration statement,
$500,000 thirty days after receipt of the second tranche, and $250,000 thirty
days after receipt of the third tranche. The subsequent tranches are subject to
certain closing conditions and are avoidable by the Company in the event they
are not required. Among the closing conditions on the subsequent tranches is the
filing and effectiveness of a registration statement with the SEC covering the
shares of Common Stock issuable upon conversion of the Preferred Stock.
The Preferred Stock will be convertible into common shares at a discount to the
average of the three closing bid prices prior to conversion, which is at the
option of the holder after July 12, 1997. The 6% dividend is payable in cash or
in kind on each July 31st and January 31st, commencing with July 31,1998.
The Company believes that this private placement is sufficient to fund its
working capital needs through December 31, 1997. In addition, management has
taken actions to reduce the cash burn rate, including reductions in headcount,
management salaries, shipping costs, employee benefits, and personal service
contracts. Further, management is seeking strategic alliances to fund the
marketing of its existing product line on a cost effective basis, to expand its
catalog-sourced business and expand its product offerings with nationally
recognized characters, and to more fully expose its patented personalization
technology to the marketplace.
10
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.
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.
On May 9, 1997, the Company's Board of Directors, acting
pursuant to the authority granted under Section 4.2.1 of the Company's
Certificate of Incorporation, authorized the creation of a series of the
Company's Preferred Stock, par value $.0001 per share. The series so authorized
is designated as the Series A 6% Convertible Participating Preferred Stock (the
"Series A Preferred Stock") and consists of 4,000 shares, each share having a
liquidation value of $1,000. There is no Preferred Stock currently authorized
for issuance by the Company other than the Series A Preferred Stock.
On May 13, 1997, the Company consummated a private placement
sale of 750 shares of Series A Preferred Stock. The shares were sold at their
liquidation value, for a total purchase price of $750,000, in a transaction
arranged through Gerard Klauer Mattison & Co., Inc., as placement agent. As a
result of such sale, and in accordance with the terms of the Series A Preferred
Stock and Section 4.3.2 of the Certificate of Incorporation, holders of Common
Stock will rank junior to holders of Series A Preferred Stock in the event of
any voluntary or involuntary liquidation, distribution or sale of assets,
dissolution or winding up of the Company.
The following is a summary of certain terms and conditions
relating to the Series A Preferred Stock and the agreements pursuant to which
the Company effectuated the sale described above. The statements made in such
summary (and in the two preceding paragraphs) are qualified in their entirety by
reference to the following instruments filed as Exhibits to this Report: the
Certificate of Designations relating to the Series A Preferred Stock (the
"Certificate of Designations"); the Stock Purchase Agreement, dated as of May
13, 1997, between the Company and Sellet Marketing Corp. ("Sellet"); the
Registration Rights Agreement, dated as of May 13, 1997, between the Company and
Sellet; and the Joint Escrow Instructions, dated as of May 13, 1997, between the
Company and Krieger & Prager, as Escrow Agent.
Subject to the satisfaction of certain closing conditions
contained in the Stock Purchase Agreement, the Company pursuant to such
agreement will have the option to sell to Sellet up to 1,250 additional shares
of Series A Preferred Stock for aggregate additional consideration of up to
$1,250,000. Among those conditions are the filing with the SEC (and the SEC's
declaration of effectiveness) of a registration statement providing for the sale
under the Securities Act of 1933 of the shares of Common Stock into which the
Series A Preferred Stock may be convertible. As contemplated by the Registration
Rights Agreement, the Company anticipates the filing of the registration
statement no later than June 12, 1997.
Pursuant to the Certificate of Designations, the Series A
Preferred Stock will be convertible at a holder's option into shares of Common
Stock upon the first to occur of (a) July 12, 1997 and (b) the date as of which
the SEC declares the registration statement to be effective (the "Effective
Date"). In addition, under the Certificate of Designations, the Company has the
right to cause a mandatory conversion of all outstanding shares of Series A
Preferred Stock at any time after the one-year anniversary of the Effective
Date.
The Certificate of Designations provides that the Series A
Preferred Stock will initially be convertible (subject to customary
anti-dilution adjustments) into common shares based upon the ratio of (a) the
total liquidation value (at $1,000 per preferred share) of the preferred shares
being converted, to (b) the
11
then-effective conversion price. The conversion price at any point in time will
be 80% of the prior three trading days' average of the closing bid price per
share of Common Stock (as reported by Nasdaq).
The Certificate of Designations provides that dividends on the
Series A Preferred Stock are payable semi-annually on each July 31st and January
31st, commencing with July 31, 1998. The Company has the option to pay any or
all of the dividends through the issuance of additional common shares (utilizing
the same conversion ratio as described above).
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) Exhibits Required by Item 601
of Regulation S-B
None.
(b) Reports on Form 8-K.
On May 27, 1997, the Company filed a report on Form 8-K
relating to the sale of Preferred Stock described under Item
2 above.
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KIDEO PRODUCTIONS, INC.
Dated: June 16, 1997
By /s/ Richard L. Bulman
--------------------------------
Richard L. Bulman
President and Chief
Executive Officer
By /s/ Robert J. Riscica
--------------------------------
Robert J. Riscica
Vice President and Chief
Financial Officer
12