-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NUPaH3NF/86vh5TkLfcs2Q6WHITz+XzBWQLBFDotqif+DmHQ7L3XVTJpta3Vl1Is YraI67qeYhU+cULqVTDsIg== 0000950116-96-000576.txt : 19960626 0000950116-96-000576.hdr.sgml : 19960626 ACCESSION NUMBER: 0000950116-96-000576 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960625 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIDEO PRODUCTIONS INC CENTRAL INDEX KEY: 0000946073 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133729350 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02294 FILM NUMBER: 96585540 BUSINESS ADDRESS: STREET 1: 611 BROADWAY STE 523 CITY: NEW YORK STATE: NY ZIP: 10022 MAIL ADDRESS: STREET 1: 611 BROADWAY STREET 2: STE 523 CITY: NEW YORK STATE: NY ZIP: 10012 424B1 1 Filed Pursuant to Rule 424(b) Registration No. 333-2294 KIDEO PRODUCTIONS, INC. 1,400,000 Shares of Common Stock and Redeemable Warrants to Purchase 1,400,000 Shares of Common Stock As described below, an additional 290,000 shares of Common Stock are being registered in connection with this offering on behalf of certain selling stockholders; however, such shares are being registered for resale purposes only and not as part of the underwritten offering. Kideo Productions, Inc. (the "Company") is offering hereby 1,400,000 shares (the "Shares") of the common stock of the Company (the "Common Stock") and redeemable warrants to purchase 1,400,000 shares of Common Stock (the "Warrants"). The Shares and Warrants may be purchased separately and will be separately transferable immediately upon issuance. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at a price of $4.00, subject to adjustment in certain circumstances, for a period of four years commencing June 24, 1997. The Warrants are redeemable by the Company, upon the consent of the Underwriter, at any time commencing June 24, 1997, upon notice of not less that 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock for the period of 20 consecutive trading days ending on the third day prior to the day on which the Company gives notice has been at least 150% (currently $6.00, subject to adjustment) of the then effective exercise price of the Warrants. See "Description of Securities." Prior to this offering, there has been no public market for the Common Stock or the Warrants and there can be no assurance that any such market will develop. The Common Stock and Warrants have been approved for listing on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "KIDO" and "KIDOW," respectively, however, there can be no assurance that an active trading market will develop as a result of such listing. Additionally, the Company has consented to the denial of secondary trading of its securities in New Jersey. See "Risk Factors - No Secondary Trading in New Jersey." The offering prices for the Shares and Warrants, and the exercise price of the Warrants, were determined pursuant to negotiations between the Company and the Underwriter and do not necessarily relate to the Company's book value or any other established criteria of value. For a discussion of factors considered in determining the offering prices, see "Underwriting." The Company will utilize approximately one-third of the estimated net proceeds of this offering for the repayment of indebtedness, including to affiliates, and other pre-existing obligations. See "Use of Proceeds." This Prospectus also relates to the offer and sale by certain persons (collectively, the "Selling Stockholders") of up to 290,000 shares of Common Stock (collectively, the "Selling Stockholders' Shares") issued in connection with the Company's recent bridge financings. The Selling Stockholders' Shares are not part of this underwritten offering, however, and may not be offered or sold prior to 12 months following the date of this Prospectus without the prior written consent of the Underwriter. The Company will not receive any of the proceeds from the sale of the Selling Stockholders' Shares. See "Prospectus Summary--Recent Financings," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Selling Stockholders and Plan of Distribution." ---------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 11 AND "DILUTION" ON PAGE 22. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================== Underwriting Price to Discounts Proceeds to Public and Commissions(1) Company(2) - ------------------------------------------------------------------------------ Per Share $5.00 $.50 $4.50 Per Warrant .. $.10 $.01 $.09 Total(3) ..... $7,140,000 $714,000 $6,426,000
- ----------------------------------------------------------------------------- (1) In addition, the Company has agreed to pay to the Underwriter a 3% nonaccountable expense allowance, to sell to the Underwriter warrants (the "Underwriter's Warrants") to purchase up to 140,000 shares of Common Stock and/or 140,000 warrants and to retain the Underwriter as a financial consultant. The Company has also agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, including the Underwriter's nonaccountable expense allowance in the amount of $214,200 ($246,330 if the Underwriter's over-allotment option is exercised in full), estimated at $709,200. The Selling Stockholders will not bear any of the expenses of this offering. (3) The Company has granted the Underwriter an option, exercisable within 45 days from the date of this Prospectus, to purchase up to 210,000 additional shares of Common Stock and/or 210,000 additional Warrants, on the same terms as set forth above, solely for the purpose of covering over-allotments, if any. If the Underwriter's over-allotment option is exercised in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $8,211,000, $821,100 and $7,389,900, respectively. See "Underwriting." ---------- The Shares and Warrants are being offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the Shares and Warrants will be made against payment therefor at the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on or about June 28, 1996. ---------- Whale Securities Co., L.P. The date of this Prospectus is June 24, 1996. KIDEO (TM) [COLOR INSERTS] [color photograph of child sitting in front of] television set holding the Company's product] AVAILABLE INFORMATION As of the date of this Prospectus, the Company will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will file periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Company intends to furnish its stockholders with annual reports containing audited financial statements and such other periodic reports as may be required by law. ------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Except as otherwise noted, all information contained in this Prospectus, including per share data and information relating to the number of shares outstanding, (i) gives effect, retroactive to the Company's inception, to an 8.6545-for-1 split of the Common Stock effected on January 5, 1996 (the "Stock Split"), (ii) gives effect to the consummation of the transactions comprising the Pending Recapitalization described below (which will occur upon or immediately prior to the consummation of this offering), as if they had occurred as of the date of this Prospectus, and (iii) assumes no exercise of the Underwriter's over-allotment option to purchase up to 210,000 additional shares of Common Stock and/or 210,000 additional Warrants. See " Pending Recapitalization," "Underwriting" and Notes 8 and 12 of Notes to Consolidated Financial Statements. THE COMPANY Kideo Productions, Inc. (the "Company") develops, manufactures and markets digitally personalized videos ("Kideos") for children. In Kideos, a child's face and spoken name are digitally placed by a personal computer into a story template stored as digital video, which is then output to analog video, allowing the child to become the star in a personalized VHS videocassette. Each of the Company's current Kideo titles has a playing time of approximately 20 minutes and is in video-picturebook format (although, in the Company's latest product, the illustrated body of the child's character exhibits two-dimensional full-motion animation). The Company currently offers four Kideo titles, each of which was developed by the Company and has a digital story template which utilizes content that is proprietary to the Company. In addition, a personalized Kideo is produced using the Company's proprietary computerized personalization production process. It is this production process -- a sophisticated technological system for the low cost, mass production of digitally personalized videos, implemented by the Company in the latter half of 1995 -- which the Company believes will provide it with a meaningful short- to near-term competitive advantage over new entrants into the emerging market for digitally personalized video products. The Company has filed two patent applications relating to this process with the United States Patent and Trademark Office. The Company launched its Kideo line nationally in the spring of 1994 and has, to date, relied primarily on national catalogue retailers to market and sell its products. Each of the Company's current Kideo titles has a suggested retail list price of $29.95, but the Company believes that more than half of all Kideos being sold by its customers are being offered at an actual retail price of $34.95 or higher. The Company's primary target market for its Kideo titles is currently children between the ages of two and seven. With its existing Kideos targeting this market, the Company has created -- and believes it dominates -- a unique product niche in the home video market. Over the approximately one and a half years that Kideos have been marketed, the Company believes that it has developed important sales and distribution relationships with some of the country's most respected catalogue retailers and retail stores. During the nine months ended April 30, 1996, Kideo order kits were available for purchase at various times through such national mail order catalogues as Hammacher Schlemmer, Spiegel, the Boston Museum of Fine Arts, Personal Creations, Fingerhut, Celebration Fantastic, One Step Ahead, Johnson Smith, Just Between Us, Skymall and Critics Choice Video. Since the Company first began marketing its products, sales through catalogue retailers have in fact been the primary distribution outlet for Kideos. Order forms are also provided as inserts in every package of finished portrait photographs picked up by Sears Portrait Studio customers in the United States. The Company's long-term business strategy is to become a premier market leader, both domestically and internationally, in the development, manufacturing and marketing of a wide variety of digitally per- 3 sonalized home video and other audiovisual products for children and other consumers. For the near term, however, the Company intends to focus its efforts primarily on the continued expansion of the Kideo concept and product line. The key elements of the Company's strategy are: o to develop additional Kideo titles for children, including (i) titles featuring newly-created proprietary content, (ii) a series of titles, each featuring the same cast of proprietary characters, (iii) titles for children beyond pre-school age, and (iv) titles featuring the licensed use of popular children's characters; o to develop other digitally personalized audiovisual products likely to appeal to a demographic base spanning both children and adults, such as personalized screen savers and other personalized software products for personal computers; and o to expand the Company's sales and marketing efforts by increasing its distribution channels (e.g., through increased use of targeted direct marketing). Using the current capabilities of its recently developed and proprietary production system, the Company intends to introduce, during the Fall of 1996, a new series of Kideo titles in which, for the first time, the two-dimensional characters (including the illustrated body of the child's character) are fully animated and in which even the personalized facial image of the child's character has limited motion, such as eyes that blink and lips that move up and down. This new series of Kideo titles is called the "Gregory and Me"(TM) series. In each title in this series, the child's character will interact with Gregory Gopher(TM) and other of the Company's proprietary characters. Following the commercial introduction of the Gregory and Me videos, the Company will continue to seek to expand its product line by exploiting more sophisticated digital personalization technologies, as they become available, in order to offer progressively more sophisticated and entertaining personalized media products. The Company, a Delaware corporation, was originally incorporated in August 1993 under the laws of the State of New York. The stockholders of the Company's New York predecessor, which was also known as Kideo Productions, Inc. (referred to herein as "Kideo-NY"), exchanged all of their outstanding shares of common stock of Kideo-NY for the capital stock of the Company in January 1995. Effective upon such exchange, Kideo-NY became a wholly-owned subsidiary of the Company until it was merged into the Company in March 1996. Unless the context otherwise requires, the terms "Company" and "Kideo Productions, Inc." as used in this Prospectus refer to Kideo Productions, Inc., a Delaware corporation; its predecessor, Kideo-NY; and its wholly-owned subsidiary, Kideo Productions (Canada), Inc. ("Kideo- Canada"). The Company's principal executive offices are located at 611 Broadway, Suite 523, New York, New York 10012, and its telephone number is (212) 505-6605. Third-party trademarks referenced in this Prospectus are the property of their respective holders. RECENT FINANCINGS 1995 Pre-Bridge Financing During September and October 1995, the Company effectuated a private placement of $300,000 of its securities to six existing stockholders, including an affiliate of Charles C. Johnston, a director of the Company (the "1995 Pre-Bridge Financing"). In connection with such financing, the Company issued to the investors an aggregate of $300,000 in principal amount of 9% promissory notes (the "1995 Pre-Bridge Notes") and 90,000 shares of Common Stock (the "1995 Pre-Bridge Shares"). The 1995 Pre-Bridge Notes bear interest at the rate of 9% per annum and are due and payable on the earlier of (i) one year from the date of issuance and (ii) the consummation of an initial public offering of the Company's securities. The net proceeds of the 1995 Pre-Bridge Financing were used for working capital purposes. The Company intends, upon the consummation of this offering, to use approximately $316,000 of the proceeds from this offering to repay all of the 1995 Pre-Bridge Notes, including interest accrued thereon through and until such repayment date. In addition, the 90,000 1995 Pre-Bridge Shares are included in the Selling Stock- 4 holders' Shares and are being registered by the Company for resale by their holders concurrently with this offering. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Certain Transactions -- Transactions with Johnston" and "Selling Stockholders and Plan of Distribution." 1996 PRE-BRIDGE FINANCING In January 1996, the Company obtained an aggregate of $125,000 in financing (the "1996 Pre-Bridge Financing") from two of its executive officers (Robert J. Riscica, the Company's Chief Financial Officer, and Marvin H. Goldstein, the Company's Vice President-Comptroller). In connection with this 1996 Pre- Bridge Financing, Messrs. Riscica and Goldstein purchased two and one-half units of the Company's securities, which units were identical to the Bridge Units subsequently issued in connection with the 1996 Bridge Financing, as such terms are defined immediately below (except that, unlike the shares of Common Stock included in the Bridge Units, the shares included in these units (the "1996 Pre-Bridge Shares") are not included in the Selling Stockholders' Shares being registered concurrently with this offering). As a result of the 1996 Pre-Bridge Financing, the Company issued to Messrs. Riscica and Goldstein unsecured 9% promissory notes of the Company in the aggregate principal amount of $125,000 (the "1996 Pre- Bridge Notes") and an aggregate of 25,000 1996 Pre-Bridge Shares. The Company intends, upon consummation of this offering, to use approximately $129,000 of the proceeds from this offering to repay all of 1996 Pre-Bridge Notes, including interest accrued thereon through and until such repayment date. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Certain Transactions -- Transactions with Management." 1996 BRIDGE FINANCING In February 1996, the Company completed the sale of 15 units (the "Bridge Units") to 11 private investors (the "1996 Bridge Financing"), each Bridge Unit consisting of (i) an unsecured 9% promissory note of the Company in the principal amount of $50,000, due and payable on the earlier of the consummation of this offering and February 23, 1997 (subject to extension, under certain circumstances, to February 23, 1998) (each, a "Bridge Note") and (ii) 10,000 shares of Common Stock (the "Bridge Shares"), at a price of $50,000 per Bridge Unit. The Company received gross proceeds of $750,000 from the sale of the Bridge Units. After the payment of $75,000 in placement fees to the Underwriter, who acted as placement agent for the Company with respect to the sale of the Bridge Units, and other offering expenses of approximately $85,000, the Company received net proceeds of approximately $590,000 in connection with the 1996 Bridge Financing. The Company's sale of the 15 Bridge Units resulted in the Company's issuance of a total of $750,000 in principal amount of Bridge Notes and 150,000 Bridge Shares. The Company intends, upon the consummation of this offering, to use approximately $767,000 of the proceeds from this offering to repay all of the Bridge Notes, including interest accrued thereon through and until such repayment date. The 150,000 Bridge Shares are included in the Selling Stockholders' Shares and are being registered by the Company (for resale by their holders) concurrently with this offering. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Selling Stockholders and Plan of Distribution." JUNE 1996 FINANCING In June 1996, the Company completed the sale of two units (the "June 1996 Units") to two private investors (the "June 1996 Financing"), each June 1996 Unit consisting of (i) an unsecured 9% promissory note of the Company in the principal amount of $100,000, due and payable on the earlier of the consummation of this offering and February 23, 1997 (subject to extension, under certain circumstances, to February 23, 1998) (each, a "June 1996 Note") and (ii) 25,000 shares of Common Stock (the "June 1996 Shares"), at a price of $100,000 per June 1996 Unit. The Company received gross proceeds of $200,000 from the sale of the June 1996 Units. After the payment of $20,000 in placement fees to the Underwriter, who acted as placement agent for the Company with respect to the sale of the June 1996 Units, the Com- 5 pany received net proceeds of $180,000 in connection with the June 1996 Financing. The Company's sale of the two June 1996 Units resulted in the Company's issuance of a total of $200,000 in principal amount of June 1996 Notes and 50,000 June 1996 Shares. The Company intends, upon the consummation of this offering to use $200,000 of the proceeds from this offering to repay all of the June 1996 Notes, including interest acrued thereon through and until such repayment date. The 50,000 June 1996 Shares are included in the Selling Stockholders' Shares and are being registed by the Company (for resale by their holders) concurrenlty with this offering. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Selling Stockholders and Plan of Distribution." PENDING RECAPITALIZATION On or immediately prior to the consummation of this offering, the Company intends to effectuate a recapitalization of its outstanding securities as follows (the "Pending Recapitalization"): (i) all 1,048.672 of the currently outstanding shares of Series A Preferred Stock (the "Series A Preferred Stock") of the Company (including 48.672 shares which were issued in December 1995 in payment of the then outstanding dividends due on the Series A Preferred Stock) will be automatically converted into an aggregate of 293,533 shares of Common Stock; (ii) dividends outstanding on the Series A Preferred Stock immediately prior to its conversion, in the anticipated aggregate amount of $60,484 (as of April 30, 1996 such dividends, if then declared, would have aggregated $43,818) will be paid; (iii) the Company will redeem certain Class A Warrants exercisable to purchase an aggregate of 34,989 shares of Common Stock at $2.86 per share and certain Class B Warrants exercisable to purchase an aggregated of 17,496 shares of Common Stock at $5.72 per share, for an aggregate redemption price of approximately $88,000; and (iv) all $1,000,000 principal amount currently outstanding under the Company's 10% Convertible Subordinated Debentures due in 1998 (the "Debentures") will be converted into 279,889 shares of Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ---------- The Common Stock and Warrants offered hereby have been qualified for sale pursuant to certain state securities laws. The Company has not applied for registration of its securities in certain jurisdictions and has withdrawn its application in New Jersey by reason of specific provisions contained in New Jersey's securities laws. As of the date of this Prospectus, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland, Nevada, New York and Rhode Island residents, and California and Washington residents meeting certain investor suitability criteria described below, will be able to purchase securities in this offering. Notice to California Investors. Each purchaser of Common Stock and Warrants in California must be an "accredited investor," as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act,"), or satisfy one of the following suitability standards: (i) minimum actual gross income of $65,000 and net worth (exclusive of home, home furnishings and automobiles) of $250,000; or (ii) minimum net worth (exclusive of home, home furnishing and automobiles) of $500,000. Notice to Washington Investors. Each purchaser of Common Stock and Warrants in Washington must be an "accredited investor," as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The Company has consented to the denial of secondary trading in its securities in the State of New Jersey. As a result of this action, stockholders of the Company will not be able to sell their shares of Common Stock or Warrants through a broker-dealer whose office is located in New Jersey or to any New Jersey resident, whether through a broker-dealer or not, unless such denial is removed, of which there can be no assurance. 6 THE OFFERING Securities offered ............ 1,400,000 shares of Common Stock and Warrants to purchase 1,400,000 shares of Common Stock. The Shares and Warrants may be purchased separately and will be separately transferable immediately upon issuance. See "Description of Securities." Common Stock to be outstanding after this offering .................... 2,938,985 shares of Common Stock(1)(2) Warrants(3) Number to be outstanding after this offering .............. 1,400,000 Warrants Exercise terms .............. Exercisable for a period of four years commencing June 24, 1997, each to purchase one share of Common Stock at a price of $4.00 per share, subject to adjustment in certain circumstances, including in the event of a stock split or dividend, recapitalization, reorganization, merger or consolidation of the Company. See "Description of Securities Public Warrants." Expiration date ............. June 24, 2001 Redemption .................. Redeemable by the Company, upon the consent of the Underwriter, at a redemption price of $.10 per Warrant, at any time commencing June 24, 1997 provided that notice of not less than thirty (30) days is given and the closing bid quotation of the Common Stock has been at least 150% (currently $6.00, subject to adjustment) of the then effective exercise price of the Warrants for the period of 20 consecutive trading days ending on the third day prior to the day on which notice is given. See "Description of Securities -- Public Warrants." Use of Proceeds ............... The Company intends to apply the $5,716,800 estimated net proceeds of this offering approximately as follows: $1,500,000 for marketing; $1,431,000 for the repayment of the 1995 Pre-Bridge Financing, the 1996 Pre-Bridge Financing, the 1996 Bridge Financing and the June 1996 Financing (collectively, the "Bridge Financings"); $1,120,000 for creative development; $500,000 for the repayment of certain pre-existing obligations; $360,000 for capital expenditures; and $805,800 for working capital and general corporate purposes. As a result of such applications, the Company will utilize approximately a third of the estimated net proceeds of this offering for the repayment of indebtedness, including to affiliates, and other pre-existing obligations. See "Use of Proceeds." Risk Factors .................. The securities offered hereby are speculative and involve a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Such risk factors include, among others: o a limited operating history; o a going concern qualification in the independent auditor's report; 7 o history of significant losses, limited revenues and anticipated future losses; o dependence on the proceeds of this offering and need for additional financing; o the developing market for, and unproven acceptance of, the Company's products and its limited marketing capabilities; o dependence on key personnel and a limited number of customers; o potential obsolescence due to rapid technological changes and potentially intense competition; and o the seasonality and significant fluctuations associated with the Company's quarterly financial results. Nasdaq symbols ................. Common Stock -- KIDO Warrants -- KIDOW - ------ (1) Includes the 50,000 June 1996 Shares. (2) Does not include: (i) 1,400,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 280,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants and the warrants included therein; (iii) 83,975 shares of Common Stock reserved for issuance upon exercise of the Class A Warrants and Class B Warrants beneficially owned by Charles Johnston, a director and principal stockholder of the Company (representing those Class A Warrants and Class B Warrants which are not being redeemed in connection with the Pending Recapitalization and which are sometimes referred to herein as the "Johnston Warrants"); (iv) 341,000 shares of Common Stock reserved for issuance upon exercise of outstanding options, and 9,000 shares of Common Stock reserved for issuance upon exercise of options available for future grant, under the Company's 1996 Stock Option Plan (the "Option Plan"); (v) 45,003 shares of Common Stock reserved for issuance upon exercise of outstanding non-plan options held by Richard L. Bulman, the Chairman of the Board and President of the Company (the "Bulman Options"); and (vi) up to a maximum of 50,000 shares of Common Stock reserved for issuance in the event the Company fails under certain circumstances to maintain an effective registration statement with respect to the Selling Stockholders' Shares. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management -- 1996 Stock Option Plan," "Certain Transactions," "Underwriting," and "Description of Securities." (3) Does not include any warrants referenced in clauses (ii) and (iii) of note 2 above. 8 SUMMARY CONSOLIDATED FINANCIAL INFORMATION Set forth below is certain summary financial information for the periods and as of the dates indicated. This information is derived from, and should be read in conjunction with, the consolidated financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. STATEMENT OF OPERATIONS DATA:
Period from November 1, (the Nine-Month Period (date operations Ended April 30, commenced) Year Ended -------------------------------- to July 31, 1994 July 31, 1995 1995 1996 ---------------- --------------- -------------- -------------- (unaudited) (unaudited) Sales ........................... $ 38,223 $ 521,186 $ 426,489 $ 669,734 Gross profit (loss) ............. $ (56,930) $ (136,312) $ (102,352) $ 173,213 Loss from operations ............ $ (404,989) $ (1,460,088) $(1,129,382) $(1,168,140) Other expenses .................. -- $ 118,485 $ 22,473 $ 420,166 Net loss ........................ $ (404,989) $ (1,578,573) $(1,151,855) $(1,588,306) Pro forma net loss(1) ........... -- $ (1,916,573) $(1,408,855) $(1,662,306) Pro forma net loss per share(1) . -- $ (1.18) $ (.90) $ (1.01) Weighted average number of shares outstanding .................... 1,571,450 1,571,450 1,571,450
BALANCE SHEET DATA:
April 30, 1996 (unaudited) -------------------------------------------------------- July 31, 1995 Actual Pro Forma (2) As Adjusted(3) --------------- ------------------- ---------------- -------------- Cash and cash equivalents . $ 61,137 $ 56,553 $ 45,524 $4,472,422 Working capital (deficit) . $ (681,806) $ (1,821,529) $(1,863,347) $3,508,197 Total assets ............. $1,447,717 $ 1,689,391 $ 1,542,664 $5,494,214 Total liabilities ........ $2,061,339 $ 3,222,608(4)(5)(6) $ 2,273,397(7) $1,178,751 Stockholders' equity (deficiency) ............ $ (613,622) $ (1,533,217) $ (730,733)(8)(9) $4,315,463(10)
- ------ (1) The pro forma financial information reflects the operations of the Company as if the employment agreements described in the section "Employment Agreements" herein had been entered into on August 1, 1994. (2) Gives effect to: (i) the application in June 1996 of approximately $103,000 of the proceeds from the 1996 Bridge Financing for the repayment of debt and certain interest expenses; (ii) the sale of two June 1996 Units in June 1996 in connection with the June 1996 Financing (including the issuance of $200,000 in principal amount of June 1996 Notes and 50,000 June 1996 Shares) and the application of the $180,000 in net proceeds therefrom; and (iii) the Pending Recapitalization transactions, including the conversion of the $1,000,000 principal amount of Debentures into 279,889 shares of Common Stock, the conversion of the Series A Preferred Stock into 293,533 shares of Common Stock, the redemption of certain outstanding warrants for approximately $88,000 and the payment of dividends on the Series A Preferred Stock in the aggregate amount of $43,818 (the amount which, if such dividends had been declared at April 30, 1996, would have then been outstanding). The adjustments in this footnote 1 are collectively referred to herein as the "Pro Forma Adjustments." See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and Note 12 of Notes to Consolidated Financial Statements. (3) Gives effect to the sale of the 1,400,000 Shares and 1,400,000 Warrants being offered hereby and the anticipated application of the estimated net proceeds therefrom, including for the repayment of the Bridge Financings. See "Use of Proceeds." 9 (4) Includes $136,364 allocated to the 1995 Pre-Bridge Notes and $81,818 of amortization of the $163,636 loan discount associated with the 1995 Pre-Bridge Notes (resulting from the allocation of $163,636 of the $300,000 proceeds from the 1995 Pre-Bridge Financing to the issuance of the 90,000 1995 Pre-Bridge Shares). Such loan discount is being amortized beginning from the issuance of the 1995 Pre-Bridge Notes over their estimated one-year term. Upon the repayment of the 1995 Pre- Bridge Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- 1995 Pre-Bridge Financing." (5) Includes $66,986 allocated to the 1996 Pre-Bridge Notes and $15,712 of amortization of the $58,014 loan discount associated with the 1996 Pre-Bridge Notes (resulting from the allocation of $58,014 of the proceeds from the 1996 Pre-Bridge Financing to the issuance of the 25,000 1996 Pre-Bridge Shares). Such loan discount is being amortized beginning from the issuance of the 1996 Pre- Bridge Notes over their estimated one-year term. Upon the repayment of the 1996 Pre-Bridge Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- 1996 Pre-Bridge Financing." (6) Includes $476,175 allocated to the 1996 Bridge Notes and $51,342 of amortization of the $273,825 loan discount associated with the 1996 Bridge Notes (resulting from the allocation of $273,825 of the estimated proceeds from the 1996 Bridge Financing to the issuance of the 150,000 1996 Bridge Shares). Such loan discount is being amortized beginning from the issuance of the 1996 Bridge Notes over their estimated one-year term. Upon the repayment of the 1996 Bridge Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. In addition, $160,000 of debt issuance costs ($30,000 of which has been amortized) relating to the 1996 Bridge Notes have been recorded as an asset and are being amortized over the same period as the above loan discount. Upon the repayment of the 1996 Bridge Notes, the unamortized portion of such debt issuance costs will also be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- 1996 Bridge Financing." (7) Includes $110,000 allocated to the June 1996 Notes. Does not include any of the $90,000 loan discount associated with the June 1996 Notes (resulting from the allocation of $90,000 of the proceeds from the June 1996 Financing to the issuance of the 50,000 June 1996 Shares). Such loan discount is being amortized beginning from the issuance of the June 1996 Notes over their estimated term. Upon the repayment of the June 1996 Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. In addition, $20,000 of debt issuance costs relating to the June 1996 Notes have been recorded as an asset and are being amortized over the same period as the above loan discount. Upon the repayment of the June 1996 Notes, the unamortized portion of such debt issuance costs will also be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--June 1996 Financing." (8) Includes $90,000 of the proceeds from the June 1996 Financing allocated to the issuance of 50,000 June 1996 Shares. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (9) Gives effect to the charge to operations resulting (in connection with the Pending Recapitalization) from the redemption by the Company of certain warrants for an aggregate redemption price of approximately $88,000 and the recognition of deferred financing costs of approximately $156,000 associated with the conversion of $1,000,000 principal amount of the Debentures. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." (10) Because the four Bridge Financings are being repaid upon the consummation of this offering, "stockholders equity" includes the recognition of a charge to operations of $81,818 of unamortized loan discount associated with the 1995 Pre-Bridge Financing, $42,302 of unamortized loan discount associated with the 1996 Pre-Bridge Financing, $222,483 of unamortized loan discount, as well as $130,000 of unamortized deferred financing costs, associated with the 1996 Bridge Financing and $90,000 of loan discount, as well as $20,000 of deferred financing costs, associated with the June 1996 Financing. 10 RISK FACTORS The securities being offered hereby are highly speculative and involve a high degree of risk, including but not limited to, those risk factors set forth below, and therefore should not be purchased by anyone who cannot afford a loss of his entire investment. Prior to making an investment in the Company, each prospective investor should carefully consider the following risk factors inherent in and affecting the business of the Company and this offering. Limited Operating History. Although the Company was organized in August 1993, it did not launch its initial line of Kideo products until the spring of 1994. The Company thus has a limited operating history upon which an evaluation of its business and prospects can be based. Such prospects must be considered in light of the numerous risks, expenses, difficulties and delays frequently encountered in connection with the formation and early phase of operation of a new business, the development and commercialization of new products based on innovative technology (such as Kideos, which are an emerging business concept in a new and largely untested market) and the rapid technological changes and evolving industry standards associated with the industry in which the Company operates. See "Business." Going Concern Qualification in Independent Auditor's Report; History of Significant Losses; Limited Revenues; Accumulated Deficit; Anticipated Future Losses. The report of independent accountants on the Company's consolidated financial statements for all periods presented 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 expressing doubt as to the Company's ability to do so without the infusion of additional capital. The consolidated financial statements do not include any adjustments that might result from the outcome of such uncertainty. The Company has incurred substantial operating losses since its inception, resulting in an accumulated deficit of $3,620,540 as of April 30, 1996. For its fiscal year ended July 31, 1995, the Company had revenues of approximately $521,000 and a net loss of approximately $1,579,000, and, for the nine months ended April 30, 1996, the Company had revenues of approximately $669,700 and a net loss of approximately $1,588,300. The Company expects that its net loss for the fiscal year ending July 31, 1996 will substantially exceed the net loss for the prior fiscal year and that the Company will continue to operate at a loss until such time, if ever, when its operations generate sufficient revenues to cover its costs. There can be no assurance that revenues will increase significantly in the future, or even be sustained, or that the Company will ever achieve profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and Consolidated Financial Statements. Significant Capital Requirements; Working Capital Deficit; Dependence on Offering Proceeds; Need for Additional Financing. The Company's capital requirements in connection with its development and marketing activities have been and will continue to be significant. Because the Company has operated at a loss since its inception and is not generating sufficient revenues from its operations to fund its activities (as of April 30, 1996, the Company had a working capital deficit of $1,821,529 and, after giving effect to the Pro Forma Adjustments, a pro forma working capital deficit of $1,863,347), it has, to date, been substantially dependent on loans from its stockholders and private placements of its securities to fund its operations. The Company is dependent upon the proceeds of this offering to continue its creative development activities and fund its marketing and production expansion plans, as well as its other working capital requirements. Although the Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress and timing of its new product development efforts), that the net proceeds of this offering, together with anticipated revenues from operations and its current cash and cash equivalent balances, will be sufficient to fund the Company's operations and capital requirements for at least 12 months following the consummation of this offering, there can be no assurance that such funds will not be expended prior thereto due to unanticipated changes in economic conditions or other unforeseen circumstances. In the event the Company's plans change or its assumptions change or proved to be inaccurate, the Company could be required to seek additional financing sooner than currently anticipated. The Company has no current arrangements with respect to, or potential sources of, 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. Any inability to obtain additional financing when needed would have a material adverse effect on the Company, 11 requiring it to curtail and possibly cease its operations. In addition, any additional equity financing may involve substantial dilution to the interests of the Company's then existing stockholders. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Developing Market; New Entrants; Unproven Acceptance of the Company's Products. The market for digitally personalized media products has only recently begun to develop, is rapidly evolving and currently has few proven products. As it evolves, the Company believes it likely that this market will become characterized by rapid technological changes and an increasing number of market entrants. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced products are subject to a high level of uncertainty and there can be no assurance that products like those of the Company will meet with widespread consumer acceptance. The Company believes, for example, that in order for Kideos to meet with widespread consumer acceptance, they will ultimately need to be produced so that (unlike the present time) the personalized child characters appearing in them can exhibit substantially the same features as the animated and live-action characters now appearing in popular children's films and television shows -- such features as three- dimensional full-motion animation and lips that move in synchronization with the child character's voice. There can be no assurance that the Company will ever succeed in developing a production system capable of producing Kideos with those types of features at a cost acceptable to the Company. In addition, because the market for the Company's products is new and evolving, it is difficult to predict the future growth rate (if any) and size of this market or which methods of product distribution will ultimately prove successful. The Company, for instance, has experienced difficulties in attempting to market its products through mass market retailers. It believes that such difficulties may stem inherently from the fact that a customer at a retail store cannot make an impulse purchase of a Kideo (but instead must take home, fill out and send in a Kideo order form and then wait two to four weeks to receive the product). There can be no assurance that the market for the Company's products will develop to a point that will enable the Company's business to grow significantly (if at all) or become profitable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or, if the Company's products do not achieve market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. See "Business - -- Competition and Industry Background." Limited Marketing Capabilities. The Company has only recently commenced significant marketing activities relating to product commercialization and currently has limited marketing experience and limited financial, personnel and other resources to undertake extensive marketing and advertising activities. Developing market acceptance for the Company's existing and proposed products will require substantial marketing efforts and the expenditure of a significant amount of funds to inform consumers about the Company's products. Although the Company intends to use approximately $1,500,000 (26.2%) of the estimated net proceeds of this offering in connection with its proposed marketing activities (primarily in connection with the development and support of various forms of direct-to-consumer marketing), there can be no assurance that the Company will be able to penetrate existing children's video markets on a widescale basis or position its products to appeal to mainstream consumer markets, or that any marketing efforts undertaken by the Company will result in any increased demand for or greater market acceptance of the Company's existing and proposed products. The Company relies, and intends to continue relying, both on direct sales and on arrangements with third parties for the marketing of its products, including arrangements with reputable distributors (such as catalogue retailers and retail stores). There can be no assurance that they or the Company will be able to successfully market the Company's products or that their efforts will result in any significant increase in revenues. See "Use of Proceeds" and "Business -- Marketing." Dependence on Key Personnel. The success of the Company will be largely dependent on the abilities and continued personal efforts of its executive officers, including especially those of Richard L. Bulman, the Company's President and Chairman of the Board. All of the Company's current employment agreements with its officers expire by December 1998. Any incapacity or inability of Mr. Bulman or other of the Company's officers to perform their services would have a material adverse effect on the Company. Moreover, other than key man life insurance on the life of Mr. Bulman in the amount of $2,000,000, the Company does not intend to have key man life insurance on the lives of its officers or employees. The success of the Company will also be dependent upon its ability to continue to retain and attract qualified personnel. There is considerable and often intense 12 competition for the services of such personnel, both on a national level and within the rapidly growing community of young computer-related businesses that have recently chosen to locate in New York City, the site of the Company's offices. There can be no assurance that the Company will be able either to retain its present personnel or to acquire additional qualified personnel as and when needed. The loss of any of its key employees' services could have a material adverse effect on the Company's operations. See "Business -- Employees" and "Management." Dependence on Limited Number of Customers. For the fiscal year ended July 31, 1995 and the nine months ended April 30, 1996, approximately 42% and 28%, respectively, of the Company's revenues were derived from sales through the Hammacher Schlemmer catalogue. The Company does not have a written agreement with such company, and the loss of its business would have a material adverse effect on the Company. For the nine months ended April 30, 1996, approximately 7% of the Company's revenues were derived from sales of Kideos through order form inserts placed in the photographic portrait orders picked up by customers of Sears Portrait Studios. The Company's agreement with the corporation that operates the Sears Portrait Studios has expired and been continued by the mutual oral agreement of the parties. That agreement could be terminated by the other party at any time. Such a termination could have a material adverse effect on the Company. See "Business -- Marketing." Potential Obsolescence due to Rapid Technological Changes. The technologies underlying the Company's products (such as personal computer hardware and software), as well as the market for those products, are subject to rapid changes and evolving industry standards often resulting in product obsolescence or short product lifecycles. While the Company will continue to devote its efforts and funds to further developing and enhancing its existing products, technologies and production facilities, there can be no assurance that it will succeed in those efforts. The Company's future operating results will likely depend to a considerable extent upon its ability to develop and implement improved technologies for the production of digitally personalized media products that embody features (e.g., improved animation) superior to those displayed by the Company's existing Kideos. The development and implementation of such new technologies is a complex and uncertain process requiring high levels of skill and innovation, as well as accurate anticipation of technological and market trends, and there can be no assurance that the Company's efforts in this direction will succeed. The Company's digitally personalized media products are designed for a relatively new and largely untested market. Such a new market is particularly susceptible to rapidly changing and evolving technologies and industry standards. The introduction by the Company's existing or future competitors of digitally personalized media products embodying superior technologies or the emergence of new industry standards could exert adverse price pressures on the Company's existing or future products or could render the Company's technologies obsolete or its products unmarketable, any of which occurrences would have a material adverse effect on the Company. See "Business -- Technology Overview," "-- Potential Future Products" and "-- Competition and Industry Background." Competition. The Company believes that the market for digitally personalized video media -- although only in its development stages -- will likely evolve into a highly competitive market. The Company is aware of only one other company in this country that is currently producing and marketing personalized video media products. However, there are numerous other companies involved in video media production who could possibly enter the personalized market segment in which the Company is doing business. Many of such companies have substantially greater financial, technical, production, marketing and other resources than those of the Company. In the case of an entity with such resources, the Company does not believe that there currently are, or are likely to be in the foreseeable future, prohibitive barriers to entry into the business of developing and marketing digitally personalized media products. Accordingly, the ability of the Company to compete will depend on its ability to complete development of, and introduce into the marketplace in a timely manner, its proposed products and technology, and to continually enhance and improve such products and technology. There can be no assurance that the Company will be able to compete successfully, that its existing or future competitors will not develop technologies or products that render the Company's products and technology obsolete or less marketable (or otherwise have a material adverse effect upon the Company's operations) or that the Company will be able to successfully enhance its proposed products or technology or adapt them satisfactorily. See "Business -- Competition and Industry Background." Seasonality; Significant Fluctuations in Quarterly Financial Results. Based upon the Company's limited operating history, it expects that a substantial portion of its revenues in any fiscal year may result from sales during the months of October through December. The Company believes that a reason for this sales pattern is 13 that a significant percentage of its products have been given as gifts and, as such, sell at larger volumes during the holiday season. For that and other reasons, the Company's results of operations are likely to vary significantly from quarter to quarter, and financial results for any given fiscal quarter will not necessarily be indicative of the results to be anticipated for a full fiscal year. Other such reasons could include significant fluctuations in demand for the Company's products, a change in the mix of distribution channels through which products are sold, the introduction of new products by the Company or its competitors, and changes in general economic conditions. Moreover, as a result of the Company's limited operating history, the Company does not have historical financial data for a significant number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenues and to a large extent are fixed. However, the Company typically operates with no backlog. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to fulfill orders received within the quarter, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenue. Accordingly, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations would have an immediate adverse impact on the Company's business, operating results and financial condition. Due to all of the foregoing factors, it is likely that the Company's operating results in some future quarter will be below the expectations of public market analysts and investors. In such an event, the market price of the securities offered hereby would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Assurances as to Protection of Proprietary Technology. The Company currently has no patents relating to its proprietary technology, although it has filed two patent applications with the United States Patent and Trademark Office relating to aspects of its digital personalization production process. Any patent applications like the ones filed by the Company involve complex legal and factual questions, and the scope and breadth of patent claims that may be allowed (if any) is inherently uncertain. Accordingly, with respect to any patent application filed by the Company, whether now or in the future, there can be no assurance that any patent will issue as a result of such an application, that the claims allowed under any patent will be sufficiently broad to protect the Company's proprietary technology or processes to which such application relates, or that any patent issued to the Company will not be challenged, invalidated, designed around by others or otherwise circumvented. Even if patents are issued, there can also be no assurance as to the degree or adequacy of protection any such patents may afford. In either event, there can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of the technology or independent development by others of hardware and software products with features based upon, or otherwise similar to, those of the Company's products. In addition, if the Company were to become involved in litigation to enforce any patent that may be issued to it, the attendant costs could be substantial or even prohibitive. The Company accordingly may not enjoy any effective patent protection with respect to its proprietary technology and processes. In addition, although the Company believes that its existing technologies and implementations of such technologies do not infringe upon the rights of others, it is possible that third parties may currently have, or may be granted in the future, patents claiming products or processes that are necessary for or useful to the development of the Company's technology, and that legal actions could be brought against the Company asserting infringement. In addition, there can be no assurance that products developed by the Company in the future will not infringe the current or future patent rights of others, giving rise to infringement claims against the Company. In the case of such infringement, the Company could, under certain circumstances, be required to modify its products or to obtain a third-party license in order to render the Company's technology or processes non-infringing. Such thirty-party license might not be granted, or may not be available to the Company on reasonable terms, either of which results could materially adversely affect the Company's business and prospects. See "Business -- Intellectual Property Rights." Possible Inability to Use or Register the Word "KIDEO" as a Trademark. The Company has adopted and used the word "KIDEO" as its principal trademark for its products and services and has applied for registration of this trademark in the United States Patent and Trademark Office. Another party had previously registered two allegedly similar trademarks but had ceased using them and had filed for bankruptcy under Chapter 11. In July 1994, the Company commenced proceedings against the successor to the original owner of these two trademarks (the "Successor") in order to obtain the cancellation of these trademarks on the basis of abandonment. The Company prevailed in one proceeding but the other proceeding is still pending. This latter proceed- 14 ing is currently suspended, pursuant to a stipulation agreed upon by the Company and the Successor while they discuss a possible settlement. There can be no assurance that a settlement satisfactory to the Company will be reached. If a satisfactory settlement is not obtained, the Company intends to recommence the pending proceeding. In that event, the Company expects (based upon statements made to it by the Successor) that the Successor will allege that, even if the previously registered trademarks were abandoned by the original owner, the Successor nonetheless made the first use thereafter of the trademark "KIDEO" in the United States. Although the Company believes that it should prevail in this proceeding and that the Successor's claim of "first use" is also without merit, a proceeding of this nature is a lengthy and potentially expensive process, and there can be no assurance that the Company will ultimately obtain a registered trademark for the word "KIDEO" and obtain the right to use this mark in connection with its products and services. Another third party also has been using the trademark "KIDEO" locally in the State of Illinois and has obtained an Illinois state registration of this mark. This may prevent the Company from using this mark in the state of Illinois. See "Business -- Legal Proceedings." Broad Discretion in Application of Proceeds; Substantial Use of Proceeds for Repayment of Debt and Other Pre-Existing Obligations and to Benefit Related Parties. Approximately $805,800 (14.1%) of the estimated net proceeds of this offering has been allocated to working capital and general corporate purposes. Accordingly, the Company's management will have broad discretion as to the application of such proceeds. In addition, the Company intends to use approximately $1,931,000 (33.8%) of the estimated net proceeds of this offering to repay indebtedness (including accrued interest thereon) and satisfy pre-existing obligations (such as trade payables) and, therefore, such funds will be unavailable to fund future growth. Included in the indebtedness to be repaid are the 1996 Pre-Bridge Notes payable to Robert J. Riscica and Marvin H. Goldstein, two of the Company's officers, in the principal amounts of $100,000 and $25,000, respectively, and a 1995 Pre-Bridge Note payable to Charles C. Johnston, a director of the Company, in the principal amount of $100,000. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Certain Transactions." Substantial Dilution. Investors purchasing Shares in this offering will incur immediate and substantial dilution of approximately $3.54 (71%) per share between the adjusted net tangible book value per share of Common Stock after this offering and the initial public offering price of $5.00 per Share. See "Dilution." Lack of Prior Public Market; Arbitrary Offering Price; Possible Volatility of Market Prices. Prior to this offering, there has been no public trading market for any of the Company's securities and there can be no assurance that a regular trading market for either the Common Stock or the Warrants will develop, or be sustained, after this offering. Moreover, the initial public offering prices of the Shares and the Warrants and the exercise price of the Warrants have been determined by negotiations between the Company and the Underwriter and, as such, are arbitrary in that they do not necessarily bear any relationship to the assets, book value or potential earnings of the Company or any other recognized criteria of value and may not be indicative of the prices that may prevail in the public market. In addition, the market prices of the Company's securities following this offering may be highly volatile, as has been the case with the securities of other companies in emerging growth businesses. Factors such as the Company's financial results, the introduction of new products by the Company or its competitors, and factors affecting the video industry generally may have a significant impact on the market price of the Company's securities. Additionally, in recent years, the stock market itself has experienced a high level of price and volume volatility and market prices for the stock of many companies (particularly of small and emerging growth companies, the common stock of which trade in the over-the-counter-market) have experienced wide price fluctuations which have not necessarily been related to the operating performance of such companies. See "Underwriting." No Dividends. The Company has never paid any cash or other dividends on its Common Stock. Payment of dividends on the Common Stock is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition, and other relevant factors. For the foreseeable future, the Board intends to retain future earnings, if any, to finance its business operations and does not anticipate paying any cash dividends with respect to the Common Stock. In addition, the payment of cash dividends in the future will potentially be limited by the Company's obligations to first pay interest on its then outstanding Debentures and could be further limited or prohibited by the terms of financing agreements that may be entered into by the Company or by the terms of any preferred stock that may be issued by the Company. See "Dividend Policy" and "Description of Securities -- Debentures." 15 Control by Existing Stockholders; Significant Management Holdings. Upon the consummation of this offering, the Company's existing stockholders will own approximately 52% of the outstanding shares of Common Stock. As a result, purchasers of the Shares offered hereby will be minority stockholders, and although entitled to vote on matters submitted for a vote of the stockholders, will not control the outcome of such a vote. In addition, upon the consummation of this offering, the Company's directors and officers as a group will own an aggregate of approximately 21% of the outstanding shares of Common Stock (27% when beneficial ownership is considered) and will thus continue to be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions (such as acquisitions of the Company or its assets). If they were to act together as a group, the Company's officers and directors could delay or prevent a change of control of the Company. See "Principal Stockholders" and "Description of Securities." Delaware Anti-Takeover Statute; Possible Adverse Effects Associated with the Issuance of "Blank Check" Preferred Stock. The Company is a Delaware corporation and, thus, upon the consummation of this offering, will become subject to the prohibitions imposed by Section 203 of the Delaware General Corporation Law ("DGCL"), which is generally viewed as an anti-takeover statute. In general, this statute will prohibit the Company, once public, from entering into certain business combinations without the approval of its Board of Directors and, as such, could prohibit or delay mergers or other attempted takeovers or changes in control with respect to the Company. Such provisions may discourage attempts to acquire the Company. In addition, the Company's Certificate of Incorporation authorizes the Company's Board of Directors to issue up to 5,000,000 shares of "blank check" preferred stock, from time to time, in one or more series, solely on the authorization of its Board of Directors. The Board of Directors will thus be authorized, without further approval of the stockholders, to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each new series of preferred stock. The issuance of such stock could, among other results, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company, discourage bids for the Common Stock at a premium, or otherwise adversely affect the market price of the Common Stock and Warrants. See "Description of Securities - Preferred Stock" and "-- Anti-Takeover Provisions of Delaware Law." Adoption of Certain Charter and By-Law Provisions Having Anti-Takeover Effects. The Company amended and restated its Certificate of Incorporation in February 1996 in certain ways that may, under certain circumstances, make it more difficult for a third party to gain control of the Company (e.g., by means of a tender offer), prevent or substantially delay such a change of control, discourage bids for the Common Stock at a premium, or otherwise adversely affect the market price of the Common Stock and Warrants. The Certificate of Incorporation provides that following the consummation of this offering the Company's Board of Directors will be classified into three classes of directors, with each class serving a staggered three-year term, and stockholder action may only be effected at a duly called meeting of stockholders and not by a written consent in lieu of a meeting. These provisions could make it more difficult for stockholders to effect certain corporate actions that might facilitate a proposed acquisition of the Company (e.g., the replacement of directors of the Company) and have the effect of delaying or preventing a change of control of the Company. See "Management -- Directors and Executive Officers." Limitations on Liability of Directors and Officers. The Company's Certificate of Incorporation includes provisions to eliminate, to the full extent permitted by the DGCL as in effect from time to time, the personal liability of directors of the Company for monetary damages arising from a breach of their fiduciary duties as directors. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent that such indemnification and advancement of expenses is permitted under such law, as it may from time to time be in effect. In addition, the Company's By-Laws (the "By-Laws") require the Company to indemnify, to the full extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Certificate of Incorporation. As a result of such provisions in the Certificate of Incorporation and the By-Laws, stockholders may be unable to recover damages against the directors and officers of the Company for actions taken by them which 16 constitute negligence, gross negligence or a violation of their fiduciary duties, which may reduce the likelihood of stockholders instituting derivative litigation against directors and officers and may discourage or deter stockholders from suing directors, officers, employees and agents of the Company for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its stockholders. See "Management -- Limitations of Liability and Indemnification." Possible Inability to Exercise Warrants. Holders of Warrants will be able to exercise the Warrants only if (i) a current prospectus under the Securities Act relating to the securities underlying the Warrants is then in effect and (ii) such securities are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of Warrants reside. Although the Company will, following the consummation of this offering, use its best efforts to maintain a current prospectus covering the securities underlying the Warrants, to the extent required by federal securities laws, there can be no assurance that the Company will be able to do so. Moreover, the Company intends to qualify the sale of the Common Stock and the Warrants in a limited number of states. Although certain exemptions in the securities laws of certain states might permit Warrants to be transferred to purchasers in states other than those in which the Warrants were initially qualified, the Company will be prevented from issuing Common Stock in such other states upon the exercise of the Warrants unless an exemption from qualification is available or unless the issuance of Common Stock upon exercise of the Warrants is qualified. The Company is under no obligation to seek, and may decide not to seek or may not be able to obtain, qualification of the issuance of such Common Stock in all of the states in which the ultimate purchasers of the Warrants reside. In such a case, the Warrants held will expire and have no value if such Warrants cannot be sold. Accordingly, the market for the Warrants may be limited because of these restrictions. See "Description of Securities -- Public Warrants." Potential Adverse Effect of Redemption of Warrants. The Warrants may be redeemed by the Company, upon the consent of the Underwriter, at any time commencing June 24, 1997, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock, for the period of 20 consecutive trading days ending on the third day prior to the day on which the Company gives notice, has been at least 150% (currently $6.00, subject to adjustment) of the then effective exercise price of the Warrants. Redemption of the Warrants could force the holders: (i) to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so; (ii) to sell the Warrants at the then market price when they might otherwise wish to hold the Warrants; or (iii) to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. Moreover, although the Warrant Agreement (as defined herein) requires the Company to have in effect, as of the date of redemption (if and when the Warrants become redeemable by the terms thereof), a current prospectus under the Securities Act relating to the securities underlying the Warrants, the Company will not be required to qualify the underlying securities for sale under all applicable state securities laws prior to exercising its redemption rights. See "Description of Securities -- Public Warrants." Shares Eligible for Future Sale; Registration Rights. Upon the consummation of this offering, the Company will have outstanding 2,938,985 shares of Common Stock, of which the 1,400,000 Shares offered hereby and, subject to certain contractual restrictions with the Underwriter, the 290,000 Selling Stockholders' Shares included in the Registration Statement of which this Prospectus forms a part, will be freely tradeable without restriction or further registration under the Securities Act. All of the remaining 1,248,985 shares of Common Stock are "restricted securities" (as that term is defined in Rule 144 under the Securities Act) and in the future may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. Commencing one year following the date of this Prospectus, substantially all of these restricted shares will either become eligible for sale in the public market pursuant to Rule 144 or subject to the exercise of certain demand and/or piggyback registration rights which the Company from time to time has granted to various of its securityholders. No prediction can be made as to the effect, if any, that sales of such securities, or the availability of such securities for sale, will have on the market prices prevailing from time to time for the Common Stock and Warrants. However, even the possibility that a substantial number of the Company's securities may, in the near future, be sold in the public market may adversely affect prevailing market prices for the Common Stock and Warrants and could impair the Company's ability to raise capital through the sale of its equity securities. In addition, any future exercise of the registration rights held by existing securityholders of the Company could cause it to incur sub- 17 stantial expenses and could have a further negative impact upon the Company's ability to raise capital through the sale of its equity securities. See "Description of Securities -- Registration Rights," "Shares Eligible for Future Sale," "Underwriting" and "Selling Stockholders and Plan of Distribution." Benefits of the Offering to Current Stockholders. Upon the consummation of this offering, the current stockholders of the Company will realize certain benefits, including the creation of a public trading market for their shares of Common Stock (although, all of such shares are subject to a 12-month lock-up agreement with the Underwriter and, apart from the shares of stock held by the Selling Stockholders, will not be registered for sale under the Securities Act), and the corresponding facilitation of sales by such stockholders of their shares of Common Stock in the secondary market. All of such stockholders purchased their Common Stock at prices substantially below the initial public offering price. If, at the time the existing stockholders are able to sell their shares of Common Stock in the public market, the market price per share remains at the $5.00 initial public offering price per Share (of which there can be no assurance), then such stockholders would realize an aggregate gain of $4,524,616 ($2.94 per share) on the sale of all of their existing shares. Additionally, a portion of the proceeds of this offering will be used to repay indebtedness owing to the investors in the Bridge Financings, each of whom is an existing stockholder. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Underwriting". Possible Restriction on Market Making Activities in the Company's Securities. Rule 10b-6 under the Exchange Act may prohibit the Underwriter from engaging in any market making activities with regard to the Company's securities for the period from nine business days (or such other applicable period as Rule 10b-6 may provide) prior to any solicitation by the Underwriter of the exercise of Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriter may have to receive a fee for the exercise of Warrants following such solicitation. As a result, the Underwriter may be unable to provide a market for the Company's securities during certain periods while the Warrants are exercisable. Any temporary cessation of such market making activities could have an adverse effect on the market price of the Company's securities. See "Underwriting." No Secondary Trading in New Jersey. The Company has consented to the denial of secondary trading in its securities in the State of New Jersey. As a result of this action, stockholders of the Company will not be able to sell their shares of Common Stock or Warrants through a broker-dealer whose office is located in New Jersey or to any New Jersey resident, whether through a broker-dealer or not, unless such denial is removed, of which there can be no assurance. Possible Delisting of Securities from Nasdaq. While the shares of Common Stock and Warrants meet the current Nasdaq listing requirements and are included on Nasdaq as of the date of this Prospectus, there can be no assurance that the Company will meet the criteria for continued listing. Continued inclusion on Nasdaq generally requires that (i) the Company maintain at least $2,000,000 in total assets and $1,000,000 in capital and surplus, (ii) the minimum bid price of the Common Stock be $1.00 per share, (iii) there be at least 100,000 shares in the public float valued at $200,000 or more, (iv) the Common Stock have at least two active market makers, and (v) the Common Stock be held by at least 300 holders. If the Company is unable to satisfy Nasdaq's maintenance requirements, its securities may be delisted from Nasdaq. In such event, trading, if any, in the Common Stock and Warrants would thereafter be conducted in the over-the-counter market in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts' and the news media's coverage of the Company, and lower prices for the Company's securities than might otherwise be attained. Risks Relating to Low-Priced Stocks. If the Company's securities were delisted from Nasdaq, they could become subject to Rule 15g-9 of the Exchange Act, which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worths in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a spe- 18 cial suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, such rule may adversely affect the ability of broker-dealers to sell the Company's securities and may adversely affect the ability of purchasers in the offering to sell in the secondary market any of the securities acquired hereby. Commission regulations define a "penny stock" to be any non-Nasdaq equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction by broker-dealers involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made regarding commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. These penny stock restrictions will not apply to the Company's securities if such securities are listed on Nasdaq and have certain price and volume information provided on a current and continuing basis or meet certain minimum net tangible assets or average revenue criteria. There can be no assurance that the Company's securities will qualify for exemption from these restrictions. In any event, even if the Company's securities were exempt from such restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to prohibit any person that is engaged in unlawful conduct while participating in a distribution of a penny stock from associating with a broker-dealer or participating in a distribution of a penny stock, if the Commission finds that such a restriction would be in the public interest. If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities could be severely adversely affected. Tax Loss Carryforward. The Company's net operating loss carryforwards ("NOLs") expire in the year 2010. Under Section 382 of the Internal Revenue Code of 1986, as amended, utilization of prior NOLs is limited after an ownership change, as defined in Section 382, to an annual amount equal to the value of the loss corporation's outstanding stock immediately before the date of the ownership change multiplied by the federal long-term exempt tax rate. The additional equity financing obtained by the Company in connection with its Bridge Financings has resulted, and this offering will result, in an ownership change and, thus, in limitations on the Company's use of its prior NOLs. In the event the Company achieves profitable operations, any significant limitation on the utilization of its NOLs would have the effect of increasing the Company's tax liability and reducing net income and available cash resources. See Consolidated Financial Statements. Possible Rescission of Bridge Financing. Because the Company's June 1996 Financing was conducted after the Company filed its registration statement (of which this Prospectus forms a part) for this offering on March 12, 1996, it is possible that the June 1996 Financing could be integrated with this offering. If the two offerings were integrated, the two purchasers of securities in the June 1996 Financing would have a claim for rescission of their investment because the June 1996 Financing was not registered under the Securities Act. Although the Company does not believe that the two offerings should be integrated, or that the investors in the June 1996 Financing would have a claim for rescission, there can be no assurance that this is correct. If a claim for rescission of the June 1996 Financing were upheld, the Company does not believe that it would have a material adverse impact on the Company or its investors because the Company is repaying the entire $200,000 principal amount of the June 1996 Financing, plus interest, out of the proceeds of this offering. As a result, a successful claim for rescission would have no impact on the Company's finances which has not already been contemplated by the terms of this offering. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -- June 1996 Financing." 19 USE OF PROCEEDS The net proceeds to the Company from the sale of 1,400,000 Shares and 1,400,000 Warrants offered hereby (after deducting underwriting discounts and commissions and other expenses of the offering) are estimated to be approximately $5,716,800 ($6,648,570 if the Underwriter's over-allotment option is exercised in full). The Company will receive no proceeds from the sale of the Selling Stockholders' Shares. The Company expects to use the net proceeds (assuming no exercise of the Underwriter's over-allotment option) approximately as follows:
Approximate Approximate Percentage Application of Proceeds Dollar Amount of Net Proceeds - ----------------------- --------------- --------------- Marketing (1) ..................................... $1,500,000 26.2% Repayment of Bridge Financings (2) ................ 1,431,000 25.0 Creative development (3) .......................... 1,120,000 19.6 Repayment of certain pre-existing obligations (4) . 500,000 8.8 Capital expenditures (5) .......................... 360,000 6.3 Working capital and general corporate purposes (6) . 805,800 14.1 --------------- --------------- Total ........................................... $5,716,800 100.0% =============== ===============
- ------ (1) Represents the costs associated with planned television and print advertising in connection with the Company's development and implementation of its direct marketing capabilities. See "Business Marketing -- Direct Sales." (2) Represents the repayment of (i) the 1995 Pre-Bridge Notes in the aggregate principal amount of $300,000, (ii) the 1996 Pre-Bridge Notes in the aggregate principal amount of $125,000, (iii) the Bridge Notes in the aggregate principal amount of $750,000, (iv) the June 1996 Notes in the aggregate principal amount of $200,000 and (v) interest accrued on all of the foregoing, at the rate of 9% per annum through and until the anticipated date of repayment, in the estimated aggregate amount of $56,000. The $1,195,000 in aggregate net proceeds from the Bridge Financings was, and is, being used in connection with the Company's operations, including to initiate the production of new programming, for pre-offering expenses payable in connection with this offering, to repay certain outstanding indebtedness and accrued interest (in the aggregate amount of $105,000) and for working capital and general corporate purposes. Included in the notes being repaid is a total of $225,000 (plus related interest) payable to certain affiliates of the Company, including 1996 Pre-Bridge Notes payable to Robert J. Riscica and Marvin H. Goldstein, two of the Company's officers, in the principal amounts of $100,000 and $25,000, respectively, and a 1995 Pre-Bridge Note payable to Charles C. Johnston, a director and principal stockholder of the Company, in the principal amount of $100,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Certain Transactions." (3) Represents funding for the development of future Kideo programming, of which $365,000 relates to the first three titles in the Company's new Series of Kideo titles (which are currently in progress and expected to be completed during fiscal 1996) and $755,000 relates to the development of additional programming and titles planned for the following fiscal year and for the development of Kideo related merchandise for release by the end of 1996. See "Business -- Potential Future Products." (4) Represents the estimated amount of net proceeds required to be used to fund certain past due obligations of the Company to professionals, vendors and equipment lessors. (5) Represents the costs associated with the purchase of additional equipment to be used in the manufacture of the Company's Kideo products and the expansion of its production capability. See "Business -- Technology Overview" and "-- Production of Kideo Products." (6) A portion of the proceeds allocated to working capital may be utilized to pay the salaries of the Company's executive officers, which are anticipated to aggregate $485,000 for the twelve months following the date of this Prospectus. See "Management." 20 If the Underwriter's over-allotment option is exercised in full, the Company will realize additional net proceeds of approximately $931,770. If the 1,400,000 Warrants offered hereby are exercised, the Company will realize proceeds relating thereto of approximately $5,600,000, before any solicitation fees which may be paid in connection therewith. Such additional proceeds are expected to be added to the Company's working capital. See "Underwriting." The allocation of the net proceeds from this offering set forth above represents the Company's best estimates based upon its currently proposed plans and assumptions relating to its operations and certain assumptions regarding general economic conditions. If any of these factors change, the Company may find it necessary or advisable to reallocate some of the proceeds within the above-described categories or to use portions thereof for other purposes. The Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress and timing of its new product development efforts), that the net proceeds of this offering, together with anticipated revenues from operations and its current cash and cash equivalent balances, will be sufficient to fund the Company's operations and contemplated capital requirements for at least twelve months following the consummation of this offering. In the event that the Company's plans change, or its assumptions change or prove to be inaccurate, or the proceeds of this offering prove to be insufficient to fund operations (due to unanticipated expenses, delays, problems or otherwise), the Company could be required to seek additional financing sooner than currently anticipated. Depending upon the Company's progress in the development of its products and technology, the acceptance of such products by the children's video market, and the state of the capital markets, the Company may also determine that it is advisable to raise additional equity capital within the next 12 months. The Company has no current arrangements with respect to, or sources of, any additional financing, and there can be no assurance that any additional financing will be available to the Company when needed, on commercially reasonable terms, or at all. Any inability to obtain additional financing when needed would have a material adverse effect on the Company, including possibly requiring the Company to curtail significantly, or cease, its operations. Proceeds not immediately required for the purposes described above will be invested principally in short- term bank certificates of deposit, short-term securities, United States Government obligations, money market instruments and/or other interest-bearing investments. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock, and the Board does not intend to declare or pay any dividends on its Common Stock in the foreseeable future. The Board currently intends to retain all available earnings (if any) generated by the Company's operations for the development and growth of its business. The declaration in the future of any cash or stock dividends on the Common Stock will be at the discretion of the Board and will depend upon a variety of factors, including the earnings, capital requirements and financial position of the Company and general economic conditions at the time in question. In the case of cash dividends payable on the Common Stock (if ever declared by the Board), the Company's ability to pay them following this offering would depend upon whether, at that time, it has satisfied in full its obligations to pay all interest then due on the Debentures. In addition, the payment of cash dividends on the Common Stock in the future could be limited or prohibited by the terms of financing agreements that may be entered into by the Company (e.g., a bank line of credit or an agreement relating to the issuance of other debt securities of the Company) or by the terms of any series of Preferred Stock that may be issued. See "Description of Securities -- Preferred Stock." 21 DILUTION The difference between the initial public offering price per share of Common Stock and the adjusted net tangible book value per share of Common Stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share on any given date is determined by dividing the net tangible book value (total tangible assets less total liabilities) of the Company on such date by the number of shares of Common Stock outstanding on such date. At April 30, 1996, the net tangible book value (deficit) of the Company was ($2,182,330), or ($2.38) per share of Common Stock. After giving retroactive effect as of that date to the Pro Forma Adjustments (see footnote 1 of "Prospectus Summary -- Summary Consolidated Financial Statements"), the pro forma net tangible book value (deficit) of the Company as of April 30, 1996 would have been ($1,244,148), or ($.81) per share of Common Stock. After also giving retroactive effect as of that date to the sale of the 1,400,000 Shares and 1,400,000 Warrants being offered hereby and to the receipt and application (including for the repayment of the notes issued in connection with the Bridge Financings) of the estimated net proceeds therefrom (less underwriting discounts and commissions and the estimated expenses of this offering), the adjusted net tangible book value of the Company as of April 30, 1996 would have been $4,277,396, or $1.46 per share of Common Stock, representing an immediate increase in net tangible book value of $2.27 per share to existing stockholders and an immediate dilution of $3.54 (71%) per share to new investors. The following table illustrates the foregoing information with respect to dilution to new investors on a per share basis:
Initial public offering price ...................... $5.00 Net tangible book value before Pro Forma Adjustments $(2.38) Increase attributable to Pro Forma Adjustments ... 1.57 --------- Pro forma net tangible book value before offering . $ (.81) Increase attributable to new investors ........... 2.27 --------- Adjusted net tangible book value after offering .... 1.46 -------- Dilution to new investors .......................... $3.54 ========
The following table sets forth a comparison between the existing stockholders (giving retroactive effect to the Pro Forma Adjustments) and the investors in this offering with respect to the number of shares of Common Stock acquired from the Company, the percentage ownership of such shares, the total consideration paid, the percentage of total consideration paid and the average price paid per share.
Average Shares Purchased Total Consideration Price Per ------------------------ -------------------------- ----------- Number Percent Amount Percent Share ----------- --------- ------------- --------- ----------- Existing shareholders . 1,538,985 52.4% $ 3,177,323 31.2% $2.06 New investors ........ 1,400,000 47.6% 7,000,000 68.8% $5.00 ----------- --------- ------------- --------- ----------- Total .............. 2,938,985 100.0% $10,177,323 100.0% =========== ========= ============= =========
The above table assumes no exercise of the Underwriter's over-allotment option. If the Underwriter's over-allotment option is exercised in full, the new investors will have paid $8,050,000 for 1,610,000 shares of Common Stock, representing approximately 72% of the total consideration for 51% of the total number of shares of Common Stock outstanding. See "Underwriting." 22 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company as of April 30, 1996: (i) on an actual basis; (ii) on a pro forma basis, giving effect as of such date to the Pro Forma Adjustments (see footnote 1 of "Prospectus Summary -- Summary Consolidated Financial Information"); and (iii) as further adjusted to reflect, as of such date, the issuance of the 1,400,000 Shares and 1,400,000 Warrants offered hereby and the anticipated application of the estimated net proceeds therefrom (including for the repayment of the notes issued in connection with the Bridge Financings).
April 30, 1996 ------------------------------------------------------- Actual Pro Forma As Adjusted ------------------- --------------- -------------- Short-term debt, including current maturities on long- term debt ................................................. $1,104,386(1)(2)(3) $1,111,357(4) $ 172,961 =================== =============== ============== Long-term debt and obligations under capital leases, net of current maturities ................................ $ 1,121,079 $ 121,079 $ 121,079 ------------------- --------------- -------------- Stockholders' equity: Preferred Stock, $0.01 par value, issuable in series: 5,000,000 shares authorized; 1,048.672 shares of Series A Preferred Stock issued and outstanding (actual); no shares issued and outstanding (pro forma and as adjusted) 10 -- -- Common Stock, $0.0001 par value: 15,000,000 shares authorized; 915,563 issued and outstanding (actual); 1,538,985 issued and outstanding (pro forma); 2,938,985 issued and outstanding (as adjusted) (5) ......... 92 154 294 Additional paid-in capital .......................... 2,087,221 3,177,169 8,809,829 Accumulated deficit ................................. (3,620,540) (3,908,056) (4,494,660) ------------------- --------------- -------------- Total stockholders' equity (deficiency) ............. (1,533,217) (730,733)(6)(7) 4,315,463(8) ------------------- --------------- -------------- Total capitalization ............................... ($ 412,138) $ (609,654) $ 4,436,542 =================== =============== ==============
- ------ (1) Includes $136,364 allocated to the 1995 Pre-Bridge Notes and $81,818 of amortization of the $163,636 loan discount associated with the 1995 Pre-Bridge Notes (resulting from the allocation of $163,636 of the $300,000 proceeds from the 1995 Pre-Bridge Financing to the issuance of the 90,000 1995 Pre-Bridge Shares). Such loan discount is being amortized beginning from the issuance of the 1995 Pre-Bridge Notes over their estimated one-year term. Upon the repayment of the 1995 Pre-Bridge Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- 1995 Pre-Bridge Financing." (2) Includes $66,986 allocated to the 1996 Pre-Bridge Notes and $15,712 of amortization of the $58,014 loan discount associated with the 1996 Pre-Bridge Notes (resulting from the allocation of $58,014 of the proceeds from the 1996 Pre-Bridge Financing to the issuance of the 25,000 1996 Pre-Bridge Shares). Such loan discount is being amortized beginning from the issuance of the 1996 Pre-Bridge Notes over their estimated one-year term. Upon the repayment of the 1996 Pre-Bridge Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- 1996 Pre-Bridge Financing." (3) Includes $476,175 allocated to the 1996 Bridge Notes and $51,342 of amortization of the $273,825 loan discount associated with the 1996 Bridge Notes (resulting from the allocation of $273,825 of the estimated proceeds from the 1996 Bridge Financing to the issuance of the 150,000 1996 Bridge Shares). Such loan discount is being amortized beginning from the issuance of the 1996 Bridge Notes over their estimated one- 23 year term. Upon the repayment of the 1996 Bridge Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. In addition, $160,000 of debt issuance costs ($30,000 of which has been amortized) relating to the 1996 Bridge Notes have been recorded as an asset and are being amortized over the same period as the above loan discount. Upon the repayment of the 1996 Bridge Notes, the unamortized portion of such debt issuance costs will also be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- 1996 Bridge Financing." (4) Includes $110,000 allocated to the June 1996 Notes. Does not include any of the $90,000 loan discount associated with the June 1996 Notes (resulting from the allocation of $90,000 of the proceeds from the June 1996 Financing to the issuance of the 50,000 June 1996 Shares). Such loan discount is being amortized beginning from the issuance of the June 1996 Notes over their estimated term. Upon the repayment of the June 1996 Notes in connection with the consummation of this offering, the unamortized portion of the loan discount on such payment date will be charged to earnings. In addition, $20,000 of debt issuance costs relating to the June 1996 Notes have been recorded as an asset and are being amortized over the same period as the above loan discount. Upon the repayment of the June 1996 Notes, the unamortized portion of such debt issuance costs will also be charged to earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- June 1996 Financing." (5) Does not include (i) 1,400,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 280,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants and the warrants included therein; (iii) 83,975 shares of Common Stock reserved for issuance upon exercise of the Johnston Warrants; (iv) 341,000 shares of Common Stock reserved for issuance upon exercise of outstanding options, and 9,000 shares of Common Stock reserved for issuance upon exercise of options available for future grant, under the Option Plan; (v) 45,003 shares of Common Stock reserved for issuance upon exercise of the Bulman Options; and (vi) up to a maximum of 50,000 shares of Common Stock reserved for issuance in the event the Company fails under certain circumstances to maintain an effective registration statement with respect to the Seller Stockholders' Shares. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management -- 1996 Stock Option Plan," "Certain Transactions," "Description of Securities" and "Underwriting." (6) Includes $90,000 of the proceeds from the June 1996 Financing allocated to the issuance of the 50,000 June 1996 Shares. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (7) Gives effect to the charge to operations resulting from the redemption by the Company of certain warrants for an aggregate redemption price of approximately $88,000, the recognition of deferred financing costs of approximately $156,000 associated with the conversion of $1,000,000 principal amount of the Debentures, in connection with the Pending Recapitalization and dividends of $43,818, payable June 1996, on the Series A Preferred Stock (the amount which, if such dividends had been declared at April 30, 1996, would have then been outstanding). See "Managements Discussion and Analysis of Financial Condition and Results of Operation." (8) Because the four Bridge Financings are being repaid upon the consummation of this offering, "stockholders equity" includes the recognition of a charge to operations of $81,818 of unamortized loan discount associated with the 1995 Pre-Bridge Financing, $42,302 of unamortized loan discount associated with the 1996 Pre-Bridge Financing, $222,483 of unamortized loan discount, as well as $130,000 of unamortized deferred financing costs, associated with the 1996 Bridge Financing and $90,000 of loan discount, as well as $20,000 of deferred financing costs, associated with the June 1996 Financing. 24 SELECTED FINANCIAL DATA The following selected financial data as of July 31, 1994 and 1995 and for the period from inception to July 31, 1994 and the year ended July 31, 1995 is derived from the Company's consolidated financial statements, audited by Goldstein Golub Kessler & Company, P.C., included elsewhere in this Prospectus. The data as of April 30, 1995 and 1996 (including the pro forma data as of April 30, 1996) and for the nine-month periods then ended is derived from the Company's unaudited financial statements included elsewhere in this Prospectus, which, in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The results of operations for the nine months ended April 30, 1996 are not necessarily indicative of the results that may be expected for the full year. The following data should be read in conjunction with the financial statements of the Company, including the notes thereto. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." STATEMENT OF OPERATIONS DATA:
Period from November 1, (the (date operations Nine-Month Period commenced) Year Ended Ended April 30, -------------------------------- to July 31, 1994 July 31, 1995 1995 1996 ---------------- --------------- -------------- -------------- (unaudited) (unaudited) Sales .............................. $ 38,223 $ 521,186 $ 426,489 $ 669,734 Gross profit (loss) ................ $ (56,930) $ (136,312) $ (102,352) $ 173,213 Loss from operations ............... $ (404,989) $ (1,460,088) $ (1,129,382) $ (1,168,140) Other expenses ..................... -- $ 118,485 $ 22,473 $ 420,166 Net loss ........................... $ (404,989) $ (1,578,573) $ (1,151,855) $ (1,588,306) Pro forma net loss(1) .............. -- $ (1,916,573) $ (1,408,855) $ (1,662,306) Pro forma net loss per share(1) .... -- $ (1.18) $ (.90) $ (1.01) Weighted average number of shares outstanding ...................... 1,571,450 1,571,450 1,571,450
BALANCE SHEET DATA:
April 30, 1996 (unaudited) ------------------------------------------------- July 31, 1995 Actual Pro Forma (2) As Adjusted(3) --------------- -------------- -------------- -------------- Cash and cash equivalents ........ $ 61,137 $ 56,553 $ 45,524 $4,472,422 Working capital (deficit) ........ $ (681,806) $ (1,821,529) $ (1,863,347) $3,508,197 Total assets ..................... $1,447,717 $ 1,689,391 $ 1,542,664 $5,494,214 Total liabilities ................ $2,061,339 $ 3,222,608 $ 2,273,397 $1,178,751 Stockholders' equity (deficiency) . $ (613,622) $ (1,533,217) $ (730,733) $4,315,463
- ------ (1) The pro forma financial information reflects the operations of the Company as if the employment agreements described in the section "Employment Agreements" had been entered into on August 1, 1994. (2) Gives effect to the Pro Forma Adjustments, consisting of: (i) the application in June 1996 of approximately $103,000 of the proceeds from the 1996 Bridge Financing for the repayment of debt and certain interest expenses; (ii) the sale of two June 1996 Units in June 1996 in connection with the June 1996 Financing (including the issuance of $200,000 in principal amount of June 1996 Notes and 50,000 June 1996 Shares) and the application of the $180,000 in net proceeds therefrom; (iii) the Pending Recapitalization transactions, including the conversion of $1,000,000 in principal amount of Debentures into 279,889 shares of Common Stock, the conversion of the Series A Preferred Stock into 293,533 shares of Common Stock, the redemption of certain outstanding warrants for approximately $88,000, and the payment of dividends on the Series A Preferred Stock in the aggregate amount of $43,818 (the amount which, if such dividends had been declared at April 30, 1996, would have then been outstanding). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 12 of Notes to Consolidated Financial Statements. (3) Gives effect to the sale of the 1,400,000 Shares and 1,400,000 Warrants being offered hereby and the anticipated application of the estimated net proceeds therefrom, including for the repayment of the Bridge Financings. See "Use of Proceeds." 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was organized in August 1993 (and began operations in November 1993) to develop, manufacture and market personalized videos for children. The process of mass-producing personalized videos was developed internally and supplemented with additional technology purchased in 1995 (see "1995 Technology Acquisition" described below). Two patent applications for this process are pending. The Company is currently developing several new titles featuring full motion animation with characters and story lines that will be proprietary to the Company and available for merchandising and licensing applications. A significant portion of the proceeds from this offering is intended to fund the development and marketing of these titles and others planned for release during the fall of 1996 and early 1997. The Company has incurred substantial operating losses since its inception, resulting in an accumulated deficit of approximately $3,620,540 as of April 30, 1996. For its fiscal year ended July 31, 1995, the Company had revenues of approximately $521,200 and a net loss of approximately $1,578,600, and, for the nine months ended April 30, 1996, the Company had revenues of approximately $669,700 and a net loss of approximately $1,588,300. The Company expects that its net loss for the fiscal year ending July 31, 1996 will substantially exceed the net loss for the prior fiscal year and that the Company will continue to operate at a loss until such time, if ever, when its operations generate sufficient revenues to cover its costs. The report of independent accountants on the Company's consolidated financial statements for all periods presented 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 expressing doubt as to the Company's ability to do so without the infusion of additional capital. The consolidated financial statements do not include any adjustments that might result from the outcome of such uncertainty. The Company recognizes revenue at the time of shipment of a completed personalized video to the ultimate consumer. Sales of personalized videos through mail order houses or retail stores are generated from pre- paid order kits that the ultimate consumer purchases from these outlets. The Company records a receivable from the mail order house or retail store upon shipment of the pre-paid order kits but defers recognition of its revenue until the personalized video has been created and shipped to the ultimate consumer. Collection of the receivable for the pre-paid order kits from the mail order house or retail store is separate from the production of the personalized video. The pre-paid order kits are billed at full wholesale prices to these outlets and the Company receives no additional revenue from these outlets upon the sale to the ultimate consumer. On or prior to the consummation of this offering, the Company intends to effectuate the Pending Recapitalization of its securities, in connection with which: (i) all 1,048.672 of the currently outstanding shares of Series A Preferred Stock of the Company will be automatically converted into an aggregate of 293,533 shares of Common Stock; (ii) the Company will redeem certain Class A Warrants exercisable to purchase an aggregate of 34,989 shares of Common Stock at $2.86 per share and certain Class B Warrants exercisable to purchase an aggregate of 17,496 shares of Common Stock at $5.72 per share, for an aggregate redemption price of approximately $88,000; and (iii) the $1,000,000 principal amount currently outstanding under the Debentures will be converted into 279,889 shares of Common Stock. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO THE NINE MONTHS ENDED APRIL 30, 1995 Sales. Sales increased 57%, or $243,200, from $426,500 in the nine months ended April 30, 1995 to $669,700 in the nine months ended April 30, 1996. Sales generated through catalogs increased by $131,200. 26 Direct customer orders increased by $64,400, and sales generated through retail outlets accounted for the remaining $47,600 of sales growth. The Company expects that a significant portion of future revenue will be derived from direct customer orders, to be solicited through television and print advertising, although there can be no assurances that this expectation will be realized. The Company recognizes revenue at the time it ships the completed personalized video to the consumer. Cost of Sales. Cost of sales decreased 6%, or $32,300, from $528,800 in the nine months ended April 30, 1995 to $496,500 in the nine months ended April 30, 1996. Increases in material costs (resulting principally from increased order volume and higher depreciation expenses) were more than offset by reduced consulting fees, savings in amortization of storylines and lower direct payroll costs. Operating Expenses. Operating expenses inclusive of interest expense increased 68%, or $712,000, to $1,761,500 in the nine months ended April 30, 1996 from $1,049,500 in the nine months ended April 30, 1995. Selling expenses increased by $24,500, primarily as a result of increased sales volume. The significant components of the selling expense increase are in packaging materials for the catalog and retail-sourced sales, shipping expenses and commissions to sales representatives. General and administrative expenses rose $289,700 when compared to the nine months ended April 30, 1995. The primary causes of this increase were in development expenses related to enhancing the technology used to personalize videos, costs incurred in connection with expanding the Company's customer and production databases, and in staffing to accommodate increased business. The development and database expenses are relatively fixed costs and are expected to be ongoing as the Company expands its title offerings and production volume. Other expenses increased by $397,800. Interest accounts for $306,900 of this increase and is related to $44,900 primarily for capitalized leases on manufacturing equipment, $113,000 for interest on the Debentures and $149,000 for amortization of original issue discount related to the Bridge Financings. Amortization of debt issuance costs and other expenses related to the Debentures and 1996 Bridge Financing was $90,900. PERIOD FROM NOVEMBER 1, 1993 TO JULY 31, 1994 ("INITIAL OPERATING PERIOD") COMPARED TO THE YEAR ENDED JULY 31, 1995 ("FISCAL 1995") The Company commenced operations on November 1, 1993. During the nine-month Initial Operating Period, approximately 1,500 personalized videos were sold. During the subsequent full year of operations, approximately 21,300 personalized videos were sold. Sales. Sales increased by 1,264%, or $483,000, from $38,200 in the Initial Operating Period to $521,200 in the year ended July 31, 1995. Catalog-sourced sales accounted for $317,100 of the increase. There were no catalog sales in the prior period. Direct orders from consumers grew 525%, accounting for an increase of $134,400 to full year sales of $160,000 in the fiscal year ended July 31, 1995. Retail-sourced sales increased 252%, to $44,000, from $12,500 in the Initial Operating Period. The increase in sales for the fiscal year ended July 31, 1995 is attributable to the Company's representation in several nationally and regionally recognized catalogs, including, most notably, Hammacher Schlemmer, which accounted for 42% of the Company's total sales for the year. Retail sales growth was driven by the Company's sales arrangement with Sears Portrait Studios. Several direct marketing initiatives in print and television, as well as a higher level of consumer awareness of the Company's products, drove the growth in direct sales. As described above, the Company expects that a significant portion of future revenue will be derived from direct customer orders solicited through print and television advertising, although there are no assurances that this expectation will be realized. The Company's sales are highly seasonal, with 49% of orders placed during the October-December period in the fiscal year ended July 31, 1995. Orders in the Initial Operating Period were not significant due to the timing of the startup of operations. Cost of Sales. Cost of sales increased 591% or $562,300 from $95,200 in the Initial Operating Period to $657,500 in the fiscal year ended July 31, 1995. Depreciation and amortization of product content costs accounted for $185,000 of the increase. Materials increased by $65,000 and direct labor accounted for $247,000. Operating Expenses. Operating expenses inclusive of interest expense increased 314%, or $1,094,200, from $348,100 in the Initial Operating Period to $1,442,300 for the fiscal year ended July 31, 1995. Selling expenses increased 524%, from $107,000 in the Initial Operating Period to $667,700 in the fiscal year ended July 31, 1995. The increase reflects the acceleration of the Company's marketing efforts. The significant components of 27 the increase were: television advertising, direct mail, Sears rollout, trade show costs, commissions, shipping, and sales salaries. General and administrative expenses increased 172%, or $415,000, reflecting higher payroll costs incurred in connection with the expansion of the business, database costs, professional fees and development expenses. Interest accounts for an additional $118,500 of the increased operating expenses and is related to capitalized leases on manufacturing equipment and interest on the Debentures. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements in connection with its development and marketing activities have been and will continue to be significant. As of April 30, 1996, the Company had a working capital deficit of $1,821,529 and, after giving effect to the Pro Forma Adjustments, a pro forma working capital deficit of $1,863,347. The Company is dependent upon the proceeds of this offering to continue its creative development activities and fund its marketing and production expansion plans, as well as its other working capital requirements. The Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress and timing of its new product development efforts), that the net proceeds of this offering, together with anticipated revenues from operations and its current cash and cash equivalent balances, will be sufficient to fund the Company's operations and capital requirements for at least 12 months following the consummation of this offering. 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, or potential sources of, 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. Because the Company has operated at a loss since its inception and has not generated sufficient revenues from its operations to fund its activities, it has, to date, been substantially dependent on loans from its stockholders and private placements of its securities to fund its operations. These financings are described below: September 1994 Financing In September 1994, the Company borrowed an aggregate principal amount of $250,000 from nine accredited investors participating in a private placement of the Company's 10% promissory notes (the "September 1994 Financing"). The net proceeds of the September 1994 Financing were used for working capital purposes. The September 1994 Financing was subsequently restructured as a result of the Company's inability to repay the indebtedness in November 1994, when it was originally due. As a result of that restructuring, in May 1995, in connection with the initial closing of the May 1995 Units Financing (described below): (i) $75,000 in principal amount of the September 1994 Financing was repaid; (ii) $175,000 in principal amount of the September 1994 Financing was converted into 1.75 of the units sold in the May 1995 Units Financing; and (iii) the lenders in the September 1994 Financing were issued, in proportion to their respective initial September 1994 loans, Class A Warrants to purchase an aggregate of 34,989 shares of Common Stock and Class B Warrants to purchase an aggregate of 17,496 shares of Common Stock. All of these Class A Warrants and Class B Warrants are being redeemed in connection with the Pending Recapitalization. Johnston Financings In October 1994, Charles C. Johnston (then and now a director of the Company) and J&C Resources, a corporation of which Mr. Johnston is the sole stockholder, (together, "Johnston") invested an aggregate of $300,000 in the Company, in consideration of which Johnston was issued 3,226.085 shares of Preferred Stock of the Company. In March 1995, Johnston (i) returned his 3,226.085 shares of Preferred Stock to the Company for cancellation in exchange for a promissory note of the Company in the principal amount of $300,000, and (ii) loaned the Company an additional $100,000 (collectively, the "Johnston Financings"). The net proceeds of the Johnston Financings were used by the Company for working capital purposes. The $400,000 principal amount of notes issued pursuant to the Johnston Financings (the "Johnston Notes") accrued interest at a rate of 12% per annum and were secured by a pledge of substantially all of the Company's assets (which security has since been terminated). In addition, pursuant to the terms of the Johnston Notes, in May 1995 Johnston received Class A Warrants to purchase an aggregate of 55,983 shares of Common Stock and Class B Warrants to purchase an 28 aggregate of 27,992 shares of Common Stock (collectively, the "Johnston Warrants"). The Johnston Notes were to have matured in September 1995; however, prior to such time and in accordance with their terms, in June 1995 the $400,000 aggregate principal amount of the Johnston Notes was converted into four of the units sold in the May 1995 Units Financing. The interest owed on the Johnston Notes at the time of such conversion was not paid. The $17,000 interest owed on the Johnston Notes at the time of such conversion was paid to Mr. Johnston out of the net proceeds of the 1996 Bridge Financing. See "Certain Transactions -- Transactions with Johnston" and "Description of Securities -- Johnston Warrants." December 1994 Financing In December 1994, the Company borrowed an aggregate principal amount of $400,000 from eight accredited investors participating in a private placement of the Company's promissory notes, which notes were to be repaid in an amount equal to 105% of the principal amount borrowed on the earlier of (i) the consummation of a subsequent private placement generating net proceeds to the Company in excess of $950,000 and (ii) May 15, 1995 (the "December 1994 Financing"). The net proceeds of the December 1994 Financing were used for working capital purposes. As a result of an agreement made in March 1995 among the Company and the lenders of the December 1994 Financing, in May 1995 (in connection with the initial closing of the May 1995 Unit Financing) the $400,000 principal amount of the December 1994 Financing was converted into four of the units sold in the May 1995 Units Financing, and the December 1994 lenders were paid interest equal to 5% of their original investment in the December 1994 Financing. May 1995 Units Financing During the period from May through October 1995, the Company consummated a series of sales of units of its Debentures and Series A Preferred Stock, having an aggregate purchase price of $2,000,000, to 79 accredited investors participating in the May 1995 Units Financing. For each $100,000 unit purchased in the May 1995 Units Financing, a purchaser received 50 shares of Series A Preferred Stock and a Debenture in the principal amount of $50,000. Of the 20 units sold in the May 1995 Units Financing: (i) 1.75 units represented the conversion in May 1995 of $175,000 of the then-outstanding principal amount due in connection with the September 1994 Financing; (ii) 4 units represented the conversion in June 1995 of the $400,000 aggregate principal amount then outstanding in connection with the Johnston Financings; and (iii) 4 units represented the conversion in May 1995 of the $400,000 aggregate principal amount then outstanding in connection with the December 1994 Financing, each described above. The net proceeds from the sale of the remaining 10.25 units in the May 1995 Units Financing were used (a) to repay the remaining $75,000 principal amount of the September 1994 Financing, (b) to pay the 5% interest owing in respect of the December 1994 Financing, and (c) for working capital purposes. 1995 Pre-Bridge Financing During September and October 1995, the Company effectuated a private placement of its securities to six existing stockholders participating in its 1995 Pre-Bridge Financing, for aggregate gross proceeds to the Company of $300,000. In connection with such financing, the Company issued to the investors an aggregate of $300,000 in principal amount of 1995 Pre-Bridge Notes and 90,000 1995 Pre-Bridge Shares. The 1995 Pre- Bridge Notes bear interest at the rate of 9% per annum and are due and payable on the earlier of (i) one year from the date of issuance and (ii) the consummation of an initial public offering of the Company's securities. The net proceeds of the 1995 Pre- Bridge Financing were used for working capital purposes. The Company intends, upon the consummation of this offering, to use approximately $316,000 of the proceeds from this offering to repay all of the 1995 Pre-Bridge Notes, including interest accrued thereon through and until such repayment date. In addition, the 90,000 1995 Pre-Bridge Shares are included in the Selling Stockholders' Shares and are being registered by the Company for resale by their holders concurrently with this offering. See "Selling Stockholders and Plan of Distribution." 1996 Pre-Bridge Financing In January 1996, the Company obtained $125,000 in financing from two of its executive officers (Robert J. Riscica, the Company's Chief Financial Officer, and Marvin H. Goldstein, the Company's Vice President- Controller). In connection with this 1996 Pre-Bridge Financing, Messrs. Riscica and Goldstein purchased two 29 and one-half units of the Company's securities, which units were identical to the Bridge Units subsequently sold in connection with the 1996 Bridge Financing (except that, unlike the Bridge Shares, the 1996 Pre-Bridge Shares are not included in the Selling Stockholders' Shares being registered concurrently with this offering). As a result of the 1996 Pre-Bridge Financing, the Company issued to Messrs. Riscica and Goldstein (i) 1996 Pre-Bridge Notes in the aggregate principal amount of $125,000, bearing interest at the rate of 9% per annum and due and payable on the earlier of the consummation of this offering or February 23, 1997 (subject to extension, under certain circumstances, to February 23, 1998, and (ii) 25,000 1996 Pre-Bridge Shares. The proceeds from the 1996 Pre-Bridge Financing are being used by the Company for working capital and general corporate purposes. The Company intends, upon the consummation of this offering, to use approximately $129,000 of the proceeds from this offering to repay all of the 1996 Pre-Bridge Notes, including interest accrued thereon through and until such repayment date. See "Certain Transactions -- Transactions with Management." 1996 Bridge Financing In February 1996, the Company completed the sale of 15 Bridge Units to 11 private investors in connection with the 1996 Bridge Financing, each Bridge Unit consisting of: (i) a Bridge Note in the principal amount of $50,000, bearing interest at the rate of 9% per annum and due and payable on the earlier of the consummation of this offering or February 23, 1997 (subject to extension, under certain circumstances, to February 23, 1998); and (ii) 10,000 Bridge Shares, at price of $50,000 per Bridge Unit. The Company received gross proceeds of $750,000 from the sale of the Bridge Units. After the payment of $75,000 in placement fees to the Underwriter, who acted as placement agent for the Company with respect to the sale of the Bridge Units, and other offering expenses of approximately $85,000, the Company received net proceeds of approximately $590,000 in connection with the 1996 Bridge Financing. Those net proceeds were used to repay certain indebtedness, to pay past due trade payables and for working capital and general corporate purposes. The Company intends, upon the consummation of this offering, to use approximately $767,000 of the proceeds from this offering to repay all of the Bridge Notes, including interest accrued thereon through and until such repayment date. The 150,000 Bridge Shares are including in the Selling Stockholders' Shares and are being registered by the Company for resale by their holders concurrently with this offering. See "Selling Stockholders and Plan of Distribution." June 1996 Financing In June 1996, the Company completed the sale of two units (the "June Bridge Units") to two private investors (the "June 1996 Financing"), each June 1996 Unit consisting of (i) an unsecured 9% promissory note of the Company in the principal amount of $100,000, due and payable on the earlier of the consummation of this offering and February 23, 1997 (subject to extension, under certain circumstances, to February 23, 1998) (each, a "June 1996 Note") and (ii) 25,000 shares of Common Stock (the "June 1996 Shares"), at a price of $100,000 per June 1996 Unit. The Company received gross proceeds of $200,000 from the sale of the June 1996 Units. After the payment of $20,000 in placement fees to the Underwriter, who acted as placement agent for the Company with respect to the sale of the June 1996 Units, the Company received net proceeds of $180,000 in connection with the June 1996 Financing. The Company's sale of the two June 1996 Units resulted in the Company's issuance of a total of $200,000 in principal amount of June 1996 Notes and 50,000 June 1996 Shares. The Company intends, upon the consummation of this offering to use $200,000 of the proceeds from this offering to repay all of the June 1996 Notes, including interest accrued thereon through and until such repayment date. The 50,000 June 1996 Shares are included in the Selling Stockholders' Shares and are being registered by the Company (for resale by their holders) concurrenlty with this offering. See "Selling Stockholders and Plan of Distribution." 1995 TECHNOLOGY ACQUISITION In July 1995, the Company, through its wholly owned subsidiary Kideo-Canada, acquired (the "Technology Acquisition") certain computer hardware and software assets (the "Assets") from V-Seion Multimedia Systems, Inc. (as the "Seller" in such transaction), of which Bradley Dahl was then the sole stockholder. As a result of the Technology Acquisition, Mr. Dahl became employed by the Company as Vice President-Development. The purchase price paid by the Company for such assets was approximately $144,000 and was paid (i) by cash in the sum of approximately $37,000, (ii) partly through the forgiveness of a loan made previously by Kideo-Canada to the Seller in the principal amount of approximately $37,000, and (iii) partly through the transfer from Kideo- 30 Canada to the Seller of 19,645 shares of Common Stock of the Company, which shares were valued at approximately $70,000. In addition, legal fees of approximately $48,000 incurred in connection with the Technology Acquisition were capitalized in connection therewith. See "Certain Transactions -- 1995 Technology Acquisition." Approximately three weeks before the Technology Acquisition was consummated, the Seller had acquired the Assets from IVS Holdings Ltd., a British Columbia corporation ("IVS") and Interactive Videosystems Inc., a British Columbia corporation ("IVI") and the parent corporation of IVS. IVS and IVI are hereinafter collectively called the "Prior Asset Owners". Mr. Dahl had been one of a team of four persons who had been engaged as independent subcontractors by the Prior Asset Owners in connection with their operation of a business that, until approximately December 1994, had utilized the Assets principally to produce a line of digitally personalized videos for children which were marketed under the name of "Starmaker" videocassettes (the "Starmaker Business"). The Starmaker Business had engaged in marketing only two Starmaker titles -- The Forgetful King's Festival and Rocket Rescue and sold those titles primarily in Canada. In approximately December 1994, the Prior Asset Owners ceased selling the two Starmaker titles to consumers when they closed the office of the Starmaker Business in Vancouver and dismissed all of the personnel thereof except for Mr. Dahl. From December 1994 through the time of the Seller's acquisition of the Assets from the Prior Asset Owners, the Starmaker Business generated no revenues from the sale of Starmaker titles to consumers; instead, the only revenues generated by the Starmaker Business during that period were derived from the Spring 1995 sale to three third parties of a turnkey production system that would permit such parties to engage in the on-site production and sale for their own account of the two Starmaker titles. At the time of their acquisition by Kideo-Canada, the Assets consisted of substantially all of the assets that the Prior Asset Owners had used in connection with operating the Starmaker Business. The Assets were comprised principally of: (i) PC software technologies (the "Acquired Software Technologies") which, in the opinion of the Company, would enable the production at a lower cost than could be achieved with the Company's own then-existing technologies of Kideos featuring a superior implementation of two-dimensional and three dimensional partial-motion and full-motion animation in the child character's animated body; and (ii) PCs, other computer-related hardware and office supplies that had been used in the Starmaker Business (the "Acquired Equipment"). Since consummating the Technology Acquisition, the Company has employed the Acquired Software Technologies so as to (i) adapt and integrate them into its process for the computerized mass production of digitally personalized videos and (ii) take advantage of such software's ability to produce improved animation in the child-character whose digitally personalized face appears in a Kideo. The Company has, for example, modified the Acquired Software Technologies in order to enable them to produce multiple Kideos simultaneously (prior to the Company making such improvements, such software had been capable of producing only one Starmaker video at a time). With respect to the Acquired Equipment, while the Starmaker Business had utilized it in part for the actual production of Starmaker videos, the Company has not been utilizing such equipment for the production of Kideos. The Company instead uses the Acquired Equipment as general office equipment for its Vancouver facility. In addition, although the Company has, as a result of the Technology Acquisition, become the owner of the two Starmaker titles and of the rights to the Starmaker name, the Company has not resumed the sale of those titles in the Canadian or any other market, does not intend to sell those titles in any market and does not intend to market its own digitally personalized videos under the Starmaker name. Consistent with its own selling practices, the Company also has not continued the practice of the Starmaker Business of selling turnkey systems for the production of digitally personalized videos. As the foregoing demonstrates, the revenue producing activities of the Starmaker Business had, in essence, ceased by the end of 1994, and the Company, since consummating the Technology Acquisition, has not resumed or otherwise continued such activities. Accordingly, because the revenue producing activities that were once associated with the Assets have not remained generally the same as before the Technology Acquisition, the Company does not believe that the financial condition or results of operations of the Starmaker Business would in any way be relevant or material to an analysis of the Company's business or future operations. The Company therefore has not included in this Prospectus the historical financial statements of the Starmaker Business. 31 BUSINESS GENERAL The Company develops, manufactures and markets digitally personalized videos ("Kideos") for children. In Kideos, a child's face and spoken name are digitally placed by a personal computer into a story template that is stored as digital video. The digital video is then output to analog video, allowing the child to become the star in a personalized VHS videocassette. Each of the Company's current Kideo titles has a playing time of approximately 20 minutes and is in video-picturebook format (although, in the Company's latest Gregory and Me(TM) Kideos, the illustrated body of the child's character exhibits two-dimensional full-motion animation). The Company currently offers four Kideo titles, each of which was developed by the Company and has a digital story template which utilizes content that is proprietary to the Company. In addition, a personalized Kideo is produced using the Company's proprietary computerized personalization production process. It is this production process -- a sophisticated technological system for the low cost, mass production of digitally personalized videos, implemented by the Company in the latter half of 1995 -- which the Company believes will provide it with a meaningful short- to near-term competitive advantage over new entrants into the emerging market for digitally personalized video products. The Company launched its Kideo line nationally in the spring of 1994 and has, to date, relied primarily on national catalogue retailers, such as Hammacher Schlemmer and Spiegel, to market and sell its products. Each of the Company's current Kideo titles has a suggested retail list price of $29.95, but the Company believes that more than half of all Kideos being sold by its customers are being offered at an actual retail price of $34.95 or higher. The Company's primary target market for its Kideo titles is currently children between the ages of two and seven. With its existing Kideos targeting this market, the Company has created -- and believes it dominates - -- a unique product niche in the home video market. OPERATING STRATEGY The Company's long-term business strategy is to become a premier market leader, both domestically and internationally, in the development, manufacturing and marketing of a wide variety of digitally personalized consumer media products. For the near term, however, the Company intends to focus its efforts primarily on the continued expansion of the Kideo concept and product line. The key elements of the Company's strategy are: o to develop additional Kideo titles for children, including (i) titles featuring newly-created proprietary content, (ii) a series of titles, each featuring the same cast of proprietary characters, (iii) titles for children beyond pre-school age, and (iv) titles featuring the licensed use of popular children's characters; o to develop other digitally personalized audiovisual products likely to appeal to a demographic base spanning both children and adults, such as personalized screen savers and other personalized software products for personal computers; and o to expand the Company's sales and marketing efforts by increasing its distribution channels (e.g., through increased use of targeted direct marketing). See " -- Potential Future Products" and -- Marketing." Using the current capabilities of its recently developed and proprietary production system, the Company intends to introduce, during the Fall of 1996, its new Gregory and Me(TM) series of titles in which, for the first time, the two-dimensional characters (including the illustrated body of the child's character) are fully animated and in which even the personalized facial image of the child's character has limited motion (such as eyes that blink and lips that move up and down). The Company will continue to seek to expand its product line by exploiting more sophisticated digital personalization technologies, as they become available, in order to offer to consumers progressively more sophisticated and entertaining personalized media products. See " -- Technology Overview" and " -- Potential Future Products." TECHNOLOGY OVERVIEW The Company's production of Kideos was made possible by relatively recent advancements in the capabilities of affordable desktop personal computers ("PCs") to process, manipulate and edit digital video information. A Kideo is created by overlaying a digitized photographic image of a child's face onto the body of an illustrated 32 character embodied in a pre-existing digital story template and then recording, to a VHS videocassette, the resulting series of digital images to the accompaniment of music and narration. The narrative track is also personalized in appropriate places by inserting the spoken name of the child. The three older Kideo titles -- Mr. Tibbs & the Great Pet Search; My Alphabet; and 1,2,3, Come Count With Me -- were conceived and produced by the Company prior to the Company's development of its current production process, using a less advanced production system (referred to herein as the "TVL system"). These three Kideo titles consist merely of 130 to 150 two-dimensional full-screen illustrated images (or "frames") in which the child appears as the main character together with other illustrated characters who comprise the standard content of the particular title. In the three Kideo titles produced with the TVL system, the illustrated body of the child's personalized character can be moved around within a frame, but only in a limited number of frames, and each frame appears on screen for almost six seconds before fading to the next frame. As a result, the finished Kideo product has a somewhat static appearance that might be likened to a "video picturebook," as distinguished from the full-motion animation a consumer experiences when viewing, for example, a videocassette of Disney's The Lion King. The Company's fourth and newest Kideo title, My Christmas Wish, which was introduced to the market in the latter half of 1995, was the first Kideo title to be produced by the Company with its new proprietary Kideo production system. Because the Company utilized some of the new and more advanced production technologies available to it with such system, the two-dimensional illustrated body of the child's personalized character in this latest Kideo title exhibits a significantly greater range of animated motion -- although still not full-motion animation. In My Christmas Wish, not only can the illustrated character be moved around the screen, but there is also movement within the illustrated body itself (i.e., arms can be raised, the head turned, etc.). During the Fall of 1996, the Company intends to introduce its new Gregory and Me(TM) series of titles to the market and, in producing these new titles, intends to utilize other of its new production system's more advanced capabilities. Use of such capabilities will enable the illustrated body of the child's personalized character in these new Kideo products to exhibit two-dimensional full-motion animation (instead of merely partial-motion animation) and the personalized facial image of such character to exhibit, for the first time, at least some limited motion, such as eyes that blink and lips that move in a flapping sort of manner. The Company's ultimate objective for the evolution of its production system, however, is to create a system capable of producing, at low cost, Kideos -- as well as other digitally personalized consumer media products -- in which the customer's personalized character can: (i) exhibit two dimensional or three dimensional full-motion animation, both in its illustrated body and in the features of its personalized facial image (e.g., moving eyes and eyebrows and lips that move in synchronization with sound); and (ii) appear in combination and interaction with other two dimensional or three dimensional full- motion illustrated characters and/or human actors. The Company believes that such features may be required in order for digitally personalized media products to achieve broad consumer acceptance. There can be no assurance, however, that the Company will ever succeed in developing a production system capable of producing products with such features at a cost acceptable to the Company. For instance, while the Company believes that, at the present time, there are existing technologies (such as those that enabled Pixar Animation Studios to produce the feature film Toy Story) that could be used to produce products with such features, the costs associated with such production would make those products far too expensive for the broad-based consumer market. PRODUCTION OF KIDEO PRODUCTS The TVL Production System Until recently, the TVL system (jointly developed by the Company and Television Laboratories Inc. ("TVL") and first implemented by the Company in October 1994) served as the Company's primary system for producing personalized videos. This customized hardware/software system can store, and record to VHS videocassette, personalized Kideos in a video-picturebook format, in which only minimal animation is possible, i.e., the illustrated body of the child's personalized character can be moved from place to place within some of the frames, but there is no movement within the character's illustrated body itself. Each of the Company's first three Kideo titles -- Mr. Tibbs & the Great Pet Search, My Alphabet and 1,2,3, Come Count With Me - -- was created by the Company using the TVL system. 33 The TVL system couples Macintosh PCs with a customized version of TVL's Director Turbo video processing and editing system, which is a computer hardware/software system that employs custom computer processor boards to handle digital video information. The TVL system uses these custom computer processor boards to create two-dimensional animation screen effects, in real-time, on three different layers: (i) a photograph of the customer is frame-grabbed by the TVL system and stored to its computer hard-disk; (ii) the screen version of the customer's face is then manually silhouetted (or "cut-out") on screen by the TVL system's human operator; and (iii) the computerized cut-out of the customer's face is then automatically sized and placed by the TVL system in each of the 130 to 150 frames of the Kideo title being produced. The time required for the TVL system to then record the VHS version of the personalized Kideo story template is approximately equal to the playing time of the videocassette tape itself (about 20 minutes). Each of the Company's TVL-system production stations is generally comprised of six networked TVL systems. The Company currently utilizes 32 TVL systems, two of which it owns and 30 of which it leases (at a monthly lease payment of approximately $550 per system). No license fee or royalty is payable by the Company on Kideos produced using the TVL system. Leases for 5 of the TVL systems will expire during 1996, and the leases for the other 25 leased TVL systems will expire in November and December 1997. Pursuant to the terms of the Company's agreements with the lessors of its TVL systems (all of which were entered into prior to the Company's development of its new production system), the Company will acquire all of its currently leased TVL systems upon their respective lease expiration dates, for an aggregate purchase price of approximately $33,119 (which represents less than 20% of the Company's funds which are currently being held by such lessors as security deposits). The New Kideo Production System The Company's new Kideo production system was developed in order to further the Company's ultimate objective of creating digitally personalized products featuring two-dimensional and three-dimensional full- motion animation. The Company developed this new system using, in large part, certain computer software assets and production technologies that it acquired through an asset purchase transaction consummated with a Canadian company in July 1995. The new production system (which is based upon the use of affordable IBM- compatible PCs) produces Kideos by employing PC hardware, proprietary computer software and proprietary production technologies and components in combination with various commercially available multimedia production software applications. The Company claims proprietary rights in, and is seeking to patent various aspects of, the resulting digital production process. See " -- Intellectual Property Rights" and "Certain Transactions -- Asset Purchase Agreement." The Company used its new production system in the development of My Christmas Wish. As a result, this title is the first Kideo title in which the illustrated body of the child's personalized character is able to exhibit actual two-dimensional partial-motion animation. The new Kideo production system is already capable, however, of producing an even wider range of motion than that exhibited by the personalized character in My Christmas Wish. The more advanced technologies utilized in the new system make it possible to produce a personalized video in which (i) the illustrated body of the child's personalized character can exhibit two-dimensional full- motion animation and (ii) the personalized facial image of the child's character can exhibit at least some limited motion, such as eyes that blink and lips that move up and down (although not necessarily in synchronization with the soundtrack). The Company expects that these improvements in the features of its Kideos will enable it to produce new titles that will be more entertaining and engaging for the child for whom a Kideo is purchased. The Company believes that in addition to improving the quality and features of the Company's products -- its new Kideo production system will afford it a variety of other competitive advantages, including these: o Less Costly Production Equipment. A single production station employing the Company's new production system consists of eight networked desktop PCs at a total acquisition cost to the Company of approximately $32,000 (including the installation and integration of all related proprietary and third- party components and software applications). In contrast, there is approximately a $102,000 cost to the Company of acquiring a single TVL-system production station (which consists of only six networked Macintosh PCs but requires the installation of six Director Turbo systems as well, each of which includes an additional computer and custom computer processor boards and other components and software which are not required when using the Company's new system). 34 o Reduced Production Time. When using the new production system, the time required to manually silhouette (or "cut") the customer's face and then for the PC to automatically size and place that face's digital image throughout a digital video template is reduced by approximately 50% when compared with the time required for these procedures using the TVL system. (The time required to then complete the final step in the process, i.e., to record the VHS version of the Kideo, remains, as with the TVL system, approximately equal to the playing time of the videocassette tape itself.) o Greater Production Yields. A single production station employing the Company's new production system is capable of producing approximately 160 personalized Kideos during an eight-hour shift, as compared to the less than 80 such Kideos that a single TVL-system production station is capable of producing during the same shift. o Simplified Operating Procedures. The new production system has proven to be easier to operate than the TVL system from the point of view of the Company's production personnel who are engaged in the process either of "cutting" the child's face or of recording the finished Kideo to VHS videocassette. Because of this greater ease of use, the Company has found that less time (about one week) is required to train newly-hired personnel to perform these functions using the new system. In addition to My Christmas Wish, the Company's new production system is now also being used (in tandem with the TVL system) to produce the other three existing Kideo titles. PRODUCT FULFILLMENT The Company designs, develops and produces its Kideo products as finished goods at its New York City facility, without employing any subcontractors in the production process. Pre-paid Kideo order kits are shipped to the Company's customers from a third-party fulfillment center located in Minneapolis, Minnesota. The components used in the production of Kideos (e.g., PCs, commercially available multimedia production software applications, and VHS videocassettes and related labels and packaging) are readily available to the Company from a large number of competitively priced suppliers. Once ordered, a personalized Kideo is produced and shipped to the customer generally within two to four weeks after the order is received. There is consequently no meaningful backlog. The Company believes that it currently has the production capacity, personnel and other resources required in order to produce and deliver its existing Kideo products, as well as new Kideo titles planned for introduction during 1996, on a timely basis and in accordance with the Company's estimated demand for its products. This belief is derived in large part from the nature of both the TVL system and the Company's new production system, each of which is comprised of modular production stations. In the event of increased demand for its Kideos, the Company's experience has been that one or more production stations can be added and the related production personnel trained in about one week. In addition, because the Company sells a Kideo by first selling the order kit for the desired title, the Company at any point in time can accurately forecast the short-term demand for its products based upon the number of Kideo order kits then in circulation. As a result, the Company believes that it can anticipate a need to add new Kideo production stations reasonably in advance of having actually to meet any increased future demand for its products. EXISTING KIDEO TITLES The Company currently markets four Kideo titles -- Mr. Tibbs & the Great Pet Search; My Alphabet; 1,2,3, Come Count With Me; and My Christmas Wish -- which feature characters developed by the Company (respectively, Mr. Tibbs, Alexander G. Bear, Counting Cat and the Company's own version of Santa Claus). Each story lasts for approximately 20 minutes and is in a video-picturebook format (although My Christmas Wish, as described above, employs two-dimensional partial animation). These titles have been produced almost entirely using the Company's in-house resources, with a few outside contractors providing various services (relating mainly to audio support, e.g., music, singing and editing). Each of the four existing Kideo titles has been designed to take advantage of the power of video personalization to stimulate the imagination of children by literally placing them in exciting and educational situations where they can see themselves learning and having fun. They ride on the back of a hippo while counting four turtles in a boat; they learn about the letter "L" by leapfrogging over Alexander G. Bear; and they dive beneath the sea to meet a tortoise. Mr. Tibbs even asks, "Sarah, would you like a zebra for a pet?" 35 In addition to the child's face appearing in each frame of his or her personalized Kideo, the child's name is spoken in various appropriate places on the Kideo soundtrack. The Company maintains an extensive digital archive of the audio recordings of the spoken first names of all of its child-customers. The archive is updated on a regular basis as new Kideo orders are received which require the recording and insertion of a name not then in the Company's database. In its Kideo order kits and other marketing materials, the Company makes a commitment to its potential customers to produce a Kideo in which any specified name of a child will be spoken on the Kideo to that child's personalized character. The child's name is also printed on the outside cover of each tape (which is packaged in a white vinyl album cover), as well as on the label of the tape itself. The tape shells come in assorted bright colors. Each of the Company's Kideo stories has a suggested retail list price of $29.95. The Company believes, however, that more than half of all Kideos are currently being sold by its customers at an actual retail price of $34.95 or higher. For the fiscal year ended July 31, 1995 and the nine months ended April 30, 1996, sales of Mr. Tibbs & the Great Pet Search accounted for approximately 35% and 34%, respectively, of the Company's revenues, sales of My Alphabet accounted for approximately 46% and 40%, respectively, thereof, sales of 1, 2, 3, Come Count with Me accounted for approximately 17% and 14%, respectively, thereof, and sales of My Christmas Wish, the marketing of which commenced in connection with the 1995 holiday season, accounted for approximately 12% thereof. POTENTIAL FUTURE PRODUCTS There can be no assurance that the Company will ever be successful in developing any of the potential new products described below (or their associated production methodologies) or that any of such products, if commercialized, will be successfully marketed by the Company or contribute materially to the Company's future revenues or profits, if any. Near-Term Product Development Goals From among the many conceivable new product opportunities envisioned by the Company, it currently intends, in the short- to near-term, to continue to direct its product development efforts towards the market segment that it believes it has largely created and accordingly knows best the home-consumer market for digitally personalized products that are essentially videos in nature (as opposed to, for example, computer games or other computer software titles). For the near future, the Company also intends to focus its efforts primarily on the continued expansion of the Kideo concept and product line. The Gregory and Me(TM) Series. The Company believes that, for the foreseeable future, it will continue to derive the substantial majority of its revenue from the sale of Kideos embodying its own proprietary content. The Company accordingly will focus its product development efforts on the creation and exploitation of such content. In the Fall of 1996, for example, the Company plans to introduce new Kideo titles as part of the Gregory and Me(TM) series which will feature the same cast of proprietary characters in each title, led in each case by Gregory Gopher. The Company anticipates marketing three titles in this new Kideo series during 1996, with additional titles following during 1997. The titles in the Gregory and Me(TM) series will be produced utilizing the Company's newly-implemented production system and, as currently envisioned, the Company's proprietary characters appearing throughout the new series will be a combination of two-dimensional animated characters and three-dimensional live action puppet-based characters. The child's personalized character will interact with these other characters in various entertaining environments (although, when it interacts with the puppet-based characters, the puppets will be rendered only in two-dimensional versions). The illustrated body of the child's personalized character will exhibit two- dimensional full-motion animation, and the personalized facial image of the child's character will exhibit limited motion, such as eyes that blink and lips that move up and down. In addition, the child's personalized character will appear throughout each title in the Gregory and Me(TM) series on a nearly continuous basis (whereas in the four existing Kideos the personalized character appears far less frequently). Kideo Related Merchandise. By focusing on the use of proprietary content and characters to expand its line of Kideos, the Company believes that it may be able to leverage the investment it makes in the creation of such characters into an additional revenue stream, i.e., by selling other, related merchandise featuring those same characters. Gregory Gopher, Mr. Tibbs, Alexander G. Bear and Counting Cat, for instance, could all be produced as plush stuffed- 36 animal toys or could be featured in children's coloring books and work books. The Company's newly- implemented Kideo production system currently has the capability not only to produce such books, but also to produce them so that every page will show the child's digitally personalized character (using a laser-printed version of the same photograph of the child that was used in creating that child's personalized Kideo). The Company currently envisions that it will seek to begin marketing plush toys and coloring books and work books by the end of 1996. Kideos Featuring Popular Licensed Characters. Although the Company will be focusing on the development and exploitation of its proprietary content, it will not ignore the opportunity to expand its line of Kideos to include titles featuring licensed characters that are popular in the children's market. In such a Kideo title, the child's personalized character could conceivably appear alongside and interact with animated characters (e.g., Bugs Bunny and Johnny Quest) or live-action characters (e.g., Barney and The Mighty Morphin Power Rangers). To date, however, the Company has not entered into any agreements or negotiations with respect to the licensing of any such characters, and there can be no assurance either that any such licenses will be made available to the Company or that, if made available, they will be offered on terms and conditions that are acceptable to the Company. Longer-Term Product Development Goals The Company expects that, over the course of the next decade or so, the digital/electronic audiovisual media industries will experience significant growth and that this growth could present businesses employing technologies like those the Company has developed with numerous opportunities to apply digital personalization to virtually any popular media content. While no assurance can be given to this effect, such opportunities could someday in the future result in consumer products that might conceivably include personalized computer screen savers, personalized interactive video games or even personalized interactive television programming. In order to capitalize on such opportunities, it is part of the Company's long-term strategy for the development of future products to create digitally personalized audiovisual products that are likely to appeal to a broad demographic base, spanning both children and adults. The Company also intends to continually seek to expand its product line by exploiting more sophisticated digital personalization technologies, as they become available, in order to offer progressively more sophisticated and entertaining personalized media products. In furtherance of its longer-term product development goals, the Company is currently engaged in, among other things, attempting to develop a line of personalized computer screen savers in which a person of the customer's choice (child, spouse, boss, etc.) will appear in digitally rendered and animated scenes. In such a screen saver as in existing Kideos the photographic facial image of the selected person would be digitally processed and placed onto an animated body. The Company has successfully developed a prototype of such a screen saver and currently expects that, if this screen saver product can be successfully commercialized, it could be (i) loaded from disk onto any IBM- or Macintosh-compatible PC or (ii) played on Macintosh-compatible PCs using the popular Berkeley Systems After Dark series of screen saver programs. The manufacturing of a personalized screen saver would simply require that the customer provide a photograph to the Company. The Company would then create the personalized product and copy it to a 3.5" PC diskette (or other PC storage media), which could then be sent directly to the customer. MARKETING General Over the approximately one and a half years that Kideos have been marketed, the Company believes that it has developed important sales and distribution relationships with some of the country's most respected catalogue retailers and retail stores. During the nine months ended April 30, 1996, Kideo order kits were available for purchase at various times through such national mail order catalogues as Hammacher Schlemmer, Spiegel, the Boston Museum of Fine Arts, Personal Creations, Fingerhut, Celebration Fantastic, One Step Ahead, Johnson Smith, Just Between Us, Skymall, Critics Choice Video and Troll Learn & Play. Since the Company first began marketing its products, sales through catalogue retailers have in fact been the primary distribution outlet for Kideos. Retail stores currently selling Kideo order kits include the FAO Schwarz flagship store in New York City. Order forms are also provided as inserts in every package of finished portrait photographs picked up by Sears Portrait Studio customers in the United States. 37 The Company is seeking to expand its sales and marketing efforts by increasing its distribution channels. One way in which the Company seeks to attract new customers is through attendance at the country's major trade shows for children's entertainment products. During 1995, for example, the Company presented its Kideo products at the Toy Fair 1995 convention and at the annual convention of the Video Software Dealers Association. Catalogue Sales For the fiscal year ended July 31, 1995 and the nine months ended April 30, 1996, catalogue sales accounted for approximately 61% and 63% respectively of the Company's revenues. Sales through the Hammacher Schlemmer catalogue, in particular, accounted for approximately 42% and 28%, respectively, of the Company's revenues. The Company believes that the initial placement of Kideo information in mail order catalogues resulted largely from the Company's engagement of an independent national catalogue representative who represents over forty catalogues nationwide. This representative (who is still being utilized by the Company) receives 15% of the net sales proceeds generated by its product placements. During the 1995 Christmas holiday season, Kideos were the third highest selling item in Hammacher Schlemmer's "Christmas" and "Gift" mail order catalogues and the fourth highest selling item in its "Holiday" catalogue. The titles in the new Kideo Series are currently scheduled to appear in the Hammacher Schlemmer fall 1996 holiday catalogs. Because of the success generally experienced by Hammacher Schlemmer and other catalogue retailers who were among the first to offer Kideos in their catalogues, the Company currently is finding it increasingly easy to convince other catalogue retailers to feature Kideos in their publications. In the twelve months ended March 31, 1996, the number of nationally distributed catalogues in which Kideos were marketed increased from four to approximately a dozen. The Company will continue to target major catalogues as potential new marketing outlets for Kideos during 1996. During the fall 1996 holiday season, for example, Kideos will appear for the first time in the Sears 1996 Wish Book. Retail Portrait Studios Since approximately January 1995, Kideos have been marketed in Sears Portrait Studios located throughout the United States, Canada and Puerto Rico. The Sears Portrait Studios are operated by Consumer Programs Incorporated ("CPI"). Initially, this marketing program was conducted utilizing in-store displays of Kideo order kits in hundreds of Sears Portrait Studio retail locations. The experience of CPI and the Company with this initial marketing approach was not satisfactory and was consequently changed in April 1995. Under the new marketing program, CPI inserts, into each customer's package of processed photograph(s) taken at a Sears Portrait Studio, an order form which explains what a Kideo is and can be used to order a Kideo through CPI. Although sales of Kideos through this marketing program were made only during the last three months of the fiscal year ended July 31, 1995, they accounted for approximately 5% of the Company's revenues for that year. For the nine months ended April 30, 1996, sales of Kideos through Sears Portrait Studios accounted for approximately 7% of the Company's revenues. As a result of its experience with this marketing program, CPI has orally agreed to expand the program to include the placing of Kideo order forms into customer packages at approximately 50 of the nearly 280 Fox Photo Finishing locations that CPI owns or manages (on a 90-day test basis) in mid 1996. The Company's written agreement with CPI relating to the Sears Portrait Studio marketing program (the "CPI Agreement") expired in July 1995, but this marketing program has been continued since then, under the same terms, pursuant to an oral agreement between the Company and CPI. While the Company has no reason to believe that this oral agreement will be terminated by CPI in the near future, there can be no assurance that it will be continued for any extended period of time (if at all). Pursuant to such agreement, CPI currently retains approximately 50% of the retail sales price of Kideos sold through Sears Portrait Studios and remits the balance of the sales price to the Company. The Company expects that, if the 90-day test referred to above proves favorable (of which there can be no assurance), a similar arrangement with CPI could be agreed upon with respect to sales generated from Fox Photo Finishing locations. The CPI Agreement contains an exclusivity provision which prohibits the Company from selling Kideos through retail portrait studios other than Sears Portrait Studios. The Company accordingly has no current plans to pursue the test marketing of Kideos at other retail portrait studios. The Company remains free, however, under its arrangement with CPI, to sell Kideos through other photograph finishing outlets. Many major retail chain 38 stores, as well as pharmacy chains, provide photo-finishing services to their customers. The Company is accordingly in the process of approaching a number of such companies to determine if they would be willing to agree to include Kideo order kits in their customers' packages of finished photos. Along these lines, the Company has recently developed a marketing relationship with Nashua Photo (also known as York Photo), one of the nation's largest direct-to-consumer photo-finishing companies. Kideos as a result are currently being offered to Nashua's customers on the cover of the catalog that is included by Nashua with finished photographs being delivered to customers. Under this arrangement, Nashua is purchasing Kideo order kits from the Company on the same terms and conditions as apply to catalog retailers. Mass Market Retail Toy and Other Stores In March 1994, the FAO Schwarz flagship store on Fifth Avenue in New York City became the first retail store to market the Company's products. The store used an in-store display that provided order kits for Kideos. Most retailers typically sell a Kideo order kit for $34.95. To date, however, sales of Kideos through retail toy stores and other retail stores have been negligible, and there accordingly can be no assurance that any of the Company's current or future efforts to expand the marketing of Kideos through mass market retail locations will prove successful or meaningful to the Company's operations. Direct Sales Direct sales to consumers accounted for approximately 31% and 24% of the Company's revenues for the fiscal year ended July 31, 1995 and the nine months ended April 30, 1996, respectively (as compared to approximately 67% and 22% of revenues for the corresponding prior fiscal periods). Favorable customer word- of-mouth has historically been a major source of direct-to-consumer sales of Kideos. During 1995, referrals by satisfied purchasers of Kideos generally accounted for approximately 40 daily telephone inquiries by potential new customers (and the number of such referral inquiries increased to approximately 100 per day during the October to December holiday selling season). The Company believes that, over the long term, if sufficient funding could be obtained, its direct sales efforts could ultimately become its largest distribution channel. The Company bases its belief in part upon recent reported experiences in the "special interest" segment of the domestic home video industry, where direct response marketing has been generating approximately 39% of all sales of special interest home video titles. The Company's own recent experience with direct response marketing has been similarly encouraging. In November 1995, the Company conducted a direct-response test mailing to approximately 3,000 consumers who had previously purchased a Kideo. This test generated additional Kideo purchases from approximately 10% of the targeted mailing audience (a figure that is considered extraordinarily high when compared to average purchase rates for direct response mailings which range from 1% to 2%). In March 1996, the Company conducted another direct- response test mailing to approximately 1,000 consumers who had recently previously purchased a Kideo. While results from this mailing are still being received by the Company, this test has to date generated additional Kideo purchases from approximately 6.5% of the targeted mailing audience. To date, however, the high costs of developing a broad-based direct marketing capability have prevented the Company from engaging in meaningful direct marketing activities. The Company intends to commence television advertising for its products upon the consummation of, and using proceeds from, this offering. The Company anticipates that the development and implementation of its direct marketing capabilities will consume the substantial majority of its marketing expenditures during the remainder of the current fiscal year. In furtherance of developing such marketing capabilities, the Company has also recently employed a new Vice President of Marketing. See "Management -- Directors and Executive Officers." CUSTOMER SATISFACTION AND SERVICE A Kideo customer's satisfaction is guaranteed by the Company in that, if unhappy with the product, the customer may return it until the Company has produced and delivered a satisfactory Kideo. Even with this policy, refunds have historically been negligible. The Company provides its customers with the opportunity to track the status of their Kideo orders by utilizing the Company's automated, toll-free telephone response system (the "Customer Response System"). A cus- 39 tomer who orders a Kideo receives his order number for it from the Kideo order kit that he purchased. When the Company receives that order kit, it creates a digital, computerized version of the order (including the corresponding order number) together with a physical bar-coded version (which also embodies the order number information). At each stage of the Company's process of manufacturing that particular Kideo, the bar-coded physical order is manually "swiped" through an optical scanner, resulting in the computerized version of the order being updated as to where that customer's Kideo is in the production process (e.g., the child's voice has been recorded and/or inserted into the title; the child's face has been digitized; etc.). Because the Company's production system is fully computerized and networked, when that customer calls the toll-free number and inputs his order number, the Company's customer service operator can respond instantly with the status of the order in question after checking the appropriate computer database. COMPETITION AND INDUSTRY BACKGROUND The Company believes that the market for digitally personalized video media -- although only in its development stages -- will likely evolve into a highly competitive market. The technologies which have enabled the production of digitally personalized video products utilizing relatively low cost PC hardware and software (as opposed to more expensive computer workstations and larger computer systems) have only been available since approximately 1993. As a result, there is relatively limited information available concerning the potential market and demand for personalized video media products or concerning the performance and prospects of companies seeking to do business in this new and largely untested market. To the Company's knowledge, at present there is only one other company marketing personalized video media of any kind: U.R. The Star ("URTS"). URTS, a Florida-based company, has been in the personalized video business since 1993. The Company believes that URTS currently offers six stories, each having a suggested retail list price of $19.95. Although the URTS product features a combination of two-dimensional and three-dimensional partial motion animation, the Company does not believe that these products compete effectively with Kideos on the basis of quality. While each URTS tape is approximately 12 to 15 minutes long, for example, the child's face will appear on-screen only for a total of approximately 60 seconds. Several minutes can pass without the child's face appearing at all. The Company does not believe that URTS engages in substantial marketing of its stories through major national catalog retailers, direct mail-order solicitations or television advertising. There are numerous other companies involved in video media production who could possibly enter the personalized market segment in which the Company is doing business. Many of such companies have substantially greater financial, technical, research, development, production, marketing and other resources than those of the Company. Although the Company believes -- based upon the technical expertise it has developed in its market and the quality, price and features of its products -- that it will be able to compete favorably with its existing and future competitors, there can be no assurances in this regard. In light of the fact that the personalized video media business is in the earliest stages of its development, there also can be no assurance that existing or future competitors of the Company will not develop technologies and products that are significantly superior to those of the Company, or that their products will not gain substantially greater market acceptance, or that developments of such nature will not ultimately render the Company's technologies obsolete or its products unmarketable. Despite risks of this nature, the Company believes that its new, proprietary Kideo production system -- a uniquely sophisticated technological system for the low cost, mass production of digitally personalized videos -- will provide it with a meaningful short- to near-term competitive advantage over new entrants into the emerging market for digitally personalized video products. The Company does not believe that even well- financed potential competitors will be able, in a relatively short period of time, to successfully research, develop, test and implement production systems capable of low-cost mass production of digitally personalized videos. INTELLECTUAL PROPERTY RIGHTS The Company believes that its prospects for success depend more upon the dedication, knowledge, ability, experience and technological expertise of its employees than upon any legal protection that may be afforded to the Company's proprietary rights. 40 The Company claims proprietary rights in various technologies (including hardware and software), videos, cartoon characters, music, text, graphic images, techniques, methods and trademarks which relate to the Company's products and operations. Like many computer-related technology companies, the Company seeks to protect such proprietary rights by relying upon a combination of patent, trade secret, copyright, trademark and unfair competition laws and various contractual restrictions, including confidentiality and non-disclosure agreements. Although the Company intends to protect its rights vigorously, there can be no assurance as to the degree of legal protection that may be afforded to the proprietary rights claimed by the Company. It is possible, for example, that trade secrets may not be established, that secrecy obligations will not be honored or enforceable, or that other parties will independently develop technologies or processes that are similar or superior to those of the Company. It is also possible that a consultant or other third party engaged by the Company might independently develop certain technological information which such party then applies to one of the Company's own technological processes. In such an event, a dispute could arise as to the ownership of the proprietary rights to the information developed by such party. It is possible that such a dispute might not be resolved in the Company's favor, despite steps the Company may have taken in a contract with the party at issue seeking to claim ownership in information developed by that party while engaged by the Company. In addition, although the Company has filed two patent applications with the United States Patent and Trademark Office relating to aspects of its digital personalization production process, the Company's intellectual property rights are not currently the subject of any issued patents in any jurisdiction. Moreover, patent applications like the ones filed by the Company involve complex legal and factual questions, and the scope and breadth of patent claims that may be allowed (if any) is inherently uncertain. As a result, even if a patent is issued to the Company, there can be no assurance as to the degree or adequacy of protection that such patent may afford. The Company has applied for a registered trademark for the word "KIDEO." Since one or more other parties may have rights to this trademark, however, there can be no assurance that the Company will ultimately obtain a registered trademark for the word "KIDEO" for use with respect to its products and services. See " -- Legal Proceedings." EMPLOYEES As of June 1, 1996, the Company employed 16 full-time and three part-time employees, including three in administration and finance, five in marketing and sales, one in new product creation, four in production, one in shipping, and five who are secretarial/clerical, database or customer service employees. During the Christmas holiday season (roughly the months of October through December), the Company generally employs approximately 30 additional part-time employees to perform production and database tasks. The Company's employees are not represented by any labor organizations. Management believes that its relationship with its employees is good. PROPERTY The Company leases facilities in New York City pursuant to a two-year lease expiring in September 1997 and operates a small office in Vancouver, British Columbia, on a month-to-month basis. All of the Company's employees work out of its New York City facilities, except for one employee (Bradley Dahl) who works from the Vancouver office. The Company believes that its facilities are adequate for its present staff and production operations and could serve an increased demand for its products. See "Management." LEGAL PROCEEDINGS The Company has adopted and used the word "KIDEO" as its principal trademark for its products and services and has applied for registration of this trademark in the United States Patent and Trademark Office. Another party had previously registered two allegedly similar trademarks but had ceased using them and had filed for bankruptcy under Chapter 11. On July 6, 1994, the Company commenced proceedings, before the Trademark Trial and Appeals Board of the United States Patent and Trademark Office, against such party's successor (the "Successor"), seeking to obtain the cancellation of these trademarks on the basis of abandonment. The Company has prevailed in one proceeding, but the other proceeding is still pending. This latter proceeding 41 is currently suspended, pursuant to a stipulation agreed upon by the Company and the Successor, while they discuss a possible settlement. There can be no assurance that a settlement satisfactory to the Company will be reached. If a satisfactory settlement is not obtained, the Company intends to recommence the pending proceeding. In that event, the Company expects (based upon statements made to it by the Successor) that the Successor will allege that, even if the previously registered trademarks were abandoned by the original owner, the Successor nonetheless made the first use thereafter of the trademark "KIDEO" in the United States. Although the Company believes that it should prevail in this proceeding and that the Successor's claim of "first use" is also without merit, a proceeding of this nature is a lengthy and potentially expensive process, and there can be no assurance that the Company will ultimately obtain a registered trademark for the word "KIDEO" and obtain the right to use this mark in connection with its products and services. Another third party also has been using the trademark "KIDEO" locally in the State of Illinois and has obtained an Illinois state registration of this mark. This may prevent the Company from using the "KIDEO" mark in the state of Illinois. In the event that the Company does not prevail in obtaining the unquestioned right to use the mark "KIDEO," it does not believe that its business or prospects will be materially adversely affected. While the Company thinks that the name "Kideo" is particularly well-suited to the type of product that it sells, the Company does not believe that its market penetration to date has been extensive enough that the inability to market products under the Kideo name will adversely affect its ability to find new customer accounts or damage its relationships with existing accounts. 42 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following are the directors and executive officers of the Company. All officers serve at the discretion of the Board of Directors. There is currently one vacancy on the Board of Directors.
Name Age Position -------------------- ----- ---------------------------------- Richard L. Bulman .. 31 Chairman of the Board and President Robert J. Riscica .. 44 Chief Financial Officer Marvin H. Goldstein . 49 Vice President-Controller Bradley Dahl ....... 36 Vice President-Development Joanne Denk ........ 34 Vice President-Marketing Richard D. Bulman .. 61 Secretary and Director Charles C. Johnston . 61 Director Thomas Griffin ..... 58 Director
Richard L. Bulman is the founder of the Company and has served as its President and Chairman of the Board since its inception in August 1993. Prior thereto, from April 1991 to June 1993, Mr. Bulman was Director of Applications Development at Targa Systems Corp. ("Targa"), where he was responsible for developing customized multimedia applications for such clients as International Business Machines ("IBM"), John Hancock Mutual Life and Keystone Foods (McDonalds). From February 1990 to April 1991, Mr. Bulman managed his own marketing consulting firm, Richard Bulman Consulting, in Milan, Italy, where he had responsibility for developing international marketing and advertising campaigns for a broad range of clients including multinational corporations such as Montedison and Instrumentation Laboratories. From December 1988 to February 1990, Mr. Bulman was Advertising Manager for 7 Days Magazine in New York. Richard L. Bulman is the son of Richard D. Bulman, a director of the Company. Robert J. Riscica was engaged as the Company's Chief Financial Officer in December 1995. For approximately the ten preceding years, he served in a variety of executive positions with various companies owned or controlled by Ronald O. Perelman's holding company, MacAndrews & Forbes Group Incorporated, including as: Executive Vice President, Operations, Marvel Entertainment Group (1992-1995); Chief Financial Officer, Marvel Entertainment Group (1990-1992); and Director, Special Projects, MacAndrews & Forbes Group Incorporated (1985-1990). Mr. Riscica has been licensed as a certified public accountant in the State of New York since 1978. Marvin H. Goldstein was the Chief Financial Officer of the Company from June 1994 until December 1995, when Mr. Riscica was engaged to fill that position and Mr. Goldstein became Vice President-Controller. Mr. Goldstein also has been a partner of Golden Pearl Associates, a real estate management firm that owns, manages and operates various business interests since 1980. In addition, from August 1979 to December 1993, Mr. Goldstein owned and operated Hermans Haberdashery Co. Inc., a retail clothing firm, and prior to that time he was with the accounting firm of Grant Thornton for approximately four years and was a partner at William Greene & Co., CPAs for approximately five years. Mr. Goldstein has been licensed as a certified public accountant in the State of New York since 1972. Bradley Dahl has served as the Company's Vice President of Development since July 1995. Prior to being employed by the Company, Mr. Dahl served as the Creative Director of Interactive Videosystems, Inc. from January 1993 to April 1995, where he market tested and developed certain technologies (later acquired by the Company) relating to the mass production of digitally personalized video products. Prior to his employment at Interactive Videosystems, Mr. Dahl was, from May 1992 to January 1993, a product developer for Serius Imaging and, from May 1990 to May 1992, an Account Representative at Impex Controls Ltd., a company that develops computer-based network control systems for institutions such as hospitals and prisons. From January 1984 to May 1990, Mr. Dahl was the President of Alphatel Videotex Directories Ltd., which developed, marketed and operated digital video multimedia local area networked systems for large corporations and government agencies. 43 Joanne Denk has served as the Company's Vice President of Marketing since January 1996. Prior to being employed by the Company, Ms. Denk served as Executive Vice President of Marketing of the Home Shopping Network Direct, Inc. from January 1995 to December 1995. Ms. Denk also served as General Manager of Home Shopping Showcase, Inc. from September 1993 to December 1994. Prior to her employment with the Home Shopping Network, Ms. Denk was employed by Time-Life Video, Inc., serving as its Vice President of Marketing from December 1992 to August 1993, its Director of Broadcast Media from September 1992 to November 1992, and its Marketing Director of Television and Print from October 1990 to August 1992. From May 1989 to September 1990, Ms. Denk was the Marketing Manager of U.S. New Video, Inc., a subsidiary of U.S. News & World Report, and, from June 1988 to April 1989, she served as an Account Executive at the radio station WCHV-AM1260. From September 1985 to May 1988, Ms. Denk was a Media Buyer for A. Eicoff & Company, Inc., where she managed national direct response television campaigns for U.S. News & World Report, AT&T and TV Guide. Richard D. Bulman has served as Secretary and a director of the Company since August 1993. Mr. Bulman has served as the Chairman of the Board of Directors of Targa since March 1992. Prior to joining that company, Mr. Bulman was Vice President and General Manager for the International Market Network (IMNET), a joint venture between IBM and Merrill Lynch & Co., from March 1988 to January 1991. For the preceding 30 years, Mr. Bulman held various positions at IBM, including Group Director and Chief Financial Officer of the U.S. Product Group, Group Director of the U.S. Marketing and Services Group, and Vice President, Chief Financial Officer and Treasurer of the IBM Service Bureau Corporation. Mr. Bulman has also served as President of Bedford Associates, a subsidiary of British Airways, Chairman and Chief Executive Officer of Information Systems, Inc., a technology outsourcing company, and a consultant to various venture capital firms. Richard D. Bulman is the father of Richard L. Bulman, the President and Chairman of the Board of the Company. Charles C. Johnston has served as a director of the Company since June 1994. Mr. Johnston has served as the Chairman of the Board of the Computer Systems and Services Business Unit of Teleglobe, Inc. of Montreal, Canada since November 1989. He was previously founder, Chief Executive Officer and Chairman of the Board of ISI Systems, Inc., a provider of specialty data processing services and software which was acquired by Teleglobe, Inc. in 1989. Mr. Johnston has also served as Chairman and Chief Executive Officer of Ventex Technologies, a company involved in the design and sale of electronic transformers for the neon lighting industry. Mr. Johnston serves on the Board of Directors of I.D. Matrix of Clearwater, Florida, Wordenglass & Electric, Inc. and Spectrum Signal Processing of Vancouver, Canada, and is a trustee of Worcester Polytechnic Institute. Thomas Griffin has served as a director of the Company since February 1996. Mr. Griffin has been the Co-Chairman of Griffin Bacal, Inc., an advertising agency that he founded in 1978, for more than five years prior to the date hereof. Griffin Bacal focuses on the advertising and marketing of entertainment products and services for children and adults. Mr. Griffin is also the founder, and since 1978 has been Co-Chairman, of Sunbow Entertainment, Inc., a company that produces and distributes animated and live action dramatic television programming for children. Mr. Griffin also has been serving as a director of both DDB Needham Worldwide since July 1994 and the Eastern Region of the American Association of Advertising Agencies since January 1994. The Company currently has authorized five directors (pursuant to a resolution adopted by the Board of Directors in accordance with the Certificate of Incorporation). There is one vacancy on the Board. The Company expects that, prior to the consummation of this offering, the Board will appoint a non-management director to fill the vacancy and serve as one of the Class I directors described two paragraphs below. The Board has not yet determined who it will appoint to this directorship. Certain stockholders currently have a contractual right to nominate an additional director to the Board. Such right has not been exercised and will expire upon the consummation of this offering. Mr. Johnston also has a contractual right to continue to be nominated as a director until the consummation of this offering. All directors will hold office until the annual meeting of stockholders to be held following the end of the fiscal year ending July 31, 1996 (the "1996 Annual Meeting") and until their successors are duly elected and qualified. In February 1996, the Board of Directors and the requisite number of stockholders approved an Amended and Restated Certificate of Incorporation of the Company. As a result, the Certificate of Incorporation now provides that, upon the closing of this offering, the terms of office of the directors will be divided into three 44 classes, designated Class I, Class II and Class III. At the 1996 Annual Meeting, Class I directors (consisting initially of Thomas Griffin) will be elected for a term expiring at the annual meeting of stockholders to be held in 1997, Class II directors (consisting initially of Charles C. Johnston) will be elected for a term expiring at the annual meeting of stockholders to be held in 1998, and Class III directors (consisting initially of Richard L. Bulman and Richard D. Bulman) will be elected for a term expiring at the annual meeting of stockholders to be held in 1999. At each annual meeting of stockholders beginning with the 1997 annual meeting, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election (and in each case until their successors have been duly elected and qualified). Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. The Company has agreed, for a period of five years following the date of this Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter to the Company's Board of Directors or, at the Underwriter's option, as a nonvoting advisor to the Board. The Underwriter has not yet exercised its right to designate such person, and has informed the Company that it does not currently anticipate that it will exercise such right in the foreseeable future. See "Underwriting." The Company has obtained key man life insurance on the life of Richard L. Bulman in the amount of $2,000,000. DIRECTOR COMPENSATION The Company reimburses the directors for reasonable travel expenses incurred in connection with their activities on behalf of the Company but does not pay its directors any fees for Board participation (although it may do so in the future). EXECUTIVE COMPENSATION For the fiscal year ended July 31, 1995, the executive officers in the aggregate were paid approximately $146,000, and no executive officer received aggregate cash compensation in excess of $100,000. Richard L. Bulman, the Chairman of the Board and President, received cash compensation during the fiscal year ended July 31, 1995 totaling approximately $88,000 and cash compensation totaling approximately $28,000 in respect of the preceding fiscal year (all of which represented salary in each case). Mr. Bulman also holds options to purchase shares of Common Stock which were granted to him in connection with the May 1995 Units Financing. See "Certain Transactions -- Bulman Options." The following table summarizes the cash and other compensation paid by the Company to Richard L. Bulman in respect of the fiscal year ended July 31, 1995: SUMMARY COMPENSATION TABLE
Long Term Compensation Award -------------- Annual Compensation Securities -------------------------------------- -------------- Name and Year Ended Underlying Principal Position July 31, Salary/$ Bonus/$ Options ----------------------- ------------ ---------- --------- -------------- Richard L. Bulman, Chairman and President . 1995 88,000 0 45,003(1)
- ------ (1) Represents non-plan options granted to Mr. Bulman in connection with the May 1995 Units Financing. See "Certain Transactions -- Bulman Options." 45 The following table sets forth all grants of options to purchase Common Stock which were awarded by the Board during the fiscal year ended July 31, 1995: OPTION GRANTS DURING LAST FISCAL YEAR
Individual Grants ------------------------------------------------------------------- Number of Securities Percent of Total Underlying Options Granted Exercise or Options To Employees in Base Price Granted Fiscal Year ($/share) Expiration Date ------------ ---------------- ------------- ---------------- Richard L. Bulman . 45,003(1) 100% $3.57 December 31, 1999
- ------ (1) Represents options to purchase shares of Common Stock which were granted to Mr. Bulman in connection with the May 1995 Units Financing. See "Certain Transactions -- Bulman Options." The following table sets forth information concerning outstanding options to purchase Common Stock held by Richard L. Bulman as of the year ended July 31, 1995. Mr. Bulman did not exercise any options in the fiscal year ended July 31, 1995: OPTION EXERCISES DURING FISCAL YEAR ENDED JULY 31, 1995 AND FISCAL YEAR-END OPTION VALUES
Value of Number of Unexercised Unexercised In-the-Money Options at Options at Shares July 31, 1995 July 31, 1995 Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable ---------------------- --------------- ------------ ------------------ ---------------------- Richard L. Bulman .... -- -- 0 exercisable/ $-0- exercisable/ 45,003 $-0- unexercisable unexercisable
EMPLOYMENT AGREEMENTS Richard L. Bulman. Effective January 1, 1996, the Company entered into a three-year employment agreement with Mr. Bulman, the Chairman of the Board and President of the Company. Pursuant to this agreement, Mr. Bulman is to receive a base salary of $125,000 for 1996, which will be subject to annual increases determined at the Board's discretion (but not less than the annual increase in the cost of living). Mr. Bulman will also be eligible to receive a discretionary annual bonus in respect of each of the fiscal years ending July 31, 1996 and 1997. Each such annual bonus will be payable at the sole discretion of the Board, based upon whatever factors and considerations the Board may deem relevant in connection with the fiscal year at issue. The Company currently anticipates that, in determining whether to pay any such bonus, the Board may take into consideration, with respect to the fiscal year at issue, the Company's achievement of profitability (if any), the performance of the Common Stock in the public trading market, whether the Company achieved the budget goals established by the Board for that fiscal year, and the Company's management of its resources over the course of that year. In the event the Board decides to award any such annual bonus, the amount of such bonus must be reasonably acceptable to the Underwriter. Under the agreement, Mr. Bulman is entitled to a $1 million term life insurance policy and to long-term disability insurance, and his employment is subject to confidentiality restrictions and a two-year non-competition covenant. Pursuant to the employment agreement, Mr. Bulman was granted ten-year options under the Option Plan to purchase an aggregate of 125,000 shares of Common Stock at a price of $5.00 per share, which options vest in increments as follows: (i) as to 41,667 shares, on March 13, 1996; (ii) as to 41,667 shares, on January 1, 1997; and (iii) as to 41,666 shares, on January 1, 1998. All of such options will vest immediately in the event of the termination without cause of Mr. Bulman's employment prior to December 31, 1998. In the event of his termination for cause, however, the Option Plan will result in the simultaneous termination of all of Mr. Bulman's then-unexercised options. Mr. Bulman's employment agreement also provides that, in the event of the termination without cause of his employment before December 31, 1998, he will be 46 entitled to receive severance pay in an amount equal to his annual base salary for the then-current year of the term of the agreement. In the event Mr. Bulman's employment is terminated for cause, however, he will not be entitled to receive any severance pay. Mr. Bulman's employment agreement defines "cause" as including (in summary terms) his commission of a fraud on the Company, misappropriation of Company funds or assets, possession of an illegal substance, a material violation of any covenant in his Employment Agreement, or knowingly influencing the Company's financial reporting in a manner inconsistent with generally accepted accounting principles. Robert J. Riscica. Effective January 1, 1996, the Company entered into a one-year employment agreement with Mr. Riscica, which provides for him to serve as Chief Financial Officer of the Company. Pursuant to the agreement, Mr. Riscica is to receive a base salary of $105,000 for 1996, which will be subject to annual increases thereafter, at the discretion of the Board, if the agreement's term is extended. Mr. Riscica is also eligible to receive a discretionary annual bonus in respect of the fiscal year ending July 31, 1996 and the fiscal year ending July 31, 1997 (if the agreement's term has been extended beyond that date). As in the case of the discretionary bonus potentially payable to Mr. Bulman, each such annual bonus will be payable to Mr. Riscica at the Board's sole discretion. In the event the Board decides to award any such annual bonus, the amount of such bonus must be reasonably acceptable to the Underwriter. Mr. Riscica's employment is subject to confidentiality restrictions and a two-year non-competition covenant. Pursuant to the employment agreement, Mr. Riscica was granted ten-year options under the Option Plan to purchase 35,000 shares of Common Stock at a price of $5.00 per share. The options vest in increments as follows: (i) 12,000 shares vested on March 13, 1996; and (ii) 12,000 shares and 11,000 shares will vest on, respectively, January 1, 1997 and 1998, provided that Mr. Riscica remains employed on each such date. In the event of his termination for cause, however, the Option Plan will result in the simultaneous termination of all of Mr. Riscica's then-unexercised options. Mr. Riscica's employment agreement also provides that, in the event of the termination without cause of his employment before the then- effective expiration date of such agreement, Mr. Riscica will be entitled to receive severance pay in an amount equal to half of his then-current annual base salary. In the event Mr. Riscica's employment is terminated for cause, however, he will not be entitled to receive any severance pay. Mr. Riscica's employment agreement contains a definition of "cause" identical to that contained in Mr. Bulman's employment agreement. Marvin H. Goldstein. In November 1995, the Company entered into an employment agreement with Mr. Goldstein which provides for his employment as Vice President-Comptroller for a two-year term commencing on January 1, 1996. After December 31, 1997, the term of Mr. Goldstein's employment agreement will be automatically extended each year for an additional one-year period, unless either party notifies the other to the contrary. The agreement provides that Mr. Goldstein's base salary is $75,000 for 1996 and will increase each year the agreement is in effect by at least the percentage increase of the consumer price index for the preceding year. Mr. Goldstein is also eligible to receive a discretionary annual bonus in respect of each of the fiscal years ending July 31, 1996 and 1997. As in the case of the discretionary bonus potentially payable to Mr. Bulman, each such annual bonus will be payable to Mr. Goldstein at the Board's sole discretion. In the event the Board decides to award any such annual bonus, the amount of such bonus must be reasonably acceptable to the Underwriter. Mr. Goldstein's employment is subject to confidentiality and non-competition restrictions. Pursuant to the employment agreement, Mr. Goldstein was granted ten-year options under the Option Plan to purchase 20,000 shares of Common Stock at a price of $5.00 per share. The options vest in increments as follows: (i) 7,000 shares vested on March 13, 1996; and (ii) 7,000 shares and 6,000 shares will vest on, respectively, January 1, 1997 and 1998, provided that Mr. Goldstein remains employed on each such date. In the event of his termination for cause, however, the Option Plan will result in the simultaneous termination of all of Mr. Goldstein's then-unexercised options. Mr. Goldstein's employment agreement also provides that, in the event of the termination without cause of his employment before the then-effective expiration date of such agreement, Mr. Goldstein will be entitled to receive severance pay in an amount equal to ten months of his then-current annual base salary. In the event Mr. Goldstein's employment is terminated for cause, however, he will not be entitled to receive any severance pay. Mr. Goldstein's employment agreement contains a definition of "cause" substantially identical to that contained in Mr. Bulman's employment agreement. Bradley Dahl. In July 1995, the Company entered into an employment agreement with Mr. Dahl which provides for his employment as Vice President of Development through June 30, 1997. Mr. Dahl's annual base salary is $100,000 in Canadian dollars (which is approximately $73,000). Mr. Dahl's employment is subject to 47 confidentiality and non-competition restrictions. In January 1996, the Company agreed that Mr. Dahl would be granted ten-year options under the Option Plan to purchase 10,000 shares of Common Stock a price of $5.00 per share. The options, which were granted to him in March 1996, will vest in increments of 4,000 shares on January 1, 1997 and 3,000 shares on each January 1st of 1998 and 1999, provided that Mr. Dahl remains employed on each such date. In the event of his termination for cause, however, the Option Plan will result in the simultaneous termination of all of Mr. Dahl's then-unexercised options. In general terms, Mr. Dahl's employment agreement defines "cause" as a material breach by him of his covenants contained in that agreement (subject to notice of and an opportunity to cure such breach), his commission of a felony, or his perpetration of a common law or statutory fraud against the Company. Joanne Denk. Ms. Denk has entered into an employment agreement with the Company which provides for her employment as Vice President of Marketing for a two-year term that commenced January 2, 1996. The agreement provides that Ms. Denk's base salary is $105,000 for 1996 and is subject to annual increases thereafter at the discretion of the Board. Ms. Denk is also entitled to an annual gross-revenue-based bonus payable in respect of the twelve months ending December 31, 1996 (up to a maximum of $37,500, if the Company is not profitable during that period, and a maximum of $50,000, if instead it is profitable). Her employment agreement also provides that a gross-revenue-based bonus will be payable to her in respect of the twelve months ending December 31, 1997 based upon a formula (to be similar to the one currently in place for her 1996 bonus) which has been approved by the Company's President, approved by the Board and approved as reasonably acceptable to the Underwriter. be reasonably acceptable to the Underwriter. Ms. Denk's employment is subject to confidentiality and non-competition restrictions. Pursuant to the employment agreement, Ms. Denk was granted ten-year options under the Option Plan to purchase 30,000 shares of Common Stock at a price of $5.00 per share. The options will vest in increments of 10,000 shares on each January 1st of 1997, 1998 and 1999, provided that Ms. Denk remains employed on each such date. In the event of her termination for cause, however, the Option Plan will result in the simultaneous termination of all of Ms. Denk's then-unexercised options. Ms. Denk's employment agreement also provides that, in the event of the termination without cause of her employment before the then-effective expiration date of such agreement, Ms. Denk will be entitled to receive severance pay in an amount equal to eight months of her then-current annual base salary. In the event her employment is terminated for cause, however, she will not be entitled to receive any severance pay. Ms. Denk's employment agreement contains a definition of "cause" substantially identical to that contained in Mr. Bulman's employment agreement. 1996 STOCK OPTION PLAN The Company's 1996 Stock Option Plan (the "Option Plan") was approved by the Board of Directors and the requisite number of stockholders in February 1996. The Option Plan is designed to serve as an incentive for retaining qualified and competent employees, directors and consultants. A total of 350,000 shares of Common Stock have been reserved for issuance under the Option Plan. So long as the Company is subject to the reporting requirements under the Exchange Act (which it will be following the closing of this offering), the Option Plan must be administered by members of the Board of Directors who are "disinterested persons" within the meaning of that term under Rule 16b-3(c)(2)(i) promulgated by the Commission under the Exchange Act (such persons are herein called the "Plan Administrators"). In February 1996, the Board appointed Richard D. Bulman and Thomas Griffin to serve as the Plan Administrators. Under the terms of the Option Plan, any Plan Administrator, upon his initial appointment as such, is automatically granted nonstatutory stock options exercisable for 15,000 shares of Common Stock. The Plan Administrators are not permitted under the Option Plan to grant any options to themselves. Under the Option Plan, the Plan Administrators are authorized, in their discretion, to grant options thereunder to all eligible employees of the Company, including officers and directors (whether or not employees) of the Company as well as to consultants to the Company. The Option Plan provides for the granting of both (a) "incentive stock options" (as defined in Section 422 of the Internal Revenue Code) to employees (including officers and employee directors) and (b) nonstatutory stock options to employees (including officers and employee directors) and consultants. Options can be granted under the Option Plan on such terms and at such prices as determined by the Plan Administrators, except that: (i) in the case of incentive stock options granted 48 prior to the consummation of this offering, the per share exercise price of such options must be $5.00 or more; and (ii) in the case of incentive stock options granted after the consummation of this offering, the per share exercise price of such options cannot be less than the fair market value of the Common Stock on the date of grant. In the case of an incentive stock option granted to a 10% stockholder (a "10% Stockholder"), the per share exercise price cannot be less than 110% of such fair market value. To the extent that the grant of an option results in the aggregate fair market value of the shares with respect to which incentive stock options are exercisable by a grantee for the first time in any calendar year to exceed $100,000, such option will be treated under the Option Plan as a nonstatutory option. Options granted under the Option Plan will become exercisable after the vesting period or periods specified in each option agreement. Options are not exercisable, however, after the expiration of ten years from the date of grant (or five years from such date in the case of an incentive stock option granted to a 10% Stockholder) and are not transferable other than by will or by the laws of descent and distribution. In March and May 1996, options to purchase an aggregate of 341,000 shares of Common Stock at a purchase price of $5.00 per share were granted under the Option Plan, including options to purchase 125,000, 15,000, 35,000, 20,000, 30,000, 10,000, 45,000 and 15,000 shares granted respectively to Richard L. Bulman, Charles C. Johnston, Robert J. Riscica, Marvin H. Goldstein, Joanne Denk, Bradley Dahl, Richard D. Bulman and Thomas Griffin. Subject to various vesting periods, all of such options (once vested) will be exercisable until March or May, 2006. LIMITATIONS OF LIABILITY AND INDEMNIFICATION Section 145 of the DGCL contains provisions entitling the Company's directors and officers to indemnification from judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees) as the result of an action or proceeding in which they may be involved by reason of having been a director or officer of the Company. In its Certificate of Incorporation, the Company has included a provision that limits, to the fullest extent now or hereafter permitted by the DGCL, the personal liability of its directors to the Company or its stockholders for monetary damages arising from a breach of their fiduciary duties as directors. Under the DGCL as currently in effect, this provision limits a director's liability except where such director (i) breaches his duty of loyalty to the Company or its stockholders, (ii) fails to act in good faith or engages in intentional misconduct or a knowing violation of law, (iii) authorizes payment of an unlawful dividend or stock purchase or redemption as provided in Section 174 of the DGCL, or (iv) obtains an improper personal benefit. This provision does not prevent the Company or its stockholders from seeking equitable remedies, such as injunctive relief or rescission. If equitable remedies are found not to be available to stockholders in any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. The Certificate of Incorporation also includes provisions to the effect that (subject to certain exceptions) the Company shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify, and upon request shall advance expenses to, any director or officer to the extent that such indemnification and advancement of expenses is permitted under such law, as it may from time to time be in effect. In addition, the By-Laws require the Company to indemnify, to the fullest extent permitted by law, any director, officer, employee or agent of the Company for acts which such person reasonably believes are not in violation of the Company's corporate purposes as set forth in the Certificate. At present, the DGCL provides that, in order to be entitled to indemnification, an individual must have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the Company's best interests. 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information (based on information obtained from the persons named below), as of the date of this Prospectus and as adjusted to reflect the sale by the Company of the 1,400,000 shares of Common Stock offered hereby, relating to the beneficial ownership of shares of Common Stock by (i) each person or entity who is known by the Company to own beneficially five percent or more of the outstanding Common Stock, (ii) each of the Company's directors and (iii) all directors and executive officers of the Company as a group.
Percentage of Outstanding Shares Owned(2) ------------------------ Amount and Nature of Before After Beneficial Name and Address of Beneficial Owners(1) Ownership(2) Offering Offering ---------------------------------------------------- --------------------- ---------- ---------- Richard L. Bulman .................................. 418,138(3) 26.45% 14.03% Charles C. Johnston ................................ 298,136(4) 18.20% 9.81% Lawrence Kaplan c/o GroVest Inc. 150 Vanderbilt Motor Parkway Hauppage, NY 11788 ................................ 88,514(5) 5.75% 3.01% Richard D. Bulman .................................. 45,000(6) 2.84% 1.51% Thomas Griffin ..................................... 15,000(7) * * All directors and executive officers as a group (8 persons) ......................................... 839,920(8) 47.76% 26.59%
- ------ * Less than 1%. (1) Unless otherwise indicated, the address for each named individual or group is in care of Kideo Productions, Inc., 611 Broadway, Suite 523, New York, New York 10012. (2) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date of this Prospectus have been exercised and converted. Percentages herein assume a base of 1,538,985 shares of Common Stock outstanding prior to this offering and a base of 2,938,985 shares of Common Stock outstanding immediately after this offering, before any consideration is given to outstanding options, warrants or convertible securities. (3) Includes 41,667 shares of Common Stock subject to currently exercisable options granted under the Option Plan. Does not include the Bulman Options. See "Certain Transactions Bulman Options." (4) Includes 83,975 shares of Common Stock issuable upon exercise of the Johnston Warrants and 15,000 shares of Common Stock issuable upon exercise of options granted under the Option Plan. See "Certain Transactions Transactions with Johnston" and "Description of Securities Johnston Warrants." (5) Includes (i) 33,588 shares of Common Stock owned by G/V Capital Corp., a company of which Mr. Kaplan is the President and sole stockholder; and (ii) 14,551 shares of Common Stock owned by a pension plan for the benefit of Mr. Kaplan and an associate of Mr. Kaplan (the "Pension Plan"). Mr. Kaplan disclaims beneficial ownership of half of the share amount listed in (ii) above, as he is one of two equal beneficiaries under the Pension Plan. See "Certain Transactions Transactions in Connection With the May 1995 Units Financing" and "Description of Securities." (6) Represents 45,000 shares of Common Stock issuable upon exercise of options granted under the Option Plan. (7) Represents 15,000 shares of Common Stock issuable upon exercise of options granted under the Option Plan. (8) Includes an aggregate of 135,667 shares of Common Stock issuable upon exercise of options granted under the Option Plan and 83,975 shares of Common Stock issuable upon exercise of the Johnston Warrants. See "Certain Transactions" and "Description of Securities." 50 CERTAIN TRANSACTIONS TRANSACTIONS WITH JOHNSTON Charles C. Johnston, a director and principal stockholder of the Company has been a director of the Company since June 1994, at which time he purchased 53,681 shares of Common Stock from the Company, and the Company was granted a right of first refusal to purchase his shares of Common Stock in the event Mr. Johnson determines to sell, transfer or otherwise dispose of such shares (other than to certain qualified transferees). Pursuant to a letter agreement dated June 17, 1994, the Company also granted to Mr. Johnston certain preemptive rights which will expire upon the consummation of this offering. In October 1994, Mr. Johnston and J&C Resources, a corporation of which Mr. Johnston is the sole Stockholder, (together, "Johnston") invested an aggregate of $300,000 in the Company, in consideration of which Johnston was issued 3,226.085 shares of preferred stock of the Company. In March 1995, Johnston (i) returned his 3,226.085 shares of preferred stock to the Company for cancellation in exchange for a promissory note of the Company in the principal amount of $300,000, and (ii) loaned the Company an additional $100,000. The $400,000 in aggregate principal amount of these two Johnston Notes accrued interest at a rate of 12% per annum and was secured by a pledge of substantially all of the Company's assets (which security has since been terminated). In addition, pursuant to the terms of the Johnston Notes, in May 1995 Johnston received the Johnston Warrants (Class A Warrants to purchase an aggregate of 55,983 shares of Common Stock at $2.86 per share and Class B Warrants to purchase an aggregate of 27,992 shares of Common Stock at $5.72 per share). In connection with this offering, Johnston and the Company have agreed that the exercise price for all of these Johnston Warrants will, as of the date of this Prospectus, become $3.60. The Johnston Notes were to have matured in September 1995; however, prior to such time (in June 1995), and in accordance with their terms, the $400,000 aggregate principal amount of the Johnston Notes was converted into four of the units sold in the May 1995 Units Financing (an aggregate of 200 shares of Series A Preferred Stock and $200,000 principal amount of Debentures). The $17,000 interest owed on the Johnston Notes at the time of such conversion was paid to Mr. Johnston out of the net proceeds of the 1996 Bridge Financing. In connection with the Pending Recapitalization, all of Mr. Johnston's Series A Preferred Stock and Debentures are being converted into an aggregate of 114,307 shares of Common Stock. "Description of Securities -- Johnston Warrants." In connection with the 1995 Pre-Bridge Financing, Johnston invested an additional $100,000 in the Company, for which he received a 1995 Pre-Bridge Note in the principal amount of $100,000 (the Company intends to use approximately $107,500 of the proceeds from this offering to repay this note, including estimated interest accrued thereon through and until such repayment date) and 30,000 1995 Pre-Bridge Shares. These 30,000 shares are being registered concurrently with this offering as part of the Selling Stockholders' Shares. See "Selling Stockholders and Plan of Distribution." Mr. Johnston is a limited partner in the Underwriter. BULMAN OPTIONS In connection with the May 1995 Units Financing, in March 1995 the Board granted to Richard L. Bulman, the Chairman of the Board and President of the Company, the Bulman Options to purchase from 34,618 shares of Common Stock (if the minimum number of units being offered in that financing were sold) up to a maximum of 45,003 shares of Common Stock (if, as ultimately occurred, the maximum number of units being offered in that financing were sold). The purchase price of the shares subject to such options is $3.57 per share. The Bulman Options expire on December 31, 1999 and become exercisable only if the Company reports audited earnings before income taxes of not less than $880,000 for the fiscal year ending July 31, 1996. The Company expects to report a net loss for that fiscal year. TRANSACTIONS IN CONNECTION WITH THE MAY 1995 UNITS FINANCING G/V Capital Corp. ("GVCC"), a company of which Lawrence Kaplan is the President and sole stockholder, acted as the placement agent for the May 1995 Units Financing. As a result of the closings under the May 1995 Units Financing, the Company paid as placement agent fees: (i) to GVCC, cash in the amount of $90,000 and approximately 33,588 shares of Common Stock; and (ii) to Mr. Kaplan, 11.625 shares of Series A Preferred Stock, a Debenture in the principal amount of $11,625 and 1,889 shares of Common Stock. Mr. Kaplan had pre- 51 viously loaned the Company $50,000 in the December 1994 Bridge Financing. Pursuant to an agreement between the Company and Mr. Kaplan, that loan was converted into one-half of one of the units offered pursuant to the May 1995 Units Financing, and approximately $2,500 of interest then due on that loan was paid out of the net proceeds from such financing. Mr. Kaplan also invested an additional $60,000 in 0.6 units offered pursuant to the May 1995 Units Financing on the same terms as the other investors therein. As a result of such transactions, Mr. Kaplan has become the beneficial owner of Common Stock in an amount sufficient to make him a principal stockholder of the Company. 1995 TECHNOLOGY ACQUISITION In July 1995, the Company, through its wholly owned subsidiary Kideo-Canada, acquired (the "Technology Acquisition") certain computer hardware and software assets from V-Seion Multimedia Systems, Inc. (as the "Seller" in such transaction), of which Bradley Dahl was then the sole stockholder. As a result of the Technology Acquisition, Mr. Dahl became employed by the Company as Vice President-Development. The purchase price paid by the Company for such assets was approximately $144,000 and was paid (i) by cash in the sum of approximately $37,000, (ii) partly through the forgiveness of a loan made previously by Kideo-Canada to the Company in the principal amount of $37,000, and (iii) partly through the transfer from Kideo-Canada to the Seller of approximately 19,645 shares of Common Stock of the Company, which shares were valued at approximately $70,000. In addition, legal fees of approximately $48,000 incurred in connection with the Technology Acquisition were capitalized in connection with that transaction. TRANSACTIONS WITH MANAGEMENT In January 1996, the Company obtained $125,000 in financing from two of its executive officers (Robert J. Riscica, the Company's Chief Financial Officer, and Marvin H. Goldstein, the Company's Vice President- Comptroller). In connection with this 1996 Pre-Bridge Financing, Messrs. Riscica and Goldstein purchased two and one-half units of the Company's securities, which units were identical to the 1996 Bridge Units (except that, unlike the 1996 Bridge Shares, the 1996 Pre-Bridge Shares will not be required to be registered under the Securities Act). As a result of the 1996 Pre-Bridge Financing, the Company issued to Messrs. Riscica and Goldstein (i) $125,000 in aggregate principal amount of 1996 Pre-Bridge Notes and (ii) an aggregate of 25,000 1996 Pre- Bridge Shares. The Company intends to use approximately $129,000 of the proceeds from this offering to repay these 1996 Pre-Bridge Notes (including estimated interest accrued thereon through and until such repayment date) upon the consummation of this offering. TRANSACTIONS WITH ADVERTISING AGENCY AFFILIATED WITH DIRECTOR The Company from time to time has utilized advertising and related services provided by Griffin Bacal, Inc. ("GBI"). Thomas Griffin, a director of the Company, has been the Co-Chairman of GBI, which he founded in 1978, for more than five years prior to the date hereof. From October 1994 through January 1995, GBI had billed the Company approximately $79,000 for services rendered, of which $54,000 has been paid. Future transactions (if any) between the Company and any of its directors, officers and/or 5% stockholders will continue to be on terms no less favorable to the Company than could be obtained from independent third parties and will be approved by a majority of the independent, disinterested directors of the Company. DESCRIPTION OF SECURITIES GENERAL The Company is authorized to issue 15,000,000 shares of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share. As of the date of this Prospectus, there are 1,538,985 shares of Common Stock outstanding and no shares of preferred stock outstanding (based on the assumed completion of the Pending Recapitalization transactions). 52 COMMON STOCK The holders of the Common Stock are entitled to one vote for each share held of record in the election of directors of the Company and in all other matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors. Holders of Common Stock are entitled (i) to receive such dividends as may be declared from time to time by the Board out of funds legally available therefor and (ii) in the event of liquidation, dissolution or winding up of the Company, to share ratably in all assets remaining after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. Holders of Common Stock have no conversion rights or preemptive rights and are not subject to further capital calls or assessments. There are no redemption or sinking fund provisions applicable to the Common Stock. The rights of the holders of the Common Stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is issued. All of the outstanding shares of Common Stock are fully paid and non-assessable. Upon issuance, all of the 1,400,000 Shares offered hereby will be fully paid and nonassessable. The Company's By-Laws provide that the holders of at least 10% of its voting stock will be able to call special meetings of stockholders. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of preferred stock from time to time in one or more series, in all cases ranking senior to the Common Stock with respect to payment of dividends and in the event of the liquidation, dissolution or winding up of the Company. There are currently no shares of preferred stock outstanding. The Board has the power, without stockholder approval, to issue shares of one or more series of preferred stock, at any time, for such consideration and with such relative rights, privileges, preferences and other terms as the Board may determine (including, but not limited to, terms relating to dividend rates, redemption rates, liquidation preferences and voting, sinking fund and conversion or other rights). The rights and terms relating to any new series of preferred stock could adversely affect the voting power or other rights of the holders of the Common Stock or could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. JOHNSTON WARRANTS Upon the consummation of this offering, there will be outstanding Class A Warrants and Class B Warrants (which together constitute the Johnston Warrants) to purchase an aggregate of 83,975 shares of Common Stock. All of these warrants are beneficially owned by Charles C. Johnston, a director and principal stockholder of the Company. Each Johnston Warrant is exercisable for the purchase of one share of Common Stock at an exercise price of $3.60 per share. All of the Johnston Warrants will expire during the year 2000. In addition, the Johnston Warrants are callable by the Company under certain circumstances. The Company has also granted the holders of the Johnston Warrants certain piggyback registration rights for the Common Stock issuable upon exercise thereof. See " -- Registration Rights." PUBLIC WARRANTS Each Warrant offered hereby will entitle the registered holder thereof to purchase one share of Common Stock, at a price of $4.00, subject to adjustment in certain circumstances, at any time during the four year period commencing on June 24, 1997. The Warrants will be separately transferable immediately upon issuance. The Warrants are redeemable by the Company, upon the consent of the Underwriter, at any time commencing on June 24, 1997, upon notice of not less than 30 days, at a price of $.10 per Warrant, provided that the closing bid quotation of the Common Stock, for a period of 20 consecutive trading days ending on the third day prior to the day on which the Company gives notice, has been at least 150% (currently $6.00, subject to adjustment) of the then effective exercise price of the Warrants. The holders of the Warrants will have the right to exercise their Warrants until the close of business on the date fixed for redemption. The Warrants will be issued in registered form under a Warrant Agreement by and among the Company, American Stock Transfer & Trust Company, as Warrant Agent, and the Underwriter. Reference is made to the Warrant Agreement (which has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part) for a complete description of the terms and conditions therein (the description herein contained being qualified in its entirety by reference thereto). 53 The exercise price and number of shares of Common Stock or other securities issuable upon exercise of the Warrants are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. However, such warrants are not subject to adjustment for issuances of Common Stock at a price below the exercise price of the Warrants. The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the certificate completed and executed as indicated, accompanied by full payment of the exercise price (by certified check payable to the Company) to the Warrant Agent for the number of Warrants being exercised. The holders of Warrants do not have the rights or privileges of holders of Common Stock. No Warrant will be exercisable unless at the time of exercise (i) the Company has filed a current prospectus with the Commission covering the shares of Common Stock issuable upon exercise of such Warrant and (ii) such shares have been registered or qualified, or have been deemed to be exempt from registration or qualification, under the securities laws of the state of residence of the holder of such Warrant. The Company will use its best efforts to have all such shares so registered or qualified on or before the first possible Warrant exercise date (i.e., the one-year anniversary of the date of this Prospectus) and to maintain a current prospectus relating thereto until the expiration date of the Warrants, subject to the terms and conditions of the Warrant Agreement. While it is the Company's intention to maintain such a current prospectus for such time period, there can be no assurance that the Company will in fact be able to do so. No fractional shares will be issued upon exercise of the Warrants. However, if a warrantholder exercises all Warrants then owned of record by him, the Company will pay to such warrantholder, in lieu of the issuance of any fractional share which is otherwise issuable, an amount in cash based on the market value of the Common Stock on the last trading day prior to the Warrant exercise date. REGISTRATION RIGHTS 1995 Registration Rights Agreement The Company has granted certain piggyback registration rights relating to the shares of Common Stock to be issued in connection with the Pending Recapitalization upon conversion of the Debentures and Series A Preferred Stock (as well as those issued in payment of outstanding interest due on the Debentures) and those issuable upon exercise of the Johnston Warrants, representing an aggregate of 663,830 shares of Common Stock (collectively, the "1995 Registrable Shares"), pursuant to an agreement between the holders of such securities and the Company, dated May 12, 1995 (the "1995 Registration Rights Agreement"). In the event a registration is a primary registration on behalf of the Company, the Company will use its best efforts to include in such registration, subject to the agreement of the managing underwriter or underwriters of the offering relating thereto (if any): (i) first, the securities that the Company proposes to sell; (ii) second, those (a) 1995 Registrable Shares, (b) securities which are registrable pursuant to the terms of an agreement, dated June 17, 1994 (the "Investor Rights Agreement"), between the Company and certain stockholders (the "June Investor Shares"), and (c) Bulman Shares (as hereinafter defined) which are requested by the holders thereof to be included in such registration (pro rata among the holders thereof); and (iii) third, other securities requested to be included in such registration. In secondary, non-issuer registrations, the Company will use its best efforts to include in such registration, subject to the agreement of the managing underwriter or underwriters of the offering relating thereto (if any): (X) first, those 1995 Registrable Shares, June Investor Shares and Bulman Shares which are requested by the holders thereof to be included in such registration (pro rata among the holders thereof); and (Y) second, other securities requested to be included in such registration. In connection with any underwritten piggyback registration, the holders of the 1995 Registrable Shares have agreed to execute and deliver a "lock-up agreement" with respect to any of their registrable securities included therein for up to 90 days (or longer as the Company's underwriters may request but not to exceed 180 days) after the effective date of the registration statement relating to such underwritten offering. 54 Investor Rights Agreement Under the Investor Rights Agreement, the Company agreed to register the June Investor Shares (currently representing approximately 136,342 shares of Common Stock) upon the demand of holders owning at least 20% of the June Investor Shares then outstanding; provided that (among other conditions): (i) no such demand registration is required to become effective prior to the earlier of June 1, 1999 or within 90 days (or longer as the Company's underwriters may request but not to exceed 180 days) after the effective date of any registration statement initiated by the Company; and (ii) no more than two such demand registrations are required to be effected. The Company also agreed to cause a Form S-3 registration of the June Investor Shares upon demand, but not more frequently than once every year, and to include the June Investor Shares in certain piggyback registrations as provided in the Investor Rights Agreement, which are subject to the priorities discussed above concerning the 1995 Registration Rights Agreement. See "Shares Eligible for Future Sale" and "Underwriting." Bulman Registration Rights Agreement Pursuant to an agreement between the Company and Richard L. Bulman, dated January 1, 1995, the Company has agreed to cause a registration statement to be filed with respect to the shares of Common Stock held by Mr. Bulman (the "Bulman Shares") upon Mr. Bulman's demand made not more than once per year during an eight year period ending January 1, 2003. In addition, Mr. Bulman was granted piggyback registration rights relating to such shares, which are subject to the priorities discussed above concerning the 1995 Registration Rights Agreement. Mr. Bulman is currently the owner of 376,471 outstanding shares of Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." Registration Rights of Gary Bilezikian Pursuant to an agreement, dated October 26, 1993, between the Company and Gary Bilezikian, a stockholder of the Company, the Company has granted Mr. Bilezikian certain piggyback registration rights relating to his shares of Common Stock if it proposes to file a registration statement under the Securities Act. The Company is not obligated, however, to include any shares of Common Stock held by Mr. Bilezikian either (i) in any registration statement relating solely to the sale of securities to participants in a Company stock plan or (ii) in any registration statement whose form does not include substantially the same information as would be required to be included in a registration statement covering the sale of shares of Common Stock owned by Mr. Bilezikian. Mr. Bilezikian is currently the owner of 38,945 outstanding shares of Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." V-Seion Registration Rights Agreement Pursuant to a Registration Rights Agreement, dated as of July 14, 1995, between the Company and V-Seion Multimedia Systems, Inc. ("V-Seion", which was the seller of the assets acquired by the Company in the Technology Acquisition), the Company granted V-Seion piggyback registration rights relating to its shares of Common Stock (other than in connection with a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145(a) promulgated under the Securities Act is applicable). If the registration proposed by the Company is to be an underwritten offering of securities for the account of either the Company or the holders of such securities, then the amount of shares which V-Seion will be allowed to register can be limited, in the underwriter's discretion, by certain relevant marketing factors. In the event that any shares of Common Stock held by V-Seion are permitted by the underwriter to be included in such a registration, V-Seion is prohibited from selling any of such shares to the public for a period of 90 days (or such longer period, not to exceed 180 days, as the underwriter may request) from the effective date of such registration. V-Seion is currently the owner of 19,645 outstanding shares of Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." The March 1996 Shares In March 1996, the Company issued 24,000 shares of Common Stock to legal counsel to the Company in partial payment of outstanding legal fees. In connection with such issuance, the Company did not grant (or agree to grant) to its legal counsel any registration rights of any kind relating to such shares. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW The Company is a Delaware corporation and thus subject to Section 203 of the DGCL ("Section 203"), which is generally viewed as an anti-takeover statute. In general, Section 203 prohibits a publicly traded Dela- 55 ware corporation from engaging in any "business combination" (as defined) with any "interested stockholder" (as defined) for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purpose of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meetings of the stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder. In general, Section 203 defines a "business combination" to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; (iii) (subject to certain exceptions) any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through corporation. In general, Section 203 defines an "interested stockholder" as (a) any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation or (b) any entity or person affiliated with or controlling or controlled by such entity or person. The existence of Section 203 would be expected to have the effect of discouraging takeover attempts involving the Company, including attempts that might result in a premium over the market price of the Common Stock (if it is then publicly traded). TRANSFER AGENT, WARRANT AGENT AND REGISTRAR The transfer agent, warrant agent and registrar for the Common Stock is American Stock Transfer & Trust Company. REPORTS TO STOCKHOLDERS The Company intends to file, prior to the date of this Prospectus, an application with the Commission to register the Shares and Warrants under the provisions of Section 12(g) of the Exchange Act. The Company has agreed with the Underwriter that the Company will use its reasonable best efforts to continue to maintain such registration. Such registration will require the Company to comply with periodic reporting, proxy solicitation and certain other requirements of the Exchange Act. SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of this offering, the Company will have outstanding 2,938,985 shares of Common Stock. Of these outstanding shares, 1,690,000 shares of Common Stock (consisting of the 1,400,000 Shares offered hereby and the 290,000 Selling Stockholders' Shares included in the Registration Statement of which this Prospectus forms a part) have been registered under the Securities Act and, accordingly, will be freely transferable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Rule 144") described below; except that, in the case of the 290,000 Selling Stockholders' Shares, the holders of such shares have agreed that, without the Underwriter's prior written consent, such holders will not sell or otherwise dispose of any shares of Common Stock in any public market transaction (including pursuant to Rule 144) for the 12-month period following the date of this Prospectus. 56 All of the remaining 1,248,985 shares of Common Stock currently outstanding (the "Restricted Common Stock") are "restricted securities" or owned by "affiliates" (as those terms are defined in Rule 144) and thus may not be sold publicly unless they are registered under the Securities Act or are sold pursuant to Rule 144 or another exemption from registration. At various times during the twelve months following the date of this Prospectus, shares of Restricted Common Stock will become eligible for sale in the public market pursuant to Rule 144. In addition, 1,235,234 shares of the Restricted Common Stock are held by stockholders to whom the Company has granted certain registration rights. In addition, the holders of the Johnston Warrants have been granted certain registration rights related to the 83,975 shares of Common Stock underlying such warrants. However, the holders of all of the Restricted Common Stock and Mr. Johnston have agreed that, without the Underwriter's prior written consent, they will not, for the 12-month period following the date of this Prospectus (i) sell or otherwise dispose of any shares of Common Stock in any public market transaction (including pursuant to Rule 144) or (ii) exercise any rights held by such holders to cause the Company to register any shares of Common Stock for sale pursuant to the Securities Act. The Underwriter also has certain demand and piggyback registration rights with respect to the securities underlying the Underwriter's Warrants. The Underwriter's Warrants will be exercisable at any time and from time to time, in whole or in part, during the four-year period commencing one year following the date of this Prospectus. In the event that all of the Underwriter's Warrants (and the warrants to purchase Common Stock which underlie the Underwriter's Warrants) were to be exercised, the holders of the Underwriter's Warrants would become the owners of an aggregate of 280,000 shares of Common Stock, all of which would be subject to the registration rights granted by the Company to the Underwriter in connection with the issuance of the Underwriter's Warrants. See "Underwriting." In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including persons who may be deemed to be "affiliates" of the Company (as that term is defined under the Securities Act), is entitled to sell, within any three-month period, a number of restricted shares that have been beneficially owned for a least two years which does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) an amount equal to the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. However, a person who is not deemed an affiliate and has beneficially owned restricted shares for at least three years is entitled to sell such shares without regard to the volume or other resale requirements. Under Rule 701 of the Securities Act, persons who purchase shares upon exercise of options granted prior to the date of this Prospectus are entitled to sell such shares after the 90th day following the date of this Prospectus in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day period, but without a holding period. Prior to this offering, there has been no market for any securities of the Company, and no predictions can be made of the effect, if any, that sales of shares of Common Stock, or the availability of such shares for sale, will have on the market price of such securities prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. UNDERWRITING Whale Securities Co., L.P. (the "Underwriter"), has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase the 1,400,000 Shares and 1,400,000 Warrants offered hereby from the Company. The Underwriter is committed to purchase and pay for all of the Shares and Warrants offered hereby if any of such securities are purchased. The Shares and Warrants are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Shares and Warrants to the public at the public offering prices set forth on the cover page of this Prospectus. The Underwriter may allow certain 57 dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") concessions, not in excess of $.20 per Share $.004 per Warrant, of which not in excess of $.10 per Share and $.002 per Warrant may in turn be reallowed to other dealers who are members of the NASD. The Company has granted to the Underwriter an option, exercisable for 45 days following the date of this Prospectus, to purchase up to 210,000 additional Shares and/or 210,000 additional Warrants at the respective public offering prices set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriter may exercise this option in whole or, from time to time, in part, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the Shares and/or Warrants offered hereby. The Company has agreed to pay to the Underwriter a nonaccountable expense allowance equal to 3% of the gross proceeds derived from the sale of the securities offered hereby, including any securities sold pursuant to the Underwriter's over-allotment option, $50,000 of which has been paid as of the date of this Prospectus. The Company has also agreed to pay all expenses in connection with qualifying the Shares and Warrants offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to sell to the Underwriter and its designees, for an aggregate of $140, warrants (the "Underwriter's Warrants") to purchase up to 140,000 shares of Common Stock at an exercise price of $8.25 per share (165% of the public offering price per share) and/or up to 140,000 warrants (each exercisable to purchase one share of Common Stock at a price of $5.20 per share) at an exercise price of $.165 per warrant (165% of the public offering price per Warrant). The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year following the date of this Prospectus, except to the officers and partners of the Underwriter and members of the selling group, and are exercisable at any time and from time to time, in whole or in part, during the four-year period commencing one year following the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's stockholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected, since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants, the underlying shares of Common Stock or the underlying warrants, or the shares of Common Stock issuable upon exercise of such underlying warrants, may be deemed additional underwriting compensation. The Underwriter's Warrants contain a cashless exercise provision. Subject to certain limitations and exclusions, the Company has agreed that, upon the request of the holders of a majority of the Underwriter's Warrants, the Company will (at its own expense), on one occasion during the Warrant Exercise term, register the Underwriter's Warrants and the securities underlying the Underwriter's Warrants under the Securities Act and that it will include the Underwriter's Warrants and all such underlying securities in any appropriate registration statement which is filed by the Company under the Securities Act during the seven years following the date of this Prospectus. In the event that all of the Underwriter's Warrants (and the warrants to purchase Common Stock which underlie the Underwriter's Warrants) were to be exercised, the holders of the Underwriter's Warrants would become the owners of an aggregate of 280,000 shares of Common Stock, all of which would be subject to the registration rights granted by the Company to the Underwriter in connection with the issuance of the Underwriter's Warrants. In connection with exercises of Warrants pursuant to a solicitation made by the Underwriter which occur after the one-year anniversary of the date of this Prospectus, the Company has agreed to pay to the Underwriter a fee of 5% of the exercise price for each Warrant exercised; provided, however, that the Underwriter will not be entitled to receive such compensation in Warrant exercise transactions in which: (i) the market price of the Common Stock at the time of exercise is lower than the exercise price of the Warrants; (ii) the Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made, in addition to the disclosure provided in this Prospectus, in documents provided to holders of the Warrants at the time of exercise; 58 (iv) the holder of the Warrants has not confirmed in writing that the Underwriter solicited such exercise; or (v) the solicitation of exercise of the Warrants was in violation of Rule 10b-6 promulgated under the Exchange Act. The Company has agreed not to solicit Warrant exercises other than through the Underwriter, unless the Underwriter declines to make such solicitation. Rule 10b-6 promulgated under the Exchange Act may prohibit the Underwriter from engaging in any market-making activities with regard to the Company's securities for the period from nine business days (or such other applicable period as Rule 10b-6 may provide) prior to any solicitation by the Underwriter of the exercise of Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriter may have to receive a fee for the exercise of Warrants following such solicitation. As a result, the Underwriter may be unable to provide a market for the Company's securities during certain periods while the Warrants are exercisable. The Company has agreed to retain the Underwriter as a financial consultant for a period of two years following the consummation of this offering at an annual fee of $30,000, the entire $60,000 being payable in full, in advance, upon the consummation of this offering. The consulting agreement with the Underwriter will not require it to devote a specific amount of time to the performance of its duties thereunder. It is anticipated that these consulting services will be provided by principals of the Underwriter and/or members of the Underwriter's corporate finance department who, however, have not been designated as of the date hereof. In addition, in the event that the Underwriter originates a financing, merger, acquisition, joint venture or other transaction to which the Company is a party, the Underwriter will be entitled to receive a finder's fee in consideration for the origination of such transaction. All of the Company's current directors and officers, and substantially all of its current securityholders, have agreed that, without the Underwriter's prior written consent, for the 12-month period following the date of this Prospectus, they will not sell or otherwise dispose of any shares of Common Stock in any public market transaction (including pursuant to Rule 144) or exercise any rights held by them to cause the Company to register any shares of Common Stock for sale pursuant to the Securities Act. The Underwriter has informed the Company that it does not expect sales of the securities offered hereby to discretionary accounts to exceed 1% of the securities offered hereby. The Company has agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act. Prior to this offering, there has been no public market for the Common Stock or the Warrants. Accordingly, the initial public offering prices of the Shares and Warrants offered hereby and the terms of the Warrants have been determined by negotiation between the Company and the Underwriter and are not necessarily related to the Company's asset value, net worth or other established criteria of value. Factors considered in determining such prices and terms include the Company's financial condition and prospects, an assessment of the Company's management, market prices of similar securities of comparable publicly-traded companies, certain financial and operating information of companies engaged in activities similar to those of the Company and the general condition of the securities market. Charles C. Johnston, a principal stockholder and director of the Company, is a limited partner in the Underwriter. 59 SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION An aggregate of up to 290,000 Selling Stockholders' Shares (comprised of the 90,000 1995 Pre-Bridge Shares, the 150,000 1996 Bridge Shares and the 50,000 June 1996 Shares) may be offered and sold pursuant to this Prospectus by the Selling Stockholders. The Company has agreed to register the Selling Stockholders' Shares under the Securities Act concurrently with this offering and to pay all expenses in connection therewith. The Selling Stockholders' Shares have been included in the Registration Statement of which this Prospectus forms a part. None of the Selling Stockholders' Shares may be sold by the Selling Stockholders prior to 12 months following the date of this Prospectus without the prior written consent of the Underwriter. Other than Charles C. Johnston (who is a director and principal stockholder of the Company and the sole stockholder of J&C Resources, Inc., one of the Selling Stockholders, and who is also a limited partner in the Underwriter) and Harvey Kohn (who was a director of the Company from June 1994 to March 1995), none of the Selling Stockholders nor their affiliates has ever held any position or office with the Company or ever had any other material relationship with the Company. The Company will not receive any of the proceeds from the sale of the Selling Stockholders' Shares by the Selling Stockholders. The following table sets forth certain information with respect to the Selling Stockholders.
Percentage Beneficial Beneficial Beneficial Amount of Ownership of Ownership of Ownership of Selling Shares of Common Shares of Common Shares of Common Stockholders' Stock After Stock After Selling Stockholders Stock Prior to Sale Shares Offered Offering(1) Offering (1) -------------------------------------- ------------------- -------------- ---------------- ---------------- Herbert Berman ....................... 20,000 20,000 -0- -0- Isaac Berman ......................... 10,000 10,000 -0- -0- Bodywell International ............... 50,000 50,000 -0- -0- Ben Bollag ........................... 44,103(2) 15,000 29,103(2) * Michael Bollag ....................... 73,206(3) 15,000 58,206(3) 1.98% Robert S. Cohen ...................... 10,000 10,000 -0- -0- Cowen & Company f/b/o Lewis Merenstein IRA .................................. 10,000 10,000 -0- -0- J&C Resources, Inc. .................. 298,136(4) 30,000 268,136(4) 8.83% Lawrence Howard ...................... 25,000 25,000 -0- -0- Robert Howard ........................ 25,000 25,000 -0- -0- Harvey Kohn .......................... 37,572 7,500 30,072 1.02% Helen Kohn ........................... 5,000 5,000 -0- -0- Michael Miller ....................... 10,000 10,000 -0- -0- Rahn & Bodmer ........................ 32,322 15,000 17,322 * Michael Schachter .................... 10,000 10,000 -0- -0- Arthur Steinberg ..................... 10,000 10,000 -0- -0- Cary Sucoff .......................... 30,160 7,500 22,660 * Ronit Sucoff ......................... 5,000 5,000 -0- -0- Universal Partners, L.P. ............. 10,000 10,000 -0- -0-
- ------ * Less than one percent. (1) Assumes all of the Selling Stockholders' Shares are sold by the Selling Stockholders. (2) Includes 29,103 shares of Common Stock owned by The Sunshine Charitable Trust, of which Ben Bollag is a trustee. (3) Includes (i) 29,103 shares of Common Stock owned by The Sunshine Charitable Trust, of which Michael Bollag is a trustee, and (ii) 29,103 shares of Common Stock owned by The Michael Bollag Charitable Remainder Unitrust, of which Michael Bollag is the beneficiary until January 2009. (4) Includes 83,975 shares of Common Stock issuable upon exercise of the Johnston Warrants and 15,000 shares of Common Stock issuable upon exercise of options granted under the Option Plan. The sole stockholder of J&C Resources is Charles C. Johnston, who is a director and principal stockholder of the Company and a limited partner in the Underwriter. 60 The Selling Stockholders' Shares may be offered and sold from time to time as market conditions permit in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices relating to the then- current market price, or in negotiated transactions. The Selling Stockholders' Shares may be sold by one or more of the following methods, without limitation: (a) a block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchases; and (d) face-to-face transactions between sellers and purchasers without a broker/dealer. In effecting sales, brokers or dealers engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Such brokers or dealers may receive commissions or discounts from Selling Stockholders in amounts to be negotiated. Such brokers and dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Solovay Marshall & Edlin, P.C. ("SME"), New York, New York. Certain legal matters will be passed upon for the Underwriter by Tenzer Greenblatt LLP, New York, New York. On March 26, 1996, SME agreed to accept from the Company, in lieu of cash and as partial payment for legal services rendered prior to that date, 24,000 shares of Common Stock (valued by the Company at that time as having a fair market value of $3.50 per share). The Company issued such 24,000 shares to members and an employee of SME on March 27, 1996. EXPERTS The consolidated financial statements of Kideo Productions, Inc. and Subsidiaries as of July 31, 1995, and for the period from November 1, 1993 (date operations commenced) to July 31, 1994 and for the year ended July 31, 1995, included in this Prospectus and in the Registration Statement have been included herein in reliance upon the reports (which contain an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 1 of the notes to the consolidated financial statements) of Goldstein Golub Kessler & Company, P.C., independent certified public accountants given upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a registration statement (the "Registration Statement", which term shall include all amendments, exhibits and schedules thereto) on Form SB-2 under the Securities Act with respect to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement may be inspected and copied at prescribed rates at the public reference facilities of the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. 61 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report ........................ F-2 Consolidated Financial Statements: Balance Sheet .................................. F-3 Statement of Operations ........................ F-4 Statement of Shareholders' Deficiency .......... F-5 Statement of Cash Flows ........................ F-6 -- F-7 Notes to Consolidated Financial Statements ...... F-8 -- F-15
F-1 INDEPENDENT AUDITOR'S REPORT To the Shareholders and Directors of Kideo Productions, Inc. We have audited the accompanying consolidated balance sheet of Kideo Productions, Inc. and Subsidiaries as of July 31, 1995 and the related consolidated statements of operations, shareholders' deficiency, and cash flows for the period from November 1, 1993 (date operations commenced) to July 31, 1994 and for the year ended July 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kideo Productions, Inc. and Subsidiaries as of July 31, 1995 and the results of their operations and their cash flows for the period from November 1, 1993 (date operations commenced) to July 31, 1994 and for the year ended July 31, 1995 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 of the notes to consolidated financial statements, the Company sustained a loss for the period ended July 31, 1994 and for the year ended July 31, 1995 and has a working capital deficiency at July 31, 1995. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. GOLDSTEIN GOLUB KESSLER & COMPANY, P.C. New York, New York November 13, 1995, except for the first paragraph of Note 8, as to which the date is January 5, 1996 F-2 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
Pro Forma at July 31, April 30, April 30, 1995 1996 1996 ------------- ------------- -------------- (unaudited) (unaudited) (Note 12) ASSETS Current Assets: Cash ................................................ $ 61,137 $ 56,553 $ 45,524 Accounts receivable (Note 1) ........................ 59,313 27,610 27,610 Prepaid expenses and other current assets (Note 7) .. 107,503 195,837 215,837 ------------- ------------- -------------- Total current assets ........................... 227,953 280,000 288,971 Property and Equipment, net (Note 2) .................. 766,377 600,169 600,169 Deferred Offering Costs (Note 1) ...................... 325,348 325,348 Other Assets (Notes 1 and 3) .......................... 453,387 483,874 328,176 ------------- ------------- -------------- Total Assets ................................... $ 1,447,717 $ 1,689,391 $ 1,542,664 ============= ============= ============== LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current Liabilities: Accounts payable .................................... $ 428,188 $ 589,012 $ 589,012 Accrued expenses .................................... 233,590 275,358 278,019 Obligations under capital leases -- current portion (Notes 2 and 6) .................................. 144,171 172,961 172,961 Loans payable -- related parties (Note 4) ........... 61,472 61,872 -- Notes payable (Notes 7 and 10) ...................... -- 828,396 938,396 Unearned revenue (Note 1) ........................... 42,338 173,930 173,930 ------------- ------------- -------------- Total current liabilities ...................... 909,759 2,101,529 2,152,318 Obligations under Capital Leases, net of current portion (Notes 2 and 6) ..................................... 195,330 121,079 121,079 Long-term Debt (Notes 7 and 10) ....................... 956,250 1,000,000 -- ------------- ------------- -------------- Total liabilities .............................. 2,061,339 3,222,608 2,273,397 ------------- ------------- -------------- Commitments and Contingencies (Notes 1, 5 and 11) Shareholders' Deficiency (Notes 1, 7, 8, 10 and 12): Preferred stock -- $.01 par value; authorized 5,000,000 shares, issued and outstanding 956.25 shares (July 31, 1995), 1,048.672 shares (April 30, 1996) and -0- shares (pro forma), respectively ($1,048,672 aggregate liquidation preference at April 30, 1996) .................................. 10 10 -- Common stock -- $.0001 par value; authorized 15,000,000 shares, issued and outstanding 616,891 shares (July 31, 1995), 915,563 shares (April 30, 1996) and 1,538,985 shares (pro forma), respectively 62 92 154 Additional paid-in capital .......................... 1,385,574 2,087,221 3,177,169 Accumulated deficit ................................. (1,999,268) (3,620,540) (3,908,056) ------------- ------------- -------------- Shareholders' deficiency ....................... (613,622) (1,533,217) (730,733) ------------- ------------- -------------- Total Liabilities and Shareholders' Deficiency . $ 1,447,717 $ 1,689,391 $ 1,542,664 ============= ============= ==============
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements F-3 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Period from November 1, 1993 Nine-month (date operations Year ended period ended commenced) to July 31, April 30, July 31, 1994 1995 1995 1996 ---------------- -------------- -------------- --------------- (unaudited) Sales ........................................ $ 38,223 $ 521,186 $ 426,489 $ 669,734 Costs of sales (Note 1) ...................... 95,153 657,498 528,841 496,521 ---------------- -------------- -------------- --------------- Gross profit (loss) .......................... (56,930) (136,312) (102,352) 173,213 Operating expenses (including interest expense of $118,485, $22,473 and $329,373 for the year ended July 31, 1995 and the nine-month periods ended April 30, 1995 and 1996, respectively) (Note 7) 348,059 1,442,261 1,049,503 1,761,519 ---------------- -------------- -------------- --------------- Net loss ..................................... $ (404,989) $(1,578,573) $(1,151,855) $ (1,588,306) ================ ============== ============== =============== Pro forma financial information (unaudited) (Note 12): Net loss ................................... -- $(1,578,573) $(1,151,855) $(1,588,306) Pro forma adjustment for employment agreements -- (338,000) (257,000) (74,000) ---------------- -------------- -------------- --------------- Pro forma net loss ......................... -- $(1,916,573) $(1,408,855) $(1,662,306) ================ ============== ============== =============== Pro forma net loss per common share ........ -- $ (1.18) $ (.90) $ (1.01) ================ ============== ============== =============== Weighted average number of common shares outstanding (Note 1) .................... -- 1,571,450 1,571,450 1,571,450 ================ ============== ============== ===============
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements F-4 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY Period from November 1, 1993 (date operations commenced) to July 31, 1994, year ended July 31, 1995 and the nine month period ended April 30, 1996 (unaudited)
Additional Preferred Stock Common Stock Paid-in Accumulated Shareholders' Shares Amount Shares Amount Capital Deficit Deficiency ------ ------ ------ ------ ---------- ----------- ------------ Issuance of common stock for cash ....... -- -- 544,060 $54 $ 409,341 -- $ 409,395 Net loss ................................ -- -- -- -- -- $ (404,989) (404,989) -------- ------ ------- ---- ---------- ----------- ------------ Balance at July 31, 1994 ................ -- -- 544,060 54 409,341 (404,989) 4,406 Exercise of stock options (Note 8) ...... -- -- 19,272 2 47,448 -- 47,450 Issuance of preferred stock in connection with private placement memorandum (Note 7) 956.25 $10 -- -- 737,311 -- 737,321 Issuance of common stock in satisfaction of expenses in connection with private placement memorandum (Note 7) .......... -- -- 33,914 3 121,291 -- 121,294 Issuance of common stock in connection with acquisition of technology and software (Note 1) ................................ -- -- 19,645 3 70,183 -- 70,186 Accrued dividends on preferred stock .... -- -- -- -- -- (15,706) (15,706) Net loss ................................ -- -- -- -- -- (1,578,573) (1,578,573) -------- ------ ------- ---- ---------- ----------- ------------ Balance at July 31, 1995 ................ 956.25 10 616,891 62 1,385,574 (1,999,268) (613,622) (Unaudited): Issuance of preferred stock in connection with private placement memorandum (Note 7) ........................... 43.75 -- -- -- 43,750 -- 43,750 Issuance of common stock in satisfaction of expenses in connection with private placement memorandum (Note 7) ...... -- -- 3,239 -- 6,751 -- 6,751 Issuance of common stock in connection with October 1995 private placement (Note 7) -- -- 90,000 9 163,627 -- 163,636 Issuance of common stock in connection with January 1996 private placement (Note 7) -- -- 25,000 2 58,012 -- 58,014 Issuance of common stock in partial payment of interest on long-term debt ...... -- -- 6,433 1 23,028 -- 23,029 Issuance of preferred stock in satisfaction of dividends ....................... 48.672 -- -- -- 48,672 -- 48,672 Issuance of common stock in connection with February 1996 private placement (Note 7) ........................... -- -- 150,000 15 273,810 -- 273,825 Issuance of common stock for legal expenses in connection with the proposed initial public offering (Note 8) ........... -- -- 24,000 3 83,997 -- 84,000 Accrued dividends on preferred stock .. -- -- -- -- -- (32,966) (32,966) Net loss .............................. -- -- -- -- -- (1,588,306) (1,588,306) --------- ------ ------- ---- ---------- ----------- ------------ Balance at April 30, 1996 ............. 1,048.672 $10 915,563 $92 $2,087,221 $(3,620,540) $ (1,533,217) ========= ====== ======= ==== ========== =========== ============
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements F-5 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Period from November 1, 1993 Nine-month (date operations Year ended period ended commenced) to July 31, April 30, July 31, 1994 1995 1995 1996 ---------------- -------------- -------------- -------------- (unaudited) Cash flows from operating activities: Net loss ............................. $(404,989) $(1,578,573) $(1,151,855) $(1,588,306) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ..... 31,694 147,397 100,383 245,250 Amortization of loan discount ..... -- -- -- 148,872 Amortization of deferred debt costs . -- -- -- 81,233 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable ................... (9,954) (49,359) (9,585) 31,703 (Increase) decrease in prepaid expenses and other current assets -- (107,503) (217,651) 41,666 (Increase) decrease in deferred production costs ............. (42,490) 21,245 -- -- Increase in other assets ........ (7,849) (378,412) (231,175) (94,002) Increase in accounts payable .... 69,274 358,914 427,418 4,574 Increase in accrued expenses .... 29,210 188,674 291,742 110,503 Increase in unearned revenue .... -- 42,338 49,450 131,592 ---------------- -------------- -------------- -------------- Net cash used in operating activities ................... (335,104) (1,355,279) (741,273) (886,915) ---------------- -------------- -------------- -------------- Cash flows from investing activity -- purchase of property and equipment ... (92,756) (336,637) (246,887) (66,760) ---------------- -------------- -------------- -------------- Cash flows from financing activities: Proceeds from (repayment of) loans payable -- related parties ........ 68,138 (6,666) (6,000) 400 Proceeds from bridge notes ........... -- 1,050,000 1,100,000 1,175,000 Repayment of bridge notes ............ -- (75,000) -- -- Net proceeds from issuance of capital stock ............................... 409,395 357,982 47,448 32,125 Proceeds from long-term debt ......... -- 468,750 -- 32,125 Principal payments of capital lease obligations ....................... -- (91,686) (62,727) (45,461) Payment of debt issue costs .......... -- -- -- (160,000) Payment of deferred offering costs ... -- -- -- (85,098) ---------------- -------------- -------------- -------------- Net cash provided by financing activities ........................ 477,533 1,703,380 1,078,721 949,091 ---------------- -------------- -------------- -------------- Net increase (decrease) in cash ........ 49,673 11,464 90,561 (4,584) Cash at beginning of period ............ -- 49,673 49,673 61,137 ---------------- -------------- -------------- -------------- Cash at end of period .................. $ 49,673 $ 61,137 $ 140,234 $ 56,553 ================ ============== ============== ==============
(continued) The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements F-6 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Period from November 1, 1993 Nine month (date operations Year ended period ended commenced) to July 31, April 30, July 31, 1994 1995 1995 1996 ---------------- ------------ ----------- ----------- (unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................... -- $ 83,288 $ 22,473 $ 42,465 ================ ============ =========== =========== Income taxes ............................... -- $ 713 -- $ 3,931 ================ ============ =========== =========== Supplemental schedule of noncash investing and financing activities: Capital lease obligations for equipment purchases .................................. -- $431,187 $431,187 -- ================ ============ =========== =========== Dividends accrued on preferred stock .......... -- $ 15,706 -- $ 32,966 ================ ============ =========== =========== Conversion of bridge notes into preferred stock -- $487,500 -- -- ================ ============ =========== =========== Conversion of bridge notes into long-term debt -- $487,500 -- -- ================ ============ =========== =========== Issuance of capital stock for software, technology rights and intellectual property ($51,647 capitalized to property and equipment) ................................. -- $ 70,186 -- -- ================ ============ =========== =========== Issuance of capital stock in satisfaction of expenses ................................... -- $121,294 -- $ 84,000 ================ ============ =========== =========== Conversion of accrued expenses into long-term debt ....................................... -- -- -- $ 11,625 ================ ============ =========== =========== Conversion of accrued expenses into capital stock ...................................... -- -- -- $ 41,404 ================ ============ =========== =========== Conversion of dividends payable into preferred stock ...................................... -- -- -- $ 48,672 ================ ============ =========== =========== Deferred offering costs accrued but not paid .. -- -- -- $ 156,250 ================ ============ =========== =========== Loan discounts associated with bridge notes ... -- -- -- $ 495,476 ================ ============ =========== ===========
The accompanying notes and independent auditor's report should be read in conjunction with the consolidated financial statements F-7 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION PERTAINING TO THE NINE-MONTH PERIODS ENDED APRIL 30, 1995 AND 1996 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CORPORATE STRUCTURE AND PRINCIPAL BUSINESS ACTIVITY: Kideo Productions, Inc. ("Kideo-Delaware"), a Delaware corporation, was incorporated on June 24, 1994 and subsequently amended and restated its certificate of incorporation on December 28, 1994. As of January 9, 1995, Kideo-Delaware exchanged its common stock for all of Kideo-New York's (the operating company incorporated in New York in 1993) outstanding common stock whereby Kideo-New York became a wholly owned subsidiary of Kideo-Delaware. The accompanying consolidated financial statements include the accounts of Kideo-Delaware and its wholly owned subsidiaries, Kideo-New York and Kideo Productions (Canada), Inc. (collectively the "Company"). Kideo Productions (Canada), Inc. commenced operations in July 1995. All significant intercompany transactions and balances have been eliminated. See Note 8 for stock split and Note 12 for recapitalization. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the consolidated financial statements, the Company has incurred net losses of $404,989, $1,578,573 and $1,588,306 for the period from the date operations commenced (November 1, 1993) to July 31, 1994, the year ended July 31, 1995 and the nine-month period ended April 30, 1996, respectively. In addition, the Company had a working capital deficiency of $1,821,529, and total liabilities exceeded its total assets by $1,533,217, as of April 30, 1996. These factors indicate that the Company may be unable to continue as a going concern. Management is seeking additional funds from the completion of an additional private placement (see Note 10) and a proposed initial public offering ("IPO") of the Company's common stock and warrants (see Note 12). The net proceeds are expected to be used to meet the Company's working capital requirements. Management believes that the successful completion of an additional private placement (see Note 10) and of an IPO will enable it to continue as a going concern during the 12-month period following the most recent balance sheet presented. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company develops, produces and markets personalized children's educational video tapes sold through direct sales, mail-order houses, children's toy stores and various catalogs. The principal shareholder developed the initial product line prior to the Company's commencement of operations. The Company is devoted to the development of multimedia products using emerging technologies with an emphasis on personalized products for children. The Company's sales are seasonal in nature based, in part, on gift buying during the months of October though December. The Company generally records an account receivable and a corresponding liability for unearned revenue for video tape order kits shipped to mail order houses and retail stores. The Company is entitled to collect the original billed accounts receivable based upon the terms of sale to the mail order houses and retail stores whether or not the video tape order kit is sold to the ultimate consumer. No additional revenue is received by the Company upon the sale of the video tape order kit by the mail order houses and retail stores to the ultimate consumer. Revenue is recognized on the accrual basis when the video tape is shipped to the ultimate consumer of the order kit and the Company's obligation is satisfied. Deferred production costs consist of capitalized costs related to the production and development of the storylines of the Company's video tapes. These costs are charged to operations over a two-year period. As of July 31, 1995, all amounts, totaling $21,245, have been charged to operations. Legal and accounting fees, printing costs and other expenses associated with the issuance of the Company's $1,000,000 subordinated debentures (the "Debentures") (see Note 7) of $223,746 are being amortized over the term of the Debentures. Amortization expense charged to operations for the year ended July 31, 1995 and the nine-month period ended April 30, 1996 was $11,996 and $56,052, respectively. F-8 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CORPORATE STRUCTURE AND PRINCIPAL BUSINESS ACTIVITY: - (Continued) Certain technology rights, intellectual property and software related to the production of video products, amounting to approximately $192,000 ($121,814 in cash, legal costs and other items and $70,186 in common stock of the Company), were acquired on July 17, 1995 and are being amortized over a three-year period which commenced August 1, 1995 using the straight-line method. Depreciation and amortization charged to operations for the nine-month period ended April 30, 1996 amounted to $48,039. Depreciation of property and equipment is provided for by the accelerated and straight-line methods over the estimated useful lives of the respective assets. Deferred offering costs represent costs attributable to an IPO (see Note 12). The Company intends to offset these costs against the proceeds from this transaction. In the event that such offering is not completed, these costs will be charged to operations. To date, the Company has not had any significant warranty costs for repair or replacement of its product. Based on current sales and historical experience, warranty costs, if any, are charged to operations when incurred. Advertising costs are charged to operations when the advertising first takes place. Advertising expenses for the period ended July 31, 1994, the year ended July 31, 1995 and the nine-month periods ended April 30, 1995 and 1996 were $25,651, $182,149, $61,889 and $31,573, respectively. As of July 31, 1995, the Company had a net operating loss carryforward for both financial reporting and income tax purposes of approximately $1,981,000 available to offset future income through 2010. There were no material temporary differences between the book bases and tax bases of assets and liabilities. This resulted in a deferred income tax asset of approximately $891,000 for which the Company recorded a full valuation allowance due to the uncertainty of future realization of such losses. Utilization of the net operating loss carryforward will be limited based on the ownership changes described in Notes 7, 8, 10 and 12. The accompanying unaudited interim financial statements include all adjustments (consisting only of those of a normal recurring nature) necessary for a fair statement of the results of the interim periods. Pro forma net loss per common share is calculated by dividing the pro forma net loss by the weighted average number of common shares outstanding. Pro forma net loss has been adjusted for interest expense on the convertible debt. For purposes of this computation, shares of common stock, and shares of common stock issuable upon the exercise of options or warrants to purchase common stock, conversion of debt to common stock and conversion of preferred stock to common stock have been included in the weighted average number of shares outstanding from inception utilizing the treasury stock or if converted method, as appropriate. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates by management affecting the reported amounts of assets and liabilities and revenue and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is effective for financial statements for fiscal years beginning after December 15, 1995. The Company does not believe the adoption of SFAS No. 121 will have a material effect on its financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock- based Compensation," which is effective for financial statements with fiscal years beginning after December 15, 1995. Management has not yet determined what effect, if any, adoption of SFAS No. 123 will have on its financial position or results of operations. F-9 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 2. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the following:
July 31, April 30, Estimated 1995 1996 Useful Life ---------- ----------- ------------- Video production equipment and related software . $862,466 $910,397 3 years Furniture and fixtures ......................... 5,653 5,653 7 years Office equipment ............................... 44,109 62,938 5 years ---------- ----------- ------------- 912,228 978,988 Less accumulated depreciation .................. 145,851 378,819 ---------- ----------- $766,377 $600,169 ========== ===========
Included in property and equipment as of July 31, 1995 and April 30, 1996 is approximately $431,000 of assets acquired under capital leases. Accumulated depreciation on these assets as of July 31, 1995 and April 30, 1996 amounted to approximately $72,000 and $180,000, respectively. The property held under these leases is collateral for the related capital lease obligations described in Note 6. 3. OTHER ASSETS: Other assets consist of the following:
July 31, April 30, 1995 1996 ---------- ---------- Deferred debt costs (Note 1) .................. $206,931 $155,698 Deposits on capital lease obligations (Note 6) . 186,000 186,000 Technology rights and intellectual property ... 50,349 38,067 Security deposits ............................. 10,107 14,109 Advance on production contract ................ 90,000 ---------- ---------- $453,387 $483,874 ========== ==========
4. RELATED PARTY TRANSACTIONS: Loans payable -- related parties consist of the following:
July 31, April 30, 1995 1996 ---------- ----------- Loan from a shareholder bearing interest at a rate of 6%. The Company has issued 4 shares of common stock in lieu of interest. .......... $ 3,650 $ 3,650 Debt to a former director of the Company with no repayment terms and whose payment has not been requested. ............................. 57,822 58,222 ---------- ----------- $61,472 $61,872 ========== ===========
5. COMMITMENTS: The Company is obligated under a noncancelable operating lease for office space expiring in 1997. The lease is subject to escalation for the Company's proportionate share of increases in real estate taxes and certain other operating expenses. In addition, the Company rents additional office space on a month-to-month basis at F-10 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 5. COMMITMENTS: - (Continued) a monthly rent of approximately $700, inclusive of utilities. Total rent expense for the period ended July 31, 1994, the year ended July 31, 1995 and the nine-month periods ended April 30, 1995 and 1996 amounted to $26,585, $42,512, $34,059 and $41,169, respectively. Future approximate minimum rental payments required are as follows:
Three-month period ending July 31, 1996 $14,000 Year ending July 31, 1997 ............................... 59,000 1998 ............................... 10,000 --------- $83,000 =========
The Company has entered into employment contracts with five employees expiring at various times through December 1998. The aggregate minimum commitment for future salaries, excluding bonus, is as follows:
Three-month period ending July 31, 1996 $127,000 Year ending July 31, 1997 ................................ 441,000 1998 ................................ 200,000 1999 ................................ 52,000 ---------- $820,000 ==========
6. CAPITAL LEASE OBLIGATIONS: During the year ended July 31, 1995, the Company entered into several capital leases, totaling approximately $431,000, for the purchase of equipment. The Company paid deposits of $186,000 (see Note 3) upon execution of the leases. The obligations are due in monthly installments of principal and interest aggregating $16,400, with interest rates ranging from 16% to 30%, through December 1997. Aggregate lease payments required under these leases at July 31, 1995 and April 30, 1996 are as follows:
July 31, April 30, Year or period ending July 31, 1995 1996 ----------------------------------- ---------- ----------- 1996 .............................. $191,786 $ 84,212 1997 .............................. 167,087 167,087 1998 .............................. 84,250 84,250 ---------- ----------- 443,123 335,549 Less amounts representing interest . 103,622 41,509 ---------- ----------- $339,501 $294,040 ========== ===========
7. BRIDGE NOTE FINANCING AND PRIVATE PLACEMENT OFFERING: In September 1994, a group of investors loaned the Company an aggregate of $250,000 ("September 1994 Financing") evidenced by signed promissory notes that bear interest at 10% per annum. Upon the closing of the May 1995 Units Financing described below, $175,000 of these notes was converted into 1.75 of the units sold in the May 1995 Units Financing (comprised of preferred stock and Debentures) and $75,000 was repaid. In F-11 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 7. BRIDGE NOTE FINANCING AND PRIVATE PLACEMENT OFFERING: - (Continued) addition, upon closing of the May 1995 Units Financing, warrants to purchase up to 52,485 shares of common stock of the Company were issued to the lenders in the September 1994 Financing. In connection with the Company's proposed IPO (see Note 12), these warrants will be purchased for $88,000 by the Company and such amount will be charged to operations during the year ending July 31, 1996. In December 1994, the Company received $400,000 from additional investors ("December 1994 Financing") evidenced by signed promissory notes totaling $420,000 including interest. Upon closing of the May 1995 Units Financing (as described below), the $400,000 of notes was converted into four of the units sold in the May 1995 Units Financing (comprised of preferred stock and Debentures) and $20,000 of interest was paid to the lenders. On October 14, 1994, an existing shareholder loaned $300,000 to the Company. In March 1995, the shareholder loaned the Company an additional $100,000. These loans ("Johnston Financing") bear interest at 12% per annum. Interest on the Johnston Financing at the time of their conversion was not paid. The accrued interest due this shareholder at April 30, 1996 amounted to approximately $18,000. Upon the closing of the May 1995 Units Financing, the Johnston Financing was converted into four of the units sold in the May 1995 Units Financing (comprised of preferred stock and Debentures) and the shareholder received warrants to purchase 83,975 shares of common stock at various exercise prices. Subsequently, the shareholder and the Company have agreed that the exercise price will be $3.60 per common share. In 1995, the Company completed a private placement (the "May 1995 Units Financing") of its securities which consisted of an offering of 20 units at $100,000 per unit. Each unit consisted of 50 shares of convertible preferred stock ("Preferred Stock") and a 10% convertible subordinated debenture in the amount of $50,000 ("Debentures"). Both the Preferred Stock and the Debentures will be convertible into common stock of the Company at an initial ratio of 279.9 shares of common stock for every 1 share of Preferred Stock and 279.9 shares for every $1,000 of Debentures. Subject to earlier conversion or repayment, the Debentures will mature three years after their issuance. Interest on the Debentures shall accrue at 10% per annum, 5% payable in cash and 5% payable in either cash or common stock of the Company or some combination thereof. The Preferred Stock has a liquidation value of $1,000 per share in the event of the dissolution or liquidation of the Company. Dividends accrue at a rate of 10% per annum payable semiannually, in cash or through the issuance of additional shares of Preferred Stock or any combination thereof. The net proceeds from the sale of the units were used to repay $75,000 of the September 1994 Financing and to meet the Company's working capital requirements. The balance of the September 1994 Financing, as well as the December 1994 Financing and the Johnston Financing, were converted into an aggregate of 9.75 of the 20 units sold in the May 1995 Units Financing. At July 31, 1995, the Company had closed on 19.125 units (including the 9.75 units issued upon conversion of prior financings). The Company closed on the remaining .875 units in October 1995. In connection with the Company's proposed IPO (see Note 12) all of the Preferred Stock and all of the Debentures will be converted into shares of common stock of the Company. Upon conversion of the Debentures approximately $156,000 of debt issue costs will be charged to operations. During September and October 1995, the Company completed a $300,000 private placement of its securities in connection with which it issued 90,000 shares of common stock and $300,000 of 9% promissory notes (the "Fall 1995 Pre-Bridge Financing") with interest payable semiannually. These notes are due and payable upon the completion of a proposed IPO (see Note 12) or one year from the closing date of the Fall 1995 Pre- Bridge Financing. In the accompanying unaudited April 30, 1996 financial statements, the Company recorded the common stock at an estimated fair value of $1.818 per share and will record a related charge to earnings for $163,636 during the period the notes remain outstanding. For the nine-month period ended April 30, 1996, $81,818 was charged to operations. F-12 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 7. BRIDGE NOTE FINANCING AND PRIVATE PLACEMENT OFFERING: - (Continued) In January 1996, the Company issued 25,000 shares of common stock and $125,000 of 9% promissory notes, with interest payable semiannually, to two of its officers for aggregate proceeds of $125,000 ("January 1996 Pre-Bridge Financing"). These notes are due and payable upon the completion of a proposed IPO or one year from the closing date of the January 1996 Pre-Bridge Financing. In the accompanying unaudited April 30, 1996 financial statements, the Company recorded the common stock at an estimated fair value of $2.32 per share and will record a related charge to earnings for $58,014 during the period the notes remain outstanding. For the nine-month period ended April 30, 1996, $15,712 was charged to operations. In February 1996, the Company completed an additional private placement of its securities (the "1996 Bridge Financing"). The private placement consisted of 15 units at a price of $50,000 per unit. Each unit consisted of 10,000 shares of common stock and a $50,000 unsecured non-negotiable promissory note bearing interest at 9% per annum. These notes are due and payable at the earlier of the completion of a proposed IPO or one year from the closing date of the private placement. In the accompanying unaudited April 30, 1996 consolidated financial statements, the Company recorded the common stock at an estimated fair value of $1.823 per share and will record a related charge to earnings for $273,825 during the period the notes remain outstanding. For the nine-month period ended April 30, 1996, $51,342 was charged to operations. The Company received net proceeds of $590,000 from this private placement and incurred debt issue costs of $160,000 which are included in prepaid expenses and other current assets in the accompanying unaudited consolidated financial statements. Debt issue costs will be amortized over the period the notes remain outstanding. For the nine-month period ended April 30, 1996 amortization of debt issue costs amounted to approximately $30,000. 8. SHAREHOLDERS' EQUITY: In January 1996, the Company's Board of Directors authorized an increase in the number of shares of preferred stock from 100,000 to 5,000,000. In addition, the Company's Board of Directors authorized an increase in the number of shares of common stock from 400,000, $.01 par value, to 15,000,000, $.0001 par value, and declared a stock split for which shareholders received 8.6545 shares of common stock for each share of common stock previously owned. The transaction described in this paragraph has been given retroactive effect in the accompanying consolidated financial statements and related notes. The Company has granted to a director/shareholder and another shareholder certain preemptive rights to purchase additional shares of common stock to avoid dilution of their ownership in the event of certain sales of securities. The Company has the right to acquire all or a part of one of these shareholders' outstanding shares (up to 38,945 shares) for a price of up to $150,000 plus the fair value of outstanding options, warrants or other rights to purchase securities of the Company. In March 1995, options to purchase 19,272 shares of the Company were exercised by certain shareholders for an aggregate price of $47,450. On March 15, 1995, the Company entered into an agreement with the majority shareholder of the Company granting him an option to purchase up to 45,003 additional shares of the Company's common stock at an exercise price of $3.57 per common share. The option may not be exercised unless the Company has earnings before income taxes of not less than $880,000 for the year ending July 31, 1996, and the option shall expire on December 31, 1999. In February 1996, the Board of Directors approved a stock option plan (the "Plan"), under which 350,000 shares of common stock were reserved for future issuance. The Plan provides for the sale of shares of common stock to employees of the Company, including officers and directors (whether or not employees) as well as to consultants to the Company. For stock options granted before the closing of the Company's proposed IPO, the per share exercise price of such options must be $5.00 or more, and for stock options granted after the closing F-13 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 8. SHAREHOLDERS' EQUITY: - (Continued) of the Company's proposed IPO, the per share exercise price of such options cannot be less than the fair market value of the shares of common stock on the date of grant, provided that the exercise price of any option granted to an employee owning more than 10% of the outstanding common shares of the Company may not be less than 110% of the fair market value of the shares of common stock on the date of the option grant. The term of each option and the manner of exercise is determined by the Plan's administrators, but options granted under the Plan will become exercisable after the vesting period or periods specified in each option agreement. However, options are not exercisable after the expiration of 10 years from the date of grant (or 5 years from such date in the case of an option granted to a 10% stockholder). Through May 1996, options to purchase 341,000 shares of common stock at an exercise price of $5.00 per share were granted under the Plan. In March 1996, the Company issued 24,000 shares of common stock, valued by the Company at $84,000 ($3.50 per share) at the time of issuance, for legal services rendered in connection with the proposed IPO (see Note 12). 9. SIGNIFICANT CUSTOMER: During the period ended July 31, 1994, the year ended July 31, 1995 and the nine-month periods ended April 30, 1995 and 1996, approximately $14,000, $220,000, $197,000 and $189,000, respectively, of the Company's sales were to one customer. 10. SUBSEQUENT EVENT: In June 1996, the Company completed an additional private placement of its securities (the "June 1996 Financing"). The private placement consisted of two units at a price of $100,000 per unit. Each unit consisted of 25,000 shares of common stock and a $100,000 unsecured non-negotiable promissory note bearing interest at 9% per annum. These notes are due and payable at the earlier of the completion of a proposed IPO or February 23, 1997. The Company recorded the common stock at an estimated fair value of $1.80 per share and will record a related charge to earnings for $90,000 during the period the notes remain outstanding. The Company received net proceeds of $180,000 from this private placement. 11. LITIGATION: The Company has applied for a registered trademark for the name "Kideo," however, this trademark has been previously registered by another party. On July 6, 1994, the Company began litigation against the successor to the original owner of the trademark before the Trademark Trial and Appeals Board of the United States Patent and Trademark Office. That proceeding is currently suspended pursuant to a stipulation agreed upon by the Company and such successor while they discuss possible settlement. There can be no assurance that a settlement satisfactory to the Company can be reached. If a satisfactory settlement is not obtained the Company will pursue the original proceeding, and in the event that the Company does not prevail in the proceeding it does not believe that its business will be adversely affected. 12. INITIAL PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS TO BALANCE SHEET (UNAUDITED): On March 12, 1996, the Company filed a Registration Statement on Form SB-2 under the Securities Act of 1933. The Registration Statement contemplates an offering of 1,400,000 shares of common stock at an offering price of $5.00 per share and 1,400,000 warrants at an offering price of $.10 per warrant. Each warrant will entitle the holder to purchase one share of common stock at an exercise price of $4.00 per share. The warrants will be exercisable for a 48-month period commencing 1 year from the effective date of the IPO. F-14 KIDEO PRODUCTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (information pertaining to the nine-month periods ended April 30, 1995 and 1996 is unaudited) 12. INITIAL PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS TO BALANCE SHEET (UNAUDITED): -- (CONTINUED) The unaudited pro forma balance sheet as of April 30, 1996 gives effect to certain transactions which have either occurred subsequent to April 30, 1996 or will occur prior to or in connection with the consummation of the Company's proposed IPO. The pro forma balance sheet does not give effect to the consummation of the proposed IPO. Transactions reflected as pro forma adjustments to the April 30, 1996 balance sheet are as follows: 1. The application of $103,029 of proceeds from the 1996 Bridge Financing (Note 7) for the repayment of an outstanding debt ($61,872) and certain accrued interest ($41,157). 2. The charge to operations in connection with the Company's redemption of the warrants issued to the lenders of the September 1994 Financing in May 1995 (see Note 7) for an aggregate redemption price of $88,000, which redemption will occur upon the consummation of the proposed IPO. 3. The conversion of all of the outstanding Preferred Stock and all of the outstanding Debentures (see Note 7) into 293,533 and 279,889 shares of common stock, respectively, and the charge to operations upon conversion of the Debentures for approximately $156,000 of unamortized debt issue costs. 4. The receipt of net proceeds of $180,000 from the issuance of two units, each unit consisting of 25,000 shares of common stock and a $100,000 unsecured promissory note in connection with the June 1996 Financing (see Note 10). In addition, the adjustment includes the $90,000 unamortized loan discount and $20,000 of deferred debt costs. 5. The increase in accrued expenses and accumulated deficit resulting from recording dividends of $43,818 through April 30, 1996, payable June 1996, on the Preferred Stock issued in the May 1995 Units Financing (see Note 7). The pro forma financial information included in the statement of operations reflects the operations of the Company as if the employment agreements described in Note 5 had been entered into on August 1, 1994. F-15 [COLOR INSERTS] [color photographs depicting the packages of each of the Company's four video products with a still frame from each video showing a child as depicted in that video] Kideo Productions, Inc. develops, manufactures and markets digitally personalized videos for children. ============================================================================= No dealer, salesperson or any other person has been authorized to give information or make any representation in connection with this offering other than as contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Underwriter or the Selling Stockholders. This Prospectus does not constitute (i) an offer to sell, or a solicitation of an offer to buy, any security other than the securities offered by this Prospectus, or (ii) an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction in which such offer or solicitation is not authorized or would be unlawful. Neither the delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date of this Prospectus. TABLE OF CONTENTS
Page -------- Prospectus Summary .............................. 3 Risk Factors .................................... 11 Use of Proceeds ................................. 20 Dividend Policy ................................. 21 Dilution ........................................ 22 Capitalization .................................. 23 Selected Financial Data ......................... 25 Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 26 Business ........................................ 32 Management ...................................... 43 Principal Stockholders .......................... 50 Certain Transactions ............................ 51 Description of Securities ....................... 52 Shares Eligible for Future Sale ................. 56 Underwriting .................................... 57 Selling Stockholders and Plan of Distribution ... 60 Legal Matters ................................... 61 Experts ......................................... 61 Additional Information .......................... 61 Index to Consolidated Financial Statements ...... F-1
Until July 19, 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ============================================================================= ============================================================================= 1,400,000 Shares of Common Stock and Redeemable Warrants to Purchase 1,400,000 Shares of Common Stock [LOGO] ------ PROSPECTUS ------ Whale Securities Co., L.P. June 24, 1996 ============================================================================= -----END PRIVACY-ENHANCED MESSAGE-----