Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

FOR THE TRANSITION PERIOD FROM      TO      .

COMMISSION FILE NUMBER: 000-32989

BAM! ENTERTAINMENT, INC.

333 WEST SANTA CLARA STREET, SUITE 716
SAN JOSE, CALIFORNIA 95113
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(408) 298-7500
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [ X ]   No [   ]

THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 12, 2002:
14,668,676

Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

See notes to condensed consolidated financial statements

2

Table of Contents

BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

See notes to condensed consolidated financial statements

3

Table of Contents

BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See notes to condensed consolidated financial statements

4

Table of Contents

BAM! ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.

BASIS OF PRESENTATION

The condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of the operations of the interim period, have been included.

These condensed consolidated financial statements include the accounts of Bam! Entertainment, Inc. (“Bam” or “the Company”) and its wholly owned subsidiaries, located in the United Kingdom. All significant intercompany transactions and balances have been eliminated in consolidation. The interim accompanying financial information has been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for annual financial statements.

The results of operations for the three months ended September 30, 2002 are not necessarily indicative of the results to be expected for the entire fiscal year, which ends on June 30, 2003.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2002, together with management’s discussion and analysis of financial condition and results of operations, contained in Bam’s 2002 Annual Report and Form 10-K.

These condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in these condensed financial statements, during the three months ended September 30, 2002, the Company used cash in operating activities of $2.3 million and incurred a net loss of $8.4 million. As of September 30, 2002, the Company had cash, cash equivalents and short-term investments of $9.1 million and its accumulated deficit was $32.0 million. The Company may not have sufficient cash to continue operations for the next 12 months. In November 2002, the Company initiated a restructuring of its operations. Continued negative cash flows create uncertainty about the Company’s ability to implement its operating plan. In addition, current market conditions present uncertainty as to the Company’s ability to secure financing, if needed, and to reach profitability. If cash, cash equivalents and short-term investments, together with cash generated from operations are insufficient to satisfy the Company’s liquidity requirements, the Company may seek to raise additional financing or reduce the scope of its planned product development and marketing efforts. However, there can be no assurances as to the availability of additional financing, the terms of such financing if it is available, or as to the Company’s ability to achieve positive cash flow from operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

2.

INCOME TAXES

Bam accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Bam’s financial statements or tax returns. In estimating future tax consequences, Bam generally considers all expected future events other than enactments of changes in the tax law or rates.

3.

NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of common stock shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common stock shares and common stock share equivalents outstanding during the period. Potential common shares consist of warrants and stock options, using the treasury stock method. Potential common shares are excluded from the computation, if their effect is antidilutive.

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

5

Table of Contents

4.

COMPREHENSIVE LOSS

Statement of Financial Accounting Standard No.130, “Reporting Comprehensive Income” (“SFAS No. 130”), requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual statement that is displayed with the same prominence as other annual financial statements. SFAS No. 130 also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. Comprehensive loss, as defined, includes all changes in equity during a period from nonowner sources.

The components of comprehensive loss for the three months ended September 30, 2002 and 2001 were as follows (in thousands):

5.

SHORT-TERM INVESTMENTS

Bam has classified all of its short-term investments as available-for-sale securities, as the sale of such securities may be required prior to maturity to implement management strategies. Bam’s short-term investments comprise U.S. Government Securities of $3.1 million, corporate notes of $1.1 million and foreign debt securities of $2.6 million at September 30, 2002, with original maturities ranging between 90 days and two years. All investments are reported at fair market value with the related unrealized holding gains and losses reported as a component of accumulated other comprehensive income.

6.

INVENTORIES

Inventories, which consist primarily of finished goods, are stated at the lower of cost (based upon the first-in, first-out method) or market value. Bam estimates the net realizable value of slow moving inventories on a product-by-product basis and charges any excess of cost over net realizable value to cost of revenues.

7.

LONG-TERM RECEIVABLE

On January 22, 2002 Kmart, a customer of Bam, filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. On January 22, 2002 Bam had an accounts receivable balance from Kmart of $1.7 million. Bam is an unsecured creditor, and as such is at risk of not recovering in full its accounts receivable balance. Accordingly, in the third quarter of fiscal 2002 Bam recorded an allowance of $1.1 million against the receivable. As Kmart has stated that at earliest it will complete its reorganization in 2003, Bam classified the receivable, net of allowance, as a long-term asset.

In the quarter ended September 30, 2002 Bam reevaluated and increased the allowance to cover the full accounts receivable balance.

Subsequent to January 22, 2002 Kmart arranged debtor-in-possession financing and Bam has sold product to Kmart under this arrangement. Accounts receivables under this financing are classified in current assets.

6

Table of Contents

8.

SHORT-TERM BORROWINGS

         In February 2002, Bam entered into a two year factoring agreement (the “Agreement”) with a finance company, whereby Bam assigns its North American receivables to the finance company. The finance company is responsible for collecting customer receivables, and upon collection, remits the funds to Bam, less a service fee. Under the Agreement, Bam may obtain advances, subject to the finance company’s discretion, in the form of cash or as collateral for letters of credits, up to a maximum of 75% of outstanding domestic receivables at any point in time.

         Under the terms of the Agreement, Bam pays a service fee on all receivables assigned, with a minimum annual fee of $150,000, and interest at prime plus 1% on all cash sums advanced. All fees are included in interest expense. Bam bears the collection risk on its accounts receivable that are assigned, unless the finance company approves the receivable at the time of assignment, in which case the finance company bears the risk.

         The finance company has a security interest in Bam’s accounts receivable, inventory, fixed assets and intangible assets. As of September 30, 2002, Bam had no advances outstanding, and $3.1 million in letters of credit issued on its behalf, under the Agreement.

         In February 2000, prior to entering into the Agreement, Bam had entered into a master purchase order assignment agreement with a different finance company, whereby Bam assigned purchase orders entered into with its customers to the finance company and requested the finance company purchase finished goods to fulfill such customer purchase orders. The master purchase order assignment agreement, and a factoring agreement entered into in August 2001 with an affiliate of the finance company, terminated in February 2002, and all outstanding amounts funded were fully repaid.

9.

COMMON STOCK

As more fully described in Note 12, in September 2002 Bam issued 68,738 shares of common stock pursuant to a license agreement with a production company. Bam capitalized the cost of this issuance at the fair market value of the common stock, equal to $70,000, and is amortizing this amount to royalties, software costs, license costs and project abandonment over the life of the products after release. Bam previously issued 68,738 shares of common stock pursuant to this license agreement in April 2001. During the three months ended September 30, 2002 and 2001, $26,000 and $0, respectively, was amortized to royalties, software costs, license costs and project abandonment.

10.

WARRANTS

There were outstanding warrants to purchase a total of 858,450 and 853,450 shares of common stock as of September 30, 2002 and June 30, 2002, respectively.

In connection with an agreement entered into with a production company during January 2002, Bam obtained the exclusive right of first refusal, for a period of five years, to develop products based on certain properties owned by the production company and to distribute them worldwide. In connection with the agreement, Bam is required to issue to the production company warrants to purchase up to 50,000 shares of common stock, in pre-determined multiples of either 5,000 or 10,000 shares, upon the occurrence of certain pre-determined events. Warrants are issued at the average closing price of Bam’s stock for the five days immediately prior to the date of issue, have a five year term from date of issue, and are fully vested and are immediately exercisable upon issuance. Bam issued warrants to purchase 5,000 shares of common stock in July 2002 under this agreement. The fair value of the warrant was estimated to be $7,000 at the grant date, using the Black-Scholes option pricing model with the following assumptions: expected term equal to five years; risk-free interest rate of 4.7%; volatility of 88%; and no dividends during the expected term. The fair values of the warrants were capitalized to prepaid royalties, capitalized software costs and licensed assets and will be amortized over the life of the products (generally between three and six months) to which they relate when these products are released. Through September 30, 2002, Bam has issued warrants to the production company to purchase a total of 25,000 shares of common stock.

7

Table of Contents

11.

BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

As defined by the requirements of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company operates in one reportable segment: the development and publishing of interactive entertainment products.

Financial information by geographical region is summarized below (in thousands):