<PAGE>
DME INTERACTIVE HOLDINGS INC - 10QSB - Quarterly Report
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-QSB
--------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________
--------------
DME INTERACTIVE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
0-27944
(COMMISSION FILE NUMBER)
DELAWARE 98-0157860
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
39 BROADWAY
NEW YORK, N.Y. 10006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 422-6600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL
YEAR, IF CHANGED SINCE LAST REPORT)
--------------
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 requirement for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
As of August 1, 2000 there were 25,964,666 shares of common stock
outstanding.
===============================================================================
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.......................................................................... 3
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999......................................................................... 3
Consolidated Statements of Operations for the six months ended
June 30, 2000 (Unaudited) and June 30, 1999 (Unaudited)...................................... 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 (Unaudited) and June 30, 1999 (Unaudited)....................................... 5
Notes to Consolidated Financial Statements.................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................... 12
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................. 15
ITEM 2. CHANGES IN SECURITIES......................................................................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 15
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS....................................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 15
SIGNATURE..................................................................................... 16
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DME INTERACTIVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER
2000 31, 1999
-------------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 27,222 $ 171,996
Accounts receivable, net........................................................... 207,862 116,168
Prepaid expenses................................................................... -- 28,661
-------------- -----------
Total current assets............................................................... 235,083 316,825
Security deposits.................................................................. 156,257 167,257
Property and equipment, net........................................................ 618,046 62,980
-------------- -----------
Total assets....................................................................... $ 1,009,386 $ 547,062
============== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................................. 808,057 460,695
Due to affiliated company.......................................................... 1,353 1,297
Loans from shareholders, short term................................................ 1,118,000 50,000
Note payables...................................................................... 86,805 86,805
Note payable to employee........................................................... 41,000 41,000
-------------- -----------
Total current liabilities.......................................................... 2,055,215 552,992
Loans from shareholders, long term................................................. 122,196 158,906
Unearned revenue................................................................... 10,000 --
-------------- -----------
Total liabilities.................................................................. 2,187,411 $ 798,703
-------------- -----------
Commitments and Contingencies (Note 11)
SHAREHOLDERS' EQUITY:
Common stock, par value $0.001; 60,000,000 shares authorized 25,964,666 and
23,714,666 issued and outstanding as of June 30, 2000 and December 31, 1999,
respectively.................................................................... 25,965 23,715
Additional paid-in capital......................................................... 17,984,709 980,980
Accumulated deficit................................................................ 3,991,301 1,256,336
Less deferred strategic agreement expenses......................................... (23,180,000) --
-------------- -----------
Total shareholders' deficit........................................................ (1,178,025) (251,641)
-------------- -----------
Total liabilities and shareholders' deficit........................................ $ 1,009,386 $ 547,062
============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
DME INTERACTIVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
6-MONTH 6-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
GROSS REVENUES.................................................................. $ 418,933 $ 246,809
-------------- --------------
COST OF OPERATIONS:
Salaries and employee benefits.................................................. 1,005,244 127,757
Project expense................................................................. 132,830 41,902
Consulting services............................................................. 102,334 93,786
-------------- --------------
Total cost of operations........................................................ 1,240,408 263,445
-------------- --------------
GROSS LOSS...................................................................... (821,475) (16,636)
GENERAL AND ADMINISTRATIVE EXPENSES............................................. 1,077,648 259,927
-------------- --------------
LOSS FROM OPERATIONS............................................................ (1,899,123) (276,563)
-------------- --------------
OTHER INCOME AND (EXPENSES):
Interest and rental income...................................................... 18,968 --
Interest expense................................................................ (826) (491)
-------------- --------------
18,142 (491)
============== ==============
NET LOSS........................................................................ $ (1,880,981) $ (277,054)
============== ==============
LOSS PER SHARE:
Basic........................................................................... $ (0.072) $ (0.012)
============== ==============
Diluted......................................................................... $ (0.072) $ (0.012)
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic........................................................................... 25,964,666 23,347,999
-------------- --------------
Diluted......................................................................... 25,964,666 23,347,999
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
DME INTERACTIVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
6-MONTH 6-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, 2000 JUNE 30, 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (1,880,981) $ (277,055)
Adjustments to reconcile net loss to net cash used in operating activities:
Increase in accounts receivable................................................ (91,693) (1,690)
Increase in accounts payable................................................... 256,108 109,078
(Increase) in prepaid expenses................................................. 28,661 --
Increase in due to affiliated company.......................................... 55 (12,115)
Increase in advances/unearned revenue.......................................... 10,000 5,000
Increase in security deposit................................................... 11,000 --
--------------- ---------------
Net cash used in provided by operating activities.............................. (1,666,851) (176,782)
--------------- ---------------
INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (555,066) 1,532
--------------- ---------------
Net cash used in investing activities.......................................... (555,066) 1,532
--------------- ---------------
FINANCING ACTIVITIES:
Proceeds from loans and notes payable.......................................... 901,250 178,068
Proceeds from sale of common stock............................................. 1,118,000 858,931
Increase in capital lease obligation........................................... 57,892 --
--------------- ---------------
Net cash provided by financing activities...................................... 2,077,142 1,036,998
--------------- ---------------
Net increase in cash and cash equivalents...................................... (144,774) 861,749
CASH AND CASH EQUIVALENTS:
Beginning of period............................................................ 171,996 629
--------------- ---------------
End of period.................................................................. $ 27,222 $ 862,378
=============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which
include the accounts of DME Interactive Holdings, Inc. and its wholly owned
subsidiaries, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring accruals
considered necessary for a fair presentation, have been included in the
accompanying unaudited consolidated financial statements. All significant
intercompany transactions and balances have been eliminated in consolidation.
Operating results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2000. For further information, refer to the consolidated financial
statements and notes thereto, included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999.
NOTE 2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Pride Automotive Group ("Pride") was incorporated in 1995 in the State of
Delaware as a "C" Corporation. On June 18, 1999, Pride changed its name to DME
Interactive Holdings, Inc. ("DME" or "Company") following a reverse merger
(re-capitalization) with Digital Mafia Entertainment, LLC. ("Digital Mafia"), a
New Jersey Limited Liability Company (the "Transaction"). The re-capitalization
occurred pursuant to the Exchange of Common Stock Agreement dated March 30, 1999
(as amended). In connection with the re-capitalization, Pride exchanged
14,800,000 shares of its Common Stock (representing approximately 64% of the
outstanding shares after the exchange) for all of the membership interests of
Digital Mafia. In addition, Pride sold all of its interest in its two operating
subsidiaries to Pride, Inc., its parent and owner of more than 50% of its
outstanding common stock prior to the transaction, for $1.00 each. As a result,
Digital Mafia became a wholly owned subsidiary of Pride. For accounting
purposes, the exchange was treated as a re-capitalization, as if Digital Mafia
acquired Pride.
Digital Mafia is deemed to be the predecessor company and all financial
information prior to June 18, 1999 is that of Digital Mafia.
DME is an interactive services (sometimes called advanced technology)
company that has historically provided corporate Internet strategy and
development services and advertising services primarily to clients seeking to
reach the urban African-American and Latino markets ("urban markets"). The
Company is preparing to launch two on-line resources communities, Places of
Color and Fan4Life that will include content of interest to its target urban
market.
On February 2, 2000, DME and Places of Color entered into a "strategic
agreement" with CompuServe Interactive Service, Inc. ("Compuserve"), a
subsidiary of America Online, Inc. ("AOL"), an internet service provider
("ISP"). The agreement expires 18 months after the launch date and requires the
ISP to provide hosting and other technical and support services for a website
customized service for internet users from the urban market. Places of Color
will receive a stated percentage of the monthly subscription fees received by
the ISP. DME has issued 1,250,000 common shares to the ISP. In addition to the
shares, DME has granted a warrant for 4,000,000 additional shares to the ISP at
a purchase price of $8.563 per share. The warrant only becomes exercisable if,
at the end of the eighteen-month term, the parties negotiate an extension of the
strategic agreement or if the parties entered into a substantially similar
agreement. On May 24, 2000, DME notified AOL that DME had unilaterally decreased
the exercise price to $3.00, and waived all conditions to exercise, which
changes were effective through July 22, 2000. AOL did not exercise any part of
the warrant by July 22, 2000 and the warrant is now exercisable on its original
terms.
6
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of DME and its wholly owned subsidiaries, Digital Mafia Entertainment, LLC and
DME 39 Broadway Corporation ("DME 39"). All material intercompany transactions
and balances have been eliminated in consolidation.
FIXED ASSETS
Fixed assets are recorded at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
STATEMENT OF CASH FLOWS
For financial statement purposes, cash in demand deposit accounts and
money market accounts with maturities of ninety days or less are considered to
be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for uncollectible accounts
receivable based on historical collection experience and management's evaluation
of collectibility of outstanding accounts receivable. Accounts receivable is
shown net of allowance for doubtful accounts in the accompanying consolidated
financial statements. The allowance for uncollectible accounts receivable as of
June 30, 2000 and December 31, 1999 was $19,725 and $30,030, respectively.
REVENUE RECOGNITION
The Company bills for services and recognizes project revenues based on
time-and-materials arrangements, fixed-price contracts and maintenance
agreements. The Company recognizes project revenues on a percentage of
completion method. Maintenance revenue is recognized on a monthly basis while
the relevant maintenance agreement is in effect, and the Company has performed
the agreed-upon maintenance services.
NOTE 3. INCOME TAXES
DME accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 is 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 the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or rates. Any
available deferred tax assets arising from net operating loss carryforwards has
been offset by a deferred tax valuation allowance on the entire amount.
7
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30, DECEMBER 31,
USEFUL LIFE 2000 1999
------------- ----------- ------------
<S> <C> <C> <C>
Office equipment...................................... 5 $ 321,445 $ 74,952
Furniture and fixtures................................ 5 104,064 6,490
Software.............................................. 3 233,331 4,628
----------- -----------
658,840 86,070
Accummulated depreciation............................. (40,794) (23,090)
----------- -----------
$ 618,046 $ 62,980
=========== ===========
</TABLE>
Depreciation expense for the six-month period ended June 30, 2000 was
$23,583.90.
NOTE 5. NOTES PAYABLE
The Company has two notes payable outstanding, one for $50,000 and
another for $36,805. The $50,000 note bears interest at a rate of 9% per annum
and matures on March 21, 2001. The $36,805 note bears interest at a rate of 9%
per annum and has no stated maturity date.
NOTE 6. EQUITY FINANCING
In January 2000, we issued 500,000 shares of Common Stock at par value, 500,000
warrants at a $2.00 strike price, and 500,00 shares at $2.00 per share in a
private placement to satisfy our working capital requirements. Gross proceeds
totaled $1,000,000.
NOTE 7. STOCK OPTIONS AND WARRANTS
EMPLOYEE STOCK OPTIONS
DME has an incentive stock option plan (the "2000 Plan") for employees.
On May 8, 2000, the Board of Directors increased the maximum shares of common
stock that may be issued under the 2000 Plan to 12,000,000 from 3,000,000. The
option price, number of shares and grant date are determined at the discretion
of the Board of Directors. Options granted under the 2000 Plan are exercisable
at dates determined by the Board of Directors. If an employee is terminated, all
unexercised options expire automatically. An employee has ninety days from the
date of voluntary termination to exercise options to the extent such options
were exercisable at the time of termination. As of June 30, 2000, no employee
compensation expenses were incurred nor were any options exercised. As of July
31, 2000, 4,650,000 options had been granted to thirteen employees.
As of June 30, 2000 a total of 1,202,000 options had been granted to
nineteen employees of the Company. These options were not granted pursuant to
the 2000 Plan.
On July 21, 2000 the Board of Directors granted to Andre H. McKoy the
option to purchase up to 500,000 shares of the Company's Common Stock pursuant
to the 2000 Plan for a period over 10 years, at the purchase price of $1.25 per
share. The shares can be exercised on or after the first anniversary of the
grant date.
WARRANTS
As of March 31, 2000, DME had 2,595,000 redeemable purchase warrants
outstanding. Each warrant allows the holder to purchase one share of the
Company's Common Stock at a price of $5.75, per share. DME may redeem
8
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the warrants at anytime upon 30 days' written notice at a price of $0.05, per
warrant, subject to certain conditions. The expiration date on the warrants is
April 23, 2001.
NOTE 8. NET LOSS PER COMMON SHARE
The following table presents the calculation of basic and diluted net
loss per common share required under SFAS 128:
<TABLE>
<CAPTION>
PERIOD PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
-------------- --------------
<S> <C> <C>
Net loss........................................................ $ (1,880,981) $ (277,055)
============== ==============
Weighted average shares--basic................................... 25,964,666 23,347,999
Effect of dilutive securities:
Warrants and employee stock options.......................... -- --
-------------- --------------
Weighted average shares--diluted................................. 25,964,666 23,347,999
-------------- --------------
Net loss per common share--basic................................. $ (0.072) $ (0.012)
-------------- --------------
Net loss per share--diluted...................................... $ (0.072) $ (0.012)
-------------- --------------
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
DUE TO AFFILIATED COMPANY
Digital Mafia shares office space with an affiliated company. Certain
administrative expenses incurred by Digital Mafia may from time to time be paid
by the affiliated company. The amount payable to the affiliated company as of
June 30, 2000 and June 30, 1999 was $1,353 and $0, respectively.
LOAN PAYABLE TO EMPLOYEE
DME also issued a $41,000 note payable to an employee pursuant to an
asset purchase agreement executed on September 1, 1999. There is no stated
interest rate. The note will be settled from collections on accounts receivable
assigned by the employee to DME.
LOANS TO COMPANY
As of June 30, 2000, the Company owes its principal shareholder a total
of $928,906, pursuant to promissory notes. As presently modified, $770,000 of
the notes has an interest rate of 10% and $158,906 of the notes has an interest
rate of 9%. Each note matures on March 31, 2001. The principal shareholder will
also receive warrants to purchase 24,900 shares of the Company's Common Stock at
$.75 per share, which warrants will expire in July 2005.
On June 19, 2000, and July 5, 2000, the Company borrowed $200,000 and
$300,000, respectively from a non-affiliated third party pursuant to promissory
notes. The notes have an interest rate of 10% and matures on the earlier of (i)
March 31, 2001 or (ii) the receipt by the Company of aggregate gross proceeds in
the minimum amount of $10,000,000 in debt (having a maturity of not less than
three years from the date of issue) and/or equity financing. In consideration
for the loan, the Company issued to such non-affiliate 6,000,000 shares of the
Company's Common Stock. The lender and the principal shareholder have agreed
that the repayment of their notes will be made pro rata based upon the principal
amount owed to each.
On May 31, 2000, the Company borrowed $100,000 from an employee and
shareholder, pursuant to a promissory note. The note has an interest rate of 10%
and matures on August 31, 2000. The Company repaid $80,000 of the note in July
2000.
On May 31, 2000, the Company borrowed $100,000 pursuant to a promissory
note. There is no stated interest rate. The Company issued 25,000 shares of the
Company's Common Stock and a warrant to purchase 250,000 shares of the Company's
Common Stock at $1.00 per share, which warrant will expire on December 31,
2001. The note matures on August 31, 2000. If the Company fails to repay the
note by September 30, 2000, an additional 25,000 shares of the Company's Common
Stock will be issued.
On August 1, 2000, the Company borrowed $35,000 from an employee,
pursuant to a promissory note. The note has an interest rate of 10% and matures
on September 15, 2000.
9
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10. STRATEGIC AGREEMENT
In February 2000, the Company entered into a strategic agreement with
Compuserve, a subsidiary of AOL. In connection with this agreement the Company
issued 1,250,000 shares of the Company's Common Stock to AOL valued at
$11,210,000, based upon the trading price of the stock on the issuance date. In
addition the Company also issued 4,000,000 options with an exercise price of
$8.563 that are exercisable at the end of the term of the strategic agreement.
The value of the warrants on the issuance date was $11,970,000 using the
Black-Scholes Option-Pricing Model.
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net income for future months due to,
among other things, DME reaching certain performance milestones. The deferred
strategic agreement expense is recognized by using straight line depreciation
over the 18 months after the POC launch. As of June 30, 2000, no strategic
agreement expenses have been recognized.
NOTE 11. COMMITMENTS AND CONTINGENCIES
(A) TERMINATION AGREEMENT
On April 20, 2000 Thomas O'Rourke joined the Company as President to
effect cost reductions. He terminated approximately 60% of the employees. After
the work force reduction, Mr. O'Rourke and the Board of Directors determined
that it would be in their mutual interests if Mr. O'Rourke's employment were
terminated. Upon the termination on June 12, 2000, the 4 million employee stock
options issued to Mr. O'Rourke pursuant to that certain Incentive Stock Option
Agreement dated as of May 11, 2000, were immediately vested. On July 21, 2000,
Mr. O'Rourke and the Company signed a Termination Agreement. Mr. O'Rourke agreed
to exchange such vested options for 500,000 shares of the Company's Common
Stock.
(B) RENTAL LEASE
On September 23, 1999, DME 39 entered into two non-cancelable office
space rental lease agreements with a real estate company. The agreements became
effective in March 2000 and expires in July 2010. In addition to base rent and
electricity, DME 39 is required, under the lease agreements, to pay real estate
taxes equal to 2.4% of the base tax, as defined in the lease agreements.
In conjunction with DME 39's lease signings, DME signed an absolute and
unconditional deed guaranteeing the full, prompt and complete performance of all
of the terms, covenants and conditions of the lease agreements entered into by
DME 39. The guaranty expires if, at any time, DME and/or DME 39 pays the
landlord base rent equal to $450,000 or more under the above mentioned leases.
Future minimum lease payments under the lease agreements are as follows:
FOR THE YEAR ENDING DECEMBER 31,
--------------------------------
2000........................................ $ 142,777
2001........................................ 245,909
2002........................................ 297,695
2003........................................ 305,798
2004........................................ 314,148
Thereafter.................................. 2,226,440
-------------
Total................................... $ 3,532,767
=============
Total rent expense under all operating leases amounted to $59,020 and
$12,900 for the six-month period ended June 30, 2000, and June 30, 1999,
respectively.
(C) LITIGATION
The Receiver of Autokraft Limited and ACL(1996) Limited, both in
Administrative Receivership in the United Kingdom have asserted a claim against
us for monies allegedly due under (i) a guarantee agreement and (ii) a
variation agreement executed by us pursuant to which the loan allegedly
guaranteed was restructured. The amount
10
<PAGE>
DME INTERACTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
claimed to be due is British pounds 281,107 plus interest. The obligations arise
out of the purchase by a former subsidiary of ours, when we were Pride
Automotive Group, Inc. ("PAG"), of certain assets of the claimants. We are
currently investigating the claim; however, we believe that the existence of the
liability for the claim constitutes a breach of the representations and
warranties made to Digital Mafia in the agreement pursuant to which it was
acquired in the re-capitalization. Therefore, we have asserted a claim
for demnification against Pride (now known as Mason Hill Holdings, Inc.),
the then parent of PAG, who, in the exchange agreement for the acquisition,
joined in the foregoing representations and agreed to indemnify Digital Mafia in
connection with any breach of those representations. If it is determined that we
are liable to the Receiver, we intend to vigorously assert our rights against
Pride.
In June 2000 a former white, female supervisory employee of the Company
commenced a lawsuit in the Southern District of New York court, asserting that
her employment was terminated because of her race. The suit seeks approximately
$4,000 in past due salary and expenses, as well as, unspecified compensatory and
punitive damages and statutory attorneys' fees. The Company intends to
vigorously defend the suit.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements involving
risks and uncertainties based on management's current expectations, which
involve risks and uncertainties, estimates and projections about the internet
industry and the evolution of on-line Internet commerce. All statements in this
10-QSB related to DME's changing financial operations and expected future growth
or profitability constitute forward-looking statements. The actual results may
differ significantly from those anticipated or expressed in these statements.
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements. The results of interim periods are
not necessarily indicative of the results to be obtained in a full fiscal year.
OVERVIEW
DME Interactive Holdings, Inc. is an interactive services firm and is a
leader in developing Internet marketing services aimed at the urban market. We
provide creative, technology and strategic services that we believe will enable
our clients to gain a competitive advantage in creating, enhancing and
benefiting from relationships with African-American and Latino-American
customers. We are in the process of expanding our business by developing online
resource communities which are designed to provide a variety of content of
interest to our urban target markets. We are currently preparing to launch two
on-line resource communities, Places of Color and Fan4Life.
In February 2000, the company entered into a strategic agreement with
Compuserve, a subsidiary of AOL. This alliance will enable the official launch
of an urban branded Internet service provider hosted by AOL/CompuServe and
featuring the Places of Color online resource community. AOL, through
CompuServe, will provide all interactive services, including e-mail, instant
messaging, chat rooms and news briefs as well as "back end" services for Places
of Color, including customer service, billing, dial up access numbers, and web
site hosting and other technical infrastructure. We will provide relevant
content and be responsible for all marketing and advertising for Places of
Color. We will receive a portion of the subscriber fee from AOL and derive
revenue from the advertising and affiliate relationships with content providers
and e-commerce partners.
In July 2000, the Company made a strategic decision to preserve its
capital resources and to focus its efforts on the completion and expansion of
Places of Color. During the nine weeks preceding this decision, the Company
instituted an aggressive cost cutting policy that has resulted in more than a
60% reduction in overhead of Places of Color product group.
Consistent with the new strategic direction, the Company is currently
considering various strategic alternatives for Fan4Life and its interactive
services businesses. Alternatives being considered include strategic
partnerships and/or a merger with, or other acquisition by, outside firms. The
Company is in the early stages of developing these alternatives and may not be
able to consummate any transaction.
Fan4Life is an online resource community aimed at fans of celebrities who
represent, and have popularized, the urban culture, as well as personalities
from sports and entertainment. In conjunction with the celebrity, Fan4Life
develops personal histories, current news, an e-commerce souvenir gift shop,
horoscopes and chat rooms about or related to the celebrity. Fan4Life is almost
fully operational and presently Fan4Life is negotiating with additional
celebrities to be added to the site.
As of June 30, 2000, we have not realized any income from Places of Color
and Fan4Life.
We derive our interactive service revenues from one of three pricing
arrangements: maintenance, time-and-materials and fixed-price.
We bill and recognize revenues from time-and-materials projects on the
basis of costs incurred in the period. We use a standardized estimation and work
plan development process to determine the requirements and estimated price for
each project. This process takes into account the type and overall complexity of
the project, the anticipated number of personnel of various skill sets needed
and their associated billing rates and the estimated duration of and risks
associated with the project. Management personnel familiar with the production
process evaluate and price all project proposals.
We recognize revenues from fixed-price projects using the
percentage-of-completion method based on the ratio of costs incurred to the
total estimated project costs. Fees are billed to the client over the course of
the project.
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We estimate the price for fixed-price projects using the same
methodology as time-and-materials projects. All fixed-price proposals must first
be approved by a member of our senior management team. Provisions for estimated
losses on contracts are made during the period in which such losses become
probable and can be reasonably estimated. To date, such losses have not been
significant.
We bill and recognize revenues from maintenance agreements on a monthly
basis while the agreement is in effect. We believe that maintenance arrangements
are indicative of our strong, long-term relationships with clients which yield
significant benefits both to our clients and to us. We believe that we will
achieve greater predictability of revenues and higher revenue growth with
clients who engage us in maintenance-based relationships. Maintenance agreements
are generally one to two years in length and include a renewal clause.
Typically, maintenance relationships with clients result in additional
fixed-price and time-and-materials projects. Maintenance fees currently
represent a small percentage of our overall revenues. Consistent with our focus
on long-term relationships, our goal is to increase our number of
maintenance-based arrangements.
Our revenues and earnings from our digital communication solutions
business are affected by a number of factors, including:
o the amount of business developed from existing relationships;
o our ability to meet the changing needs of the marketplace;
o employee retention;
o billing rates;
o our ability to deliver complex projects on time; and
o efficient utilization of our employees.
Many of our business initiatives are aimed at enhancing these factors.
Further, we believe that our focus on maintenance-based arrangements will
continue to improve the predictability of our quarter-to-quarter results.
Our expenses include direct salaries and costs, selling, general and
administrative and depreciation. Direct salaries and costs includes salaries,
benefits and incentive compensation of billable employees and other direct costs
associated with revenue generation. Sales and marketing expenses include
promotion and new business generation expenses. General and administrative
expenses include benefits costs of management, rent and human resources costs.
Professional fees include accounting, legal and consulting costs. Depreciation
expenses primarily include depreciation of technology equipment and furniture
and fixtures. Personnel compensation and facilities costs represent a high
percentage of our operating expenses and are relatively fixed in advance of each
quarter. Expenses related to our online resource community were expensed to
operations for the quarter ended June 30, 2000. For full year 2000, we expect
such expenses to increase significantly as we complete development and prototype
testing and commence marketing and operations.
As a strategic response to changes in the competitive environment, we may
from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on our business, results of operations and financial condition.
DME may also experience seasonality in its business in the future, resulting in
diminished revenues as a consequence of decreased demand for Internet
professional services during summer and year-end vacation and holiday periods.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED
JUNE 30, 1999
GROSS REVENUES AND OTHER INCOME. Gross Revenues for the first half of the
year 2000 were $418,933 as compared to $246,809 in 1999. The increase of
$172,124, or 70%, was attributable to several factors, including an increase
in the number of clients served, sales of additional projects to existing
clients and additional service offerings.
TOTAL EXPENSES. For the first half of 2000, total expenses were
$2,318,056 as compared to $523,372 in 1999. The increase of $1,794,684, was
primarily due to an increase in accounting, management consulting and legal
services to build the necessary infrastructure for the anticipated expansion of
our business and to commence development of
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our online resource communities. In particular, salaries and employee benefits
were $1,005,244 in the first half of 2000 as compared to $127,757 in 1999. The
increase of $877,487 was the result of hiring additional salaried employees to
support our then anticipated internal growth and expanded service offerings.
NET LOSS FROM OPERATIONS. As a result of the foregoing, in the first half
of 2000, we had a net loss from operations of ($1,899,123) as compared to a net
loss from Operations of ($276,563) in 1999.
LIQUIDITY
At June 30, 2000, the Company had $27,222 of cash and cash equivalents
compared to $862,378 at June 30, 1999.
Net cash used in operating activities for the first half of 2000 was
($1,666,851). In 2000, net cash used in operating activities was primarily
attributable to our net loss that resulted primarily from establishing the
necessary infrastructure for the expansion of our business and commencing the
development of our online resource communities.
Net cash used in investing activities was ($555,066) for first half of
2000. This was attributable to the acquisition of property and equipment.
Net cash provided by financing activities was $2,077,142. The cash
provided for financing activities during 2000 was primarily the result of
proceeds from the January 2000 private placement of common stock, the March
through June 2000 loans from shareholders to meet our working capital
requirements.
We believe that current cash on hand and cash generated from operations
in 2000 is not sufficient to fund business at our current levels including
properly developing our online resource communities. Therefore, during the
quarter ended June 30, 2000, we instituted an aggresive cost cutting policy
which resulted in a reduction of approximately 60% in personnel and we made the
strategic decision to focus our efforts on Places of Color. Consistent with this
strategic decision, we are considering strategic partnerships or a merger or
acquisition of Fan4Life and our interactive services business. Additonally, we
are actively pursuing external financing. We cannot assure you that such
additional capital will be available when needed on terms acceptable to us. The
inability to obtain such financing, if needed, could adversely affect our
ability to achieve our business objectives.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation noted in Note 11.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION AND SUBSEQUENT EVENTS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 3.1. Termination Agreement between the registrant
and Thomas O'Rourke dated July 21, 2000.
Exhibit 3.2. Voting Agreement between the registrant and
Thomas O'Rourke dated July 21, 2000.
Exhibit 3.3. Security Agreement between the registrant and
Thomas O'Rourke dated July 21, 2000
Exhibit 3.4. Stock Option agreement between the
registrant and Andre H. McKoy dated July 21,
2000.
Exhibit 27.1 Financial Data Schedule
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DME INTERACTIVE HOLDINGS, INC.
Dated: August 14, 2000 By: /s/ DARIEN DASH
-----------------------------------
Darien Dash, Chief Executive Officer and Chairman of the Board.
Dated: August 14, 2000 BY: /s/ ANDRE H. MCKOY
-------------------------------
Andre H. McKoy, Executive Vice President and Chief Financial Officer (principal
accounting officer)
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