<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
THIS DOCUMENT IS A COPY OF THE FORM 10-QSB
FILED ON MARCH 27, 1997 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-29050
TOMORROW'S MORNING, INC.
A California Corporation IRS Identification No.:
95-4379805
Principal Executive Offices:
160 North Thurston Avenue
Los Angeles, California 90049
(310) 440-2778
-------------------------
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [_] No [X]
Number of shares of common stock outstanding at March 24, 1997: 2,669,802
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, 1996
(Compiled Without Audit) June 30, 1996
------------------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash....................................................... $ 0 $ 24,526
Accounts Receivable........................................ 2,940 2,258
Deferred Capital Acquisition
Costs.................................................. 152,743 75,805
-------- -------
Total Current Assets....................................... 155,683 102,589
OFFICE FURNITURE & EQUIPMENT
(Note A), net of accumulated
depreciation of $11,829.................................... 12,782 15,242
OTHER ASSETS
Deposits................................................... 5,000 5,000
Debt Issuance Costs, net of
accumulated amortization
of $74,570............................................. 136,187 267,595
-------- --------
Total Assets............................................... $309,652 $390,426
======== ========
</TABLE>
See notes to the financial statements.
Page 2
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
BALANCE SHEET
LIABILITIES AND
SHAREHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
December 31, 1996
(Compiled Without Audit) June 30, 1996
------------------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable and Accrued
Expenses............................................... $ 724,889 $ 583,731
Cash Overdraft............................................. 30,381 0
Interest Payable........................................... 109,212 62,576
Deferred Revenue (Note A).................................. 43,098 23,809
Line of Credit............................................. 50,000 50,000
Loans Payable (Note B)..................................... 516,575 199,299
Notes Payable.............................................. 1,354,163 1,354,163
---------- ----------
Total Current Liabilities.............................. 2,828,318 2,273,578
---------- ----------
SHAREHOLDERS' DEFICIENCY
Common Stock-no par, 4,540,000
shares authorized; 1,026,494
shares issued and outstanding.......................... 2,746,800 3,268,800
Loan Receivable-Shareholder................................ (38,897) (27,575)
Accumulated Deficit........................................ (5,226,569) (5,124,377)
----------- -----------
Total Shareholders' Deficiency............................. (2,518,666) (1,883,152)
----------- -----------
Total Liabilities and Shareholders' Deficiency............. $ 309,652 $ 390,426
========== ==========
</TABLE>
COMMITMENTS AND CONTINGENCIES
(Note D)
See notes to the financial statements.
Page 3
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
(Compiled Without Audit)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Subscriptions................................. $ 9,806 $ 29,774 $ 15,735 $ 56,015
Interest...................................... 717 0 1,322 821
-------- --------- --------- ---------
Total Income.............................. 10,523 29,774 17,057 56,836
-------- --------- --------- ---------
COST OF SALES
Fulfillment................................... 332 21,960 750 37,813
Postage....................................... 25,587 59,576 35,141 112,823
Printing...................................... 60,000 126,998 146,000 324,370
Outside Writers............................... 500 3,527 1,051 3,527
Wire Services................................. 3,344 8,369 9,369 19,282
-------- --------- --------- ---------
Total Cost of Sales....................... 89,763 220,430 192,311 497,815
-------- --------- --------- ---------
Gross Profit.............................. (79,240) (190,656) (175,254) (440,979)
-------- --------- --------- ---------
OPERATING EXPENSES
Accounting & Legal............................ 57,565 106,868 65,199 139,077
Advertising/Promotional Material.............. 12,455 41,742 31,898 363,734
Amortization-Debt Issuance Costs.............. 14,704 3,519 29,408 4,067
Art Services.................................. 1,105 2,200 1,767 5,799
Auto Expense.................................. 2,240 0 2,970 0
Bank Charges.................................. 933 697 1,521 697
Computer Costs................................ 50 689 4,027 1,037
Commissions................................... 0 0 250 0
Delivery & Messenger.......................... 3,335 2,188 5,516 6,629
Depreciation.................................. 1,230 1,218 2,460 2,435
Dues & Subscriptions.......................... 0 0 42 0
Entertainment & Promotion..................... 200 0 200 0
Equipment Rental.............................. (225) 1,934 (225) 3,399
Insurance..................................... 81 0 165 201
Interest...................................... 26,177 8,614 52,029 16,448
Licenses & Permits............................ 6,818 0 6,818 0
Office Expense................................ 2,827 2,724 5,976 4,961
Outside Services.............................. 27,350 72,886 73,448 109,677
Public Relations.............................. 0 0 3,000 0
Postage....................................... 700 1,700 1,040 3,100
Rent.......................................... 11,250 11,250 22,500 21,750
Salaries...................................... 37,500 37,500 75,000 75,000
</TABLE>
See notes to the financial statements.
Page 4
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS (Continued)
(Compiled Without Audit)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Taxes & Licenses.............................. 13,817 0 13,818 0
Telephone..................................... 2,779 7,363 6,158 9,536
Travel........................................ 4,963 7,571 8,939 10,275
Utilities..................................... 4,814 3,648 7,214 5,784
--------- --------- --------- -----------
Total Operating Expenses.................. 232,668 314,311 421,138 783,606
--------- --------- --------- -----------
Net (Loss) Before Provision
for Income Tax............................ (311,908) (504,967) (596,392) (1,224,585)
Provision For State Income Tax....................... 0 0 800 800
--------- --------- --------- -----------
Net (Loss)................................ $(311,908) $(504,967) $(597,192) $(1,225,385)
========= ========= ========= ===========
</TABLE>
See notes to the financial statements.
Page 5
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
DEFICIENCY For the Six Months Ended
December 31, 1996
(Compiled Without Audit)
<TABLE>
<CAPTION>
Common Stock Loan
--------------------------- Receivable Accumulated
Shares Amount Shareholder Deficit Total
------ ------ ----------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance
June 30, 1996 1,026,494 $2,671,800 $ (27,575) $(4,629,377) $(1,985,152)
Capital Contribution-
Compensation 75,000 75,000
Loan Receivable-
Shareholder - Note G (11,322) (11,322)
Net Loss for the
Six Months Ended
December 31, 1996 (597,192) (597,192)
--------- ---------- --------- ------------ ------------
Balance,
December 31, 1996 1,026,494 $2,746,800 $ (38,897) $(5,226,569) $(2,518,666)
========= ========== ========== ============ ============
</TABLE>
See notes to the financial statements.
Page 6
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
(Compiled Without Audit)
Increase/(Decrease) in Cash
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.................................... $ 34,342 $ 45,748
Cash paid for cost of sales..................................... (145,293) (348,322)
Cash paid for operating expenses................................ (168,101) (489,251)
Interest received............................................... 1,322 821
Interest paid................................................... (5,393) (5,908)
Income taxes paid............................................... (800) (800)
---------- ----------
Net cash used in operating activities....................... (283,923) (797,712)
---------- ----------
Cash flows from investing activities:
Increase in loan receivable - shareholder....................... (11,322) (7,052)
Decrease in loan payable - shareholder.......................... 0 (26,773)
Increase in office furniture & equipment........................ 0 (3,117)
---------- ----------
Net cash used in investing activities....................... (11,322) (36,942)
---------- ----------
Cash flows from financing activities:
Increase in loans payable....................................... 317,276 43,069
Increase in deferred stock acquisition costs.................... (76,938) (43,221)
Increase in debt issuance cost.................................. 0 (43,725)
Increase in stock acquisition cost.............................. 0 (37,193)
Increase in common stock........................................ 0 216,703
Increase in notes payable....................................... 0 683,500
---------- ----------
Net cash provided by financing activities................... 240,338 819,133
---------- ---------
Net decrease in cash................................................... (54,907) (15,521)
Cash at beginning of period............................................ 24,526 26,490
---------- ----------
Cash overdraft balance at end of period................................ $ (30,381) $ 10,969
========== ==========
</TABLE>
See notes to the financial statements.
Page 7
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS (Continued)
(Compiled Without Audit)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Reconciliation of net loss to net cash used in operating activities:
Net Loss............................................................... $(597,192) $(1,225,385)
---------- ------------
Adjustments to reconcile net loss
to cash provided by operating
activities:
Depreciation and amortization............................... 31,868 6,502
Non-cash compensation....................................... 75,000 75,000
(Increase)/decrease in accounts receivable............................. (682) 339
Increase in accounts payable........................................... 47,018 149,493
Increase in accrued expenses........................................... 94,140 194,716
Increase in interest payable........................................... 46,636 10,540
Increase/(decrease) in deferred revenue................................ 19,289 (10,606)
Decrease in deposits................................................... 0 1,689
---------- ------------
Total adjustments........................................ 313,269 427,673
---------- ------------
Net cash used in operating activities.................................. $(283,923) $ (797,712)
========== ============
</TABLE>
See notes to the financial statements.
Page 8
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
NOTES TO THE FINANCIAL STATEMENTS
For the Six Months Ended December 31,
1996
(Compiled Without Audit)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INTERIM FINANCIAL
STATEMENTS:
1. Interim Financial Statements:
The accompanying financial statements include all adjustments
(consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the
results of operations for the periods presented. Interim results are
not necessarily indicative of the results to be expected for a full
year.
2. Nature of Business:
Tomorrow's Morning, Inc. (the "Company") was incorporated in June 1992
in the State of California and is engaged in the publication of a
children's weekly newspaper. As of December 31, 1996, the Company is a
development stage enterprise, as defined in Financial Accounting
Standards Board Statement No. 7. The Company is devoting substantially
all of its present efforts toward raising capital, establishing new
business and product.
In June 1996 the Company filed for an initial public offering of its
common stock on Form SB-2 with the Securities and Exchange Commission.
That offering was successfully completed in March 1997.
3. Basis of Presentation:
The Company's financial statements have been prepared assuming the
Company will continue as a going concern. The Company has negative
working capital at December 31, 1996, has suffered recurring losses
and has negative cash flows from operations for the six months ended
December 31, 1996. The Company's viability as a going concern is
dependent upon its ability to raise additional financing and,
ultimately, achieving profitable operations. Management has
successfully completed a public offering to raise the funds necessary
to satisfy its working capital needs. The accompanying financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
4. Revenue Recognition:
Subscription sales are recorded as deferred revenue at the time of
sale. Revenues from subscriptions are recognized ratably over the
subscription period as news papers are delivered. Deferred revenue
represents unfulfilled subscription sales at period end.
Page 9
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INTERIM FINANCIAL
STATEMENTS (Continued):
5. Advertising:
The Company expenses the costs of all advertising in the periods
incurred. Advertising expense was approximately $31,898 and $363,734
for the six months ended December 31, 1996 and 1995, respectively.
6. Income Taxes:
The Company uses Statement of Financial Accounting Standards No. 109,
"Account ing for Income Taxes". Under Statement No. 109, the liability
method is used in accounting for income taxes. Under this tax method,
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
Company does not have any material differences between financial
reporting and tax bases of assets and liabilities.
7. Office Furniture and Equipment:
Office furniture and equipment is stated at cost and depreciation is
computed on a straight-line basis over a period of five years.
8. Deferred Capital Acquisition Costs:
The costs related to the initial public offering have been deferred
and will be deducted from the proceeds of the initial public offering.
9. Debt Issuance Costs:
The costs related to the issuance of debt are capitalized and
amortized to general and administrative expenses over the lives of the
related debt.
10. Software Development Costs:
The Company accounts for its software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." This statement provides for capitalization of certain
software development costs once technological feasibility is
established. The costs so capitalized are then amortized on a
straight-line basis over the estimated product life (generally
eighteen months to three years), or on the ratio of current revenue to
total projected product revenues, whichever is greater. No such
internal costs have been capitalized by the Company to date.
During the year ended June 30, 1996, the Company entered into a
software development agreement for the development of a CD-ROM
journalism game called "SCOOP". Pursuant to the agreement, the
budgeted costs to develop the CD-ROM game shall not exceed $1,210,000;
as of December 31, 1996 expenses for "SCOOP" were approximately
$110,000.
Page 10
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INTERIM FINANCIAL
STATEMENTS (Continued):
11. Compensation Expense:
Compensation expense reflects reasonable compensation, as determined
by the Company, for its Chief Executive Officer. The compensation
expense has been reflected as noncash compensation and contributed
capital in the statements of cash flows and shareholders' deficit,
respectively.
B. LOANS PAYABLE:
These loans payable are short term loans that will be repaid in 1997.
These loans bear no interest and are unsecured.
C. NOTES PAYABLE:
Notes Payable are comprised of the following:
1. Note payable is a convertible subordinated note in the
amount of $125,000, payable in four equal quarterly
installments beginning March 31, 1997 and ending
December 31, 1997. Interest accrues at a rate of 6% per
annum and is payable in quarterly install ments
beginning March 31, 1997. The holder of this note has
the option, at any time, of converting the note balance
into common stock, as defined in the note agreement. $125,000
2. Two (2) $50,000 notes payable, each having its own
agreement, both having the same terms, payable on March
31, 1998. Interest accrues at a rate of 6% per annum
and is payable in quarterly installments beginning
March 31, 1997. The holder of these notes has the
option, at any time, of converting the note balance
into common stock, as defined in the note agreement. 100,000
3. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
4. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
5. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
6. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
7. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 35,000
Page 11
<PAGE>
C. NOTES PAYABLE (Continued):
8. Note payable in four equal quarterly installments
beginning March 31, 1997 and ending December 31, 1997.
This loan bears interest at a rate of 6% per annum and
is payable quarterly beginning March 31, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
9. Note payable in four equal quarterly installments
beginning March 31, 1997 and ending December 31, 1997.
This loan bears interest at a rate of 6% per annum and
is payable quarterly beginning March 31, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 12,500
10. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 150,000
11. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 65,000
12. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
13. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
14. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
15. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
16. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
17. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 50,000
18. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 37,500
19. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 30,000
Page 12
<PAGE>
C. NOTES PAYABLE (Continued):
20. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
21. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
22. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
23. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
24. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
25. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
26. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
27. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 25,000
28. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 19,207
29. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 18,500
30. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement. 12,500
Page 13
<PAGE>
C. NOTES PAYABLE (Continued):
31. Note Payable in eight equal quarterly installments
beginning June 30, 1997 and ending March 31, 1999. This
loan bears interest at a rate of 7% per annum and is
payable quarterly beginning June 30, 1997. The note
holder has the option of converting the note balance
into common stock, as defined in the note agreement.
12,500
----------
Total convertible notes 1,342,707
Note payable in monthly installments of $1,000
beginning August, 1994. This loan bears interest at a
rate of 10% per annum, and is currently due in full. 11,456
----------
$1,354,163
==========
The Company's convertible notes contain certain covenants and events of
default which include the borrower's failure to deliver the financial
statements to the holders on or before December 31, 1995 in a form
acceptable for filing with the Securities and Exchange Commission meeting
the minimum requirements for a registration statement on Form SB-2 for an
initial public offering; or receipt of an audit opinion qualified with
respect to the Company's ability to continue as a going concern at June 30,
1996. At June 30, 1996, the Company was not in compliance with these
provisions and accordingly is in default. As a result, the outstanding
balance of these notes, $1,342,707, is classified as a current liability.
As a result of its successful public offering in March 1997, the Company is
in the process of converting these notes to common stock.
D. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities in Los Angeles, California of
approximately 4,000 square feet. The lease commenced October 31, 1993 and
continued until October 31, 1995. Subsequent to October 31, 1995, the
Company leases its office facilities on a month-to-month basis. The monthly
rent, previously $3,500, is now $3,750. Rent expense was $22,500 and
$21,750 for the six months ended December 31, 1996 and 1995, respectively.
E. COMMON STOCK, STOCK OPTIONS, AND WARRANTS:
The Company has granted non-qualified stock options that allow each holder
the right to purchase one share of the Company's common stock. The Board of
Directors determines the exercise price of the options at the date of the
grant. Options granted to date are fully vested on the date of the grant
and have expirations ranging from three to five years from grant date.
<TABLE>
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Options outstanding at June 30, 1996 776,978 $.10 to $4.52
Granted 0
-------
Options outstanding and exercisable
at December 31, 1996 776,978 $.10 to $4.52
=======
</TABLE>
To date, none of the above options have been exercised or have expired.
Page 14
<PAGE>
E. COMMON STOCK, STOCK OPTIONS, AND WARRANTS (Continued):
During the year ended June 30, 1996, the Company granted warrants to
purchase 45,400 shares of Common Stock at an exercise price of $4.52 per
share. These warrants were granted as compensation to a company acting as
the dealer-manager in connection with the issuance of the Company's 7%
convertible notes.
F. INCOME TAXES:
At the Company's previous year end, June 30, 1996, the Company had a
deferred tax asset of approximately $1,722,000 which was offset by a 100%
valuation allowance of $1,722,000. The deferred tax asset is due to the
Company's net operating loss carry forwards available to offset future
taxable income, if any, of approximately $4,304,000, which expire in years
up to 2010.
G. RELATED-PARTY TRANSACTIONS:
The printer used by Tomorrow's Morning, Inc. also has an equity interest in
the Company. Printing expense was $146,000 for the six months ended
December 31, 1996. At December 31, 1996, amounts payable to the printer are
approximately $265,000.
The Company has a loan receivable from the principal shareholder totalling
$38,897 at December 31, 1996. The loan bears interest at 8% per year.
Page 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
From inception in June 1992 to December 31, 1996, Tomorrow's Morning, Inc.
(the "Company") has incurred an aggregate of $5,226,560 in operating losses. For
the six months ended December 31, 1996, revenues were $17,057 and the Company
experienced a net loss of $(597,192), as compared to revenues of $56,836 and a
net loss of $(1,225,385) for the six months ended December 31, 1995. In
addition, for the quarter ended December 31, 1996, revenues were $10,523 and the
Company experienced a net loss of $(311,908), as compared to revenues of $29,774
and a net loss of $(504,967) for the quarter ended December 31, 1995. Up to this
point, the Company has been limited in its ability to increase its sales due to
(i) lack of working capital, (ii) the early stage development of its products,
(iii) limited market awareness and (iv) a relative lack of history compared to
its competitors in the marketplace. The Company believes that the financial
resources provided by its initial public offering (the "IPO") will enable it to
accelerate its growth by investing in appropriate marketing, product development
and staffing. See "Subsequent Events" below. The addition of qualified staff
will enable the Company to significantly expand the marketing of its "Adopt-
a-School" program to corporations and non-profit foundations, plus develop new
products and/or extend its existing product into new markets. In addition,
having achieved several years' continuous publication of its Tomorrow's Morning
newspaper (the "Newspaper"), the Company is believed to be a much more credible
and attractive partner for larger, more established companies desiring to enter
into joint-marketing ventures. The increased financial resources of the Company
resulting from the IPO will also enhance its ability to enter into such
strategic alliances. The Company has, however, sustained, and is currently
sustaining, substantial losses, which are expected to continue for at least the
short term as the Company's expenses continue to greatly exceed its income. In
order to move from losses to profitability, the Company will need to achieve
some or all of the following milestones: (i) the formation of strategic
alliances for cooperative marketing and distribution of the Newspaper to schools
nationwide, plus development of complementary products; (ii) completion of the
SCOOP(TM) CD-ROM journalism game; (iii) the formation of joint-marketing
alliances for corporate sponsorship of schools; (iv) getting one or more
television shows, or interstitial "Kids' News" spots, on the air; and
(v) expansion into ancillary publishing and merchandising through redirecting
the Company's content and/or licensing the Company's characters and identity.
The Company's intended use of the net proceeds of the IPO has been developed to
help achieve those milestones.
RESULTS OF OPERATIONS
Three Month Periods Ended December 31, 1996 and December 31, 1995
Revenues. Revenues for the three-month period ended December 31, 1996 were
$10,523, as compared to $29,774 for the corresponding period in 1995. This
approximately 65% decrease in revenues was primarily the result of the lack of a
formalized marketing effort in 1996, as compared to the Company's nationwide
telemarketing campaign and direct mail solicitation to schools and teachers in
Fall 1995 (the "Fall 1995 Marketing Campaign").
Costs and Expenses. Costs and expenses decreased to $322,431 during the
three months ended December 31, 1996, from $534,741 during the three months
ended December 31, 1995. The bulk of this approximately 40% decrease was the
result of the elimination of the advertising and promotional costs associated
with the Fall 1995 Marketing Campaign (approximately $330,000).
Page 16
<PAGE>
Interest Expense. Total interest expense for the three months ended
December 31, 1996 was $26,177, as compared to $8,614 for the corresponding
period in 1995. This approximately 204% increase is attributable to the accrual
of interest on $1,080,207 of the Company's 7% Convertible Notes sold during the
period from September 1, 1995 to June 4, 1996 and amortization of related debt
issuance costs.
Net Loss. The Company experienced a net loss of $(311,908) for the
three-month period ended December 31, 1996, an approximately 38% decrease from
the $(504,967) net loss sustained in the three months ended December 31, 1995.
The decrease in net loss was primarily due to the factors described above with
respect to costs and expenses, partially offset by the increase in interest
expense.
Six Months Ended December 31, 1996 and December 31, 1995
Revenues. Revenues for the six-month period ended December 31, 1996 were
$17,057, as compared to $56,836 for the corresponding period in 1995. This
approximately 70% decrease in revenues was primarily the result of the lack of a
formalized marketing effort in 1996, as compared to the Fall 1995 Marketing
Campaign.
Costs and Expenses. Costs and expenses decreased to $614,249 during the six
months ended December 31, 1996, from $1,282,221 during the six months ended
December 31, 1995. The bulk of this approximately 52% decrease was the result of
the elimination of the advertising and promotional costs associated with the
Fall 1995 Marketing Campaign (approximately $330,000).
Interest Expense. Total interest expense for the six months ended December
31, 1996 was $52,029, as compared to $16,448 for the corresponding period in
fiscal 1996. This approximately 216% increase is attributable to the accrual of
interest on $1,080,207 of the Company's 7% Convertible Notes sold during the
period from September 1, 1995 to June 4, 1996 and amortization of related debt
issuance costs.
Net Loss. The Company experienced a net loss of $(597,192) for the
six-month period ended December 31, 1996, an approximately 51% decrease from the
$(1,225,385) net loss sustained in the six months ended December 31, 1995. The
decrease in net loss was primarily due to the factors described above with
respect to costs and expenses, partially offset by the increase in interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's primary capital needs have been to fund the
development and growth of the Newspaper (including the costs of the Fall 1995
Marketing Campaign) and the research and development of synergistic children's
media products. Up to this point, the Company's primary sources of financing
have been proceeds from the sale of Common Stock and certain promissory notes
convertible into Common Stock, as well as various short-term loans. Since
inception, sales of the Newspaper and certain custom-published Newspaper inserts
have been essentially the sole source of Company revenue. To the extent that
sales of the Newspaper are directed at schools, such business is seasonal, with
most sales taking place between September and June. Seasonality is not believed
to be a factor with non-school sales.
The Company has a number of specific plans for the use of a large portion
of the net proceeds of the IPO. Such use of net proceeds should, in time,
provide increased funds from
Page 17
<PAGE>
operations through avenues such as (i) bulk subscription sales to schools,
libraries and hospitals, and individual subscription sales for home delivery,
(ii) periodic revenue from Newspaper inserts sponsored by corporate and
philanthropic organizations, plus additional contract publishing for
distribution through such sponsors' own channels, (iii) sales of the SCOOP(TM)
CD-ROM game/ learning system and other related products, (iv) revenues from
proposed on-line activities, including subscription dues, sponsorship of
specific areas of the Company's website and advertising, (iv) royalties from,
and direct sales of, the Company's proposed ancillary publishing products, such
as calendars, posters, playing cards and games, (v) fees from the creation,
production and syndication of proposed TV shows and (vi) revenues from direct
sales and licensing royalties of Companyrelated merchandise, although it should
be noted that the Company's ability to generate funds from such sources will not
occur for quite some time, if ever. The Company believes that, once available,
this "blend" of revenue sources derived from the Newspaper and its related
products and services will allow the Company to achieve profitable operations.
There can, however, be no guarantee that the Company will be able to achieve or
sustain significant revenues or profitability; in fact, the Company does not
expect to become profitable until it develops a blend of revenue sources, which
can be derived only from significant commercial acceptance of a variety of its
proposed products and services.
SUBSEQUENT EVENTS
The initial closing of the Company's IPO as to up to 2,000,000 shares of
Common Stock and 900,000 Common Stock Purchase Warrants (the "Warrants") took
place on March 13, 1997. At the initial closing, the Company completed the sale
of 1,106,080 shares of Common Stock and 864,387 Warrants, resulting in net
proceeds to the Company of $5,094,269.37 (before deducting certain expenses
payable by the Company).
The Company believes that the net proceeds from the IPO will satisfy the
Company's cash requirements for at least the next twelve months. However, to the
extent that the funds generated by the IPO, together with then existing
resources, are insufficient to fund the Company's planned and prospective
activities, the Company will need to raise additional funds through bank
borrowings, public or private debt or equity offerings, or otherwise. There can
be no guarantee that such additional funding will be available on terms
favorable to the Company or its shareholders, if at all. If needed funds are not
available, the Company may be required to curtail its operations, which could
have a material adverse effect on the Company's business, operating results and
financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The accounting or disclosure requirements of this statement are
effective for the Company's fiscal year 1997. The Company has not yet determined
whether it will adopt the accounting requirements of this standard or whether it
will elect only the disclosure requirements and continue to measure compensation
cost using Accounting Principles Board Opinion No. 25.
Page 18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
Reference is hereby made to the legal proceeding described in "Business-Legal
Proceedings" set forth in the Company's Prospectus for the IPO dated February
10, 1997 (the "Prospectus").
Item 3. Defaults Upon Senior Securities
- -----------------------------------------
Reference is hereby made to those convertible note defaults described in Note 2
to the Company's financial statements for the two years ended June 30, 1996, as
included in the Prospectus. All of such convertible notes are in the process of
being converted into Common Stock.
Item 5. Other Events
- ----------------------
The initial closing of the Company's public offering of up to 2,000,000 shares
of Common Stock and 900,000 Warrants took place on March 13, 1997. At the
initial closing, the Company completed the sale of 1,106,080 shares of Common
Stock and 864,387 Warrants, resulting in net proceeds to the Company of
$5,094,269.37 (before deducting certain expenses payable by the Company).
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following Exhibits are attached hereto:
Exhibit No. Description
----------- -----------
11 Computation of earnings per share.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the Company's fiscal quarter
ended December 31, 1996.
Page 19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
TOMORROW'S MORNING, INC.
March 26, 1997 By: /s/ ADAM LINTER
------------------------
Adam Linter
President and Treasurer
Page 20
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Number Description Numbered Page
- -------------- ----------- -------------
11 Computation of earnings per share. 22
27 Financial Data Schedule 23
Page 21
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, 1996 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net Loss ............................................................................ $ (311,908) $ (597,192)
Basis for computation of primary earnings per common and common equivalent
share:
Weighted average number of shares
outstanding during period ........................................................ 1,026,494 1,026,494
Weighted average (incremental) common share equivalent after considering the
effects of options and warrants outstanding during the periods ended December
31, 1996 and after assumed repurchase of treasury shares as required by
Securities Exchange Commission Staff Accounting Bulletin No. 83 .................. 172,695 172,695
----------- -----------
Total weighted average number of shares ........................................ 1,199,189 1,199,689
=========== ===========
Loss per share ................................................................ $ (.26) $ (.50)
======= =======
</TABLE>
EXHIBIT 11
Page 22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTER
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,940
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 155,683
<PP&E> 12,782
<DEPRECIATION> 11,829
<TOTAL-ASSETS> 309,652
<CURRENT-LIABILITIES> 2,828,318
<BONDS> 0
0
0
<COMMON> 2,746,800
<OTHER-SE> (38,897)
<TOTAL-LIABILITY-AND-EQUITY> 309,652
<SALES> 9,806
<TOTAL-REVENUES> 10,523
<CGS> 89,763
<TOTAL-COSTS> 232,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (311,908)
<INCOME-TAX> 0
<INCOME-CONTINUING> (311,908)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (311,908)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
