<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
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 [X] No [_]
Number of shares of common stock outstanding at May 12, 1997: 2,848,316
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
Page 1
<PAGE>
PART I
FINANCIAL INFORMATION
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1997
(COMPILED WITHOUT AUDIT) JUNE 30, 1996
------------------------ -------------
<S> <C> <C>
CURRENT ASSETS:
CASH $4,084,416 $ 24,526
ACCOUNTS RECEIVABLE 17,544 2,258
DEFERRED OFFERING COSTS - 75,805
PREPAID EXPENSES 71,671 -
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,173,631 102,589
- ------------------------------------------------------------------------------------------------------------------
FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION
OF $13,866 AND $9,369, RESPECTIVELY 27,312 15,242
NONCURRENT ASSETS:
DEPOSITS 5,000 5,000
DEBT ISSUANCE COSTS, NET OF ACCUMULATED AMORTIZATION
OF $340,757 AND $73,162, RESPECTIVELY - 267,595
- ------------------------------------------------------------------------------------------------------------------
TOTAL NONCURRENT ASSETS 5,000 272,595
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,205,943 $ 390,426
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
LIABILITIES:
<S> <C> <C>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 372,154 $ 583,731
INTEREST PAYABLE 127,267 62,576
PAYROLL TAXES PAYABLE 16,038 -
DEFERRED REVENUE 61,415 23,809
LINE OF CREDIT - 50,000
LOANS PAYABLE 463,299 199,299
NOTES PAYABLE 11,456 1,354,163
CONTRACT PAYABLE - INSURANCE 56,005 -
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $1,107,634 $2,273,578
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK, NO PAR, 1,000,000 SHARES AUTHORIZED,
NO SHARES ISSUED
COMMON STOCK, NO PAR, 4,540,000 SHARES AUTHORIZED,
2,730,908 AND 1,026,494 SHARES ISSUED AND OUTSTANDING 9,618,781 3,268,800
LOAN RECEIVABLE-SHAREHOLDER (95,080) (27,575)
DEFICIT (6,425,392) (5,124,377)
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 3,098,309 (1,883,152)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 4,205,943 $ 390,426
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the financial statements.
Page 2
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(Compiled Without Audit)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
1997 1996 1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
REVENUE:
SUBSCRIPTIONS $ 3,364 $ 38,775 $ 19,099 $ 94,790
OTHER - 3,282 - 3,282
INTEREST 6,509 159 7,831 980
- -------------------------------------------------------------- ----------------------------
TOTAL REVENUE 9,873 42,216 26,930 99,052
- -------------------------------------------------------------- ----------------------------
COST OF SALES:
FULFILLMENT 2,677 12,670 3,427 50,483
POSTAGE 3,449 18,452 39,631 131,275
PRINTING 251,621 - 397,621 324,370
OUTSIDE WRITERS 1,448 (2,540) 2,499 987
WIRE SERVICES 13,095 6,810 22,463 26,092
OUTSIDE ARTISTS 854 2,840 2,622 8,639
- -------------------------------------------------------------- ----------------------------
TOTAL COST OF SALES 273,144 38,232 468,264 541,846
- -------------------------------------------------------------- ----------------------------
(LOSS) PROFIT ON SALES (263,271) 3,984 (441,334) (442,794)
OPERATING EXPENSES:
ACCOUNTING AND LEGAL 136,227 (74,660) 201,426 64,417
ADVERTISING AND PROMOTION 18,500 27,568 50,398 391,302
AMORTIZATION OF DEBT
ISSUANCE COSTS 36,803 18,068 65,007 22,135
AUTO EXPENSES 2,920 - 5,889 -
BANK CHARGES 1,040 382 2,561 1,079
COMMISSIONS - - 250 -
COMPUTER EXPENSES (716) - 3,311 1,037
CONSULTING 8,064 - 8,064 -
DELIVERY AND MESSENGER 1,821 2,906 7,336 9,535
DUES AND SUBSCRIPTIONS 84 142 127 142
ENTERTAINMENT - - 200 -
EQUIPMENT RENTAL - (1,204) - 2,195
INSURANCE 12,996 - 13,161 201
INTEREST 25,974 21,706 78,003 38,154
MARKETING 585 - 585 -
MISCELLANEOUS 98 - 98 -
OFFICE 8,040 5,589 13,790 13,650
OUTSIDE SERVICES 13,969 72,940 66,407 182,617
PUBLIC RELATIONS - - 3,000 -
RESEARCH AND DEVELOPMENT -
"SCOOP" 12,257 - 33,257 -
RENT 11,250 9,500 33,750 31,250
WAGES 75,667 62,500 200,667 187,500
PAYROLL TAX EXPENSE 3,414 - 3,414 -
TAX, LICENSES AND PERMITS 4,600 25 25,235 25
TELEPHONE 5,199 3,745 11,358 13,281
TRAVEL 8,623 6,735 17,562 17,010
UTILITIES 2,312 1,921 9,527 7,705
DEPRECIATION 2,037 1,217 4,497 3,652
- -------------------------------------------------------------- ----------------------------
TOTAL OPERATING EXPENSES 391,755 159,080 858,882 986,887
- -------------------------------------------------------------- ----------------------------
LOSS BEFORE TAXES (655,026) (155,096) (1,300,215) (1,429,681)
TAXES - - 800 800
- -------------------------------------------------------------- ----------------------------
NET LOSS $(655,026) $(155,096) $(1,301,015) $(1,430,481)
- -------------------------------------------------------------- ----------------------------
</TABLE>
Page 3
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Nine Months Ended March 31, 1997
(Compiled Without Audit)
<TABLE>
<CAPTION>
LOAN
COMMON STOCK RECEIVABLE ACCUMULATED
------------------------
SHARES AMOUNT SHAREHOLDER DEFICIT TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1996 1,026,494 $3,268,800 $ (27,575) $(5,124,377) $(1,883,152)
ISSUANCE OF COMMON STOCK 1,167,277 5,347,724 5,347,724
CONVERSION OF 6% CONVERTIBLE
NOTES TO COMMON STOCK 105,144 262,500 262,500
CONVERSION OF 7% CONVERTIBLE
NOTES TO COMMON STOCK 432,083 1,080,207 1,080,207
CAPITAL CONTRIBUTION-
COMPENSATION 166,667 166,667
LOAN RECEIVABLE-SHAREHOLDER (67,505) (67,505)
TRANSFER OF DEBT ISSUANCE
COSTS AT CONVERSION (304,528) (304,528)
STOCK ISSUANCE COSTS (202,589) (202,589)
NET LOSS FOR THE PERIOD (1,301,015) (1,301,015)
- --------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 2,730,998 $9,618,781 $ (95,080) $(6,425,392) $ 3,098,309
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the financial statements.
Page 4
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(Compiled Without Audit)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(1,301,015) $(1,430,481)
ITEMS RECONCILING NET LOSS TO NET
CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION 4,497 3,652
AMORTIZATION OF DEBT ISSUANCE COSTS 65,007 -
NONCASH COMPENSATION 166,667 187,500
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (15,286) 3,411
DEFERRED OFFERING COSTS 75,805 -
PREPAID EXPENSES (71,671) -
DEPOSITS - 1,689
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (211,577) 260,683
INTEREST PAYABLE 64,691 27,790
PAYROLL TAXES PAYABLE 16,038 -
DEFERRED REVENUE 37,606 (16,905)
- -----------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,169,238) (962,661)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF FIXED ASSETS (16,566) (3,116)
- -----------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (16,566) (3,116)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF COMMON STOCK, NET OF COST 5,347,724 269,936
CONVERSION OF NOTES PAYABLE TO COMMON STOCK 1,342,707 -
PROCEEDS FROM REVOLVING LINE OF CREDIT - -
PROCEEDS FROM LOANS PAYABLE 402,276 126,499
PROCEEDS FROM ISSUANCE OF NOTES PAYABLE - 679,124
PROCEEDS FROM INSURANCE FINANCING CONTRACT 80,133 -
CASH PAID FOR DEBT ISSUANCE COSTS - -
REPAYMENTS OF REVOLVING LINE OF CREDIT (50,000) -
REPAYMENTS OF LOANS PAYABLE (138,276) (26,773)
CONVERSION OF NOTES PAYABLE TO COMMON STOCK (1,342,707) -
REPAYMENTS UNDER INSURANCE FINANCING CONTRACT (24,130) -
LOANS TO SHAREHOLDER (67,505) (17,192)
CASH PAID FOR OFFERING COSTS (304,528) (87,391)
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 5,245,695 944,203
- -----------------------------------------------------------------------------------------
CHANGE IN CASH 4,059,890 (21,574)
CASH AT BEGINNING OF PERIOD 24,526 26,490
- -----------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 4,084,416 $ 4,916
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
CASH PAID FOR INTEREST $ 13,312 $ 20,904
CASH PAID FOR INCOME TAXES $ 800 $ -
</TABLE>
See notes to the financial statements.
Page 5
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 1997
(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 March 31, 1997, 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 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 suffered
recurring losses and has negative cash flows from operations for the
nine months ended March 31, 1997. Management has successfully
completed a public offering to raise the funds necessary to satisfy
its working capital needs. However, the Company's viability as a going
concern is ultimately dependent upon achieving profitable operations.
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 newspapers are delivered. Deferred revenue
represents unfulfilled subscription sales at period end.
Page 6
<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 $50,398 and $391,302
for the nine months ended March 31, 1997 and 1996, respectively.
6. Income Taxes:
The Company uses Statement of Financial Accounting Standards No. 109,
"Accounting 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. Fixed Assets:
Fixed assets consist mainly of office furniture and equipment, which
are stated at cost. 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 were deferred and
have been 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 March 31, 1997 expenses for "SCOOP" were approximately $143,000.
Page 7
<PAGE>
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND INTERIM FINANCIAL
STATEMENTS (Continued):
11. Compensation Expense:
Upon the completion of the initial public offering in March 1997, the
Company commenced regular salary payments to its employees. In
addition, compensation expense includes reasonable compensation, as
determined by the Company, for its Chief Executive Officer for the
period prior to the completion of the offering. The preoffering
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:
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
============
The Company's convertible notes contained certain covenants and events of
default which included 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 was in default. As a result, the outstanding
balance of these notes, $1,342,707, was classified as a current liability.
As a result of its successful public offering in March 1997, the notes were
converted into 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 $33,750 and
$31,250 for the nine months ended March 31, 1997 and 1996, respectively.
Page 8
<PAGE>
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 March 31, 1997 776,978 $.10 to $4.52
=======
</TABLE>
To date, none of the above options have been exercised or have expired.
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. In March 1997, the Company granted warrants to purchase
116,728 shares of Common Stock at an exercise price of $8.25 per share.
Those warrants were granted as compensation to the company acting as the
managing placement agent in connection with the Company's initial public
offering. In connection with the initial public offering, the Company sold
900,000 publicly tradeable Common Stock Purchase Warrants. Each Common
Stock Purchase Warrant entitles the holder to purchase one share of Common
Stock for $6.50 per share (subject to redemption for $0.35 each upon the
occurrence of certain conditions).
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 $397,621 and $324,370 for the nine months
ended March 31, 1997 and 1996. At March 31, 1997, amounts payable to the
printer were approximately $92,000.
The Company has a loan receivable from a principal shareholder totalling
$95,080 at March 31, 1997. The loan bears interest at 8% per year.
Page 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
From inception in June 1992 to March 31, 1997, Tomorrow's Morning, Inc.
(the "Company") has incurred an aggregate of $6,425,392 in operating losses. For
the nine months ended March 31, 1997, revenues were $26,930 and the Company
experienced a net loss of $1,301,015, as compared to revenues of $99,052 and a
net loss of $1,430,481 for the nine months ended March 31, 1996. In addition,
for the quarter ended March 31, 1997, revenues were $9,873 and the Company
experienced a net loss of $655,026, as compared to revenues of $42,216 and a net
loss of $155,096 for the quarter ended March 31, 1996. 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. On March 28, 1997, the Company completed its initial public
offering which had commenced on February 10, 1997 (the "IPO"). As a result of
the IPO, the Company sold 1,167,277 shares of Common Stock and 900,000 Common
Stock Purchase Warrants (the "Warrants"), resulting in net proceeds of
$5,347,724 (before deducting certain expenses payable by the Company). However,
in addition to the losses noted above, the Company continues to sustain
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 March 31, 1997 and March 31, 1996
Revenues. Revenues for the three-month period ended March 31, 1997 were
$9,873, as compared to $42,216 for the corresponding period in 1996. This
approximately 77% 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 increased to $664,898 during the
three months ended March 31, 1997 from $197,312 during the three months ended
March 31, 1996. The bulk of this approximately 300% increase was the result of
printing costs incurred and an increase in operating costs related to
commencement of operations with a number of new employees.
Interest Expense. Total interest expense for the three months ended March
31, 1997 was $62,777, as compared to $39,774 for the corresponding period in
1996. This approximately 58% 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. As of March 31, 1997, all of those Convertible Notes, together
with the
Page 10
<PAGE>
Company's previously issued 6% Convertible Notes, were converted into Common
Stock of the Company.
Net Loss. The Company experienced a net loss of $655,026 for the three-
month period ended March 31, 1997, an approximately 322% increase from the
$155,096 net loss sustained in the three months ended March 31, 1996. The
increase in net loss was primarily due to the factors described above with
respect to costs and expenses, including the increase in interest expense.
Nine Months Ended March 31, 1997 and March 31, 1996
Revenues. Revenues for the nine-month period ended March 31, 1997 were
$26,930, as compared to $99,052 for the corresponding period in 1996. This
approximately 73% 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 $1,327,145 during the
nine months ended March 31, 1997, from $1,528,733 during the nine months ended
March 31, 1996. The bulk of this approximately 13% decrease was the result of
the elimination of the advertising and promotional costs associated with the
Fall 1995 Marketing Campaign.
Interest Expense. Total interest expense for the nine months ended March
31, 1997 was $143,010, as compared to $60,289 for the corresponding period in
fiscal 1996. This approximately 138% 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, all of which was eliminated as of March 31, 1997, as described
above.
Net Loss. The Company experienced a net loss of $1,301,015 for the nine-
month period ended March 31, 1997, an approximately 9% decrease from the
$1,430,481 net loss sustained in the nine months ended March 31, 1996. 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. Prior to the IPO, the Company's primary sources of financing
were 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 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
Page 11
<PAGE>
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 Company-related 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.
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 12
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Events
- ----------------------
The final 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 28, 1997. At the final
closing, the Company completed the sale of an aggregate of 1,167,277 shares of
Common Stock and 900,000 Warrants, resulting in total net proceeds to the
Company of $5,347,724 (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 March 31, 1997.
Page 13
<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.
Dated: May 16, 1997 By: /s/ STEVEN RAFT
------------------------------------
Steven Raft,
Chief Financial Officer
Page 14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Description Exhibit Number
- -------------- ----------- -------------
<S> <C> <C>
11 Computation of earnings per share. 16
27 Financial Data Schedule 17
</TABLE>
Page 15
<PAGE>
TOMORROW'S MORNING, INC.
(A Development Stage Enterprise)
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, 1997 March 31, 1997
-------------- -------------
<S> <C> <C>
Net Loss................................................... $ (655,026) $ (1,301,015)
Basis for computation of primary earnings per
common and common equivalent share:
Weighted average number of shares
outstanding during period............................. 1,064,372 1,064,372
Weighted average (incremental) common
share equivalent after considering the effects
of options and warrants issued during the
periods ended March 31, 1996 and after
assumed repurchase of treasury shares as
required by Securities Exchange Commission
Staff Accounting Bulletin No. 83...................... 192,695 192,695
------- -------
Total weighted average number of shares............... 1,257,067 1,257,067
========= =========
Loss per share........................................ $ (0.52) $ (1.03)
========= =========
</TABLE>
EXHIBIT 11
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTER
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JUL-01-1996 JAN-01-1997
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 4,084,416 4,084,416
<SECURITIES> 0 0
<RECEIVABLES> 17,544 17,544
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,173,631 4,173,631
<PP&E> 41,178 41,178
<DEPRECIATION> 13,866 13,866
<TOTAL-ASSETS> 4,205,943 4,205,943
<CURRENT-LIABILITIES> 1,107,634 1,107,634
<BONDS> 0 0
0 0
0 0
<COMMON> 9,618,781 9,618,781
<OTHER-SE> (95,080) (95,080)
<TOTAL-LIABILITY-AND-EQUITY> 4,205,943 4,205,943
<SALES> 19,099 3,364
<TOTAL-REVENUES> 26,930 9,873
<CGS> 468,263 273,144
<TOTAL-COSTS> 468,263 273,144
<OTHER-EXPENSES> 715,872 328,977
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 143,010 62,777
<INCOME-PRETAX> (1,300,215) (655,026)
<INCOME-TAX> 800 0
<INCOME-CONTINUING> (1,301,015) (655,026)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,301,015) (655,026)
<EPS-PRIMARY> (1.22) (0.62)
<EPS-DILUTED> (1.03) (0.52)
</TABLE>
