<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to ______________.
COMMISSION FILE NUMBER: 0-29050
TOMORROW'S MORNING, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-4379805
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
125 South Barrington Place, Los Angeles, California 90049
(Address of principal executive offices)
Issuer's telephone number: (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 April 30, 1998: 2,818,692
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
Page 1
<PAGE>
PART I
FINANCIAL INFORMATION
TOMORROW'S MORNING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 2,342,849
Accounts receivable, net of reserves of $98,353 and $0, respectively 43,212 5,380
Prepaid expenses 179,828 480,721
- -------------------------------------------------------------------------------------------------------------
Total current assets 223,040 2,828,950
- -------------------------------------------------------------------------------------------------------------
[A
Fixed assets, net of accumulated depreciation of $34,580
and $16,786, respectively 105,821 52,769
Deposits 32,772 31,355
- -------------------------------------------------------------------------------------------------------------
Total noncurrent assets 138,593 84,124
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total assets $ 361,633 $ 2,913,074
=============================================================================================================
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses 1,347,380 257,385
Cash overdraft 189 -
Deferred revenue, net of reserves of $30,735 and $0 respectively 89,017 52,603
Contracts payable 47,800 31,114
Loans payable 389,299 264,299
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 1,873,685 605,401
- -------------------------------------------------------------------------------------------------------------
Noncurrent portion of contracts payable 14,874 -
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,888,559 605,401
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' (deficit) equity:
Preferred Stock, no par, 1,000,000 shares authorized, no shares issued. - -
Common Stock, no par, 4,540,000 shares authorized, 2,818,692
shares issued and outstanding 12,602,936 10,484,681
Loan receivable - shareholder (74,695) (96,952)
Accumulated deficit (14,055,167) (8,080,056)
- -------------------------------------------------------------------------------------------------------------
Total shareholders' (deficit) equity (1,526,926) 2,307,673
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' (deficit) equity $ 361,633 $ 2,913,074
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE>
TOMORROW'S MORNING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenue:
Subscriptions $ 43,875 $ 3,364 $ 260,091 $ 19,099
Reading Partners Program 105 - 6,055 -
Sponsorships - - 7,500 -
- --------------------------------------------------------------------------- --------------------------
Total revenue 43,980 3,364 273,646 19,099
Reserves for refunds and uncollectibles 115,330 - 115,330 -
Editorial, Production and Distribution Cost 373,769 273,144 911,762 468,264
- --------------------------------------------------------------------------- --------------------------
Gross margin (445,119) (269,780) (753,446) (449,165)
Operating expenses 540,088 316,721 2,636,090 682,614
Research and development 88,416 12,257 551,876 33,257
- --------------------------------------------------------------------------- --------------------------
Loss from Operations (1,073,623) (598,758) (3,941,412) (1,165,036)
Noncash option compensation and consulting - - (2,026,204) -
Legal settlement - - (30,000) -
Interest expense (1,577) (62,777) (4,045) (143,010)
Interest income 1,485 6,509 27,350 7,831
- --------------------------------------------------------------------------- --------------------------
Loss before income taxes $(1,073,715) $ (655,026) $(5,974,311) $(1,300,215)
Income taxes - - 800 800
- --------------------------------------------------------------------------- --------------------------
Net loss $(1,073,715) $ (655,026) $(5,975,111) $(1,300,015)
=========================================================================== ==========================
Net loss per share $ (0.38) $ (0.55) $ (2.14) $ (1.08)
=========================================================================== ==========================
Weighted average number
of shares outstanding 2,818,692 1,199,189 2,796,906 1,199,189
========================== ==========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE>
TOMORROW'S MORNING, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
<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 3,268,800 (27,575) (5,124,377) (1,883,152)
Issuance of common stock 1,167,277 5,347,724 5,347,724
Stock issuance costs (304,528) (304,528)
Conversion of 6% convertible notes 105,144 262,500 262,500
Conversion of 7% convertible notes 432,083 1,080,207 1,080,207
Debt issuance costs (202,589) (202,589)
Capital contribution - compensation 166,667 166,667
Shareholder loans (69,377) (69,377)
Stock option compensation 733,400 733,400
Issuance of common stock for services 55,000 132,500 132,500
Net loss, 1997 (2,955,679) (2,955,679)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1997 2,785,998 $10,484,681 $(96,952) $ (8,080,056) $ 2,307,673
Stock option compensation 1,918,634 1,918,634
Stock issued - settlement of litigation 5,000 30,000 30,000
Stock options exercised 27,694 168,548 168,548
Stock warrants sold 1,074 1,074
Repayments - shareholder loans 22,257 22,257
Net loss, nine months ended March 31, 1998 (5,975,111) (5,975,111)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1998 (Unaudited) 2,818,692 $12,602,936 $(74,695) $(14,055,167) $(1,526,926)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE>
TOMORROW'S MORNING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
1998 1997
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,975,111) $(647,192)
Items reconciling net loss to cash used by operating activities:
Depreciation 17,795 2,460
Amortization of debt issuance costs - 29,408
Noncash litigation settlement 30,000 -
Noncash compensation 2,026,204 125,000
Changes in operating assets and liabilities:
Accounts receivable (37,832) (682)
Prepaid expenses 300,893 -
Deposits (1,417) -
Accounts and interest payable and accrued expenses 1,089,995 187,794
Deferred revenue 36,414 19,289
- -----------------------------------------------------------------------------------------------------
Net cash used by operating activities (2,513,059) (283,923)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (70,847) -
Loans to shareholders - (11,322)
Repayments from shareholder, net of unpaid interest 22,257 -
- -----------------------------------------------------------------------------------------------------
Net cash used by investing activities (48,590) (11,322)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 131,000 317,276
Proceeds from contracts payable 71,396 -
Proceeds from exercise of stock options 60,978 -
Proceeds from sale of warrants 1,074 -
Repayments under contracts payable (39,837) -
Repayments of loans payable (6,000)
Cash paid for offering costs - (76,938)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 218,611 240,338
- -----------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (2,343,038) (54,907)
Cash and cash equivalents at beginning of period 2,342,849 24,526
- -----------------------------------------------------------------------------------------------------
Cash overdraft at end of period $ (189) $ (30,381)
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 5
<PAGE>
TOMORROW'S MORNING, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements:
The accompanying financial statements include all adjustments (consisting
of only 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. The financial statements should be
read in conjunction with the financial statements included in the annual
report of Tomorrow's Morning, Inc. (the "Company") on Form 10-KSB for the
year ended June 30, 1997.
Nature of Business:
The Company was incorporated in June 1992 in the State of California and is
engaged in the publication of a children's weekly newspaper (which was
temporarily suspended on March 23, 1998 due to lack of funds and credit and
is to resume on May 18, 1998). Through June 30, 1997, the Company was
devoting substantially all of its efforts toward establishing new business
and product. During the three months ended September 30, 1997, significant
orders were received for its current product; therefore, as of September
30, 1997, the Company was no longer considered a development stage
enterprise, as defined in Financial Accounting Standards Board Statement
No. 7.
Basis of Presentation:
For the nine months ended March 31, 1998, the Company had negative cash
flows from operations of $2,513,059 and incurred a net loss of $5,975,111.
The Company's expenses continue to greatly exceed its income, and its
future depends on: (i) finding a strategic partner; (ii) the development of
complementary products; (iii) completion and successful marketing of the
SCOOP(TM) CD-ROM journalism game; (iv) the formation of joint-marketing
alliances for corporate sponsorship of schools through the Company's
Reading Partners Program and/or the sale of advertising space; (v) getting
one or more television shows, or interstitial news "flashes", on the air;
and (vi) expansion into ancillary publishing and merchandising through
redirecting the Company's content and/or licensing the Company's characters
and identity. The Company has used all of the net proceeds of its initial
public offering and finds that it requires substantial additional funds in
order to reach the above long-term goals. In addition, as discussed below
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources," the Company requires an
immediate infusion of working capital to continue its present operations.
There can, however, be no guarantee that the Company will be able to obtain
such additional long- and short-term funds or that, if obtained, it will be
able to achieve or sustain significant revenues or profitability in the
future.
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. Reserves have been recorded to reflect
estimated uncollectible subscription receivables as well as potential
refunds for unfulfilled subscriptions due to the temporary suspension of
publication described above.
Page 6
<PAGE>
TOMORROW'S MORNING, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Advertising:
The Company expenses the costs of all general advertising in the period
incurred. Advertising expense was approximately $75,081 and $18,500 for the
three months ended March 31, 1998 and 1997, respectively. For the nine
months ended March 31, 1998 and 1997, advertising expense was approximately
$1,032,205 and $50,398, respectively. In accordance with the American
Institute of Certified Public Accountants' Statement of Position 93-7
"Reporting on Advertising Costs", costs associated with the Company's
direct response marketing efforts have been deferred and will be amortized
over the period in which the related revenue is recognized. At March 31,
1998 and June 30, 1997, these deferred costs were approximately $911,000
and $106,000, respectively, with $44,300 and $895,992 of related
amortization having been recorded in the three and nine months ended March
31, 1998 and no amortization at June 30, 1997. Management periodically
reviews the recoverability of deferred advertising costs.
2. LOANS PAYABLE:
<TABLE>
<S> <C>
Unsecured demand loans with no stated interest $264,299
Note payable - shareholder due September 9, 1998 with interest at 10%
per annum. 125,000
--------
Total loans payable $389,299
========
</TABLE>
Included in loans payable as of March 31, 1998 and June 30, 1997 are loans
of $388,799 and $198,799, respectively, due to related parties which
include certain shareholders.
3. CONTRACTS PAYABLE:
In February 1998, the Company entered into a short-term financing contract
for an insurance policy covering its directors and officers. As of March
31, 1998, the balance was $42,069.
The Company has entered into lease contracts to purchase office equipment
and a telephone system. The contracts provide for a fair-market-value
purchase at the end of the lease terms. In accordance with Statement of
Financial Accounting Standards No. 13 (SFAS 13), the Company has
capitalized the cost of the equipment.
Lease commitments for capital leases with remaining terms of more than one
year at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
FYE June 30:
------------
<S> <C>
1998 $ 1,433
1999 5,731
2000 5,731
2001 4,123
2002 3,586
2003 299
-------
Total $20,903
=======
</TABLE>
Page 7
<PAGE>
TOMORROW'S MORNING, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES:
Leases:
On July 1, 1997, the Company entered into an operating lease for new office
facilities in Los Angeles. The lease continues until June 30, 2001 with
monthly rent of $7,514 beginning September 1, 1997. The lease provides for
annual base rent increases of 3% commencing July 1, 1998. The chief
executive officer of the Company has signed a personal guarantee of the
lease that expires after the second year of the lease.
The Company also leases office facilities in Ann Arbor, Michigan on a one-
year operating lease that commenced May 1997. The monthly rental is $252
for twelve months expiring May 31, 1998.
Rent expense, including additional costs per the leases, for the three and
nine months ended March 31, 1998 was $27,451 and $57,483, respectively. For
the three and nine months ended March 31, 1997, rent expense was $11,250
and $33,750, respectively.
In addition to the above office leases, the Company also leases an auto and
office equipment under operating leases with remaining terms of more than
one year.
Lease commitments for operating leases with remaining terms of more than
one year at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
FYE June 30,
<S> <C>
1998 $25,488
1999 102,640
2000 96,645
2001 93,914
--------
Total $323,307
========
</TABLE>
Software Development Agreement:
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(TM)". Pursuant to the agreement, the budgeted costs to
develop the CD-ROM game shall not exceed $1,210,000; through March 31,
1998, expenditures for "SCOOP(TM)" were approximately $908,000 of which
$72,500 is included in prepaid expenses.
The Year 2000 Issue:
The Company has begun addressing the potential impact of the Year 2000
Issue by inquiring of its vendors, customers, and others it does business
with, regarding the effect it may have on the Company's operations and
relationships with these entities. Internally, the Company has completed
an initial review of its operations to determine areas that need to be
further investigated regarding the effect of the Year 2000 Issue. At this
point in time, the Company believes that the Year 2000 Issue, as to its own
information systems, will not have a material effect on its operations.
Page 8
<PAGE>
TOMORROW'S MORNING, INC.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
5. NONCASH TRANSACTIONS:
The Company's Variable Non-dilutive Stock Option Agreements were amended
during the quarter ended December 31, 1997 to remove the variable and non-
dilutive features, effectively freezing the number of common shares the
optionees were previously granted. The effect of the amendments was a
charge to earnings of $1,344,022 in the quarter ended December 31, 1997.
Charges related to these options totaled $1,918,634 for the nine months
ended March 31, 1998.
In addition to the above transactions, options previously granted by the
Company were exercised by various unrelated parties during the three month
period ended December 31, 1997. The exercise of these options resulted in a
charge to earnings totaling $107,570 in that period.
On December 4, 1997, the Company settled litigation with a shareholder by
issuing 5,000 shares of common stock. The charge to earnings regarding this
transaction was $30,000.
6. INCOME TAXES:
The Company had deferred tax assets of approximately $4,028,000 and
$2,665,000 as of March 31, 1998 and June 30, 1997, respectively, which have
been offset by 100% valuation allowances of $4,028,000 and $2,665,000,
respectively. The deferred tax assets are primarily due to the Company's
federal and state net operating loss (NOL's) carryforwards available to
offset future taxable income, if any, of approximately $9,388,000, which
expire in years up to 2012. However, ultimate utilization of these NOL's is
dependent on future taxable income of the Company, subject to certain
limitations, as defined under Section 382 of the Internal Revenue Code.
Page 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains trend information and other forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 that involve a number of risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
below in "Overview."
OVERVIEW. For the quarter ended March 31, 1998, revenues were $43,980 and the
Company experienced a net loss of $1,073,715, as compared to revenues of $3,364
and a net loss of $655,026 for the three months ended March 31, 1997. For the
nine months ended March 31, 1998, revenues were $273,646 and the Company
incurred a net loss of $5,975,111, as compared to revenues of $19,099 and a net
loss of $1,301,015 for the nine months ended March 31, 1997. 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 received net
proceeds of $5,347,724 (before deducting certain expenses payable by the
Company). However, those proceeds have now been spent and the Company continues
to sustain substantial losses, which now threaten its ability to continue as a
going concern. In the long run, the Company's future depends on: (i) finding a
strategic partner; (ii) the development of complementary products; (iii)
completion and successful marketing of the SCOOP(TM) CD-ROM journalism game;
(iv) the formation of joint-marketing alliances for corporate sponsorship of
schools through the Company's Reading Partners Program and/or the sale of
advertising space in its Tomorrow's Morning newspaper (the "Newspaper"); (v)
getting one or more television shows, or interstitial news "flashes", on the
air; and (vi) expansion into ancillary publishing and merchandising through
redirecting the Company's content and/or licensing the Company's characters and
identity. However, as discussed below in "Liquidity and Capital Resources,"
because virtually all available cash has been exhausted due to continuing
losses, the Company requires an immediate infusion of working capital to remain
in operation. There can, however, be no guarantee that the Company will be able
to obtain such working capital, in which event it will most likely be required
to seek protection under the bankruptcy laws.
RESULTS OF OPERATIONS:
Three Month Periods Ended March 31, 1998 and 1997:
Revenues for the quarter ended March 31, 1998 were $43,980, as compared to
$3,364 for the three months ended March 31, 1997. This increase in revenues was
primarily the result of the Company's Spring 1997 and Fall 1997 direct response
advertising campaigns (the "1997 Advertising Campaigns"), which have generated
orders for approximately 125,000 subscriptions net of cancellations through
March 31, 1998 (see, however, Note 1 regarding further cancellations and
subscription refunds). Costs and expenses increased to $1,119,180 during the
three months ended March 31, 1998, well up from $664,899 during the quarter
ended March 31, 1997.
Total interest expense for the quarter ended March 31, 1998 was $1,577, as
compared to $62,777 for the same three month period in 1997. This decrease of
approximately 97% is attributable to the IPO, which resulted in all of the
Company's convertible notes (6% Convertible Notes due 1996, 6% Convertible Notes
due 1997 and 7% Convertible Notes due 1999) being automatically converted into
537,227 shares of Common Stock. Due to those conversions, all interest costs
associated with those notes stopped accruing in March 1997.
For the three months ended March 31, 1998, the Company experienced a net loss of
$1,073,715, an increase of approximately 64% from the $655,026 net loss incurred
in the three months ended March 31, 1997. The increase in net loss was
primarily due to the factors described above with respect to costs and operating
expenses, partially offset by a decrease in interest expense.
Nine Month Periods Ended March 31, 1998 and 1997:
Revenues for the nine months ended March 31, 1998 were $273,646, as compared to
$19,099 for the nine months ended March 31, 1997. This approximately 14-fold
increase in revenues was primarily the result of the 1997 Advertising Campaigns.
In the nine months ended March 31, 1997, no formalized marketing was occurring.
Costs and expenses increased to $6,275,307 during the nine months ended March
31, 1998, well up from $1,327,146 during the nine months ended March 31, 1997.
This approximately 373% increase includes (i) $2,026,204 of
Page 10
<PAGE>
noncash compensation and consulting expense that was recognized in connection
with the freezing of the Company's variable nondilutive stock options as well as
the exercise by unrelated parties of stock options that were previously granted
by the Company, (ii) approximately $1,032,000 of marketing expense related to
the Company's 1997 Advertising Campaigns, and (iii) $552,000 of research and
development costs associated with the SCOOP(TM) CD-ROM.
Total interest expense for the nine months ended March 31, 1998 was $4,045, as
compared to $143,010 for the same nine month period in 1997. This decrease of
approximately 97% is attributable to the IPO, which resulted in all of the
Company's convertible notes being automatically converted into 537,227 shares of
Common Stock. Due to those conversions, all interest costs associated with
those notes stopped accruing in March 1997.
For the nine months ended March 31, 1998, the Company experienced a net loss of
$5,975,111, an increase of approximately 359% from the $1,301,015 net loss
incurred in the nine months ended March 31, 1997. The increase in net loss was
primarily due to the factors described above with respect to costs, operating
expenses and noncash expenses, partially offset by a decrease 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 its marketing campaign in Fall 1995 and the 1997 Advertising Campaigns)
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 (which are currently the source of most subscriptions),
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.
In June 1997, the Company completed the first phase of its 1997 Advertising
Campaigns, which resulted in the Company receiving orders approximating $150,000
for approximately 50,000 subscriptions beginning in September 1997. As of
September 30, 1997, the second phase of the 1997 Advertising Campaigns had
generated orders for approximately 300,000 additional subscriptions, initially
resulting in total orders of approximately 350,000 generated by the 1997
Advertising Campaigns. However, through March 31, 1998, approximately 225,000
of those subscriptions have been canceled and, due to the suspension of
Newspaper publication between March 23, 1998 and May 18, 1998, there is a
liability for potential subscription refunds of approximately $48,000.
As of March 31, 1998, the Company had current assets of $223,040 virtually all
of which were derived from subscription sales. To date, the Company has utilized
all of its IPO proceeds and those subscription receivables already collected. In
the Company's fiscal quarter ended September 30, 1997, the Company began seeking
approximately $500,000 to $1,000,000 in outside debt and/or equity funding in
order to be able to complete the development of SCOOP(TM) without having to use
existing funds. To date, the Company has obtained only $125,000 of that funding.
However, because of the importance of SCOOP(TM) to the future of the Company,
the Company has continued to fund development of that product out of existing
funds. This, combined with a greater than expected number of subscription
cancellations and the inability to obtain significant corporate sponsorship of
schools through the Reading Partners Program, has depleted the Company's working
capital to a greater extent than was previously expected. As a result, the
Company is experiencing considerable difficulty in meeting financial obligations
to certain of its creditors, primarily the vendor which has printed the
Newspaper and its landlord. In order for the Company to avoid further suspension
of publication of the Newspaper and otherwise continue its normal activities,
the Company must immediately raise approximately $500,000 to $1,000,000 through
bank borrowings, public or private debt or equity offerings, or otherwise. In
addition to discussions with prospective lenders, as well as continued
solicitation of Newspaper sponsorships through the Reading Partners Program, the
Company is attempting to raise at least a portion of the needed short-term funds
through the private issuance of convertible debt or convertible preferred stock.
The Company is also continuing discussions with several prospective distributors
of SCOOP(TM), which could result in a substantial royalty advance to the Company
which would be used to complete the production of SCOOP(TM). There can be no
guarantee that any of such funding will be available on terms favorable to the
Company or its shareholders, if at all. If needed funds are not available, the
Company will most likely be required to seek protection under the bankruptcy
laws.
Page 11
<PAGE>
As to longer-term funding requirements, the Company is continuing to pursue
opportunities for a private equity offering of up to $5 million. In addition,
the Company is also investigating other approaches to obtain long-term operating
funds while also maximizing shareholder value. To date, those approaches
include, but are not limited to, a possible merger with the appropriate entity
or a sale of the Company or its assets. There can be no guarantee that any of
the Company's efforts will be successful or, if successful, that they will
result in a transaction on terms favorable to the Company or its shareholders.
If needed long-term 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 February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 will change the computation, presentation and disclosure requirements for
earnings per share. FAS 128 requires presentation of "basic" and "diluted"
earnings per share, as defined, on the face of the income statement for all
entities with complex capital structures. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997 and requires
restatement of all prior period earnings per share amounts. Management does not
believe that this pronouncement will have a material impact on its earnings per
share amounts when adopted in fiscal 1998.
On June 30, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("FAS 130"). FAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. FAS 130 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented. Management is currently evaluating the
requirements of FAS 130.
Page 12
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) On March 9, 1998, the Company issued warrants for 125,000 shares of Common
Stock (exercisable at $2.20 per share for five years) to Wilmington
Trust Company, Trustee under Agreement dated 3/17/78 with Andrea Currier
attached to a Company promissory note for $125,000 (which is convertible
into 62,500 shares of Common Stock). The securities were issued in
reliance on the exemption provided in Section 4(2) of the Securities Act of
1933 because no public offering was involved.
(d) Not applicable.
Item 5. Other Information
- --------------------------
Due to a lack of funds and credit, the publication of the Newspaper was
temporarily suspended after the March 23, 1998 issue. Publication will be
resumed with the May 18, 1998 issue.
The Company is awaiting a determination from the National Association of
Securities Dealers as to whether its Common Stock and Common Stock Warrants are
eligible for listing on the OTC Bulletin Board.
Currently, the Company is in default with various creditors and its landlord.
Such defaults will continue until funds are obtained as described in Part I
above, without which, the Company will most likely have to seek protection under
the bankruptcy laws.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following Exhibits are attached hereto:
<TABLE>
<CAPTION>
Exhibit No. DESCRIPTION
----------- -----------
<C> <S>
11 Computation of earnings per share
27 Financial Data Schedule
</TABLE>
(b) Two reports on Form 8-K were filed during the Company's fiscal quarter
ended March 31, 1998. Such reports were filed on February 4, 1998 and
February 18, 1998 with respect to events described in Item 4 of Form 8-K
("Change in Registrant's Certifying Accountant") which occurred on January
29, 1998 and February 11, 1998. No financial statements were filed in
connection with that report.
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 15, 1998 By: /s/ STEVEN RAFT
----------------------------
Steven Raft
Chief Financial Officer
Page 14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTION NUMBERED PAGE
- -------------- ----------- -------------
<C> <S> <C>
11 Computation of earnings per share 16
27 Financial Data Schedule 17
</TABLE>
Page 15
<PAGE>
TOMORROW'S MORNING, INC.
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, 1998 March 31, 1998
------------------ -----------------
<S> <C> <C>
Net loss $(1,073,715) $(5,975,111)
Basis for computation of primary earnings per common and
common equivalent share:
Weighted average number of shares outstanding during period 2,818,692 2,796,906
Weighted average (incremental) common share equivalent after
considering the effects of options and warrants outstanding
during the period ended March 31, 1998 and after assumed
repurchase of treasury shares as required by Securities and
Exchange Commission Staff Accounting Bulletin No. 83 - 0 - - 0 -
--------- ---------
Total weighted average number of shares 2,818,692 2,796,906
========= =========
Loss per share $ ( 0.38) $ (2.14)
========= =========
</TABLE>
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THREE AND
NINE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JAN-01-1998 JUL-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 0 2,342,849
<SECURITIES> 0 0
<RECEIVABLES> 141,565 5,380
<ALLOWANCES> 98,353 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 223,040 2,828,950
<PP&E> 140,401 69,555
<DEPRECIATION> 34,580 16,786
<TOTAL-ASSETS> 361,633 2,913,074
<CURRENT-LIABILITIES> 1,873,685 605,401
<BONDS> 0 0
0 0
0 0
<COMMON> 12,602,936 10,484,681
<OTHER-SE> (74,695) (96,952)
<TOTAL-LIABILITY-AND-EQUITY> 361,633 2,913,074
<SALES> 43,980 273,646
<TOTAL-REVENUES> 43,980 273,646
<CGS> 373,769 911,762
<TOTAL-COSTS> 489,099 1,027,092
<OTHER-EXPENSES> 626,927 5,216,820
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,577 4,045
<INCOME-PRETAX> (1,073,715) (5,974,311)
<INCOME-TAX> 0 800
<INCOME-CONTINUING> (1,073,715) (5,975,111)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,073,715) (5,975,111)
<EPS-PRIMARY> (0.38) (2.14)
<EPS-DILUTED> (0.38) (2.14)
</TABLE>
