<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 December 31, 1997
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 February 10, 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)
December 31, 1997 June 30, 1997
-------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 111,013 $ 2,342,849
Accounts receivable 330,262 5,380
Prepaid expenses 191,504 480,721
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 632,779 2,828,950
- ------------------------------------------------------------------------------------------------------------------------------
Fixed assets, net of accumulated depreciation of $27,425
and $16,786, respectively 112,976 52,769
Deposits 32,472 31,355
- ------------------------------------------------------------------------------------------------------------------------------
Total noncurrent assets 145,448 84,124
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 778,227 $ 2,913,074
==============================================================================================================================
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Liabilities:
Accounts payable and accrued expenses 680,533 257,385
Deferred revenue 273,785 52,603
Contracts payable 5,731 31,114
Loans payable 264,299 264,299
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,224,349 605,401
- ------------------------------------------------------------------------------------------------------------------------------
Noncurrent portion of contracts payable 16,306 -
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,240,655 605,401
- ------------------------------------------------------------------------------------------------------------------------------
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 and
2,785,998 shares issued and outstanding, respectively 12,601,862 10,484,681
Loan receivable - shareholder (82,316) (96,952)
Accumulated deficit (12,981,974) (8,080,056)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' (deficit) equity (462,428) 2,307,673
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' (deficit) equity $ 778,227 $ 2,913,074
==============================================================================================================================
The accompanying notes are an integral part of these financial statements. Page 2
</TABLE>
<PAGE>
TOMORROW'S MORNING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenue:
Subscriptions $ 95,834 $ 9,806 $ 216,216 $ 15,735
Reading Partners Program 5,600 - 5,950 -
Sponsorships - - 7,500 -
- ---------------------------------------------------------------------------- ----------------------------
Total revenue 101,434 9,806 229,666 15,735
Editorial, Production and Distribution Cost 330,330 89,763 537,992 192,311
- ---------------------------------------------------------------------------- ----------------------------
Gross margin (228,896) (79,957) (308,326) (176,576)
Operating expenses 1,096,466 216,787 2,096,468 389,701
Noncash option compensation and consulting fees 1,451,592 - 2,026,204 -
Research and development 180,820 - 463,460 -
- ---------------------------------------------------------------------------- ----------------------------
Loss from Operations (2,957,774) (296,744) (4,894,458) (566,277)
Legal settlement (30,000) - (30,000) -
Interest expense (1,443) (40,881) (2,525) (81,437)
Interest income 5,530 717 25,865 1,322
- ---------------------------------------------------------------------------- ----------------------------
Loss before income taxes (2,983,687) (336,908) (4,901,118) (646,392)
Income taxes - - 800 800
- ---------------------------------------------------------------------------- ----------------------------
Net loss $ (2,983,687) $ (336,908) $ (4,901,918) $ (647,192)
============================================================================ ============================
Net loss per share $ (1.07) $ (0.28) $ (1.75) $ (0.54)
============================================================================ =============================
Weighted average number
of shares outstanding 2,800,528 1,199,189 2,793,263 1,199,189
============================= ============================
The accompanying notes are an integral part of these financial statements. Page 3
</TABLE>
<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
Repayments - shareholder loans 14,636 14,636
Net loss, six months ended December 31, 1997 (4,901,918) (4,901,918)
- ----------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 (Unaudited) 2,818,692 $ 12,601,862 $ (82,316) $(12,981,974) $ (462,428)
============================================================================================================================
The accompanying notes are an integral part of these financial statements. Page 4
</TABLE>
<PAGE>
TOMORROW'S MORNING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
December 31,
1997 1996
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,901,918) $(647,192)
Items reconciling net loss to cash used by operating activities:
Depreciation 10,639 2,460
Amortization of debt issuance costs - 29,408
Noncash litigation settlement 30,000 -
Noncash compensation and consulting expense 2,026,204 125,000
Changes in operating assets and liabilities:
Accounts receivable (324,882) (682)
Prepaid expenses 289,217 -
Deposits (1,117) -
Accounts and interest payable and accrued expenses 423,149 187,794
Deferred revenue 221,182 19,289
- -----------------------------------------------------------------------------------------------------
Net cash used by operating activities (2,227,526) (283,923)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (70,847) -
- -----------------------------------------------------------------------------------------------------
Net cash used by investing activities (70,847) -
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 4,000 317,276
Proceeds from contract payable 23,471 -
Proceeds from exercise of stock options 60,978 -
Repayments from shareholder, net of unpaid interest 14,636 -
Repayments under contract payable (32,548) -
Repayments of loans payable (4,000) -
Loans to shareholder - (11,322)
Cash paid for offering costs - (76,938)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 66,537 229,016
- -----------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (2,231,836) (54,907)
Cash and cash equivalents at beginning of period 2,342,849 24,526
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents /(overdraft) at end of period $ 111,013 $ (30,381)
=====================================================================================================
The accompanying notes are an integral part of these financial statements. Page 5
</TABLE>
<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. 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 six months ended December 31, 1997, the Company had negative cash
flows from operations of $2,227,526 and incurred a net loss of $4,901,918.
The Company expects its losses to continue for at least the short term as
the Company's expenses continue to greatly exceed its income. The Company's
future profitability depends on: (i) the development of complementary
products; (ii) completion and successful marketing of the SCOOP(TM) CD-ROM
journalism game; (iii) the formation of joint-marketing alliances for
corporate sponsorship of schools through the Company's Reading Partners
Program; (iv) getting one or more television shows, or interstitial news
"flashes", 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 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, 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.
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 $25,000 and $12,000 for the
three months ended December 31, 1997 and 1996, respectively. For the six
months ended December 31, 1997 and 1996, advertising expense was
approximately $58,000 and $32,000, 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 December 31,
1997 and June 30, 1997, these deferred costs were approximately $911,000
and $106,000, respectively, with $567,497 and $851,691 of related
amortization having been recorded in the three and six months ended
December 31, 1997 and no amortization at June 30, 1997. At December 31,
1996, there were no deferred direct marketing costs. Management
periodically reviews the recoverability of deferred advertising costs.
2. LOANS PAYABLE:
These loans payable are demand loans that have no stated repayment
schedule. As such, they are being carried as current liabilities. These
loans bear no interest and are unsecured. Included in loans payable as of
December 31, 1997 and June 30, 1997 are loans of $198,799 due to related
parties which include certain shareholders.
3. CONTRACTS PAYABLE:
In March 1997, the Company entered into a short-term financing contract for
an insurance policy covering its directors and officers. As of December 31,
1997, the balance of the contract was fully paid.
In the six months ended December 31, 1997, the Company 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 December 31, 1997 are as follows:
<TABLE>
<CAPTION>
FYE June 30:
------------
<S> <C>
1998 $ 2,865
1999 5,731
2000 5,731
2001 4,123
2002 3,586
2003 299
--------
Total $ 22,337
========
</TABLE>
Page 7
<PAGE>
TOMORROW'S MORNING, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 for the three and six months ended December 31, 1997 was
$21,894 and $30,032, respectively. For the three and six months ended
December 31, 1996, rent expense was $11,250 and $22,500, 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 December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 51,480
1999 102,640
2000 96,645
2001 93,914
--------
Total $ 367,222
=========
</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 December 31,
1997, expenditures for "SCOOP(TM)" were approximately $820,000 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 Issues. At this point in
time, the Company believes that the Year 2000 Issues as to its own
information systems will not have a material effect on its operations.
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. Charges related to these options totaled
$1,918,634 for the six months ended December 31, 1997
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.
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.
Page 8
<PAGE>
TOMORROW'S MORNING, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
6. INCOME TAXES:
The Company had deferred tax assets of approximately $3,567,000 and
$2,665,000 as of December 31, 1997 and June 30, 1997, respectively, which
have been offset by 100% valuation allowances of $3,567,000 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 $8,300,000, 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 December 31, 1997, revenues were $101,434 and
the Company experienced a net loss of $2,983,687, as compared to revenues of
$9,806 and a net loss of $336,908 for the three months ended December 31, 1996.
For the six months ended December 31, 1997, revenues were $229,666 and the
Company incurred a net loss of $4,901,918, as compared to revenues of $15,735
and a net loss of $647,192 for the six months ended December 31, 1996. 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, 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. The
Company's future profitability depends on: (i) the development of complementary
products; (ii) completion and successful marketing of the SCOOP(TM) CD-ROM
journalism game; (iii) the formation of joint-marketing alliances for corporate
sponsorship of school subscriptions to Tomorrow's Morning (the "Newspaper")
------------------
through the Company's Reading Partners Program; (iv) getting one or more
television shows, or interstitial news "flashes", 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. As shown in Part
II below under "Item 2 -Changes in Securities and Use of Proceeds," the Company
has used all of the net proceeds of the IPO and finds that it requires
substantial additional funds in order to reach the above long-term goals. In
addition, as discussed below in "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.
RESULTS OF OPERATIONS:
Three Month Periods Ended December 31, 1997 and 1996:
Revenues for the quarter ended December 31, 1997 were $101,434, as compared to
$9,806 for the three months ended December 31, 1996. This increase in revenues
of approximately 930% 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 December 31, 1997. Costs and expenses increased to
$3,090,651 during the three months ended December 31, 1997, well up from
$347,431 during the quarter ended December 31, 1996. About half of this
approximately 790% increase was the result of $1,451,592 of noncash compensation
and consulting expense being 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.
In addition, marketing expense of approximately $610,000 related to the 1997
Advertising Campaigns, as well as $180,820 of research and development costs
associated with the SCOOP(TM) CD-ROM were charged to operations in the quarter.
Total interest expense for the quarter ended December 31, 1997 was $1,443, as
compared to $40,881 for the same three month period in 1996. This decrease of
approximately 96% 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 December 31, 1997, the Company experienced a net loss
of $2,983,687, an increase of approximately 790% from the $336,908 net loss
incurred in the three months ended December 31, 1996. 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.
Page 10
<PAGE>
Six Month Periods Ended December 31, 1997 and 1996:
Revenues for the six months ended December 31, 1997 were $229,666, as compared
to $15,735 for the six months ended December 30, 1996. This approximately
fifteen-fold increase in revenues was primarily the result of the 1997
Advertising Campaigns. In the six months ended December 31, 1996, no formalized
marketing was occurring. Costs and expenses increased to $5,156,649 during the
six months ended December 31, 1997, well up from $663,449 during the six months
ended December 31, 1996. This approximately 680% increase includes $2,026,204 of
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 and approximately $960,000 of marketing expense related to the
Company's 1997 Advertising Campaigns, as well as $463,460 of research and
development costs associated with the SCOOP(TM) CD-ROM.
Total interest expense for the six months ended December 31, 1997 was $2,525, as
compared to $81,437 for the same six month period in 1996. 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 six months ended December 31, 1997, the Company experienced a net loss
of $4,901,918, an increase of approximately 660% from the $647,192 net loss
incurred in the six months ended December 31, 1996. 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 December 31, 1997, approximately 225,000
of those subscriptions have been canceled. While it is not presently known how
much of the remaining potential revenue will actually be realized, the results
of the 1997 Advertising Campaigns are still encouraging and have resulted in
greatly increased subscription revenue through December 31, 1997.
As of December 31, 1997, the Company had current assets of $632,779, virtually
all of which were derived from the results of its 1997 Advertising Campaigns. To
date, the Company has utilized all of its IPO proceeds and those subscription
receivables already collected in a variety of ways. Although there can be no
guarantees, such use, when combined with the additional required funding
described below, should, in time, provide increased funds from operations
through avenues such as (i) increased 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 supplemental educational materials, 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.
Page 11
<PAGE>
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 not obtained 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, has depleted the Company's working capital to a
greater extent than was previously expected. At this point, the Company is
experiencing some difficulty in meeting financial obligations to certain of its
trade creditors, primarily the vendor which prints the Newspaper. As a result,
in order for the Company to continue its present and prospective activities in
the near-term, the Company must raise approximately $500,000 to $1,000,000
through bank borrowings, public or private debt or equity offerings, or
otherwise. In addition to ongoing 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 preferred stock to
certain persons who are already Company shareholders. The Company is also
continuing discussions with several prospective distributors of SCOOP(TM), which
could result in a royalty advance to the Company of up to $1 million in the near
future. There can be no guarantee that 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 be required to curtail its operations (including,
but not limited to, publication of the Newspaper and the ongoing development of
SCOOP(TM)), which will have a material adverse effect on the Company's business,
operating results and financial condition.
As to longer-term funding requirements, the Company is continuing discussions as
to a larger equity offering, which commenced in December 1997 in an attempt to
maintain the Company's listing on The Nasdaq SmallCap Market by increasing its
"net tangible assets" to at least $3 million in order to meet Nasdaq's new
continued listing requirements. Through its investment bankers and its own
contacts, 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 December 4, 1997, the Company privately issued 5,000 shares of Common
Stock to Howard Miekle in settlement of litigation. 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.
On December 22, 1997, the Company privately issued 22,246 shares of Common
Stock to Michael Weinstock for $50,000 upon his exercise of previously
issued stock options. 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) With respect to the IPO, the Company's registration statement under the
Securities Act of 1933 became effective on February 10, 1997 (File No. 333-
04792-LA) and commenced on that date, offering up to 2,000,000 shares of no
par value Common Stock (aggregate offering price: $10,000,000) and up to
900,000 Common Stock Purchase Warrants (aggregate offering price:
$225,000). The Common Stock Purchase Warrants (the "Warrants") entitle the
holder to purchase one share of Common Stock at an exercise price of $6.50
per share until February 10, 2000 and are redeemable for $0.35 each under
certain circumstances. The offering was conducted on a "best efforts" basis
(minimum 1,100,000 shares of Common Stock), with J.E. Liss & Company
Incorporated as the Managing Placement Agent. The IPO terminated on March
28, 1997, at which point the Company had sold 1,167,277 shares of Common
Stock (aggregate offering price: $5,836,385) and all 900,000 Warrants
(aggregate offering price: $225,000). All securities were sold for the
account of the Company.
From the effective date of the IPO until December 31, 1997, the following
expenses were incurred for the Company's account in connection with the IPO
(none of which are estimates) All such payments were direct or indirect
payments to persons or entities other than directors, officers, affiliates
or 10% or greater security holders of the Company:
<TABLE>
<CAPTION>
TYPES OF EXPENSE AMOUNT
---------------- ------
<S> <C>
Underwriting discounts and commissions $ 566,739
Finder's fees - 0 -
Expenses paid to or for the Managing Placement Agent 121,228
Other expenses 228,283
---------
Total $ 916,250
=========
</TABLE>
As a result of the above expenses, the IPO resulted in net offering proceeds
to the Company of $5,145,135.
Page 13
<PAGE>
From the effective date of the IPO until December 31, 1997, the Company has used
IPO proceeds for the following purposes (none of which are estimates):
<TABLE>
<CAPTION>
TYPES OF EXPENSE AMOUNT
- ------------------ ------
<S> <C>
Construction of plant, building and facilities $ 19,995
Purchase and installation of machinery and equipment 115,790
Purchase of real estate - 0 -
Acquisition of other businesses - 0 -
Repayment of indebtedness 398,732
Working capital 3,840,903
Temporary investments:
Money market account 0
Other purposes in excess of $100,000:
Development costs of Interactive CD-ROM Game 769,715
</TABLE>
Except for $50,000 of debt repayment and $319,417 in salaries paid to the
Company's officers and a director who is also an employee, all of the above
payments were made directly or indirectly to persons or entities other than
directors, officers, affiliates or 10% or greater security holders of the
Company. The above use of proceeds does not represent a material change from the
use of proceeds described in the IPO prospectus.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following Exhibits are attached hereto:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10 Second Amendment to Stock Option Agreement dated as of November 3, 1997
between the Registrant and Adam Linter
11 Computation of earnings per share
27 Financial Data Schedule
</TABLE>
(b) One report on Form 8-K was filed during the Company's fiscal quarter ended
December 31, 1997. Such report was filed on November 12, 1997 with respect
to an event described in Item 9 of Form 8-K ("Sale of Equity Securities
Pursuant to Regulation S") which occurred on November 7, 1997. No financial
statements were filed in connection with that report.
Page 14
<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: February 23, 1998 By: /s/ STEVEN RAFT
----------------------------------
Steven Raft
Chief Financial Officer
Page 15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTION NUMBERED PAGE
- -------------- ----------- -------------
<C> <S> <C>
10 Second Amendment to Stock Option Agreement dated as of November 3, 1997 17
between the Registrant and Adam Linter
11 Computation of earnings per share 18
27 Financial Data Schedule 19
</TABLE>
Page 16
<PAGE>
SECOND AMENDMENT TO
STOCK OPTION AGREEMENT
THIS SECOND AMENDMENT TO STOCK OPTION AGREEMENT (this "Amendment") is
made and entered into as of November 3, 1997, by and between TOMORROW'S MORNING,
INC., a California corporation (the "Company"), and Adam Linter ("Optionee")
with respect to the following facts and circumstances:
A. The Company previously entered into a Stock Option Agreement dated
as of April 14, 1995 (the "Agreement"), with Optionee relating to 6% of the
issued and outstanding shares of the Company's Common Stock as of the date
Optionee exercises the option.
B. The Agreement has since been amended by an Amendment to Stock
Option Agreement dated as of April 18, 1997. All references to the Agreement
herein shall be deemed to include the terms of such amendment.
C. For good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the Company and the Optionee now desire to further
amend the Agreement in the following respects.
1. Amendment of Section 1.1. Section 1.1 of the Agreement is
------------------------
hereby deleted in its entirety and replaced with the following:
"1.1 Grant of Option. The Company, pursuant and subject
---------------
to the terms and conditions of this Agreement, grants to Optionee the right and
option (the "Option") to purchase, on the terms and conditions hereinafter set
forth, 281,113 shares of the Company's Common Stock (the "Shares"). It is
intended by the parties hereto that the Shares subject to this Option are
dilutable by events prior to the exercise of the Option."
2. Ratification of Remaining Terms. Except as expressly set
-------------------------------
forth in this Amendment, all of the terms and provisions of the Agreement, as
previously amended, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
TOMORROW'S MORNING, INC.
By: /s/ Steven Raft
---------------------------
Title: Chief Financial Officer
-----------------------
/s/ Adam Linter
-------------------------------
Adam Linter
EXHIBIT 10
<PAGE>
EXHIBIT 11
TOMORROW'S MORNING, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, 1997 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss $(2,983,687) $(4,901,918)
Basis for computation of primary earnings per common and
common equivalent share:
Weighted average number of shares outstanding during period 2,800,528 2,793,263
Weighted average (incremental) common share equivalent after
considering the effects of options and warrants outstanding
during the period ended December 31, 1997 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 2,800,528 2,793,263
=========== ===========
Loss per share $ ( 1.07) $ (1.75)
============ ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THREE AND
SIX MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> OCT-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 111,013 2,342,849
<SECURITIES> 0 0
<RECEIVABLES> 330,262 5,380
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 632,779 2,828,950
<PP&E> 140,401 69,555
<DEPRECIATION> 27,425 16,786
<TOTAL-ASSETS> 778,227 2,913,074
<CURRENT-LIABILITIES> 1,224,349 605,401
<BONDS> 0 0
0 0
0 0
<COMMON> 12,601,862 10,484,681
<OTHER-SE> (82,316) (96,952)
<TOTAL-LIABILITY-AND-EQUITY> 778,227 2,913,074
<SALES> 101,434 229,666
<TOTAL-REVENUES> 101,434 229,666
<CGS> 330,330 537,992
<TOTAL-COSTS> 330,330 537,992
<OTHER-EXPENSES> 2,753,348 4,590,267
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,443 2,525
<INCOME-PRETAX> (2,983,687) (4,901,118)
<INCOME-TAX> 0 800
<INCOME-CONTINUING> (2,983,687) (4,901,918)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,983,687) (4,901,918)
<EPS-PRIMARY> (1.07) (1.75)
<EPS-DILUTED> (1.07) (1.75)
</TABLE>
