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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1998
/ / TRANSITION REPORT UNDER 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.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 95-4379805
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
125 SOUTH BARRINGTON PLACE, LOS ANGELES, CALIFORNIA 90049
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (310) 440-2778
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, no par value
(TITLE OF CLASS)
Redeemable Common Stock Purchase Warrants,
exercisable at $6.50 per share until February 10, 2000
(TITLE OF CLASS)
Check whether the issuer (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 issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes / X / No / /
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / X /
Issuer's revenues for its most recent fiscal year (ended June 30, 1998) were
$218,983.
The aggregate market value of the 2,194,271 shares of common stock held by
non-affiliates of the issuer, based upon the average bid and asked price of such
stock on September 15, 1998, as reported by the OTC Bulletin Board, was
approximately $1,645,700. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of outstanding shares of the issuer's Common
Stock on September 15, 1998 was 3,212,690.
DOCUMENTS INCORPORATED BY REFERENCE NONE
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): / / YES / X / NO
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS
OF TOMORROW'S MORNING, INC. (THE "COMPANY") 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
IN "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OVERVIEW".
COMPANY BACKGROUND AND PHILOSOPHY. The Company was founded to develop and
publish a weekly newspaper for children ages 8 to 14 called TOMORROW'S MORNING
(the "Newspaper") and engage in various other publishing, video, electronic,
multimedia and merchandising lines based on the Newspaper. The Company's
philosophy can be summarized in the fusion of three concepts: (i) doing well by
doing good, (ii) developing multiple, synergistic sales through existing and
newly developing marketing channels and (iii) addressing a major market
need/opportunity. The Company's goal is to enhance the education and world-view
of children in the United States while simultaneously building a profitable,
multi-product business.
The Company believes that there is a clear need for a children's weekly
newspaper and innovative multimedia products in the United States. Given the
evidence that American children are not very well-informed or knowledgeable
about the world, and that newspaper readership is dramatically declining
(especially among the younger age groups), the Newspaper is based on the premise
that an independent, authoritative paper written for children can make a
difference. In June 1990, the Times Mirror Center for the People and the Press
published a survey entitled "The American Media: Who Reads, Who Watches, Who
Listens, Who Cares." Its various studies revealed that young Americans, 18 to
30, know less and care less about news and public affairs than any other
generation of Americans in the past 50 years. By getting to children earlier
(when they're 8 to 14), the Newspaper can help to change that.
Le Journal des Enfants ("LJDE"), the inspiration for the Newspaper, has
flourished in France since its founding in 1985. It has 180,000 subscribers and
over 550,000 readers, mostly children. Through a personal visit to study its
operation in August 1991, and consultation with LJDE's management, the Company
has translated the best of LJDE's experience and success to its own
American-tailored formulation.
The Company has also studied a substantial body of research on moral development
during preadolescence. Since news and current affairs are absent or remote in
the lives of most 8- to 14-year olds, connections must be made to their personal
concerns. In the Company's opinion, children in this age group begin to develop
communal attitudes of empathy and reciprocity, and providing news information at
this stage can truly create a sense of shared experience. As they move from
self-absorption to caring and compassion for others, the Newspaper is there as a
conduit for them to experience with other children. Given the increase in a
child's cognitive capabilities during this developmental period, the Newspaper
and its proposed family of products are in a position to not only establish
"brand loyalty," but also to help children really learn about the world.
The Company believes the main reason for the current growth in children's
magazines is the growing number of well-educated parents and grandparents who
want to give every advantage to their children and grandchildren. As a result,
the Newspaper and the product lines to be derived from it are designed to fill
that need. At the same time, by promoting the Newspaper and its planned CD-ROM
spin-offs as an interactive enterprise between parent and child, the Company can
address what is considered by teachers to be the most serious school problem:
parents' low involvement in their children's education.
The Company believes that the Newspaper, its READING PARTNERS PROGRAM
Adopt-a-School Program, its SCOOP-TM- journalism game now being developed, its
potential TV show(s), its on-line interactive publishing activities, and its
proposed ancillary publishing (such as supplemental educational materials,
calendars, posters, playing cards and games), as described below, will also
address what it believes to be another fundamental need in the marketplace: that
society needs children who are socially competent, who know how to learn and
have confidence in their learning ability.
The Company was incorporated in California in June 1992. The Company's principal
executive office is located at 125 South Barrington Place, Los Angeles,
California 90049, and its telephone number is (310) 440-2778. The Company
maintains a homepage on the World Wide Web at http://www.morning.com.
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CURRENT BUSINESS.
NEWSPAPER PUBLICATION. Due to a lack of funds, with the exception of two issues
which were published in mid-May 1998, the Company stopped publishing the
Newspaper in paper format on December 22, 1997, although electronic publication
continued at the Company's Web site until March 14, 1998. Founded in 1992, the
Newspaper was a weekly four-page, full-color home/school delivery newspaper
published expressly for children between 8- and 14-years old. Recognizing what
it believes to be a previously unaddressed niche, the Newspaper provided the
news to its targeted audience in a unique fashion, at once serious and
informative, fun, "cool" and irreverent. The Newspaper's unique "voice" and
format have been well-received, and it has been the subject of articles in THE
NEW YORK TIMES, LOS ANGELES TIMES, ROCKY MOUNTAIN NEWS, WASHINGTON POST,
CLEVELAND PLAIN DEALER, CHILD, PARENTING, FAMILY LIFE, SCHOOL LIBRARY JOURNAL,
THE DALLAS MORNING NEWS and John Naisbitt's TREND LETTER. It also received
national recognition in the Columbia University MEDIA STUDIES JOURNAL, and its
graphic format was cited in DESIGNING FOR CHILDREN, by Steven Heller, senior art
director of THE NEW YORK TIMES. In addition, the "Kidstocks" section of the
Newspaper received "Distinguished Achievement Awards" for 1996 and 1997 from the
Educational Press Association of America, an independent association of some
2,500 educational periodicals and interested individuals that promotes the
interests of educational communication. The Newspaper was also the winner of a
1996 "Parents' Choice Group Magazine Award" from PARENTS' CHOICE, a non-profit
consumer guide which annually, through groups of parents, children, teachers,
librarians, psychologists with advice from pediatricians, safety experts and
others who care about children, selects the year's top children's toys, books,
videos, computer programs, audios, magazines, TV programs and rock/pop music.
The Newspaper had formed an eight-person Advisory Board composed of the
following persons:
DR. GERALD LESSER - Bigelow Professor of Education and Developmental
Psychology, Harvard University; Chairman of the Board of Advisors for the
Children's Television Workshop.
PEGGY CHARREN - Founder and former president of Action for Children's
Television (ACT); Visiting Scholar in Education at Harvard University's
Graduate School of Education.
DR. CAROL D. BERKOWITZ - Director, Pediatric Clinic and Group Practice,
Harbor/ UCLA Medical Center and Professor of Clinical Pediatrics, UCLA
School of Medicine.
GARRY MARSHALL - Writer, director.
SUSIE BUFFETT - Activist for children's education opportunities.
BEATRICE D'IRUBE - Founder and Publisher of LJDE.
GEORGE FOREMAN - World Heavyweight Champ, actor, children's rights
advocate.
HECTOR ELIZONDO - Actor, human rights activist.
From time to time, the Newspaper has called upon members of the Advisory Board
for counsel in their specific areas of expertise and experience.
Using the Macintosh Desktop Publishing system, the Newspaper was written and
designed weekly at the Company's offices in Los Angeles. Its weekly edition was
printed in Silver Spring, Maryland and its biweekly classroom edition was
printed in various locations. The editorial and art of each issue of the
Newspaper, plus special features for on-line readers, remain available at the
Company's site on the World Wide Web (http://www.morning.com). The Company has
also published "special editions" of the Newspaper. "Special editions" of the
Newspaper were either editions of the regular paper, but emblazoned with a
client company's logo (i.e., "Brought to you by . . ."), or, more generally, a
single-theme or topic "insert" of two to four pages, underwritten by a client
company or organization, in either case with distribution through the Company's
channels and/or the client's own distribution channels. In the past, the Company
has produced special editions for Patagonia, The Body Shop and MCA/Universal
Home Video.
The Company contracted with Starbright Graphics, Inc. (a shareholder of the
Company) as its agent for printing both the home and classroom editions of the
Newspaper, plus ancillary materials such as the classroom teacher's guide,
promotional flyers, subscriber correspondence and subscription cards. The home
and classroom editions were produced in the same format, but on different
schedules. Material published in the home edition was selected for inclusion in
the classroom edition, which consisted of a series of 16 issues. The terms of
the Company's relationship with Starbright Graphics, Inc. specify that
Starbright Graphics, Inc. has a right of first refusal to provide printing
services for the Company for so long as it is a shareholder.
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The Newspaper's paid circulation has been a blend of home and school
subscriptions. The Newspaper has been sold through home subscriptions at the
rate of $16.17 for a 33-week "introductory" subscription and $24.95 for a full
year subscription. School subscriptions were $2.90 per student for 16 issues
during the September to June school year. Subscriptions have also been sold
through the Company's READING PARTNERS PROGRAM, which established school or
class sponsorships (at the rate of $350 per class for a 40-week school year,
plus teacher's guide) whereby an individual, group or company "adopted" a class
or school and underwrote the cost of delivery of the Newspaper for the school
year. Starting from zero in 1992, at its peak, the Company had approximately
400,000 subscribers. As of its last publication, the Newspaper was being
distributed to 100,000 subscribers in all 50 states, plus Canada, Mexico and
abroad. At that time, over 90% of the Newspaper's circulation was to schools.
Sales of the Newspaper and certain custom-published Newspaper inserts have been
essentially the sole source of the Company's revenues since inception. To the
extent that sales of the Newspaper have been directed at schools, such business
was seasonal, with most sales taking place between September and June.
Seasonality was not believed to be a factor with non-school sales.
Bloomberg Financial Markets, a leading financial news network and publisher
("Bloomberg"), sponsored the Newspaper's "Kidstocks" column in print and
on-line, with reciprocal links between Bloomberg's and the Company's websites.
The Newspaper also featured a special Internet column by Yahooligans!-TM-,
possibly the largest, most well-known and most-visited directory of children's
resources on the World Wide Web, in both the print and on-line versions of the
Newspaper. The Company continues to provide content to Yahooligans!-TM- (see
"Potential Future Products and Services" below).
At this time, the Company plans to resume publication of the Newspaper at such
time, if any, as it obtains the necessary funding. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BUSINESS IN DEVELOPMENT. The Company is developing a CD-ROM journalism game
called SCOOP-TM-, an innovative learning system that will be interactive and
synergistic with the Newspaper and the Company's other potential products,
including on-line services, books and TV show(s). SCOOP-TM- calls upon its
players to take on progressively more complex investigative reporting
assignments, as they move up the ladder of an imaginary newspaper - from cub
reporter to city desk to foreign bureau to Pulitzer Prize. The game is being
created under the direction of Robit Hairman, who produced "The Brief History of
Time" CD-ROM. Ben Bradlee, formerly Editor of THE WASHINGTON POST, plays the
"Editor" in SCOOP-TM-. Within a personal computer screen environment, players
navigate, investigate, interview, conduct research and file stories using a
natural language engine that will allow the players to "speak" with the
characters. The game will run on either PC or Macintosh platforms, and is
designed to interact via the Internet with the Company's website and server for
research, content updates and publishing of stories. It is designed to be
synergistic with the Newspaper in the sense that it will use the TOMORROW'S
MORNING theme as its context, share content and formatting with the Newspaper,
and will be aimed at the same audience. Also, the game will be described and
promoted, and players may be interviewed, in the Newspaper and on the Company's
website. As of September 1, 1998, the game has been designed, most of the
stories have been outlined (and some are largely complete), the "look and feel"
has been created, 3-D environments have been developed, a demonstration program
has been completed, and original characters have been created. Ben Bradlee has
also been filmed in the "Editor" role, and filming of Larry King as himself is
scheduled.
POTENTIAL FUTURE PRODUCTS AND SERVICES. The Company has established its own site
on the World Wide Web, where it has electronically posted the Newspaper and
where it intends to provide a whole range of activities, services, games,
features, content and interactive elements if and when sufficient funding
becomes available. The Company plans to use its website to offer an archive of
articles, artwork and features from past Newspaper issues, plus supplemental
resources, accessed via a "search engine" according to topic and keywords. In
addition, it is planning to enable children to engage in real-time games
together across the Internet, collaborate on creative story-writing, post local
news stories, view and contribute to an on-line art gallery, create and send
electronic postcards and animations to each other, and receive automated e-mail
greetings on special occasions. The Company also plans to host special on-line
interview sessions with celebrities and journalists. The website will also
feature a TOMORROW'S MORNING on-line store, where children and parents can order
subscriptions to the Newspaper, other products created by the Company and
additional products.
The Company and Yahooligans!-TM-, the children's division of Yahoo!, the largest
directory on the Internet, are developing a facility for providing news content
daily for children on the Yahooligans!-TM- website, with direct links to the
Company's website. The Company also has agreed to establish reciprocal links
between its website and Social Studies School Service's website at
www.socialstudies.com, and is in discussions with a number of other
organizations regarding cross-linking with their sites, with the objective of
increasing awareness of the Company's products and
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services in the marketplace. In addition, the Company plans to create a special
site on-line for interaction with the SCOOP-TM- game, providing updated content,
research resource materials and "chat" sessions for players of the game.
It is anticipated that revenue from the Company's website may in the future be
derived from on-line merchandising, advertising and sponsorships.
The Company is presently marketing a concept for a TV show based on the
Newspaper. Creative Artists Agency, a leading talent agency, is representing the
Company in those marketing efforts. The proposed TV show describes the
adventures of a group of 14-, 15- and 16-year olds who create a "webzine" for
kids. In each episode, the cast goes out to find the story - find the truth -
and ideally learn something about what they're going after, as well as something
about themselves. The show is being developed as a 30-minute live action
production, with TOMORROW'S MORNING staff and TV writer/producer Dan Funk
working on creating the show. The Company has already met with representatives
of The Disney Channel and the Warner Bros. Network and it is anticipated that
the show will be presented to additional broadcast and cable networks.
A source of revenue in the future, tapping the Company's projected circulation
base and others exposed to the Company, may be a wholly-owned or joint-venture
merchandising division, offering "TOMORROW'S MORNING" and SCOOP-TM- logo items,
clothing, characters, a SCOOP-TM- "Reporter's Kit," software, print materials,
back-to-school items and promotional packages.
The Company also plans to develop various "ancillary" publishing products, which
may include printed materials such as supplemental educational materials,
calendars, posters, playing cards and games. Such products may also include
topical guides, anthologies and books which are derived either from material
already published in the Newspaper or new material, written by the Newspaper's
staff, its readers, or outside authors under contract.
Additional products and revenue-generating items may include follow-on CD-ROM
games (eventually comprising a family of products based on the general approach
of the first, but specializing in specific subject areas), books, additional TV
shows (such as a specific "news to kids" show), sponsored one-minute
interstitial news "flashes" televised between shows on Saturday mornings,
licensing of "TOMORROW'S MORNING" characters, and a series of
corporate-sponsored Newspaper inserts with varied distribution channels and
target audiences. Based on an assessment of demand, the Company may also create
a separate version of the Newspaper for the lower elementary age group
(tentatively named "TOMORROW'S DAWN").
The foregoing notwithstanding, there can be no assurance that any additional
products or services will be developed.
MARKETING AND EXPANSION STRATEGY. The Company has marketed the Newspaper through
advertising, telemarketing and direct mail solicitations to school teachers in
the upper elementary and middle school grades. It also markets to corporations
and foundations with an interest in sponsoring distribution of the Newspaper to
schools, and utilizes catalog agents for public library sales. For sales of home
subscriptions, it has marketed through American Express credit card magazine
offers, READER'S DIGEST school marketing programs, its website, and public
relations and referrals. If and when publication resumes, the Company intends to
continue to aggressively market the Newspaper to various target audiences
through a number of means. The Company also may in the future launch targeted
direct mail and telemarketing campaigns to venues where children gather, such as
family-practice doctors' offices, orthodontists' and dentists' offices,
pediatric wards, and after-school "day-care" programs. It may also in the future
create differentiated "home" and "school" editions, with the home editions
marketed via direct mail to targeted demographic areas, and home or school
editions marketed to "home schoolers."
The Company has, from time to time, received sponsorship for the Newspaper from
major corporations, individuals and foundations. The Company will continue to
seek to develop strategic alliances with a number of high-profile companies (in
various industries), foundations and individuals around the country, based in
many cases on long-standing relationships with the Company that have been
maturing over the course of the Company's operating history. An example is the
Company's alliance with EduCap, Inc. (formerly known as University Support
Services), a non-profit organization and the country's largest provider of
private education loans, which has access to thousands of corporate sponsors,
including about 30% of the Fortune 500 companies. Such alliances may be
collaborative, with both parties underwriting the cost and sharing the revenues
from activities jointly entered into, such as the creation of new supplemental
educational materials or a CD-ROM game. They may also be contractual, as with
publishing and distribution projects (such as the Company has done for Patagonia
and MCA/Universal Home Video), with the
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Company being paid a fee for creation, printing and distribution. In addition,
these alliances may be in the form of sponsorships, whereby one or several
companies, or a combination of companies and non-profit organizations, sponsor
delivery of the Newspaper to schools, such as is currently being undertaken by
Amblin/DreamWorks SKG for schools in selected areas around the country. There
can, however, be no assurance that any such alliances will continue to be
developed.
If and when adequate funding becomes available, the Company plans to add staff
and develop and launch additional, synergistic products (as described above),
with the objective of achieving multiple potential sales to each of its
customers. The Company is presently in discussions with a variety of
distribution and sponsorship partners with respect to certain of the proposed
products. The Company anticipates marketing its products through multiple
channels, including direct mail, telemarketing, distribution alliances to
specific markets (e.g., schools), its World Wide Web site, product offers and
catalogs bundled with the Newspaper and the Company's other products, retail
outlets, and special joint-venture marketing. For example, buyers of SCOOP-TM-
will become potential subscribers to the Newspaper, and the game will also be
marketed and sold on the World Wide Web. The Company may also engage in
discussions with major technology and entertainment companies to explore
development and marketing synergies for SCOOP-TM-. When development is
completed, the Company will seek to market this product through various
channels, including retail distribution through major national outlets, mail
order companies and in a demo version bundled with other products. The Company
is also in discussions with a number of major game publisher-distributors
regarding additional marketing ventures, as well as extensions of the game's
concepts and technology into new subject areas. SCOOP-TM- will also be marketed
through the Newspaper's circulation base, using direct mail and/or response
cards in the Newspaper.
Where opportunities and resources allow, the Company may consider expansion
through acquisition of appropriate products and/or companies in related markets
in order to accelerate growth and/or secure its competitive position.
MATERIAL CONTRACTS AND SUPPLIERS. Several of the Company's personnel are
consultants. In addition, two others are provided on a project-by-project basis
by School Market Sales Management of New York under contract with the Company.
See "Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act - Significant Personnel."
The Newspaper's circulation management, subscriber "fulfillment" (i.e.,
preparation of mailing labels, order processing, etc.) and billing have been
provided by Starbright Graphics, Inc. in New York and Specialized Fulfillment
Services in Ohio. Such services have been terminated due to lack of payment
and/or termination of Newspaper publication.
During its publication, the Newspaper was written and designed weekly at the
Company's offices. The home delivery editions were being printed at Presstar in
Silver Spring, Maryland, and the classroom editions were printed at Nielsen Ohio
Valley Litho, in Florence, Kentucky, with oversight by Starbright Graphics, Inc.
as the Company's agent (which has a right of first refusal to provide printing
services for the Company for so long as it is a shareholder of the Company). The
materials used to print the Newspaper (paper and ink) are readily available from
a variety of sources, with the only variable being price, which can be volatile
as to paper.
The SCOOP-TM- journalism game, is being developed for the Company by Robit
Hairman under a Software Development Agreement. Upon completion of the game, Mr.
Hairman will receive a 33% royalty on "product revenues" (as defined in the
agreement) after reimbursement of Company costs, repayment of capital investment
and a priority payment to the Company and/or other parties providing the capital
investment. Should the Company desire to develop a new version of the game, Mr.
Hairman has a right of first refusal to provide his full-time development
services on terms no less favorable than in the original agreement. Should Mr.
Hairman desire not to participate in the development of a new version of the
game (as defined in the agreement), he will receive royalties on that version at
one-half the rate he was receiving on the preceding version. In no event will
Mr. Hairman receive royalties with respect to the game if he fails to provide
maintenance services as specified in the agreement for three years after its
completion. Under the terms of the agreement, the Company can terminate Mr.
Hairman's services "for cause" without further obligation to him. The agreement
can also be terminated by the Company without "cause" prior to completion of a
"Beta" testing version, but only if game development is discontinued altogether
and Mr. Hairman is paid for work performed up to the termination date. As
specified in the agreement, the Company owns all title and proprietary rights in
the game that are developed or created by Mr. Hairman or his subcontractors. The
principal materials and components to be used in the Company's proposed CD-ROM
title(s) include computer media, packaging and user manuals. Manufacturing
involves the duplication of computer media and user manuals, assembly of
components, sample testing the product and final packaging. The Company will
rely upon third parties to manufacture components of its CD-ROM products and
assemble completed packages in accordance with the Company's specifications. The
Company believes that there is
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an adequate supply of and source for the raw materials used in such products and
that multiple sources are available for manufacturing and assembling such
products.
PROPRIETARY RIGHTS, TRADEMARKS AND COPYRIGHTS. The copyright laws of the United
States and most foreign countries grant legal protection to "original works of
authorship" and provide substantial civil and criminal sanctions for
unauthorized duplication and publication of items such as the Newspaper, CD-ROM
titles, books and television shows. The Company plans to take all appropriate
measures to secure copyright protection for its products under the laws of all
applicable jurisdictions.
The Company holds registered trademarks for the name "Tomorrow's Morning" and
its logo. SCOOP-TM-, NEWSFLASH-TM-, KIDTERNET-TM-, and BORN TO READ-TM- are also
trademarks of the Company. The domain names morning.com, tomorrowsmorning.com,
scoopgame.com, scoopville.com, blindjoe.com and scoopclub.com have been
registered with Network Solutions, Inc., the Internet domain naming authority.
COMPETITION. For the 8- to 14-year old age group comprising its target market,
the Company's principal print publishing competitors marketing direct to schools
include THE WEEKLY READER, the SCHOLASTIC group of magazines, and TIME FOR KIDS.
Those products are published by companies much larger than the Company, with
significantly greater financial, marketing and other resources. The WEEKLY
READER and SCHOLASTIC have long been in schools, and TIME FOR KIDS entered the
market two years ago. In general, these three large publications compete
"head-to-head" for subscribers and market share.
In terms of weekly home-delivery, while there are presently no direct
competitors, growth of existing or new products may impede the Company's growth
in its target market. Indirect competitors (nearly all monthlies) competing for
sales in the home market for 8- to 14-year olds include SPORTS ILLUSTRATED FOR
KIDS (sports), NICKELODEON (general humor), NATIONAL GEOGRAPHIC WORLD, DISNEY
ADVENTURES, COBBLESTONE (literature), AMERICAN GIRL, ZILLIONS (consumer
information), and many others, covering a wide variety of subjects. While it is
unlikely that any of these will either commence weekly delivery or change to
incorporate current news, such moves could encroach on the Newspaper's potential
audience.
Despite recent high growth rates of subscribership to on-line services and
Internet service providers in general, the Company's current and pending
activities on the World Wide Web face increasing competition from the addition
of more child-oriented content providers or expansion of existing competitors
for the attention of children in the Company's target age group. In electronic
format, the Newspaper currently competes with DISNEY ADVENTURES, TIME, NATIONAL
GEOGRAPHIC WORLD and others.
Competition among CD-ROM titles is intense, and involves many large, established
companies such as Broderbund, Microsoft, Maxis, The Learning Company, Davidson,
LucasArt, Sony and ImageSoft, among others. The technologies to (i) produce and
distribute in a timely fashion high quality time-sensitive printed material
using desktop publishing techniques and (ii) distribute and make graphic and
text information accessible through speedy and universal on-line services, have
allowed for CD-ROM games with links to interactive on-line, and on-screen,
multimedia sources of content. While the Company believes that this will give
its CD-ROM game(s) a distinct competitive advantage by being innovative as a
learning system, with unique content, multimedia synergies and marketing
programs, competition for shelf space is intense. As a result, there can be no
guarantee that the Company's product(s) will be successful in gaining prominent
and sufficient shelf space in the retail market.
Despite the need of TV networks for "FCC friendly" (i.e., quality) children's
programming, the children's TV market is intensely competitive. As a result,
there can be no guarantee that the Company will succeed in getting (and keeping)
its show(s) on the air.
At this time, it is difficult to predict the extent and nature of the
competition which will be faced by the Company's other proposed product lines
(e.g., ancillary publishing and merchandising). However, in certain of those
lines (such as merchandising) competition tends to be intense.
PERSONNEL. The Company presently has seven employees, all of whom are full-time.
One of the full-time employees is the Company's executive officer, with five
more in administration and one more in sales and marketing. In addition to its
employees, the Company has from time to time retained various advisors and
consultants with respect to marketing and public relations. The Company believes
that it maintains an excellent relationship with its personnel.
7
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive office is located in leased premises of approximately
4,600 square feet. The lease commenced on July 1, 1997 and continues until June
30, 2001, with monthly rent of $7,130 beginning September 1, 1997 (subject to
annual base rent increases of 3% commencing July 1, 1998). The Company's
President has personally guaranteed the Company's performance under the lease
pursuant to an agreement that expires after the second year of the lease. The
Company expects that this space will be sufficient for the Company's executive
offices for the foreseeable future.
The Company has also leased a small satellite office in Ann Arbor, Michigan
since May 1997 at a rent of $252 per month.
In the opinion of management, the Company's properties are adequately covered by
insurance.
ITEM 3. LEGAL PROCEEDINGS
On May 27, 1998, Barrington Plaza Partnership, the Company's landlord, filed an
unlawful detainer action in Los Angeles County Municipal Court seeking
possession of the Company's executive offices and $20,207.67 in past due rent.
The Company intends to contest this action on the basis that the amount sought
by the landlord exceeds the amount actually owed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK MARKET AND OTHER INFORMATION. The Company's Common Stock has been quoted
on the OTC Bulletin Board under the symbol "TOMM," since June 2, 1998. Prior to
that, beginning four days after the completion of the Company's initial public
offering in March 1997 until February 10, 1998, the Company's Common Stock was
traded on the Nasdaq SmallCap Market. Prior to the initial public offering,
there was no public trading market for the Company's equity securities. Warrants
to purchase up to 900,000 shares of the Company's Common Stock are also quoted
on the OTC Bulletin Board under the symbol "TOMMW." The terms of the warrants
provide that one warrant plus $6.50 are required to purchase one share of the
Company's Common Stock. Commencing January 1, 1998, at the Company's option, the
warrants became redeemable for $0.35 per warrant upon at least 15 days notice to
the warrant holders if the closing price of the Common Stock has been at least
$6.50 for a period of 30 consecutive trading days ending within 15 days of the
date the notice of redemption is mailed. The warrants expire on February 10,
2000.
The following table sets forth the quarterly high and low bids for the Company's
Common Stock since public trading began, with prices from March 17, 1997 to
February 10, 1998 as reported by the Nasdaq SmallCap Market and since June 2,
1998 as reported by on the OTC Bulletin Board:
<TABLE>
<CAPTION>
FISCAL YEAR 1997 HIGH* LOW*
<S> <C> <C>
Third Quarter (starting March 17, 1997)............. $6.00 $4.50
Fourth Quarter ..................................... $6.00 $1.25
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH * LOW *
<S> <C> <C>
First Quarter......................................... $5.0625 $1.25
Second Quarter........................................ $6.4375 $3.875
Third Quarter......................................... $5.625 $1.00
Fourth Quarter ....................................... $2.0625 $0.125
</TABLE>
- -----------------
* These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
HOLDERS OF RECORD. As of September 15, 1998, there were 52 holders of record of
the Company's Common Stock and 52 holders of record of the Company's warrants.
DIVIDENDS. The Company has never paid any cash dividends on its Common Stock. It
presently intends to retain earnings and capital for use in its business and
does not expect to pay any dividends in the foreseeable future. Any payment of
cash dividends in the future on the Common Stock will be dependent on the
Company's financial condition, results of operations, current and anticipated
cash requirements, plans for expansion, restrictions under debt obligations, as
well as other factors that the Board of Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES.
On June 10, 1998, the Company issued 36,320 shares of Common Stock to James R.
Rosbe pursuant to his exercise of previously granted options by the payment of
$3,995 in cash. Based on Mr. Rosbe's access to information as a Company director
and his level of investment sophistication, the shares were issued in reliance
on the exemption provided in Section 4(2) of the Securities Act because no
public offering was involved.
On June 17, 1998, the Company issued 154,360 shares of Common Stock to Adam
Linter pursuant to his exercise of previously granted options by the payment of
$15,436 in cash. Based on Mr. Linter's access to information as a Company
director and officer and his level of investment sophistication, the shares were
issued in reliance on the exemption provided in Section 4(2) of the Securities
Act because no public offering was involved.
On June 18, 1998, the Company granted options under its Non-Qualified Stock
Option Plan to Kristan Altimus (as to 11,000 shares), Steven Raft (as to 10,000
shares) and David Hamilton (as to 10,000 shares). Each option is exercisable
until June 17, 2000 at an exercise price of $0.2125 per share. Based on each
grantee's relationship with the Company, each of them had access to appropriate
Company information. Based on that access and each grantee's level of investment
sophistication, the options were granted in reliance on the exemption provided
in Section 4(2) of the Securities Act because no public offering was involved.
On June 19, 1998, Ms. Altimus exercised the options as to all 11,000 shares by
the payment of $2,337.50 in cash. Such shares were also issued in reliance on
Section 4(2) of the Securities Act.
On June 23, 1998, the Company issued 25,000 shares of Common Stock to Earl T.
Shannon and 165,000 shares of Common Stock to Ronald W. Tupper, Trustee of the
Winthrop Trust. Each issuance was made in cancellation of Company debt at the
rate of $1.00 per share. Based on each investor's access to Company information
and investment sophistication, the shares were issued in reliance on the
exemption provided in Section 4(2) of the Securities Act in that no public
offering was involved.
On June 25, 1998, in return for a $250,000 loan from Michael Fuchs, the Company
issued to Mr. Fuchs (i) a $250,000 promissory note due December 24, 1998 and
bearing interest at 10% per year and (ii) warrants to purchase 250,000 shares of
Common Stock at $2.00 per share until June 24, 2003. The promissory note is
itself convertible, at the payee's option, into Common Stock at $2.00 per share.
Based on Mr. Fuchs' access to Company information and his investment
sophistication, the issuances were made in reliance on the exemption in Section
4(2) of the Securities Act because no public offering was involved.
9
<PAGE>
ITEM 6. 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. From inception in June 1992 to June 30, 1998, the Company has
incurred an aggregate of $11,987,623 in operating losses. For the fiscal year
ended June 30, 1998, revenues were $218,983 and the Company experienced a net
loss of $6,273,378, as compared to revenues of $38,166 and a net loss of
$2,955,679 for the fiscal year ended June 30, 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-
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 the Newspaper when
publication resumes; (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.
RESULTS OF OPERATIONS.
YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997. Revenues for the fiscal year ended
June 30, 1998 were $218,983, compared to $38,166 for fiscal 1997. This
approximately 470% increase was primarily the result of the Company's Spring
1997 and Fall 1997 direct response advertising campaigns (the "1997 Advertising
Campaigns"), which temporarily generated orders for approximately 350,000
subscriptions. Costs and expenses increased to $4,431,874 during the year ended
June 30, 1998, from $2,881,718 for the year ended June 30, 1997. This
approximately 50% change was primarily due to increased costs associated with
increases in Newspaper subscriptions.
Interest expense for fiscal 1998 was $11,460, as compared to $141,482 for fiscal
1997. This approximately 92% decrease 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 fiscal 1998, the Company experienced a net loss of $6,273,378 an
approximately 110% increase from the $2,955,679 net loss sustained in fiscal
1997. This change in net loss was primarily due to the factors described above
with respect to costs and expenses, partially offset by a decrease in interest
expense.
YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996. Revenues for the fiscal year ended
June 30, 1997 were $38,166, as compared to $112,672 for fiscal 1996. This
approximately 66% decrease in revenues was primarily the result of the lack of a
formalized marketing effort in fiscal 1997, as compared to the Company's
nationwide telemarketing campaign and direct mail solicitation to schools and
teachers in fiscal 1996 (the "Fall 1995 Marketing Campaign"). Costs and expenses
increased to $2,881,718 during the year ended June 30, 1997 from $2,585,939
during the year ended June 30, 1996. The bulk of this approximately 11% increase
was the result of the increased operational activity after the Company's IPO,
including adding staff and additional marketing and consulting expenditures.
Total interest expense for fiscal 1997 was $141,482, as compared to $137,873 for
fiscal 1996. This approximately 3% 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 a result of the IPO, all of the Company's convertible notes
(6% Convertible Notes due 1996, 6% Convertible Notes due 1997 and 7% Convertible
Notes due 1999) were automatically converted into 537,227 shares of Common
Stock. As a result, all costs associated with those notes were appropriately
charged to capital as of June 30, 1997.
For fiscal 1997, the Company experienced a net loss of $2,955,679, an
approximately 12% increase from the $2,642,296
10
<PAGE>
net loss sustained in the year ended June 30, 1996. The increase in net loss was
primarily due to the factors described above with respect to costs and expenses.
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 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 were directed at
schools, such business was seasonal, with most sales taking place between
September and June. Seasonality was 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. 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, in
light of the Company's inability to continue publishing, it is anticipated that
all subscriptions will be deemed canceled unless the Company can resume
publication in the near future.
As of June 30, 1998, the Company had current assets of only $266,841. To date,
the Company has utilized all of the 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 million in
outside debt and/or equity funding in order to be able to complete the
development of SCOOP. To date, the Company has obtained only $125,000 of that
funding. The Company is also in discussions with prospective distributors of
SCOOP, which could result in royalty advances to the Company which could be used
to complete the production of SCOOP. The Company is also experiencing
considerable difficulty in meeting its current financial obligations to certain
creditors, primarily its landlord and the vendor which has printed the
Newspaper. In order to resume publication of the Newspaper and otherwise
continue its normal activities, in addition to the funding for SCOOP, the
Company must immediately raise approximately $500,000 to $1 million in funds
through bank borrowings, public or private debt or equity offerings, or
otherwise. To date, the Company has raised only $250,000 of that financing. 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 issuance of convertible debt or convertible preferred stock. There
can, however, be no guarantee that any of the above financing will be available
on terms favorable to the Company or its shareholders, if at all.
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 would have a material adverse effect on the
Company's business, operating results and financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. 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.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company does not anticipate that the adoption of
this statement will have a material effect on its financial statements.
In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is effective
11
<PAGE>
for fiscal years beginning after December 15, 1998. The Company does not
anticipate that the adoption of this statement will have a material effect on
its financial statements.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements: PAGE
<S> <C>
Independent Auditor's Report 14
Balance Sheet 15
Statements of Operations 16
Statement of Shareholders' Equity 17
Statements of Cash Flows 20
Notes to Financial Statements 22
</TABLE>
13
<PAGE>
[STONEFIELD JOSEPHSON, INC. LETTERHEAD]
Board of Directors
Tomorrow's Morning, Inc.
Beverly Hills, California
We have audited the accompanying balance sheet of Tomorrow's Morning, Inc., (a
development stage enterprise) as of June 30, 1998, and the related statements of
operations, shareholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Tomorrow's Morning, Inc. as of June 30,
1997 including the statement of shareholders' equity from inception were audited
by other auditors whose report dated August 25, 1997, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tomorrow's Morning, Inc. as of
June 30, 1998, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has negative working capital, a shareholders' deficit, has experienced recurring
losses and has had negative cash flows from operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters are described in Note 1 to the
financial statements. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
April 24, 2000
14
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 46,154
Accounts receivable, net of reserves of $125,614 445
Loan receivable, officer-shareholder 72,766
Software development costs 95,866
Prepaid expenses 51,610
--------------
Total current assets $ 266,841
OTHER ASSETS:
Fixed assets, net of accumulated depreciation of $34,670 105,732
Deposits 32,772
---------------
Total other assets 138,504
--------------
$ 405,345
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,455,237
Current maturities of contracts payable 5,731
Loans payable, related parties 434,195
---------------
Total current liabilities $ 1,895,163
CONTRACTS PAYABLE, less current maturities 13,449
SHAREHOLDERS' DEFICIT:
Preferred stock; no par value, 1,000,000 shares
authorized, no shares issued and outstanding -
Common stock; no par value, 10,000,000 shares
authorized, 3,210,372 shares issued and outstanding 12,850,167
Deficit accumulated during development stage (14,353,434)
---------------
Total shareholders' deficit (1,503,267)
--------------
$ 405,345
==============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
15
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From inception on
Year ended Year ended June 30, 1992 to
June 30, 1998 June 30, 1997 June 30, 1998
--------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUE:
SUBSCRIPTIONS $ 218,983 $ 38,166 $ 549,701
EDITORIAL, PRODUCTION AND
DISTRIBUTION COST 925,397 782,937 3,312,446
--------------- ---------------- ----------------
GROSS MARGIN (706,414) (744,771) (2,762,745)
OPERATING EXPENSES 2,949,601 1,907,281 8,384,502
RESEARCH AND DEVELOPMENT 556,876 191,500 840,376
--------------- ---------------- ----------------
LOSS FROM OPERATIONS (4,212,891) (2,843,552) (11,987,623)
NONCASH OPTION COMPENSATION AND
CONSULTING FEES 2,026,204 - 2,026,204
LEGAL SETTLEMENT 30,000 - 30,000
OTHER EXPENSES, NET 20,180 7,417 57,057
INTEREST EXPENSE 11,460 141,482 313,478
INTEREST INCOME 28,157 37,572 65,728
--------------- ---------------- ----------------
LOSS BEFORE INCOME TAXES (6,272,578) (2,954,879) (14,348,634)
INCOME TAXES 800 800 4,800
--------------- ---------------- ----------------
NET LOSS $ (6,273,378) $ (2,955,679) $ (14,353,434)
=============== ================ ================
NET LOSS PER SHARE, BASIC AND DILUTED $ (2.23) $ (1.84)
=============== ================
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 2,812,944 1,608,412
=============== ================
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
16
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock during Total
Common stock subscriptions Treasury development shareholders'
Shares Amount receivable stock stage deficit
---------- ----------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1992 (date of inception) to
June 30, 1993 capital contribution -
compensation $ 100,000 $ $ $ $ 100,000
Issuance of common stock 9,080 25,000 25,000
Issuance of common stock 90,800 50,000 50,000
Issuance of common stock 406,330 78,900 78,900
Issuance of common stock 46,762 50,000 50,000
Issuance of common stock 17,252 75,000 75,000
Common stock subscribed 50,000 50,000
Net loss for the year ended June 30,
1993, as restated (540,430) (540,430)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1993 570,224 378,900 50,000 (540,430) (111,530)
Capital contribution - compensation 100,000 100,000
Stock option compensation 292,000 292,000
Capital contribution 51,100 51,100
Issuance of common stock 17,252 50,000 (50,000)
Issuance of common stock 34,958 50,000 50,000
Issuance of common stock 38,136 110,000 110,000
Issuance of common stock 1,816 7,500 7,500
Issuance of common stock 145,280 275,000 (50,000) 225,000
Common stock repurchased and cancelled (9,080) (25,000) (25,000)
Issuance of common stock based on
anti-dilutive agreements 35,866
Net loss for the year ended June 30,
1994, as restated (911,611) (911,611)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1994 834,452 1,289,500 (50,000) (1,452,041) (212,541)
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
17
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock during Total
Common stock subscriptions Treasury development shareholders'
Shares Amount receivable stock stage deficit
--------- ---------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Capital contribution - compensation 200,000 200,000
Common stock subscribed 250,000 250,000
Issuance of common stock for services 45,400 2,000 2,000
Issuance of common stock 61,290 125,000 125,000
Issuance of common stock 15,890 50,000 50,000
Issuance of common stock 11,804 50,000 50,000
Commitment to purchase common stock (65,000) (65,000)
Net loss for the year ended June 30,
1995, as restated (1,015,040) (1,015,040)
--------- ---------- --------- -------- ---------- ----------
Balance at June 30, 1995 968,836 1,716,500 200,000 (65,000) (2,467,081) (615,581)
Capital contribution - compensation 250,000 250,000
Stock option compensation 751,290 751,290
Issuance of common stock 49,032 200,000 (200,000)
Issuance of common stock 54,026 216,703 216,703
Conversion of 6% convertible notes 45,400 91,500 91,500
Stock issuance costs (37,193) (37,193)
Common stock repurchased and cancelled (90,800) (50,000) 65,000 (15,000)
Debt issuance costs 130,000 130,000
Shareholder loans (27,575) (27,575)
Net loss for the year ended June 30,
1996, as restated (2,642,296) (2,642,296)
--------- ---------- --------- -------- ---------- ----------
Balance at June 30, 1996 1,026,494 3,268,800 (5,151,952) (1,883,152)
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
18
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock during Total
Common stock subscriptions Treasury development shareholders'
Shares Amount receivable stock stage deficit
--------- ------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 loan (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 for the year ended June 30, 1997 (2,955,679) (2,955,679)
---------- ------------ ------------ ------------ ---------- -----------
Balance at June 30, 1997 2,785,998 10,484,681 (8,177,008) 2,307,673
Stock option compensation 1,935,374 1,935,374
Repayments - shareholder loans 7,227 7,227
Reclassification - shareholder loans 89,725 89,725
Stock issued - settlement of litigation 5,000 30,000 30,000
Stock options exercised 229,374 190,289 190,289
Stock warrants sold 1,073 1,073
Shares issued upon conversion of debt 190,000 190,000 190,000
Warrants issued in connection with debt 18,750 18,750
Net loss for the year ended June 30, 1998 (6,273,378) (6,273,378)
---------- ------------ ------------ ------------ ---------- -----------
Balance at June 30, 1998 3,210,372 $ 12,850,167 - - $(14,353,434) $(1,503,267)
========== ============ ============ ============ ========== ===========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
19
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FROM INCEPTION ON
YEAR ENDED YEAR ENDED JUNE 30, 1992 TO
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (6,273,378) $ (2,955,679) $ (14,353,434)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation 20,180 7,417 36,966
Amortization of debt issuance costs - 65,006 138,168
Amortization of loans payable discount 3,646 - 3,646
Non-cash litigation settlement 30,000 - 30,000
Non-cash compensation 2,043,124 900,067 4,638,481
Non-cash payment for services rendered - 132,500 132,500
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 4,935 (3,122) (445)
Prepaid expenses 356,611 (480,721) (124,110)
Software development costs (23,367) - (23,367)
Deposits (1,417) (26,355) (32,773)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses (1,197,852) (388,922) 1,459,238
Deferred revenue (52,603) 28,794 -
---------------- --------------- ---------------
Net cash used for operating activities (2,694,417) (2,721,015) (8,095,130)
---------------- --------------- ---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES -
acquisition of fixed assets (73,142) (44,944) (142,697)
---------------- --------------- ---------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 5,347,724 6,749,734
Proceeds from revolving line of credit - - 50,000
Proceeds from loans and warrants 375,000 424,276 799,276
Proceeds from notes payable - - 1,705,086
Proceeds from contracts payable 71,396 56,005 127,401
Cash paid for debt issuance costs - - (210,757)
Proceeds from exercise of stock options 82,538 - 82,538
Proceeds from exercise of warrants 1,073 - 1,073
Repayment of revolving line of credit - (50,000) (50,000)
Repayment of loans payable - (359,276) (423,400)
Repayment of notes payable - (11,456) (11,456)
Repayment of contracts payable (83,329) (24,891) (108,220)
Loans payable shareholders 24,186 (69,377) (72,766)
Cash paid for offering costs - (228,723) (304,528)
Purchase of treasury stock - - (50,000)
---------------- --------------- ---------------
Net cash provided by financing activities 470,864 5,084,282 8,283,981
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (2,296,695) 2,318,323 46,154
CASH, beginning of year 2,342,849 24,256 -
---------------- --------------- ---------------
CASH, end of year $ 46,154 $ 2,342,849 $ 46,154
================ =============== ===============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
20
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FROM INCEPTION ON
YEAR ENDED YEAR ENDED JUNE 30, 1992 TO
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Decrease in debt issuance costs recorded in connection
with the issuance of convertible notes payable $ - $ (202,589) $ (72,589)
================ =============== ===============
Conversion of notes payable to common stock $ 190,000 $ 1,342,707 $ 1,532,707
================ =============== ===============
Non-cash compensation $ 2,043,124 $ - $ 2,043,124
================ =============== ===============
Issuance of warrants connected to debt conversion $ 18,750 $ - $ 18,750
================ =============== ===============
</TABLE>
s
See accompanying independent auditors' report and notes to financial statements.
21
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1998
(1) SUMMARY SIGNIFICANT ACCOUNTING POLICIES:
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. As of June 30, 1998, 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 efforts toward establishing
new business and product.
In June 1996 the Company filed for an initial public offering
("IPO") of its common stock on Form SB-2 with the Securities
and Exchange Commission. That offering was successfully
completed in March 1997.
GOING CONCERN:
For the years ended June 30, 1998 and June 30, 1997, the
Company had negative cash flows from operations of $2,694,417
and $2,721,015, respectively and incurred a net loss of
$6,273,378 and $2,955,679, respectively. 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, 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.
See accompanying independent auditors' report.
22
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(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
$83,000 and $85,000 for the years ended June 30, 1998 and
1997, 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 June 30, 1998 there were no deferred
advertising costs and at June 30, 1997 the deferred costs were
approximately $106,000, with no related amortization.
Management periodically reviews the recoverability of deferred
advertising costs.
COMPENSATION EXPENSE:
Upon completion of the Company's IPO in March 1997, the
Company commenced regular salary payments to its chief
executive officer ("CEO") and other employees. Compensation
expense deemed earned by the CEO for the period prior to the
completion of the IPO has been reflected as noncash
compensation and contributed capital in the statements of cash
flows and statement of shareholders' equity (deficit),
respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
INCOME TAXES:
The Company accounts for taxes under SFAS No. 109, which
requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have
been included in financial statements or tax returns. 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. Valuation allowances are
established when necessary to reduce deferred tax assets to
amounts expected to be realized.
See accompanying independent auditors' report.
23
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET LOSS PER SHARE:
The Company has adopted Statement of Financial Accounting
Standard No. 128, "Earnings Per Share ("SFAS 128"), which is
effective for annual and interim financial statements issued
for periods ending after December 15, 1997. In accordance with
SFAS No. 128, basic net loss per share is computed by dividing
the net loss available to common shareholders for the period
by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average
number of common and common equivalent shares outstanding
during the period. Common equivalent shares are not included
in the computation of loss per share for the years ended June
30, 1998 and June 30, 1997, because the effect would be
anti-dilutive.
VARIABLE NONDILUTABLE STOCK OPTIONS:
The Company records non-cash compensation expense resulting
from an increase in fair value of the common stock to be
issued upon the exercise of the variable nondilutable stock
options outstanding (Note 5).
DEBT WITH STOCK PURCHASE WARRANTS:
The proceeds received from debt issued with stock purchase
warrants is allocated between the debt and the warrants, based
upon the relative fair values of the two securities. Fair
value of the debt element of the financial instrument is
determined by discounting the future payments of principal and
interest, based upon management's estimate of its borrowing
rate for similar financial instruments of this risk (generally
20%), and the balance of the proceeds is accounted for as
additional paid in capital. The resulting debt discount is
amortized to expense over the term of the debt instrument,
using the interest method.
CASH AND CASH EQUIVALENTS:
The Company considers cash equivalents to include highly
liquid investments purchased with a maturity of less than
three months. Cash and cash equivalents are held in a major
financial institution and at times, such balances can be in
excess of the Federal Deposit Insurance Corporation's
insurance limits.
FINANCIAL INSTRUMENTS:
The estimated fair values of cash, accounts receivable,
accounts payable, and accrued expenses approximate their
carrying value because of the short term maturity of these
instruments or the stated interest rates are indicative of
market interest rates.
OFFICE FURNITURE AND EQUIPMENT:
Office furniture and equipment is stated at cost and
depreciation is computed on a straight-line basis over a
period of five years.
See accompanying independent auditors' report.
24
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions for the reporting period and
as of the financial statement date. These estimates and
assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities and the
reported amounts of revenues and expenses. Actual results
could differ from the estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
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.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-1, "Accounting
for Costs of Computer Software Developed or Obtained for
Internal Use" which provides guidance on accounting for the
costs of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company
does not anticipate that the adoption of this statement will
have a material effect on its financial statements.
In April 1998, the American Institute of Certified Public
Accountants issued SOP No. 98-5 "Reporting on the Costs of
Start-Up Activities." This standard requires companies to
expense the costs of start-up activities and organization
costs as incurred. In general, SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. The Company
does not anticipate that the adoption of this statement will
have a material effect on its financial statements.
See accompanying independent auditors' report.
25
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(2) LOANS PAYABLE:
<TABLE>
A summary is as follows:
<S> <C>
Unsecured demand loans with no stated interest, due to
related parties $ 74,299
Note payable, net of discount - shareholder due September 9,
1998 with stated interest at 10% per annum, 15% per annum
if the note is in default, effective interest at 20% 122,396
Note payable, net of discount - shareholder due December 24,
1998, with stated interest at 10% per annum, 15% per annum
if the note is in default, effective interest at 20% 237,500
---------------
$ 434,195
===============
</TABLE>
(3) CONTRACTS PAYABLE:
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 June 30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending June 30,
1999 $ 5,731
2000 5,731
2001 4,123
2002 3,296
2003 299
---------------
$ 19,180
===============
</TABLE>
See accompanying independent auditors' report.
26
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(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 year ended
June 30, 1998 and June 30, 1997 was $90,168 and $44,750, respectively,
and $255,918 for the period from inception through June 30, 1998.
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 June 30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending June 30,
1999 $ 102,640
2000 96,645
2001 98,534
---------------
$ 297,819
===============
</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 software development costs.
LEGAL PROCEEDINGS
On July 13 1998, the Company was subject to a levy of $26,287 by the
California Employment Development Department for back taxes. Such levy
satisfied that agency's claim in full.
On August 17, 1998, the Company received a notice of levy from the
Internal Revenue Service as to $30,761 for back taxes. Upon receipt of
the notice, the Company contacted that agency and negotiated a payment
plan. As of June 30, 1999, the Company had made payments totaling
$15,000 toward the amount owed. The amount was subsequently paid in
full.
See accompanying independent auditors' report.
27
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(4) COMMITMENTS AND CONTINGENCIES, CONTINUED:
LEGAL PROCEEDINGS, CONTINUED
On May 27, 1998, the Company's landlord filed an unlawful detainer
action in Los Angeles County Municipal Court seeking possession of the
Company's executive offices and $20,208 in past due rent. On September
15, 1998, the Company's landlord filed an unlawful detainer action in
Los Angeles County Municipal Court seeking possession of the Company's
executive offices and past due rent. Such action was resolved on
October 6, 1998 by a stipulated judgment in which the Company agreed to
pay the landlord $40,429 in cash in two installments and deliver 40,000
shares of Company Common Stock. The amount owed to the landlord was
paid in full in December 1998. As part of the stipulated judgment, the
judgment obtained by the landlord in the action in May 1998 was
satisfied in full.
On December 17, 1998, Starbright Graphics, Inc. filed an action against
the Company in the Superior Court of New Jersey Law Division, Middlesex
County, seeking $699,231 for services rendered in connection with the
printing and distribution of the newspaper. This action was dismissed
in New Jersey by stipulation without prejudice on March 23, 1999, and
filed in Los Angeles County Superior Court for breach of contract on
July 13, 1999.
On March 10, 1999, Peter Li, Inc. filed an action against the Company
in Los Angeles County Superior Court seeking $33,711 in damages for
breach of contract in connection with services provided to the Company.
On May 14, 1999, the Company's landlord filed an action in Los Angeles
County Superior Court, West District, against the Company and Adam
Linter, the Chief Executive Officer, seeking $238,519 in connection
with the Company's breach of its lease payment obligations. In December
1999, this action was settled by a stipulated judgment providing for
payments of $125,000 in cash and 20,000 shares of the Company's common
stock. $30,000 of this amount has subsequently been paid.
(5) COMMON STOCK, STOCK OPTIONS AND WARRANTS:
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.
On May 15, 1996, the Company adopted a Non-Qualified Stock Option Plan
("the Plan"). The aggregate number of shares of common stock to be
delivered upon the exercise of all options granted under the Plan
cannot exceed 100,000 shares. At June 30, 1997, no options had been
granted under the Plan. At June 30, 1998 31,000 options had been
granted under the Plan.
The Company has granted non-qualified stock options outside the
NonQualified Stock Option Plan adopted on May 15, 1996 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 two to five years
from grant date.
See accompanying independent auditors' report.
28
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(5) COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:
The following table summarizes information about options outstanding at
June 30, 1998 and June 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF DATE
TOTAL EXERCISE OPTIONS OPTIONS
OPTIONS PRICE EXERCISABLE EXPIRE
-------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Options outstanding at June 30, 1996 776,978 0.53
1997:
Granted - variable nondilutive 142,400 2.63
Granted - other 86,714 5.13
--------------
Balance at June 30, 1997 1,006,092 0.88 1,006,092
--------------
1998:
Granted 210,480 0.2125 183,186 6/17/00
Exercised (229,374)
--------------
Balance at June 30, 1998 987,198 0.76
==============
</TABLE>
The weighted average exercise price of variable nondilutive options
outstanding and exercisable was $0.96 at June 30, 1997. The weighted
average exercise price of the variable nondilutive options decreases as
more options are granted. As discussed below, the nondiultive options
were frozen during November, 1997, at an average exercise price of
$0.57.
The Company has elected, as permitted by SFAS No. 123, "Accounting for
Stock Based Compensation"' to account for its stock compensation
arrangements under the provisions of APB No. 25, "Accounting for Stock
Issued to Employees". Accordingly, any excess of the market price of
the underlying stock on the date of grant over the exercise price of
the Company's employee stock options, has been recognized as
compensation expense. This resulted in a $16,740 charge to salary
expense for the year ended June 30,1998. There were no options granted
to employees for the year ended June 30, 1997.
Pro forma information regarding the effect on operations is required by
SFAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
statement. Pro forma information using the Black-Scholes method at the
date of grant based on the following assumptions:
<TABLE>
<S> <C>
Expected life (years) 1 year
Risk-free interest rate 6.50%
Dividend yield -
Volatility 3.273
</TABLE>
See accompanying independent auditors' report.
29
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(5) COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:
This option valuation model requires input of highly subjective
assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of fair
value of its employee stock options.
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's proforma information for the year ended June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Net loss, as reported $ (6,227,459)
Proforma net loss $ (6,232,729)
Basic and diluted historical loss per share $ (2.21)
Proforma basic and diluted loss per share $ (2.22)
</TABLE>
At June 30, 1997, 278,600 of the options outstanding represented
options to purchase an aggregate of 10% of the common stock which is
outstanding at the time the options are exercised (i.e. "nondilutable"
options) which were exercisable for an aggregate price of $267,618 and
expire in March 2000. As a result, the number of shares represented by
such options will change as the number of outstanding shares of common
stock change. The CEO of the Company and other related parties have
been granted 167,160 and 111,440 of these nondilutable options,
respectively. As a result of stock issued during the year ended June
30, 1997, an additional 142,400 options were granted to maintain the
nondilutive nature of these options, based upon the number of shares
outstanding at June 30, 1997. In connection with these additional
nondilutive stock options, the Company recognized $463,700 of
compensation expense for the year ended June 30, 1997.
The Company's Variable Non-dilutive Stock Option Agreements were
amended in November 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 year ended June 30, 1998.
In addition to the above transactions, options granted by the Company
were exercised by various unrelated parties during the year ended June
30, 1998. There was a charge to earnings totaling $107,570 in that
period, with respect to these options.
In April 1997, the Company granted stock options to purchase 86,714
shares of common stock at an exercise price of $2.02 per share. In
connection with these options, the Company recognized compensation
expense of $269,700 relating to consulting services and investor
relations. 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 IPO.
During the year ended June 30, 1997 the Company granted warrants to
purchase 50,000 shares of Common Stock at an exercise price of $4.00.
Those warrants were granted as compensation to an individual acting as
a public relations consultant. The warrants are subject to a vesting
schedule over the twelve-month contract entered into with the
individual.
See accompanying independent auditors' report.
30
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1998
(5) COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:
During the year ended June 30, 1997, the Company canceled warrants to
purchase 45,400 shares of Common Stock.
In June 1998 the Company converted $190,000 of debt owing to
unrelated parties into 190,000 shares of common stock.
In connection with financing raised during the year ended June 30,
1998, the Company sold 125,000 warrants exercisable at $2.20 per share
through March 2003 and 250,000 warrants exercisable at $2.00 per share
through June 2003.
(6) INCOME TAXES:
The Company had deferred tax assets of approximately $4,137,000 and
$2,665,000 as of June 30, 1998 and June 30, 1997, respectively, which
have been offset by 100% valuation allowances of $4,137,000 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 $9,640,000, 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.
(7) RELATED PARTY TRANSACTIONS:
The printer used by the Company also has an equity interest in the
Company. Printing expense was approximately $643,000 and $504,000 for
the years ended June 30, 1998 and 1997, respectively, and $2,235,000
from the period from inception through June 30, 1997. At June 30, 1998
and 1997, amounts payable to the printer were approximately $700,000
and $92,500, respectively.
Alan G. Dunn, a director, has previously loaned money to the Company,
with the maximum amount at any one time being approximately $102,800.
As a result of repayments, the Company's indebtedness to Mr. Dunn at
June 30, 1998 amounted to approximately $67,800.
See accompanying independent auditors' report.
31
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None, except as previously reported.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND OFFICERS. The officers and directors of the Company and their ages
as of September 15, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE CORPORATE POSITIONS HELD (1)
- ---- --- ----------------------------
<S> <C> <C>
Adam Linter 52 Chairman of the Board, President,
Treasurer and Secretary
James R. Rosbe 49 Director
Rick Nicita (2) 52 Director
Alan G. Dunn (2) 42 Director
</TABLE>
(1) Directors are elected for a term that expires at the Company's next annual
shareholders' meeting.
(2) These persons are the Company's independent directors. An "independent
director" is a director who is not an officer or employee of the Company
and who does not have any relationship with the Company which, in the
opinion of the Board of Directors, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.
ADAM LINTER, the founder of the Company, has served as Chairman of the Board,
President and Secretary since the Company's inception, and, as Editor-in-Chief
and Publisher, has overall responsibility for all aspects of the Company's
operations. Responsible for a majority of the writing, he has presided over the
growth and finance of the Newspaper and oversees its production every week.
Prior to founding the Company in June 1992, Mr. Linter was active in a variety
of endeavors, including biotechnology, real estate, screenwriting, and
management/consulting. From 1970 to 1976, he formed and operated his own
business management company in New York, and from 1976 to 1985, worked in real
estate and consulting in Los Angeles. From 1985 to 1991, Mr. Linter collaborated
on several venture capital projects in biotechnology involving scientists at
Harvard, Yale, Rutgers, Mt. Sinai and the University of Minnesota. He has a B.A.
in history from George Washington University.
JAMES R. ROSBE, a director since February 1996, and an Associate Publisher of
the Company from April 1997 to January 1998, has been active with the Company
since its inception, collaborating on business planning and strategy, as well as
advising on finance, marketing, circulation and synergistic product development,
and monitoring commercial opportunities on the Internet and in electronic
publishing. Mr. Rosbe previously served as Vice President-Operations for Online
Technologies Corporation in Ann Arbor, Michigan, an Internet service provider
for which he worked from October 1994 to April 1997. From August 1991 until
September 1993, Mr. Rosbe was the co-founder of Mobile Metal Services in Troy,
Michigan, a company providing metal stabilization services. From 1985 to 1989,
with Mr. Linter (his brother-in-law), he formed a seed venture capital effort to
develop commercial opportunities in biotechnology, and engaged in real estate
finance and analysis. Mr. Rosbe has an M.B.A. in Finance/Strategy from UCLA, and
a B.A. in Political Science from the University of Michigan.
RICK NICITA, a director since March 1997, is the Co-Chairman of Creative Artists
Agency ("CAA") in Beverly Hills, California, one of the leading talent agencies
in the country. Prior to his October 1, 1995, appointment as Co-Chairman, Mr.
Nicita was co-head of the Motion Picture department and head of the Talent
department at CAA. Since joining CAA in 1980, Mr. Nicita has represented many of
the motion picture industry's most renowned actors, actresses and directors. Mr.
Nicita holds a Bachelor of Arts degree from Wesleyan University.
ALAN G. DUNN, a director since March 1997, has been a strategic advisor to the
Company since 1993. Currently, he is President of Gerald E. Dunn, Inc. ("GDI"),
a Huntington Beach, California, company which provides specialized manufacturing
and systems consulting to industrial clients nationwide. Mr. Dunn has worked for
GDI since 1980. Simultaneously, from August 1993 to May 1995, Mr. Dunn was
vice-president of Gemini Management Consulting, a
32
<PAGE>
global consulting firm based in New Jersey. From July 1991 to August 1993, Mr.
Dunn was a partner at Coopers & Lybrand, the international accounting and
management consulting firm, where he was responsible for the firm's
manufacturing consulting practice in the western states. Prior to Coopers &
Lybrand, Mr. Dunn was founder and President of ADI, a manufacturing consulting
and training company, acquired by Coopers & Lybrand in 1991. Mr. Dunn's
consulting clients include a wide variety of publicly-held companies. Mr. Dunn
has conducted training programs across North America, Europe, the Far East and
southeast Asia in the areas of manufacturing systems, information management,
cost management and business finance. He also conducts 24 seminars per year for
senior manufacturing executives at California Institute of Technology (Caltech)
in Pasadena. Mr. Dunn holds a degree in business management from California
State University in Fullerton.
There are no family relationships between the Company's officers and directors
other than between Adam Linter and James R. Rosbe, who are brothers-in-law.
SIGNIFICANT PERSONNEL. The following person has made, and is expected to
continue to make, a significant contribution to the Company:
KRISTAN ALTIMUS, the Company's Art Director and Publication Manager and an
Associate Publisher, has been with the Company since its earliest stages,
serving in both administrative and production capacities, and as a director from
December 1994 until March 1997. Her principal responsibility is the art and
layout of the Newspaper each week. She also creates special editions of the
Newspaper and promotional materials, and oversees administrative and office
functions. From 1985 until joining the Company, Ms. Altimus designed and
marketed T-shirts under the "Altimus Designs" name. Ms. Altimus also has worked
as a freelance photographer and at the office of Creative Artists Agency. She
has a Bachelor of Fine Arts degree from the University of Colorado, Boulder.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION. Adam Linter has served as the Company's President (Chief
Executive Officer) since its inception. Except as shown below, no executive
officer of the Company received compensation in excess of $100,000 during fiscal
1998.
SUMMARY COMPENSATION TABLE:
<TABLE>
<CAPTION>
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ------------------ ---- ------ ----- --------------- ----------
<S> <C> <C> <C> <C> <C>
Adam Linter, President(2) 1998 $250,000(3) $ -0- $8,750(4) -0-
1997 $83,333 $ -0- - 85,440
1996 $ -0- $ -0- - 154,360
Steven Raft, Chief 1998 $82,750(3) $ -0- $5,500(6) 10,000
Financial Officer(5) 1997 $20,000 $ -0- $ -0- -0-
</TABLE>
- --------------------
(1) The compensation described in this table does not include medical insurance
and other benefits received by Mr. Linter or Mr. Raft which are available
generally to all employees of the Company and certain perquisites and other
personal benefits received by Mr. Linter or Mr. Raft the value of which did
not exceed 10% of their cash compensation in the table.
(2) Mr. Linter began receiving a salary on March 27, 1997. His annual salary is
$250,000. See "Employment Agreements" below.
(3) Of this amount, the following amounts were accrued but unpaid: Mr. Linter -
$104,167; Mr. Raft - $30,000.
(4) Consists of a $730 per month car allowance.
(5) Mr. Raft became an employee of the Company on April 17, 1997 and resigned
on May 31, 1998. His annual salary was $96,000.
33
<PAGE>
(6) Consists of a $500 per month car allowance.
The following table provides information concerning stock options granted to Mr.
Linter and Mr. Raft during the year ended June 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS FISCAL YEAR PRICE ($/SH) DATE
- ---- ---------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Adam Linter -0- N/A N/A N/A
Steven Raft 10,000 48% $0.2125 6/17/00
</TABLE>
As to Mr. Linter and Mr. Raft, the following table sets forth the number and
value of vested and unvested options held as of June 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY
SHARES --------------------------- ----------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Adam Linter 154,360 $100,334 281,113 -0- $175,696 -0-
Steven Raft -0- -0- 10,000 -0- $6,250 -0-
</TABLE>
STOCK OPTION PLAN. The Company's Non-Qualified Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors and approved by the Company's
shareholders on May 15, 1996. Under the Option Plan (which is administered by
the Company's Compensation Committee), all officers and directors of the
Company, as well as employees and consultants of the Company and any
subsidiaries, are eligible to be selected to participate. The purpose of the
Option Plan is to promote the interests of the Company by providing participants
with an inducement to maintain their status with the Company or a subsidiary and
to further advance the interests of the Company. Options are granted in
consideration of things such as past and potential future contributions to the
Company.
As of June 30, 1998, options as to 31,000 shares have been issued under the
Option Plan. The aggregate number of shares of Common Stock to be delivered upon
the exercise of all options granted under the Option Plan cannot exceed 100,000
shares. In the event of any merger, reorganization, recapitalization, stock
dividend, stock split or reverse split or other act or event which effects a
restructure of the Company's Common Stock (but not including the issuance of
additional shares of Common Stock or preferred stock), the total number of
shares covered by the Option Plan, the exercise price, and number of shares
covered by outstanding options granted pursuant to the Option Plan, and the
rights, preferences and privileges incident to such shares will be appropriately
adjusted as to any remaining options. Any shares covered by options granted
pursuant to the Option Plan which expire or are canceled are available for
reissuance under the Option Plan.
There is no maximum or minimum number of shares which may be subject to options
granted to any one individual under the Option Plan. The exercise price of the
stock covered by each option will be determined by the Compensation Committee;
provided, however, that (i) as to options granted to any person who owns stock
possessing more than 10% of the total combined voting power or value of all
classes of stock of the Company, such exercise price will not be less than an
amount equal to 110% of the "fair value" of the stock (as determined pursuant to
the Option Plan) on the date the option is granted and (ii) as to all other
persons, such exercise price will not be less than an amount equal to 85% of the
fair value of the stock on the date the option is granted. Upon the exercise of
an option granted under the Option Plan, the exercise price is payable in full
at the time of exercise, either in cash or by check or, in the discretion of the
Compensation Committee, in whole or in part in stock of the Company valued at
fair market value at the time of each such exercise.
As a general rule, if the option holder ceases, for any reason, to be an
employee of the Company or any of its
34
<PAGE>
subsidiaries, or a director of the Company, as the case may be, the option
holder will have a right thereafter to exercise the option during a specified
period set forth in the option agreement between the Company and the option
holder, which in the event of termination due to death or permanent disability,
will be no less than six months and which, in all other cases, will be no less
than 30 days in the case of an employee or one year in the case of a director.
Options granted under the Option Plan are not assignable or transferable except
by will or the laws of descent and distribution, and are exercisable during the
option holder's lifetime only by the option holder. No options will be
exercisable more than five years after the date of grant.
Upon the occurrence of certain specified events, including (i) a change in
control of the Company in connection with a cash tender offer, exchange offer,
merger or other business combination, sale of assets or contested election or
(ii) a merger, consolidation or other transaction in which the Company ceases to
be an independent corporation, all options granted under the Option Plan will
become exercisable in full for a period of 30 days following a specified date
and, thereafter, all unexercised options will expire.
Subject to the express provisions of the Option Plan, the terms of each option
granted under the Option Plan, including the exercise price, manner of exercise,
vesting and duration of each option, shall be as specified in the applicable
option agreement between the Company and the option holder; provided, however,
in no event will an option vest over a period of more than five years or at a
rate of less than 20% per year.
Subject to the express provisions of the Option Plan, in most instances the
Compensation Committee will determine the individuals to whom and the times at
which options are granted and the exercise price and terms of, and number of
shares subject to, each option. However, grants of options to members of the
Compensation Committee while members of such committee, or to members of the
Company's Board of Directors, must be approved by the Board of Directors without
counting the vote of the person being granted the options. The Compensation
Committee also has the authority to construe and interpret the Option Plan.
The Board of Directors of the Company may amend, suspend or terminate the Option
Plan at any time. Unless terminated sooner, the Option Plan will terminate on
May 15, 2006 and no options may be granted thereafter. No amendment, suspension
or termination of the Option Plan will, without the consent of the option
holder, be made which would alter or impair any rights or obligations under any
option then outstanding. Upon the dissolution or liquidation of the Company, the
Option Plan will terminate, and any option previously granted thereunder and not
yet exercisable in full will also terminate. In the event, however, that the
Company is succeeded by another corporation, the Option Plan and any remaining
options granted thereunder will be assumed by such successor corporation,
subject to such adjustments as may be necessary due to the capital structure of
the successor corporation.
EMPLOYMENT AGREEMENTS. Mr. Linter and the Company have entered into a five-year
employment agreement (terminating February 28, 2002) which provides for a salary
to Mr. Linter of $250,000 per year. Such agreement also provides for automobile
expense reimbursement, plus such annual salary increases, bonuses and other
perquisites as the Company's Board of Directors may determine. The agreement is
terminable by the Company for "good cause" (as defined in the agreement), upon
Mr. Linter's death or beginning 15 months after his permanent "disability" (also
as defined in the agreement). Under the terms of the agreement, the Company is
prohibited from merging, consolidating or otherwise reorganizing with any other
corporation or business unless the succeeding or continuing entity agrees to
assume the Company's obligations under the agreement.
DIRECTOR COMPENSATION. At this time, the Company does not contemplate paying
fees to its directors for their services solely as directors, although they will
be eligible for options under the Company's Option Plan. See "Stock Option Plan"
above. It will be the policy of the Company to reimburse directors for
reasonable travel and lodging expenses incurred in attending meetings of the
Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's Common
Stock as of September 15, 1998 as to (i) each person or entity who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock (the Company's only class of voting stock), (ii) Adam Linter and Steven
Raft, the only executive officers named above in "Item 10. Executive
Compensation," (iii) the Company's directors and (iv) all directors and
executive officers as a group.
35
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENTAGE(2)
- ---- --------------------- -------------
<S> <C> <C>
Michael Fuchs(3) 375,000(4) 10.5%
Adam Linter(5) 845,803(6) 24.2%
Steven Raft 11,000 0.3%
James R. Rosbe(7) 45,520(8) 1.4%
Rick Nicita(9) 95,138 3.0%
Alan G. Dunn(10) 34,958(11) 1.1%
All directors and executive
officers as a group (four persons)(12) 1,018,419 29.1%
</TABLE>
- --------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or Warrants held by that person
that are exercisable on or before December 15, 1998 are deemed outstanding.
Such shares, however, are not deemed outstanding for purposes of computing
the percentage ownership of any other person. To the Company's knowledge,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes to this table.
(2) Based on 3,212,690 shares of Common Stock outstanding, excluding (except as
reflected in footnotes (4), (6)) and (8)), 657,313 shares of Common Stock
issuable upon the conversion of a promissory note and exercise of
outstanding options and Warrants, 375,000 of which are held by Michael
Fuchs, 281,113 of which are held by Adam Linter, and 1,200 of which are
held by James R. Rosbe.
(3) Address is 9 West 57th Street, Suite 4220, New York, New York 10019.
(4) Includes 250,000 shares obtainable upon the exercise of warrants and
125,000 shares obtainable upon the conversion of a promissory note.
(5) Address is 125 South Barrington Place, Los Angeles, California 90049.
(6) Includes 281,113 shares of Common Stock presently obtainable through the
exercise of options. See "Item 10. Executive Compensation."
(7) Address is 3364 Tacoma Circle, Ann Arbor, Michigan 48108.
(8) Includes 1,200 shares of Common Stock obtainable through the exercise of
Warrants.
(9) Address is 9830 Wilshire Boulevard, Beverly Hills, California 90212.
(10) Address is 4041 Morningstar, Huntington Beach, California 92649.
(11) All shares are held in the Dunn Family Trust. Mr. Dunn and Jan Dunn are
trustees with shared voting power with respect to such shares.
(12) Consists of Adam Linter, James R. Rosbe, Rick Nicita and Alan G. Dunn. See
footnotes (6), (8) and (11).
Except as listed above, there is no shareholder who is known to the Company to
beneficially own more than 5% of the Company's Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Adam Linter has entered into an employment agreement with the Company, as
described in "Item 10. Executive Compensation - Employment Agreements."
As of June 30, 1998, Mr. Linter owed the Company a total of $72,766 in principal
and interest, with the principal portion
36
<PAGE>
bearing interest at 8% per year. Such amounts are unsecured and are to be paid
in full by March 2000.
James R. Rosbe, a director, was also employed by the Company as an Associate
Publisher. For his services as such, Mr. Rosbe received an annual salary of
$80,000 through January 1998.
Rick Nicita, a director, is the Co-Chairman of Creative Artists Agency, a talent
agency the Company was a client of during the fiscal year ended June 30, 1998
and continues to be a client of in the current fiscal year.
Alan G. Dunn, a director, has previously loaned money to the Company, with the
maximum amount at any one time being approximately $102,800. As a result of
repayments, the Company's indebtedness to Mr. Dunn is now approximately $67,800.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended *
3.2 Amendment to Articles of Incorporation *
3.3 Amended and Restated Bylaws of the Registrant *
4.1 Form of Warrant Agreement and Certificate *
4.2 Form of Managing Placement Agent's Warrant *
4.3 Form of Warrant issued to Michael Fuchs
10.1 Employment Agreement between the Registrant and Adam Linter *
10.2 Non-Qualified Stock Option Plan *
10.3 Form of Stock Option Agreement *
10.4 Software Development Agreement between the Registrant and Robit Hairman *
10.5 Amendment to Stock Option Agreement appearing below as Exhibit 10.11 *
10.6 Stock Option Agreement dated as of April 14, 1995 between the Registrant and Kristan Altimus *
10.7 Stock Option Agreement dated as of April 14, 1995 between the Registrant and Adam Linter *
10.8 Stock Option Agreement dated as of April 14, 1995 between the Registrant and S-M Investments *
10.9 Stock Option Agreement dated as of April 18, 1994 between the Registrant and S-M Investments *
10.10 Stock Option Agreement dated as of April 18, 1994 between the Registrant and S-M Investments *
10.11 Stock Option Agreement dated as of June 30, 1993 between the Registrant and Jim Rosbe *
10.12 Stock Option Agreement dated as of October 5, 1994 between the Registrant and Michael Weinstock
(as amended January 31, 1996) *
10.13 Stock Option Agreement dated as of May 15, 1996 between the Registrant and S-M Investments *
10.14 Stock Option Agreement dated as of May 15, 1996 between the Registrant and Adam Linter *
10.15 Form of Indemnification Agreement for directors and officers *
10.16 Warrant Agreement and Certificate issued to J.E. Liss & Company, Inc.on November 12, 1996 *
10.17 Stock Option Agreement dated as of December 1, 1995 between the Registrant and Philip Brodie,
as amended *
10.18 Stock Purchase Agreement between the Registrant and Starbright Graphics, Inc. dated as of
January 1, 1993 *
10.19 Amendment to Stock Option Agreement dated as of April 18, 1997 between the Registrant and Adam
Linter
10.20 Second Amendment to Stock Option Agreement dated as of November 3, 1997 between the Registrant
and Adam Linter**
10.21 Convertible Promissory Note dated June 25, 1998 by the Registrant in favor of Michael Fuchs
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
- -----------------
* Incorporated by reference to Registration Statement on Form SB-2 (No.
333-4792-LA). Exhibit numbers from that Registration Statement are
retained, where applicable.
** Incorporated by reference to Form 10-QSB for the quarter ended December 31,
1997 (File No. 0-29050).
37
<PAGE>
(b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on the 2nd day of
May, 2000.
TOMORROW'S MORNING, INC.
By: /s/ Adam Linter
--------------------------------------
Adam Linter, President and Treasurer
(Principal Executive Officer and Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
/s/ ADAM LINTER Chairman of the Board,
- ------------------------- President, Treasurer and
Adam Linter Secretary May 2, 2000
* JAMES R. ROSBE Director May 2, 2000
- -------------------------
James R. Rosbe
* RICK NICITA Director May 2, 2000
- -------------------------
Rick Nicita
* ALAN G. DUNN Director May 2, 2000
- -------------------------
Alan G. Dunn
* By: /s/ ADAM LINTER
--------------------
Adam Linter
(Attorney-In-Fact)
38
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended *
3.2 Amendment to Articles of Incorporation *
3.3 Amended and Restated Bylaws of the Registrant *
4.1 Form of Warrant Agreement and Certificate *
4.2 Form of Managing Placement Agent's Warrant *
4.3 Form of Warrant issued to Michael Fuchs
10.1 Employment Agreement between the Registrant and Adam Linter *
10.2 Non-Qualified Stock Option Plan *
10.3 Form of Stock Option Agreement *
10.4 Software Development Agreement between the Registrant and Robit Hairman *
10.5 Amendment to Stock Option Agreement appearing below as Exhibit 10.11 *
10.6 Stock Option Agreement dated as of April 14, 1995 between the Registrant
and Kristan Altimus *
10.7 Stock Option Agreement dated as of April 14, 1995 between the Registrant
and Adam Linter *
10.8 Stock Option Agreement dated as of April 14, 1995 between the Registrant
and S-M Investments *
10.9 Stock Option Agreement dated as of April 18, 1994 between the Registrant
and S-M Investments *
10.10 Stock Option Agreement dated as of April 18, 1994 between the Registrant
and S-M Investments *
10.11 Stock Option Agreement dated as of June 30, 1993 between the Registrant
and Jim Rosbe *
10.12 Stock Option Agreement dated as of October 5, 1994 between the Registrant
and Michael Weinstock (as amended January 31, 1996) *
10.13 Stock Option Agreement dated as of May 15, 1996 between the Registrant
and S-M Investments *
10.14 Stock Option Agreement dated as of May 15, 1996 between the Registrant
and Adam Linter *
10.15 Form of Indemnification Agreement for directors and officers *
10.16 Warrant Agreement and Certificate issued to J.E. Liss & Company, Inc. on
November 12, 1996 *
10.17 Stock Option Agreement dated as of December 1, 1995 between the Registrant
and Philip Brodie, as amended *
10.18 Stock Purchase Agreement between the Registrant and Starbright Graphics, Inc.
dated as of January 1, 1993 *
10.19 Amendment to Stock Option Agreement dated as of April 18, 1997 between
the Registrant and Adam Linter
10.20 Second Amendment to Stock Option Agreement dated as of November 3, 1997
between the Registrant and Adam Linter **
10.21 Convertible Promissory Note dated June 25, 1998 by the Registrant in favor of
Michael Fuchs
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to Registration Statement on Form SB-2 (No.
333-4792-LA). Exhibit numbers from that Registration Statement are
retained, where applicable.
** Incorporated by reference to Form 10-QSB for the quarter ended December 31,
1997 (File No. 0-29050).
39
<PAGE>
EXHIBIT 4.3
WARRANT FOR THE PURCHASE OF
SHARES OF COMMON STOCK
FOR VALUE RECEIVED, Tomorrow's Morning, Inc. (the "Company") hereby
certifies that Michael Fuchs, or a permitted successor or assign thereof, is
entitled to purchase from the Company, at any time or from time to time
commencing June 25, 1998 (the "Commencement Date") and prior to 5:00 P.M.,
P.S.T., on June 24, 2003 (the "Expiration Date"), Two Hundred Fifty Thousand
(250,000) fully paid and nonassessable shares of common stock of the Company,
for Two Dollars ($2.00) per share, subject to adjustment pursuant to Section 3.
(Hereinafter, (i) said common stock, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor, is referred to as the "Common Stock," (ii) the shares of the Common
Stock purchasable hereunder or under any other Warrant (as hereinafter defined)
are referred to as the "Warrant Shares," (iii) the aggregate purchase price
payable hereunder for the Warrant Shares is referred to as the "Aggregate
Warrant Price," (iv) the price payable hereunder for each of the Warrant Shares
is referred to as the "Per Share Warrant Price," (v) this Warrant, all identical
warrants issued on the date hereof and all warrants hereafter issued in exchange
or substitution for this Warrant or such other warrants are referred to as the
"Warrants" and (vi) the holder of this Warrant is referred to as the "Holder"
and the holder of this Warrant and all other Warrants are referred to as the
"Holders").
1. EXERCISE OF WARRANT.
(a) EXERCISE FOR CASH. This Warrant may be exercised, in whole at any
time or in part from time to time, from the Commencement Date until 5:00 P.M.,
P.S.T., on the Expiration Date (the "Warrant Period"), by the Holder by the
surrender of this Warrant (with the subscription form at the end hereof duly
executed) at the address set forth in Subsection 9(a) hereof, together with
proper payment of the Aggregate Warrant Price, or the proportionate part thereof
if this Warrant is exercised in part. Payment for the applicable number of
Warrant Shares shall be made by certified or official bank check payable to the
order of the Company. If this Warrant is exercised in part, this Warrant must be
exercised for a number of whole shares of the Common Stock, and the Holder is
entitled to receive a new Warrant covering the Warrant Shares which have not
been exercised and setting forth the proportionate part of the Aggregate Warrant
Price applicable to such Warrant Shares. Upon such surrender of this Warrant,
the Company will (a) issue a certificate or certificates in the name of the
Holder for the largest number of whole shares of the Common Stock to which the
Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of
any fractional share of the Common Stock to which the Holder shall be entitled,
pay to the Holder cash in an amount equal to the fair value of such fractional
share (determined in such reasonable manner as the Board of Directors of the
Company shall determine) and (b) deliver the other securities and properties
receivable by the Holder upon the exercise of this Warrant, or the proportionate
part thereof if this Warrant is exercised in part, pursuant to the provisions of
this Warrant.
(b) CASHLESS EXERCISE. In lieu of exercising this Warrant in the
manner set forth in
<PAGE>
paragraph (a) above, the Warrant may be exercised, in whole or in part, by
surrender of the Warrant without payment of any other consideration, commission
or remuneration, by execution of the cashless exercise subscription form
attached hereto. The number of shares to be issued in exchange for the Warrant
will then be computed by subtracting the Per Share Warrant Price from the
closing bid price of the Common Stock on the date of receipt of the cashless
exercise subscription form, multiplying that amount by the number of shares for
which the Warrant is being exercised, and dividing by the closing bid price as
of the same date. In the event there is no available "closing bid price," the
Company and the Holder shall use their best efforts to determine an alternative
method of calculation in order that a cashless exercise is still achievable.
2. RESERVATION OF WARRANT SHARES; LISTING. The Company agrees that, prior
to the expiration of this Warrant, the Company will at all times have authorized
and in reserve, and will keep available, solely for issuance or delivery upon
the exercise of this Warrant, the shares of Common Stock and other securities
and properties as from time to time shall be receivable upon the exercise of
this Warrant, free and clear of all restrictions on sale or transfer (except for
applicable state or federal securities law restrictions) and free and clear of
all pre-emptive rights.
3. PROTECTION AGAINST DILUTION
(a) DISTRIBUTION OF DEBT, ASSETS OR SECURITIES. If, at any time or
from time to time after the date of this Warrant, the Company shall issue or
distribute (for no consideration) to the holders of shares of Common Stock
evidences of its indebtedness, any other securities of the Company or any cash,
property or other assets (excluding a subdivision, combination or
reclassification, or dividend or distribution payable in shares of Common Stock,
referred to in Section 3(b)),(any such nonexcluded event being herein called a
"Special Dividend"), then in each case the Holder, upon the exercise of this
Warrant, shall be entitled to receive in addition to the shares then issuable
under this Warrant, (i) the assets or securities to which such Holder would have
been entitled as a holder of Common Stock if such Holder had exercised this
Warrant immediately prior to the record date for such Special Dividend and (ii)
with respect to clause (A) below only, any income earned on the assets or
securities distributed from the distribution date to the date of exercise. At
the time of any such distribution, the Company shall either (A) deposit the
assets or securities payable to the Holder pursuant hereto in trust for the
Holder with an "eligible institution" with instructions as to the investment of
such property and any proceeds therefrom so as to protect the value of such
property and income for the Holder upon exercise of the Warrant or (B)
distribute to the Holder the assets or securities to which it would be entitled
upon exercise and, upon any such distribution pursuant to this clause (B), the
provisions of this subparagraph (a) shall no longer apply to such event. Such
election shall be made by the Company giving written notice thereof to the
Holder.
For the purposes of this subsection 3(a), the term "eligible institution"
shall mean a corporation organized and doing business under the laws of the
United States of America or of any state thereof, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, and subject to supervision or examination by Federal or state
authority.
(b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while this
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Warrant remains outstanding and unexpired shall subdivide or combine its Common
Stock, the Per Share Warrant Price shall be proportionately decreased in the
case of a subdivision or proportionately increased in the case of a combination.
Upon each adjustment in the Per Share Warrant Price pursuant to this paragraph,
the number of shares of Common Stock purchasable hereunder shall be adjusted, to
the nearest whole share, to the product obtained by multiplying the number of
shares purchasable immediately prior to such adjustment in the Per Share Warrant
Price by a fraction, the numerator of which shall be the Per Share Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Per Share Warrant Price immediately thereafter.
(c) STOCK DIVIDEND. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to Common Stock
payable in, or make any other distribution with respect to, Common Stock (except
any distribution provided for in subparagraphs (b) or (f) of this Section 3)
then the Per Share Warrant Price shall be decreased from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Per Share Warrant Price in effect
immediately prior to such date of determination by a fraction (a) the numerator
of which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution and (b) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution. Upon each adjustment in the Per
Share Warrant Price pursuant to this paragraph, the number of shares of Common
Stock purchasable hereunder shall be adjusted, to the nearest whole share, to
the product obtained by multiplying the number of shares purchasable immediately
prior to such adjustment in the Per Share Warrant Price by a fraction, the
numerator of which shall be the Per Share Warrant Price immediately prior to
such adjustment and the denominator of which shall be the Per Share Warrant
Price immediately thereafter.
(d) SALES BELOW MARKET PRICE. If and whenever the Company shall issue
or sell its shares of Common Stock for the consideration per share which is
below the then fair market value per share for its shares of Common Stock
(unless the provisions of Sections 3(a)-3(c) or Sections 3(e) or 3(f) shall be
applicable, in which event this subsection 3(d) shall not apply), the following
provisions shall apply. An "Adjusted Fair Market Value" shall be computed (to
the nearest cent, a half cent or more being considered a full cent) by dividing:
(i) the sum of (x) the result obtained by multiplying the number
of shares of Common Stock of the Company outstanding
immediately prior to such issue or sale by the then fair
market value, plus (y) the consideration, if any, received
or deemed received by the Company upon such issue or sale,
by
(ii) the number of shares of Common Stock of the Company
outstanding and deemed to be outstanding immediately after
such issue or sale.
The resulting number shall be deemed to be the Adjusted Fair Market Value
per share. Thereafter, the Per Share Warrant Price shall be adjusted to be equal
to the product of the Per Share Warrant Price in effect immediately prior to
such actions, multiplied by a fraction the
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numerator of which is the Adjusted Fair Market Value per share and the
denominator of which is the fair market value per share immediately prior to
such actions. Upon any such adjustment of the Per Share Warrant Price, the
number of shares of Common Stock acquirable upon exercise of this Warrant shall
be adjusted to the number of shares determined by multiplying the Per Share
Warrant Price in effect immediately prior to such adjustment by the number of
shares of Common Stock acquirable upon exercise of this Warrant immediately
prior to such adjustment and dividing the product thereof by the Per Share
Warrant Price resulting from such adjustment.
(e) RIGHTS; OPTIONS; WARRANTS; CONVERTIBLE SECURITIES. In case the
Company shall issue rights, options, warrants or convertible or exchangeable
securities ("Convertible Securities") entitling the holders thereof to subscribe
for or purchase Common Stock at a price per share that is lower (at the record
date for such issuance) than the fair market value per share of such Common
Stock, (i) the number of shares of Common Stock thereafter issuable upon the
exercise of this Warrant shall be determined by adding the number of shares of
Common Stock theretofore issuable upon exercise of this Warrant to the product
of (x) the Cheap Stock Issued (as defined below), multiplied by (y) the
Ownership Ratio (as defined below), and (ii) the Per Share Warrant Price shall
be adjusted by multiplying such Per Share Warrant Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the number of
shares purchasable upon the exercise of each Warrant immediately prior to the
adjustment set forth in clause (i), and of which the denominator shall be the
number of Warrant Shares so purchasable immediately thereafter; provided,
however, that such price shall not be reduced below par. Such adjustments shall
be made whenever such rights, options, warrants or convertible or exchangeable
securities are issued, and shall become effective retroactively immediately
after the record date for the determination of shareholders entitled to receive
such rights, options, warrants or convertible or exchangeable securities.
For purposes of this Section 3(e), the "Cheap Stock Issued" shall be the
number of additional shares of any Common Stock offered by the Company for
subscription or purchase as described above minus the number of shares of Common
Stock that the aggregate offering price of the total number of shares of Common
Stock so offered would purchase at the then fair market value per share of
Common Stock. The "Ownership Ratio" shall be a fraction, the numerator of which
shall be the number of shares of Common Stock theretofore issuable upon exercise
of this Warrant, and the denominator of which shall be the number of shares of
Common Stock then outstanding on the date of issuance of (and entitled to
receive) such rights, options, warrants or convertible or exchangeable
securities.
(f) MERGERS, REORGANIZATIONS AND OTHER TRANSACTIONS. In case of any
capital reorganization or reclassification, or any consolidation or merger to
which the Company is a party (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification or change of securities of the class issuable upon exercise of
this Warrant (other than as a result of a subdivision or combination)), or in
case of any sale or conveyance to another entity of the property of the Company
as an entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Company), the
Company, or such successor or purchasing corporation shall execute a
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new Warrant providing that the Holder of this Warrant shall have the right
thereafter to convert such Warrant into the kind and amount of securities, cash
or other property which such Holder would have owned or have been entitled to
receive immediately after such reorganization, reclassification, consolidation,
merger, statutory exchange, sale or conveyance had this Warrant been converted
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance.
Such new Warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
3 and shall otherwise be subject to the same provisions and upon the same terms
and conditions set forth herein. No consolidation or merger of the Company with
or into another corporation referred to in the first sentence of this paragraph
(f) shall be consummated unless the successor or purchasing corporation referred
to above shall have agreed to execute a new Warrant as provided in this Section
3. The above provisions of this Subsection 3(f) shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any shares of stock or
other securities or property thereafter deliverable on the conversion of this
Warrant shall be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions to be made, shall be mailed to the Holders of the Warrants not less
than 10 days prior to such event. A sale of all or substantially all of the
assets of the Company for a consideration consisting primarily of securities
shall be deemed a consolidation or merger for the foregoing purposes.
(g) ADJUSTMENT PROCEDURES. No adjustment in the Per Share Warrant
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.05 per share of Common Stock; provided, however, that
any adjustments which by reason of this Subsection 3(g) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment; provided, further, that adjustments shall be required and made in
accordance with the provisions of this Section 3 (other than this Subsection
3(g)) not later than such time as may be required in order to preserve the
tax-free nature of a distribution to the Holder of this Warrant or Common Stock
issuable upon exercise hereof. All calculations under this Section 3 shall be
made to the nearest cent. Anything in this Section 3 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Per Share Warrant Price, in addition to those required by this Section 3, as it
in its discretion shall deem to be advisable in order that any stock dividend,
subdivision of shares or distribution of rights to purchase stock or securities
convertible or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
(h) ACCOUNTANTS' CERTIFICATE. Whenever the Per Share Warrant Price is
adjusted as provided in this Section 3 and upon any modification of the rights
of a Holder of Warrants in accordance with this Section 3, the Company shall
promptly obtain, at its expense, a certificate of a firm of independent public
accountants of nationally recognized standing selected by the Board of Directors
(who may be the regular auditors of the Company) setting forth the Per Share
Warrant Price and the number of Warrant Shares after such adjustment or the
effect of such modification, a brief statement of the facts requiring such
adjustment or modification and the manner of computing the same, and cause
copies of such certificate to be promptly mailed (by first class mail, postage
prepaid) to the Holders of the Warrants at 9 West 57th Street, Suite 4220,
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New York, New York 10019, or at such other address as may be provided in
writing by the Holder to the Company.
(i) NOTICE OF CAPITAL CHANGES. In case:
(a) the Company shall declare any dividend or distribution
payable to the holders of its Common Stock;
(b) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all of its assets to,
another corporation or business organization; or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give the Holder of
this Warrant written notice, in the manner set forth in subparagraph (h) above,
of the date on which a record shall be taken for such dividend or distribution
or for determining shareholders entitled to vote upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up and of the date when any such transaction shall take place, as the
case may be. Such written notice shall be given at least 30 days prior to the
transaction in question and not less than 20 days prior to the record date in
respect thereto.
4. FULLY PAID STOCK; TAXES. The Company agrees that the shares of Common
Stock represented by each and every certificate for Warrant Shares delivered on
the exercise of this Warrant shall, at the time of such delivery, be validly
issued and outstanding, fully paid and nonassessable, and not subject to any
liens, security interests, encumbrances, charges or pre-emptive rights, and the
Company will take all such actions as may be necessary to assure that the par
value or stated value, if any, per share of the Common Stock is at all times
equal to or less than the then Per Share Warrant Price. The Company further
covenants and agrees that it will pay, when due and payable, any and all federal
and state stamp, original issue, transfer or similar taxes which may be payable
in respect of the issue or delivery of any Warrant Share or certificate
therefor.
5. REGISTRATION UNDER SECURITIES ACT OF 1933.
(a) REGISTRATION RIGHTS. The Company agrees that if, at any time and
from time to time during the Warrant Period, the Board of Directors of the
Company shall authorize the filing of a registration statement or a
post-effective amendment to a registration statement other than the registration
statement for the Company's initial public offering (Registration No.
333-4792-LA) (any such registration statement being hereinafter called a
"Subsequent Registration Statement") under the Securities Act of 1933, as
amended (the "Act") (other than a registration statement on Form S-8 or other
form which does not include substantially the same information as would be
required in a form for the general registration of securities) in connection
with the proposed offer of any of its securities by it or any of its
shareholders, the Company will (i) promptly (and in no event later than at least
45 days before the initial filing with the Securities
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and Exchange Commission (the "Commission") of the Subsequent Registration
Statement) notify the Holder and each of the Holders, if any, of other Warrants
and/or Warrant Shares that such Subsequent Registration Statement will be filed
and that the Warrant Shares which are then held and/or which may be acquired
upon the exercise of the Warrants, by the Holder and such Holders, will, at the
Holder's and such Holders' request, be included in such Subsequent Registration
Statement; (ii) include in the securities covered by such Subsequent
Registration Statement all Warrant Shares which it has been so requested to
include; (iii) use its best efforts to cause such Subsequent Registration
Statement to become effective as soon as practicable; (iv) prepare and file with
the Commission such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of six months; provided, however,
that in the case of any registration of securities which are intended to be
offered on a continuous or delayed basis, such six-month period shall be
extended, if necessary, to keep the registration statement effective until all
such securities are sold; provided that Rule 415, or any successor rule under
the Act, permits an offering on a continuous or delayed basis, and provided
further that applicable rules under the Act governing the obligation to file a
post-effective amendment permit, in lieu of filing a post-effective amendment
which (A) includes any prospectus required by Section 10(a)(3) of the Act or (B)
reflects facts or events representing a material or fundamental change in the
information set forth in the registration statement, the incorporation by
reference of information required to be included in (A) and (B) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in the
registration statement; (v) notify each such Holder of Warrant Shares, at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the occurrence of an event which may require the preparation
of a supplement or amendment to such prospectus so that, as thereafter delivered
to the purchasers of such Warrant Shares, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
and promptly make available to each such Holder any such supplement or
amendment; (vi) use its best efforts to cause all such Warrant Shares to be
listed on each securities exchange or market on which similar securities issued
by the Company are then listed or traded; and (vii) take all other action
necessary under any federal or state law or regulation of any governmental
authority to permit all Warrant Shares which it has been so requested to include
in such Subsequent Registration Statement or to be sold or otherwise disposed
of, and will maintain such compliance with each such federal and state law and
regulation of any governmental authority for the period necessary for the Holder
and such Holders to effect the proposed sale or other disposition. The foregoing
notwithstanding, the Holders shall be entitled to only four registrations under
this Section 5(a).
(b) REGISTRATION PROCEDURE; INDEMNIFICATION. In connection with any
registration under Section 5, the Company covenants and agrees (i) to furnish
without charge to each Holder desiring to sell Warrant Shares such number of
prospectuses as shall reasonably be requested, (ii) to pay all costs (excluding
fees and expenses of Holder(s) counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration statements
filed pursuant to this Section 5 including, without limitation, registration
filing fees, the Company's legal and accounting fees, printing expenses, and
blue sky fees and expenses, (iii) to take all necessary action which may be
required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such
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states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction, (iv) to furnish to each Holder (and to each underwriter,
if any), an opinion of counsel to the Company dated the effective date and the
closing date and a "cold comfort" letter dated the effective date and closing
date and (v) to indemnify the Holder(s) of the Warrant Shares to be sold
pursuant to any registration statement and each person, if any, who controls
such Holders within the meaning of Section 15 of the Act, or Section 20(a) of
the Exchange Act against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or any other statute, common law or otherwise,
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in such registration statement executed by the Company
or based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Warrant Shares under the securities laws
thereof or filed with the Commission any state securities commission or agency,
the National Association of Securities Dealers, Inc., The Nasdaq Stock Market or
any securities exchange, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading, unless such statement or omission was made
specifically in reliance upon and in conformity with written information
furnished to the Company by the Holder(s) expressly and specifically for use in
such registration statement, any amendment or supplement thereto or any
application, as the case may be. The Company agrees promptly to notify the
Holder(s) of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the resale of the Warrant Shares or in connection such registration
statement. The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished in writing by or on behalf of such Holders, or their successors or
assigns, expressly for specific inclusion in such registration statement;
provided, however, that the obligations of such Holders hereunder shall be
limited to an amount equal to the proceeds to each such Holder of securities
sold as contemplated herein. Each party entitled to indemnification under this
Section 5(b) (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense; and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations hereunder except to
the extent the Indemnifying Party is actually prejudiced. No Indemnifying Party,
in the defense of any such claim or litigation, shall, except with the consent
of each Indemnified Party (which consent shall not unreasonably be withheld),
consent to entry
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of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with defense of
such claim and litigation resulting therefrom. Notwithstanding the foregoing
provisions of this Section 5, any such payment or reimbursement by the Holder(s)
of fees, expenses or disbursements incurred by an indemnified person in any
proceeding in which a final judgment by a court of competent jurisdiction (after
all appeals or the expiration of time to appeal) is entered against the Company
or such indemnified person as a direct result of the Company or such person's
gross negligence or willful misfeasance will be promptly repaid to the
Holder(s).
(c) RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may permit the sale of
the Warrant Shares to the public without registration, the Company agrees to (i)
make and keep public information available as those terms are understood and
defined in Rule 144 under the Act (and any successor rule to Rule 144) at all
times from and after 90 days following the effective date of the first
registration statement under the Act filed by the Company for an offering of its
securities to the public; and (ii) file with the Commission in a timely manner
all reports and other documents required of the Company under the Act and the
Exchange Act at any time after it has become subject to such reporting
requirements.
(d) TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register the Warrant Shares granted by the Company under this
Section 5 may be transferred or assigned by a Holder to a transferee or assignee
of any of the Warrants or the Warrant Shares; provided that the Company is given
written notice by a Holder at the time of or within a reasonable time after said
transfer or assignment, stating the name and address of said transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned and provided further that the
transferee or assignee of such rights assumes the obligations of such Holder
under this Section 5.
6. TRANSFERABILITY.
(a) Subject to Section 5 above, neither the Warrants nor the Warrant
Shares have been or will be registered under the Act or qualified under the laws
of any jurisdiction. In agreeing to issue the Warrants, the Company has relied,
among others, upon the exemption from registration provided by Section 4(2) of
the Act on the ground that the Warrants are to be issued in a transaction by an
issuer not involving any public offering.
(b) Holder represents that he, she or it is acquiring the Warrants for
their own account and not with a view to the distribution thereof. Holder agrees
not to offer, sell, transfer, pledge or hypothecate any Warrants or any Warrant
Shares without an effective registration statement for such Warrants or Warrant
Shares under the Act and all required state qualifications or an opinion of
counsel satisfactory to the Company to the effect that such registration and
qualifications are not required.
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(c) The certificates evidencing the Warrants and/or the Warrant Shares
shall contain a legend substantially in the form set forth below, and the
Company may issue orders to any duly authorized agent for the Warrants and to
its transfer agent for the Common Stock not to transfer the Warrants or Warrant
Shares if such restrictions are not satisfied.
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER
THE LAWS OF ANY STATE. THEY MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AND ALL REQUIRED STATE QUALIFICATIONS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER HEREOF TO THE EFFECT THAT SUCH
REGISTRATION AND QUALIFICATIONS ARE NOT REQUIRED."
(d) Subject to compliance with the foregoing, the Holder of any
Warrant may, prior to exercise or expiration thereof, surrender such Warrant at
the principal office of the Company for transfer or exchange. Within a
reasonable time after notice to the Company from a registered Holder of such
Holder's intention to make such exchange and without expense (other than
transfer taxes, if any) to such registered Holder, the Company shall issue in
exchange therefor another Warrant or Warrants, in such denominations as
requested by the registered Holder, for the same aggregate number of Warrants so
surrendered and containing the same provisions and subject to the same terms and
conditions as the Warrant(s) so surrendered. The Company may treat the
registered holder of this Warrant as he, she or it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
Holder of a Warrant or such Holder's duly authorized attorney, upon written
request during ordinary business hours, to inspect and copy or make extracts
from its books showing the registered holders of the Warrants. All Warrants
issued upon the transfer or assignment of this Warrant will be dated the same
date as this Warrant, and all rights of the Holder thereof shall be identical to
those of the original Holder.
7. LOSS, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and of
indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
8. WARRANT HOLDER NOT A SHAREHOLDER. Except as otherwise provided herein,
this Warrant does not confer upon the Holder any right to vote or to consent to
or receive notice as a shareholder of the Company, as such, in respect to any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
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9. COMMUNICATION. No notice or other communication under this Warrant shall
be effective unless, but any notice or other communication shall be effective
and shall be deemed to have been given if, the same is in writing and is mailed
by first-class mail, postage prepaid, addressed to:
(a) the Company at 125 South Barrington Place, Los Angeles, California
90049 or such other address as the Company has designated in writing to the
Holder; or
(b) the Holder at 9 West 57th Street, Suite 4220, New York, New York
10019, or at such other address as the Holder has designated in writing to the
Company.
10. HEADINGS. The headings of this Warrant have been inserted as a matter
of convenience and shall not affect the construction hereof.
11. APPLICABLE LAW. Due to the fact that the Company is incorporated in
California and has its principal place of business in that state, this Warrant
shall be governed by and construed in accordance with the law of the State of
California, without giving effect to the principles of conflicts of law thereof.
12. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Warrant contains the
entire agreement of the parties with respect to its subject matter and
supersedes all prior understandings or agreements, written or oral, with respect
to such subject matter. Any provision of this Warrant may be amended or waived,
but only if such amendment or waiver is in writing and is signed by the Company
and the Holder.
13. NO IMPAIRMENT. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions in the Warrant.
IN WITNESS WHEREOF, Tomorrow's Morning, Inc. has caused this Warrant to be
signed as of June 25, 1998.
TOMORROW'S MORNING, INC.
By:________________________________
Adam Linter, President
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SUBSCRIPTION
The undersigned, _____________________________, pursuant to the provisions
of the foregoing Warrant, hereby agrees to subscribe for and purchase shares of
the Common Stock of Tomorrow's Morning, Inc. covered by said Warrant, and makes
payment therefor in full at the price per share provided by said Warrant.
Dated: __________________ Signature: _____________________________
Address: _____________________________
-----------------------------
ASSIGNMENT
FOR VALUE RECEIVED ____________________ hereby sells, assigns and transfers
unto _____________ the foregoing Warrant and all rights evidenced thereby, and
does irrevocably constitute and appoint ____________________, as attorney, to
transfer said Warrant on the books of Tomorrow's Morning, Inc.
Dated: __________________ Signature: _____________________________
Address: _____________________________
-----------------------------
12
<PAGE>
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED__________________ hereby assigns and transfers unto
____________________ the right to purchase ________ shares of the Common Stock
of Tomorrow's Morning, Inc. by the foregoing Warrant, and a proportionate part
of said Warrant and the rights evidenced thereby, and does irrevocably
constitute and appoint _____________, as attorney, to transfer that part of said
Warrant on the books of Tomorrow's Morning, Inc.
Dated: __________________ Signature: _____________________________
Address: _____________________________
-----------------------------
CASHLESS EXERCISE SUBSCRIPTION
The undersigned, _____________________ pursuant to the provisions of the
foregoing Warrant, hereby agrees to subscribe to that number of shares of stock
of Tomorrow's Morning, Inc. as are issuable in accordance with the formula set
forth in Section 1(b) of the Warrant, and makes payment therefor in full by
surrender and delivery of this Warrant.
Dated: __________________ Signature: _____________________________
Address: _____________________________
-----------------------------
13
<PAGE>
EXHIBIT 10.19
AMENDMENT TO STOCK OPTION AGREEMENT
THIS AMENDMENT TO STOCK OPTION AGREEMENT (this "Amendment") is made and
entered into as of April 18, 1997, by and between TOMORROW'S MORNING, INC., a
California corporation (the "Corporation") and ADAM LINTER ("Optionee") with
respect to the following facts and circumstances:
A. Optionee and the Corporation have previously entered into a Stock Option
Agreement dated as of May 15, 1996 (the "Agreement").
B. The Corporation's Board of Directors and the Optionee now desire to
amend the Agreement in the following respects:
(1) AMENDMENT OF SECTION 1.3. Section 1.3 of the Agreement is
hereby deleted in its entirety and replaced with the
following:
"1.3 Option Period. The Option may be exercised by Optionee
at any time on or before the March 28, 2000 (the "Option
Period")."
2. AMENDMENT OF SECTION 4. Section 4 of the Agreement is
hereby deleted in its entirety and replaced with the following:
"4. TERMINATION OF OPTION. The Option shall terminate and
expire upon the earlier of (i) March 28, 2000 or (ii) the
termination of the Option pursuant to Section 5 below."
3. RATIFICATION OF REMAINING TERMS. Except as expressly set
forth in this Amendment, all of the terms and provisions of the Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
TOMORROW'S MORNING, INC.
By:__________________________________
Title:_______________________________
"Corporation"
_____________________________________
Adam Linter
"Optionee"
<PAGE>
EXHIBIT 10.21
NEGOTIABLE PROMISSORY NOTE
$250,000 June 25, 1998
FOR VALUE RECEIVED, Tomorrow's Morning, Inc., a California corporation (the
"Maker"), hereby promises to pay in lawful money of the United States in
immediately available funds, to Michael Fuchs (together with his successors and
assigns, the "Payee"), or order, at such place as may be designated in writing
by Payee, the principal amount of $250,000 together with interest thereon
calculated and payable as set forth below.
The principal amount of this Negotiable Promissory Note (the "Note") shall
bear interest at the rate of ten percent (10%) per annum from the date of this
Note. Interest shall be payable on a quarterly basis, in arrears, within ten
(10) days after the end of each calendar quarter, beginning with the quarter
ending September 30, 1998. The entire principal amount hereof and all remaining
accrued interest shall be due and payable on December 24, 1998. Maker may prepay
the principal amount of this Note at any time following ten (10) days prior
written notice, without premium or penalty (such prepayment to include all
accrued interest pursuant to this Note). All payments under this Note shall be
credited first to interest, then to principal.
Payee shall have the right at any time upon or prior to repayment, upon
written notice to Maker, to convert all or any part of this Note and any accrued
and unpaid interest thereon into unregistered shares of Maker's Common Stock at
the rate of $2.00 per share (the "Per Share Conversion Price"). Maker agrees
that the shares of Common Stock delivered on the exercise of such conversion
right (the "Conversion Shares") shall, at the time of such delivery, be validly
issued and outstanding, fully paid and nonassessable, and not subject to any
liens, security interests, encumbrances, charges or pre-emptive rights, and the
Company will take all such actions as may be necessary to assure that the par
value or stated value, if any, per Conversion Share is at all times equal to or
less than the then Per Share Conversion Price. The Company further covenants and
agrees that it will pay, when due and payable, any and all federal and state
stamp, original issue, transfer or similar taxes which may be payable in respect
of the issue or delivery of any Conversion Share or certificate therefor. The
Company agrees that, prior to the expiration of such conversion right, the
Company will at all times have authorized and in reserve, and will keep
available, solely for issuance or delivery upon the exercise of such conversion
right, the shares of Common Stock and other securities and properties as from
time to time shall be receivable upon the exercise of such conversion right,
free and clear of all restrictions on sale or transfer (except for applicable
state or federal securities law restrictions) and free and clear of all
pre-emptive rights. The Conversion Shares shall also be entitled to protection
from dilution as set forth on the attached Exhibit "A".
The following events shall constitute a "Default" hereunder: (i) if Maker
fails to pay when due any payment hereunder; (ii) if proceedings under any
bankruptcy or insolvency law are commenced by or against Maker, or if a general
assignment for the benefit of creditors of Maker is made, or if a trustee or
receiver of Maker's property is appointed; or (iii) if a default occurs under
any provision of this Note not covered by clause (i) above, or any other
agreement
<PAGE>
executed by Maker in connection with this Note, and such default is not cured by
Maker within five (5) days after notice to Maker.
To the extent not prohibited by applicable law, Maker agrees to reimburse
Payee upon demand for all reasonable out-of-pocket expenses (including
attorney's fees and related expenses) incurred by Payee in connection with or in
any way related to the enforcement of the obligations of Maker hereunder.
Maker hereby waives presentment and demand for payment, protest, notice of
protest and nonpayment, and all other demands or notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note. Maker
agrees that its liability on this Note shall not be affected by any renewal or
extension of any time of payment hereof, by any indulgences, or by any release
or change in any security for the payment of this Note, and hereby consents to
any and all renewals, extensions, indulgences, releases or changes.
Any portion of this Note which may be held by any court of competent
jurisdiction to be unenforceable shall be deemed severable, and the balance of
this Note shall be fully enforceable.
Payee shall be entitled, upon the occurrence of a Default, to accelerate
payment of the unpaid balance of this Note, in which event the entire unpaid
principal balance hereof and all other amounts due hereunder shall immediately
be due and payable without demand or notice.
In the event that any payment shall not be made on this Note when due,
whether by acceleration or otherwise, Maker agrees to pay interest on such
overdue payment from the due date until the date such payment is received by
Payee at the rate of fifteen percent (15%) per year or the maximum rate
permitted by applicable law, whichever is less.
This Note is executed in and shall be governed by and construed in
accordance with the laws of the State of California.
No delay or omission of Payee in exercising any right or remedy hereunder
shall constitute a waiver of any such right or remedy. A waiver on one occasion
shall not operate as a bar to, or waiver of, any such right or remedy on any
future occasions.
IN WITNESS WHEREOF, Maker has caused this Note to be duly executed and
delivered as of the date first set forth above.
TOMORROW'S MORNING, INC.
By:_____________________________________
Adam Linter, President
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints ADAM LINTER as his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign
Tomorrow's Morning, Inc.'s Annual Report on Form 10-KSB for the year ended June
30, 1998 and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person and hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
James R. Rosbe Director April 21, 2000
- ----------------------------
JAMES R. ROSBE
Rick Nicita Director April 20, 2000
- ----------------------------
RICK NICITA
Alan G. Dunn Director April 21, 2000
- ----------------------------
ALAN G. DUNN
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR OTHER
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1997 JUL-01-1996 JUL-01-1992
<PERIOD-END> JUN-30-1998 JUN-30-1997 JUN-30-1998
<CASH> 46,154 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 445 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 266,841 0 0
<PP&E> 140,402 0 0
<DEPRECIATION> 34,670 0 0
<TOTAL-ASSETS> 405,345 0 0
<CURRENT-LIABILITIES> 1,895,163 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 12,850,167 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 405,345 0 0
<SALES> 0 0 0
<TOTAL-REVENUES> 218,983 38,166 549,701
<CGS> 0 0 0
<TOTAL-COSTS> 925,397 782,937 3,312,446
<OTHER-EXPENSES> 5,554,704 2,068,626 11,272,411
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 11,460 141,482 313,479
<INCOME-PRETAX> (6,272,578) (2,954,879) (14,348,634)
<INCOME-TAX> 800 800 4,800
<INCOME-CONTINUING> (6,273,378) (2,955,679) (14,353,434)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (6,273,378) (2,955,679) (14,353,434)
<EPS-BASIC> (2.23) (1.84) 0
<EPS-DILUTED> (2.23) (1.84) 0
</TABLE>
