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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, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to __________ 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. / /
Issuer's revenues for its most recent fiscal year (ended June 30, 1999) were
$3,144.
The aggregate market value of the 2,334,271 shares of common stock held by
non-affiliates of the issuer, based upon the average bid and asked price of such
stock on September 16, 1999, as reported by the OTC Bulletin Board, was
approximately $140,000. While shares of Common Stock held by each officer,
director and person who owns 5% or more of the outstanding Common Stock have
been excluded from such calculation, such determination of affiliate status is
not necessarily conclusive for other purposes. The number of outstanding shares
of the issuer's Common Stock on September 15, 1999 was 3,352,690.
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.
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 has been 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. As of September 1, 1999, 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, original characters have
been created and Ben Bradlee has been filmed in the "Editor" role. However,
development of the game has been suspended until additional funds become
available. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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 may 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 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.
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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.
Subject to availability of funds, 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. 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 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 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.
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.
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MATERIAL CONTRACTS AND SUPPLIERS. 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 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
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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 one employee, who works full-time as the
Company's sole officer. In addition, the Company has from time to time retained
various advisors and consultants.
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; however, the lease is the subject of
litigation which may result in termination prior to the end of its scheduled
term (see "Item 3. Legal Proceedings" below). Should such termination occur, it
is expected that the Company will relocate its executive offices to another
suitable location in the Los Angeles area.
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 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.
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. The Company has not
contested that action, resulting in an outstanding judgment against it in that
amount.
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 seeking
$238,518.58 in connection with the Company's breach of its lease payment
obligations. The Company and Mr. Linter are attempting to negotiate a settlement
of that action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during fiscal
1999.
7
<PAGE>
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>
<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>
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH * LOW *
<S> <C> <C>
First Quarter...................................... $1.5625 $0.5625
Second Quarter..................................... $0.625 $0.125
Third Quarter...................................... $0.1875 $0.125
Fourth Quarter..................................... $0.125 $0.0625
</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, 1999, there were 49 holders of record of
the Company's Common Stock and 53 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
8
<PAGE>
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, 1999, the Company has incurred
an aggregate of $12,496,713 in operating losses. For the fiscal year ended June
30, 1999, revenues were $3,144 and the Company experienced a net loss of
$604,930, as compared to revenues of $218,983 and a net loss of $6,273,378 for
the fiscal year ended June 30, 1998. 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, 1999 AND JUNE 30, 1998. Revenues for the fiscal year ended
June 30, 1999 were $3,144, compared to $218,983 for fiscal 1998. This
approximately 99% decrease was primarily the result of final suspension of
Newspaper publication in May 1998. Costs and expenses decreased to $512,234
during the year ended June 30, 1999 from $4,431,874 for the year ended June 30,
1998. This approximately 88% change was primarily due to staff reductions and
other expense cutbacks upon suspension of Newspaper operations.
Interest expense for fiscal 1999 was $71,160, as compared to $11,460 for fiscal
1998. This approximately 620% increase is attributable to increased borrowings
after the IPO proceeds were exhausted.
For fiscal 1999, the Company experienced a net loss of $604,930, an
approximately 90% decrease from the $6,273,378 net loss sustained in fiscal
1998. This change in net loss was primarily due to the factors described above
with respect to costs and expenses, partially offset by the increase in interest
expense.
YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997. Revenues for the fiscal year ended
June 30, 1998 were $218,983, as compared to $38,166 for fiscal 1997. This
approximately 470% increase in revenues was primarily the result of a dramatic
increase in Newspaper subscriptions. Costs and expenses increased to $4,431,874
during the year ended June 30, 1998 from $2,881,718 during the year ended June
30, 1997. The bulk of this approximately 54% increase was the result of costs
associated with increased Newspaper subscribership.
Total interest expense for fiscal 1998 was $11,460, as compared to $141,482 for
fiscal 1997. This approximately 92% decrease is attributable to repayment of
debt with proceeds from the IPO.
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 the year
ended June 30, 1997. 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 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.
As of June 30, 1999, the Company had current assets of only $120,079. To date,
the Company has utilized all of the IPO proceeds and all other available cash.
During the past year, the Company has continued to seek outside debt and/or
9
<PAGE>
equity funding in order to be able to complete the development of SCOOP-TM-.
However, it has met with no success and, as a result, has suspended that
development indefinitely. As a result of its lack of working capital, the
Company has also been unable to meet its financial obligations to its lenders
and other creditors, including its landlord and the vendor which has printed the
Newspaper. In order to resume its proposed business activities, the Company must
immediately raise approximately $500,000 to $1 million in funds through private
debt or equity offerings. While the Company continues to engage in discussions
with prospective financing sources, there can be no guarantee that such funding
will become available on terms favorable to the Company or its shareholders, if
at all. Until such near-term funding is obtained, all of the Company's
operations will remain at minimal levels.
As to long-term funding requirements, the Company continues to pursue
opportunities for a private equity offering of up to $5 million. In addition,
the Company continues to investigate other approaches to obtaining long-term
operating funds while also maximizing shareholder value. To date, those
approaches have included 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 long-term funding efforts will be successful or, if successful, that
they will result in a transaction on terms favorable to the Company or its
shareholders. Even if the near-term funds described above are obtained, unless
long-term funds also become available, the Company will be required to curtail
its future operations, which would have a material adverse effect on the
Company's business, operating results and financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. 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
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 June 1998, the United States Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective for fiscal years beginning after June 15, 1999. The Company
anticipates that due to its limited use of derivative instruments, the adoption
of SFAS No. 133 will not have a material effect on its financial statements.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements: PAGE
----
<S> <C>
Independent Auditor's Report 12
Balance Sheet 13
Statements of Operations 14
Statement of Shareholders' Equity 15
Statements of Cash Flows 18
Notes to Financial Statements 20
</TABLE>
11
<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, 1999, and the related statements of
operations, shareholders' deficit and cash flows for the two years 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 statements of shareholders' equity for the period from
inception to June 30, 1997 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, 1999, and the results of its operations and its cash flows for the two
years 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
12
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - JUNE 30, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13
Loan receivable, officer-shareholder 15,176
Software development costs 95,867
Prepaid expenses 9,023
---------------
Total current assets
$ 120,079
OTHER ASSETS:
Fixed assets, net of accumulated depreciation of $62,454 77,948
Deposits 32,772
---------------
Total other assets 110,720
-------------
$ 230,799
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,749,407
Current maturities of contracts payable 9,221
Loans payable, related parties 553,050
---------------
Total current liabilities
$ 2,311,678
CONTRACTS PAYABLE, less current maturities 7,718
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, 3,360,372 shares issued and outstanding 12,869,767
Deficit accumulated during development stage (14,958,364)
---------------
Total shareholders' deficit (2,088,597)
-------------
$ 230,799
=============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
13
<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, 1999 June 30, 1998 June 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE:
SUBSCRIPTIONS $ 3,144 $ 218,983 $ 552,845
EDITORIAL, PRODUCTION AND
DISTRIBUTION COST 906 925,397 3,313,352
--------------- ---------------- ----------------
GROSS MARGIN 2,238 (706,414) (2,760,507)
OPERATING EXPENSES 511,328 2,949,601 8,895,830
RESEARCH AND DEVELOPMENT - 556,876 840,376
--------------- ---------------- ----------------
LOSS FROM OPERATIONS (509,090) (4,212,891) (12,496,713)
NONCASH OPTION COMPENSATION AND
CONSULTING FEES - 2,026,204 2,026,204
LEGAL SETTLEMENT - 30,000 30,000
OTHER EXPENSES, NET 27,784 20,180 84,840
INTEREST EXPENSE 71,160 11,460 384,639
INTEREST INCOME 3,104 28,157 68,832
--------------- ---------------- ----------------
LOSS BEFORE INCOME TAXES (604,930) (6,272,578) (14,953,564)
INCOME TAXES - 800 4,800
--------------- ---------------- ----------------
NET LOSS $ (604,930) $ (6,273,378) $ (14,958,364)
=============== ================ ================
NET LOSS PER SHARE, basic and diluted $ (.21) $ (2.23)
============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 2,844,752 2,812,944
=============== ================
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
14
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common stock
Common stock subscriptions
Shares Amount receivable
------ ------ ----------
<S> <C> <C> <C>
June 30, 1992 (date of inception) to
June 30, 1993 capital contribution -
compensation ................................. $ 100,000 $
Issuance of common stock ....................... 9,080 25,000
Issuance of common stock ....................... 90,800 50,000
Issuance of common stock ....................... 406,330 78,900
Issuance of common stock ....................... 46,762 50,000
Issuance of common stock ....................... 17,252 75,000
Common stock subscribed ........................ 50,000
Net loss for the year ended June 30,
1993, as restated ............................
--------- ---------- ------------
Balance at June 30, 1993 ....................... 570,224 378,900 50,000
Capital contribution - compensation ............ 100,000
Stock option compensation ...................... 292,000
Capital contribution ........................... 51,100
Issuance of common stock ....................... 17,252 50,000 (50,000)
Issuance of common stock ....................... 34,958 50,000
Issuance of common stock ....................... 38,136 110,000
Issuance of common stock ....................... 1,816 7,500
Issuance of common stock ....................... 145,280 275,000 50,000
Common stock repurchased and cancelled (9,080) (25,000)
Issuance of common stock based on
anti-dilutive agreements ..................... 35,866
Net loss for the year ended June 30,
1994, as restated ............................
--------- ---------- ------------
Balance at June 30, 1994 ............. 834,452 1,289,500 (50,000)
<CAPTION>
Deficit
accumulated
during Total
Treasury development shareholders'
stock stage deficit
----- ----- -------
<S> <C> <C> <C>
June 30, 1992 (date of inception) to
June 30, 1993 capital contribution -
compensation ................................. $ $ $ 100,000
Issuance of common stock ....................... 25,000
Issuance of common stock ....................... 50,000
Issuance of common stock ....................... 78,900
Issuance of common stock ....................... 50,000
Issuance of common stock ....................... 75,000
Common stock subscribed ........................ 50,000
Net loss for the year ended June 30,
1993, as restated ............................ (540,430) (540,430)
------------ ------------ ------------
Balance at June 30, 1993 ............. (540,430) (111,530)
Capital contribution - compensation .. 100,000
Stock option compensation ............ 292,000
Capital contribution ................. 51,100
Issuance of common stock .............
Issuance of common stock ............. 50,000
Issuance of common stock ............. 110,000
Issuance of common stock ............. 7,500
Issuance of common stock ............. 225,000
Common stock repurchased and cancelled (25,000)
Issuance of common stock based on
anti-dilutive agreements ...........
Net loss for the year ended June 30,
1994, as restated .................. (911,611) (911,611)
------------ ------------ ------------
Balance at June 30, 1994 ............. (1,452,041) (212,541)
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
15
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK SUBSCRIPTIONS
SHARES AMOUNT RECEIVABLE
--------------- -------------- ---------------
<S> <C> <C> <C>
Capital contribution - compensation 200,000
Common stock subscribed 250,000
Issuance of common stock for services 45,400 2,000
Issuance of common stock 61,290 125,000
Issuance of common stock 15,890 50,000
Issuance of common stock 11,804 50,000
Commitment to purchase common stock
Net loss for the year ended June 30,
1995, as restated
--------------- -------------- ---------------
Balance at June 30, 1995 968,836 1,716,500 200,000
Capital contribution - compensation 250,000
Stock option compensation 751,290
Issuance of common stock 49,032 200,000 (200,000)
Issuance of common stock 54,026 216,703
Conversion of 6% convertible notes 45,400 91,500
Stock issuance costs (37,193)
Common stock repurchased and cancelled (90,800) (50,000)
Debt issuance costs 130,000
Shareholder loans
Net loss for the year ended June 30,
1996, as restated
--------------- -------------- ---------------
Balance at June 30, 1996 1,026,494 3,268,800
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
TREASURY DEVELOPMENT SHAREHOLDERS'
STOCK STAGE DEFICIT
--------------- --------------- ------------------
<S> <C> <C> <C>
Capital contribution - compensation 200,000
Common stock subscribed 250,000
Issuance of common stock for services 2,000
Issuance of common stock 125,000
Issuance of common stock 50,000
Issuance of common stock 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 (65,000) (2,467,081) (615,581)
Capital contribution - compensation 250,000
Stock option compensation 751,290
Issuance of common stock
Issuance of common stock 216,703
Conversion of 6% convertible notes 91,500
Stock issuance costs (37,193)
Common stock repurchased and cancelled 65,000 (15,000)
Debt issuance costs 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 (5,151,952) (1,883,152)
</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), CONTINUED
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK SUBSCRIPTIONS TREASURY
SHARES AMOUNT RECEIVABLE STOCK
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Issuance of common stock 1,167,277 5,347,724
Stock issuance costs (304,528)
Conversion of 6% convertible notes 105,144 262,500
Conversion of 7% convertible notes 432,083 1,080,207
Debt issuance costs (202,589)
Capital contribution - compensation 166,667
Shareholder loans
Stock option compensation 733,400
Issuance of common stock for services 55,000 132,500
Net loss for the year ended June 30, 1997
--------------- -------------- --------------- ---------------
Balance at June 30, 1997 2,785,998 10,484,681
Stock option compensation 1,935,374
Repayments - shareholder loans
Reclassification - shareholder loans
Stock issued - settlement of litigation 5,000 30,000
Stock options exercised 229,374 190,289
Stock warrants sold 1,073
Shares issued upon conversion of debt 190,000 190,000
Warrants issued in convection with debt 18,750
Net loss for the year ended June 30, 1998
--------------- -------------- --------------- ---------------
Balance at June 30, 1998 3,210,372 12,850,167
Shares issued in connection with debt 100,000 12,500
Shares issued in exchange for rent 40,000 5,000
Stock options exercised 10,000 2,100
Net loss for the year ended June 30, 1999
--------------- -------------- --------------- ---------------
Balance at June 30, 1999 3,360,372 $ 12,869,767 - -
=============== ============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT SHAREHOLDERS'
STAGE DEFICIT
--------------- ------------------
<S> <C> <C>
Issuance of common stock 5,347,724
Stock issuance costs (304,528)
Conversion of 6% convertible notes 262,500
Conversion of 7% convertible notes 1,080,207
Debt issuance costs (202,589)
Capital contribution - compensation 166,667
Shareholder loans (69,377) (69,377)
Stock option compensation 733,400
Issuance of common stock for services 132,500
Net loss for the year ended June 30, 1997 (2,955,679) (2,955,679)
--------------- ------------------
Balance at June 30, 1997 (8,177,008) 2,307,673
Stock option compensation 1,935,374
Repayments - shareholder loans 7,227 7,227
Reclassification - shareholder loans 89,725 89,725
Stock issued - settlement of litigation 30,000
Stock options exercised 190,289
Stock warrants sold 1,073
Shares issued upon conversion of debt 190,000
Warrants issued in convection with debt 18,750
Net loss for the year ended June 30, 1998 (6,273,378) (6,273,378)
--------------- ------------------
Balance at June 30, 1998 (14,353,434) (1,503,267)
Shares issued in connection with debt 12,500
Shares issued in exchange for rent 5,000
Stock options exercised 2,100
Net loss for the year ended June 30, 1999 (604,930) (604,930)
--------------- ------------------
Balance at June 30, 1999 $ (14,958,364) $ (2,088,597)
=============== ==================
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM INCEPTION ON
YEAR ENDED YEAR ENDED JUNE 30, 1992 TO
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (604,930) $ (6,273,378) $ (14,958,364)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation 27,784 20,180 64,750
Amortization of debt issuance costs - - 138,168
Amortization of loans payable discount 21,355 3,646 25,001
Non-cash litigation settlement - 30,000 30,000
Non-cash compensation 5,000 2,043,124 4,643,481
Non-cash payment for services rendered - - 132,500
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 445 4,935 445
Prepaid expenses 42,587 356,611 42,142
Software development costs - (23,367) (124,110)
Deposits - (1,417) (23,367)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 294,175 (1,197,852) 261,313
Deferred revenue - (52,603) 1,459,238
---------------- --------------- ---------------
Net cash used for operating activities (213,584) (2,694,417) (8,308,805)
---------------- --------------- ---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES -
acquisition of fixed assets - (73,142) (142,697)
---------------- --------------- ---------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 6,749,734
Proceeds from revolving line of credit - - 50,000
Proceeds from loans and warrants 110,000 375,000 909,276
Proceeds from notes payable - - 1,705,086
Proceeds from contracts payable - 71,396 127,401
Cash paid for debt issuance costs - - (210,757)
Proceeds from exercise of stock options 2,100 82,538 84,638
Proceeds from exercise of warrants - 1,074 1,074
Proceeds from shareholders - - 11,619
Repayment of revolving line of credit - - (50,000)
Repayments from shareholder, net of unpaid interest 57,584 - 70,157
Repayment of loans payable - - (423,400)
Repayment of notes payable - - (11,456)
Repayment of contracts payable (2,241) (83,330) (110,377)
Loans payable shareholders - 24,186 (96,952)
Cash paid for offering costs - - (304,528)
Purchase of treasury stock - - (50,000)
---------------- --------------- ---------------
Net cash provided by financing activities 167,443 470,864 8,451,515
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH (46,141) (2,296,695) 13
CASH, beginning of year 46,154 2,342,849 -
---------------- --------------- ---------------
CASH, end of year $ 13 $ 46,154 $ 13
================ =============== ==============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
18
<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, 1999 JUNE 30, 1998 JUNE 30, 1999
------------- ------------- -------------
<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 $ - $ - $ (72,589)
================ =============== ===============
Conversion of notes payable to common stock $ - $ 190,000 $ 1,532,707
================ =============== ===============
Non-cash compensation $ 5,000 $ 2,043,124 $ 2,048,124
================ =============== ===============
Issuance of warrants connected to debt conversion $ - $ 18,750 $ 18,750
================ =============== ===============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
19
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1999
(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, 1999, 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, 1999 and June 30, 1998, the
Company had negative cash flows from operations of $213,584
and $2,694,418, respectively, and incurred a net loss of
$604,930 and $6,273,378, 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.
ADVERTISING:
The Company expenses the costs of all general advertising in
the period incurred. There was no advertising expense for the
year ended June 30, 1999 and advertising expense was
approximately $83,000 for the year ended June 30, 1998.
See accompanying independent auditors' report.
20
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
NET LOSS PER SHARE:
The Company computes net loss per share following SFAS No.
128, "Earnings Per Share". Under the provisions of 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,
1999 and June 30, 1998, 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.
See accompanying independent auditors' report.
21
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
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:
The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information". Adoption of these
pronouncements did not materially affect the financial
statements.
See accompanying independent auditors' report.
22
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In June 1998, the United Stated Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal
years beginning after June 15, 1999. The Company anticipates
that due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material effect on
its financial statements.
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.
(2) LOANS PAYABLE:
A summary is as follows:
<TABLE>
<S> <C>
Unsecured demand loans with no stated interest, due to
related parties $ 84,298
Note payable, shareholder, due September 9, 1998 with
stated interest at 10% per annum, 15% per annum as note
is in default 125,000
Note payable, shareholder due December 24, 1998, with
stated interest at 10% per annum, 15% per annum as note
is in default. 250,000
Note payable, net of discount - shareholder, due December 14,
1999, with interest at 10% per annum, increased to 15% per
annum if note in default; convertible at noteholder's option,
at a conversion rate of $2 per share. 93,752
---------------
$ 553,050
===============
</TABLE>
See accompanying independent auditors' report.
23
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(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, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
2000 $ 9,221
2001 4,123
2002 3,296
2003 299
---------------
$ 16,939
===============
</TABLE>
(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 is currently involved in negotiations with the landlord
regarding settlement of past due rent, as described below in Legal
Proceedings.
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, 1999 and June 30, 1998 was $109,972 and $90,512, respectively,
and $346,086 for the period from inception through June 30, 1999.
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, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
2000 $ 96,645
2001 98,534
---------------
$ 297,819
===============
</TABLE>
See accompanying independent auditors' report.
24
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(4) COMMITMENTS AND CONTINGENCIES, CONTINUED:
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 June 30, 1999, 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. This claim
was subsequently paid.
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.
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, a judgment obtained by the landlord in a
similar 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, included in accounts payable, 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.
See accompanying independent auditors' report.
25
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(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. During the year ended June 30, 1999, 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
Non-Qualified 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.
The following table summarizes information about options outstanding at
June 30, 1999 and June 30, 1998:
<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, 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
==============
1999:
Exercised (10,000) 0.2125
Expired (83,266)
--------------
Balance at June 30, 1999 893,932 0.68
==============
</TABLE>
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 in the year ended June 30, 1999.
See accompanying independent auditors' report.
26
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(5) COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:
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>
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>
<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>
278,600 of the options outstanding at the beginning of the period
represented options to purchase an aggregate of 10% of the common stock
outstanding at the time the options are exercised (i.e. "nondilutable"
options) for an aggregate price of $267,618. The CEO of the Company and
other related parties have been granted 167,160 and 111,440 of these
nondilutable options, respectively. These 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 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 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.
See accompanying independent auditors' report.
27
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED JUNE 30, 1999
(6) INCOME TAXES:
The Company had deferred tax assets of approximately $4,382,000 and
$4,137,000 as of June 30, 1999 and June 30, 1998, respectively, which
have been offset by 100% valuation allowances of $4,382,000 and
$4,137,000, 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 $10,205,000, which expires 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 for the year ended
June 30, 1998, with no expense in 1999, and $2,236,000 from the period
from inception through June 30, 1999. At June 30, 1999 and 1998,
amounts payable to the printer were approximately $700,000. The printer
has filed a lawsuit to collect these amounts (see Note 4).
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 $72,800.
See accompanying independent auditors' report.
28
<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, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE CORPORATE POSITIONS HELD
---- --- ------------------------
<S> <C> <C>
Adam Linter 53 Chairman of the Board,
President, Treasurer and
Secretary
James R. Rosbe 50 Director
Rick Nicita 53 Director
Alan G. Dunn 43 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 October 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 is currently the President of Soar Technologies, Inc., an
Ann Arbor, Michigan, software development firm. 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.
29
<PAGE>
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 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Adam Linter failed to
file a Form 4 for the month of December 1998 reporting his simultaneous
disposition and acquisition of 20,000 shares of Common Stock in non-cash private
transactions.
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
1999.
SUMMARY COMPENSATION TABLE:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ------------------ ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Adam Linter, President(2) 1999 $250,000(3) $ -0- $8,750(4) -0-
1998 $250,000(3) $ -0- $8,750(4) -0-
1997 $83,333 $ -0- - 85,440
</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, $250,000 was accrued but unpaid in fiscal 1999 and
$104,167 was accrued but unpaid in fiscal 1998.
(4) Consists of a $730 per month car allowance.
30
<PAGE>
The following table provides information concerning stock options granted to Mr.
Linter during the year ended June 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS FISCAL YEAR PRICE ($/SH) DATE
---- ---------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Adam Linter -0- N/A N/A N/A
</TABLE>
As to Mr. Linter, the following table sets forth the number and value of vested
and unvested options held as of June 30, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES ----------------------------- -------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Adam Linter -0- N/A 281,113 -0- $17,569 -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, 1999, 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 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.
31
<PAGE>
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.
32
<PAGE>
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 16, 1999 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 officer named above in "Item 10. Executive
Compensation," (iii) the Company's directors and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENTAGE(2)
- ---- --------------------- -------------
<S> <C> <C>
Michael Fuchs(3) 375,000(4) 10.1%
Adam Linter(5) 845,803(6) 23.3%
James R. Rosbe(7) 45,520(8) 1.4%
Rick Nicita(9) 95,138 2.8%
Alan G. Dunn(10) 34,958(11) 1.0%
All directors and executive
officers as a group (four persons)(12) 1,018,419 28.0%
</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, 1999 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 3,352,690 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
As of June 30, 1999, Mr. Linter owed the Company a total of $15,176 in principal
and interest, with the principal portion bearing interest at 8% per year. Such
amounts are unsecured and are to be paid in full by November 1999.
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, 1999
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
33
<PAGE>
being approximately $102,800. As a result of repayments, the Company's
indebtedness to Mr. Dunn is now approximately $72,800.
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***
10.22 Agreement for Purchase and Sale of Stock dated December 14, 1998 between the Registrant and
Wolfgang Struss
10.23 Negotiable Promissory Note dated December 14, 1998 by the Registrant in favor of Wolfgang Struss
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).
*** Incorporated by reference to Form 10-KSB for the fiscal year ended
June 30, 1998 (File No. 0-29050)
(b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K
during the fiscal year ended June 30, 1999.
34
<PAGE>
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> <C> <C>
/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)
</TABLE>
35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <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 ***
10.22 Agreement for the Purchase and Sale of Stock dated December 14, 1998 between
the Registrant and Wolfgang Struss
10.23 Negotiable Promissory Note dated December 14, 1998 by the Registrant in favor
of Wolfgang Struss
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).
*** Incorporated by reference to Form 10-KSB for the fiscal year eneded
June 30, 1998 (File No. 0-29050).
36
<PAGE>
EXHIBIT 10.22
AGREEMENT FOR PURCHASE AND SALE OF STOCK
OF TOMORROW'S MORNING, INC.
This Agreement for Purchase and Sale of Stock of Tomorrow's Morning, Inc.
(the "Agree ment") is entered into on December 14, 1998, by and between Wolfgang
Struss (the "Buyer") and Tomorrow's Morning, Inc. (the "Company") with reference
to the following facts and circumstances:
A. Concurrently herewith, Buyer has loaned to the Company the sum of
$100,000 (the "Loan").
B. In consideration for the Loan, the Company desires to transfer to Buyer
100,000 shares of the Company's no par value Common Stock (the "Shares"), and
Buyer desires to acquire the Shares from the Company, in each case on the terms
set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. SALE OF SHARES. In consideration for the Loan and without the
requirement of any additional payment, Seller hereby sells the Shares to Buyer,
and Buyer hereby purchases the Shares from Seller.
2. REPRESENTATIONS AND WARRANTIES.
(a) AUTHORITY AND TITLE. The Company warrants and represents that (i)
it has the full right, power and authority to enter into this Agreement and (ii)
Buyer will acquire good title to the Shares free and clear of all claims, liens,
encumbrances, restrictions and other rights, other than as set forth in the
legend specified in Section 4 below.
(b) BUYER'S KNOWLEDGE AND SOPHISTICATION. Buyer warrants and represents
that (i) he is familiar with the Company's operations, (ii) he has had the
opportunity to examine the Company's most recent financial statements, (iii) he
is aware of the extent of the Company's business, assets and liabilities, (iv)
he is acquiring the Shares for investment and not for distribution and (v) by
reason of his business and financial experience, he has the capacity to protect
his interests regarding the Shares and to evaluate the merits and risks of an
acquisition of the Shares.
3. REGISTRATION UNDER SECURITIES ACT OF 1933.
(a) REGISTRATION RIGHTS. The Company agrees that if, at any time and
from time to time, 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 fees and
expenses in connection with all registration statements filed pursuant to this
Section 3 including, without limitation, registration filing fees, the Company's
legal and accounting fees, printing
<PAGE>
expenses, and blue sky fees and expenses, (iii) to take all necessary action
which may be required in qualifying or registering the Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by Buyer; 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 Buyer (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 Buyer against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which Buyer 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 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 Buyer 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 Buyer 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
Shares or in connection such registration statement. Buyer, and his 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
Buyer or his successors or assigns, expressly for specific inclusion in such
registration statement; provided, however, that the obligations of Buyer
hereunder shall be limited to an amount equal to the proceeds to Buyer from the
sale of the Shares. 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 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
<PAGE>
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 3, any such payment or reimbursement by Buyer 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 Buyer.
(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 Shares to the public without registration, the Company agrees to use
its best efforts 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), 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 all times while it is subject to such reporting requirements.
(d) TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights
to cause the Company to register the Shares under this Section 3 may be
transferred or assigned by Buyer to a permitted transferee or assignee of the
Shares; provided that the Company is given written notice by Buyer at the time
of or within a reasonable time after said permitted 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 Buyer under this Section 3.
4. TRANSFERABILITY.
(a) Subject to Section 3 above, the Shares have not been, and
will not be, registered under the Act or qualified under the laws of any
jurisdiction. In issuing the Shares, the Company has relied, among others, upon
the exemption from registration provided by Section 4(2) of the Act on the
ground that the Shares are to be issued in a transaction by an issuer not
involving any public offering.
(b) Buyer agrees not to offer, sell, transfer, pledge or
hypothecate any of the Shares without an effective registration statement for
such 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.
(c) The certificates evidencing the Shares shall contain a
legend substantially in the form set forth below, and the Company may issue
orders to to its transfer agent for the Common Stock not to transfer the Shares
if such restrictions are not satisfied.
"THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED
PURSUANT TO THE SECURITIES ACT OF 1933
<PAGE>
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 QUALIFICA TIONS OR AN
OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER HEREOF TO THE EFFECT THAT SUCH
REGISTRATION AND QUALIFICATIONS ARE
NOT REQUIRED."
5. FURTHER ACTS. At any time and from time to time, each party hereto
shall, at the request of the other party, perform or cause to be performed and
execute, acknowledge and deliver or cause to be executed, acknowledged and
delivered all such further acts, assignments and documents as may be necessary
or desirable to more fully consummate the transactions contemplated by this
Agreement.
6. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and any agreements or
instruments executed pursuant hereto or concurrently herewith contain the entire
agreement between the parties with respect to the transactions contemplated by
this Agreement and supersede all prior writings, negotiations and
understandings. Such documents contain all of the covenants, representations,
warranties, promises or agreements, oral or otherwise, that have been made by
any party, or anyone acting on behalf of any party, and no covenant,
representation, warranty, promise or agreement not contained therein shall be
binding or valid. No waiver or amendment of any provision of this Agreement
shall be effective unless in writing and signed by the party to be bound.
7. HEADINGS. The headings or captions in this Agreement are for
convenience and reference only and do not form a part hereof and do not in any
way modify, interpret or construe the intent of the parties or affect any of the
provisions of this Agreement.
8. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original and the counterparts shall together
constitute one and the same agree ment, binding each of the parties hereto,
notwithstanding that all of the parties are not signatory to the original or the
same counterpart.
9. SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement and this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained therein, provided that elimination of such provision does not
affect the fundamental terms of this Agreement.
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to the
conflicts of laws rules thereof.
<PAGE>
11. NOTICES. No notice or other communication under this Agreement
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 Buyer; or
(b) Buyer at ____________________________________________, or
at such other address as Buyer has designated in writing to the Company.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the parties herein shall survive the closing of the purchase and
sale of the Shares and continue in full force and effect at all times
thereafter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
"BUYER":
--------------------------------
Wolfgang Struss
"SELLER":
TOMORROW'S MORNING, INC.
By:
-----------------------------
Adam Linter, President
<PAGE>
EXHIBIT 10.23
NEGOTIABLE PROMISSORY NOTE
$100,000 December 14, 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 Wolfgang Struss (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 $100,000 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 March 31, 1999. The entire principal amount hereof and all remaining
accrued interest shall be due and payable on December 14, 1999. 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.
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 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.
<PAGE>
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, 1999 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-30-1999 JUN-30-1998 JUN-30-1999
<PERIOD-START> JUL-01-1998 JUL-01-1997 JUL-01-1992
<PERIOD-END> JUN-30-1999 JUN-30-1998 JUN-30-1999
<CASH> 13 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 15,176 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 120,079 0 0
<PP&E> 140,402 0 0
<DEPRECIATION> 62,454 0 0
<TOTAL-ASSETS> 230,799 0 0
<CURRENT-LIABILITIES> 2,311,678 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 12,869,767 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 230,799 0 0
<SALES> 0 0 0
<TOTAL-REVENUES> 3,144 218,983 552,845
<CGS> 0 0 0
<TOTAL-COSTS> 906 925,397 3,313,352
<OTHER-EXPENSES> 536,008 5,554,704 11,808,419
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 71,160 11,460 384,639
<INCOME-PRETAX> (604,930) (6,272,578) (14,953,564)
<INCOME-TAX> 0 800 4,800
<INCOME-CONTINUING> (604,930) (6,273,378) (14,958,364)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (604,930) (6,273,378) (14,958,364)
<EPS-BASIC> (.21) (2.23) 0
<EPS-DILUTED> (.21) (2.23) 0
</TABLE>
