<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________ to ______________.
COMMISSION FILE NUMBER: 0-29050
TOMORROW'S MORNING, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 95-4379805
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
125 South Barrington Place, Los Angeles, California 90049
(Address of principal executive offices)
Issuer's telephone number: (310) 440-2778
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes __X___
No ______
Number of shares of common stock outstanding at October 29, 1999: 3,352,690
Transitional Small Business Disclosure Format (CHECK ONE) : Yes _____ No __X__
1
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PART I
FINANCIAL INFORMATION
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13
Software development costs 95,867
Prepaid expenses and other current assets 9,023
---------------
Total current assets $ 104,903
OTHER ASSETS:
Fixed assets, net of accumulated depreciation of $71,274 71,423
Deposits 32,772
---------------
Total other assets 104,195
--------------
$ 209,098
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,852,512
Current maturities of contracts payable 11,047
Loans payable 556,176
Loans payable, officer-shareholder 15,029
---------------
Total current liabilities $ 2,434,764
CONTRACTS PAYABLE, less current maturities 5,977
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 (15,101,410)
---------------
Total shareholders' deficit (2,231,643)
--------------
$ 209,098
==============
</TABLE>
2
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TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM INCEPTION ON
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1992 TO
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE:
SUBSCRIPTIONS $ - $ 3,722 $ 552,845
EDITORIAL, PRODUCTION AND
DISTRIBUTION COST - - 3,313,352
---------------- -------------- ---------------
GROSS MARGIN - 3,722 (2,760,507)
OPERATING EXPENSES 123,684 152,711 9,019,514
RESEARCH AND DEVELOPMENT - 2,000 840,376
---------------- -------------- ---------------
LOSS FROM OPERATIONS (123,684) (150,989) (12,620,397)
NONCASH OPTION COMPENSATION AND
CONSULTING FEES - - 2,026,204
LEGAL SETTLEMENT - - 30,000
OTHER EXPENSES, NET - 6,946 84,840
INTEREST EXPENSE 19,690 20,843 404,329
INTEREST INCOME 328 1,054 69,160
---------------- -------------- ---------------
LOSS BEFORE INCOME TAXES (143,046) (177,724) (15,096,610)
INCOME TAXES - - 4,800
---------------- -------------- ---------------
NET LOSS $ (143,046) $ (177,724) $ (15,101,410)
================ ============== ===============
NET LOSS PER SHARE, basic and diluted $ (0.04) $ (0.06)
=============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 3,360,372 3,220,372
================ ==============
</TABLE>
3
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TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FROM INCEPTION ON
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1992 TO
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES:
Net loss $ (143,046) $ (177,724) $ (15,101,410)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation 6,525 6,946 71,275
Amortization of debt issuance costs - - 138,168
Amortization of loans payable discount 3,126 8,854 28,127
Non-cash litigation settlement - - 30,000
Non-cash compensation - - 4,643,481
Non-cash payment for services rendered - - 132,500
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable - 445 445
Prepaid expenses - 42,587 42,140
Software development costs - - (124,110)
Deposits - - (23,367)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 103,105 51,599 364,418
Deferred revenue - - 1,459,238
------------- ---------------- ---------------
Net cash used for operating activities (30,290) (67,293) (8,339,095)
------------- ---------------- ---------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES -
acquisition of fixed assets - - (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 payable and warrants - - 909,276
Proceeds from notes payable - - 1,705,086
Proceeds from contracts payable - - 127,401
Cash paid for debt issuance costs - 2,100 (210,757)
Proceeds from loans payable, officer-shareholder 15,029 - 15,029
Proceeds from exercise of stock options - - 84,638
Proceeds from exercise of warrants - 11,446 1,074
Proceeds from shareholders - - 11,619
Repayment of revolving line of credit - - (50,000)
Repayment of loans payable - - (423,400)
Repayment of notes payable - - (11,456)
Repayment of contracts payable - (1,202) (110,377)
Repayment of loans receivable from shareholder 15,588 9,000 85,745
Loans to shareholders (327) - (97,279)
Cash paid for offering costs - - (304,528)
Purchase of treasury stock - - (50,000)
------------- ---------------- ---------------
Net cash provided by financing activities 30,290 21,344 8,481,805
------------- ---------------- ---------------
NET DECREASE IN CASH - (45,949) 13
CASH, beginning of period 13 46,154 -
------------- ---------------- ---------------
CASH, end of period $ 13 $ 205 $ 13
============= ================ ===============
</TABLE>
4
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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
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1992 TO
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Decrease in debt issuance costs recorded in connection
with the issuance of convertible notes payable $ - $ - $ (72,589)
============= ================ ===============
Conversion of notes payable to common stock $ - $ - $ 1,532,707
============= ================ ===============
Non-cash compensation $ - $ - $ 2,048,124
============= ================ ===============
Issuance of warrants connected to debt conversion $ - $ - $ 18,750
============= ================ ===============
</TABLE>
5
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TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(1) SUMMARY SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS:
The accompanying financial statements include all adjustments
(consisting of only normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation
of the results of operations for the periods presented.
Interim results are not necessarily indicative of the results
to be expected for a full year. The financial statements
should be read in conjunction with the financial statements
included in the annual report of Tomorrow's Morning, Inc. (the
"Company") on Form 10-KSB for the year ended June 30, 1999.
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 September 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 three months ended September 30, 1999, the Company had
negative cash flows from operations of $30,290 and incurred a
net loss of $143,046. The Company's expenses continue to
greatly exceed its income, and its future depends on: (i)
finding a strategic partner; (ii) the development of
complementary products; (iii) completion and successful
marketing of the SCOOP(TM) CD-ROM journalism game; (iv) the
formation of joint-marketing alliances for corporate
sponsorship of schools through the Company's Reading Partners
Program and/or the sale of advertising space; (v) getting one
or more television shows, or interstitial news "flashes", on
the air; and (vi) expansion into ancillary publishing and
merchandising through redirecting the Company's content and/or
licensing the Company's characters and identity. The Company
has used all of the net proceeds of its initial public
offering and finds that it requires substantial additional
funds in order to reach the above long-term goals. In
addition, as discussed below in "Management's Discussion and
Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources," the Company requires an
immediate infusion of working capital to continue its present
operations. There can, however, be no guarantee that the
Company will be able to obtain such additional long- and
short-term funds or that, if obtained, it will be able to
achieve or sustain significant revenues or profitability in
the future.
REVENUE RECOGNITION:
Subscription sales are recorded as deferred revenue at the
time of sale. Revenues from subscriptions are recognized
ratably over the subscription period as newspapers are
delivered. Deferred revenue represents unfulfilled
subscription sales at period-end.
6
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TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999
(2) 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. This amount was subsequently paid.
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 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.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. THE 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 BELOW IN "OVERVIEW."
OVERVIEW. For the quarter ended September 30, 1999, the Company had no revenue
and experienced a net loss of $143,046, as compared to revenues of $3,722 and a
net loss of $177,724 for the three months ended September 30, 1998. The Company
continues to sustain substantial losses, which have resulted in suspension of
publication of the Tomorrow's Morning newspaper (the "Newspaper"), the Company's
only product to date. As a result, such losses threaten the Company's ability to
continue as a going concern. In the long run, the Company's future depends on:
(i) finding a strategic partner; (ii) the development of complementary products;
(iii) completion and successful marketing of the SCOOP-TM- CD-ROM journalism
game; (iv) the formation of joint-marketing alliances for corporate sponsorship
of schools through the Company's READING PARTNERS PROGRAM and/or the sale of
advertising space in the Newspaper should publication resume; (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.
THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998. Revenues for the quarter
ended September 30, 1999 were zero, as compared to $3,722 for the three months
ended September 30, 1998. Due to ongoing cutbacks in operations, costs and
expenses decreased to $123,864 during the three months ended September 30, 1999,
a 20% change from $154,711 during the quarter ended September 30, 1998.
Total interest expense for the quarter ended September 30, 1999 was $19,690, as
compared to $20,482 for the same three month period in 1998.
For the three months ended September 30, 1999, the Company experienced a net
loss of $143,046, a decrease of approximately 20% from the $177,724 net loss
incurred in the three months ended September 30, 1998. The change in net loss
was primarily due to the factors described above with respect to costs and
operating 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. 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 (which were the source of most
subscriptions), 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 September 30, 1999, the Company had current assets of $104,903. As a
result of its lack of working capital, the Company is currently 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 $1,000,000 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 be 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 is also investigating other approaches to obtain 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. If the
near-term funds described above are obtained, unless long-term funds
8
<PAGE>
also become available, the Company may be required to curtail its future
operations, which would have a material adverse effect on the Company's
business, operating results and financial condition at that time.
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.
9
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 13, 1999, Starbright Graphics, Inc. filed a breach of contract action
against the Company and Adam Linter in Los Angeles County Superior Court seeking
$699,231.06 for services rendered in connection with the printing and
distribution of the Newspaper. The Company and Mr. Linter intend to contest that
action to the extent appropriate.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) None.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default in its obligations to virtually all of its creditors,
as well as its landlord. The Company is also in default as to the payment of
principal and interest on a $125,000 loan from Wilmington Trust Company, Trustee
for Andrea B. Currier, and a $250,000 loan from Michael Fuchs. Such defaults
will continue until funds are obtained as described in Part I above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibit is attached hereto:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the Company's fiscal quarter
ended September 30, 1999.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
TOMORROW'S MORNING, INC.
Dated: May 2, 2000 By: /s/ ADAM LINTER
----------------------------------------
Adam Linter, President and Treasurer
11
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27 Financial Data Schedule
12
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS OTHER
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999 JUN-30-2000
<PERIOD-START> JUL-01-1999 JUL-01-1998 JUL-01-1992
<PERIOD-END> SEP-30-1999 SEP-30-1998 SEP-30-1999
<CASH> 13 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 104,903 0 0
<PP&E> 142,697 0 0
<DEPRECIATION> 71,274 0 0
<TOTAL-ASSETS> 209,098 0 0
<CURRENT-LIABILITIES> 2,434,764 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> 0 0 0
<SALES> 0 0 0
<TOTAL-REVENUES> 0 3,722 552,845
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 3,313,352
<OTHER-EXPENSES> 123,356 160,603 11,931,774
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 19,690 20,843 404,329
<INCOME-PRETAX> (143,046) (177,724) (15,096,610)
<INCOME-TAX> 0 0 4,800
<INCOME-CONTINUING> (143,046) (177,724) (15,101,410)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (143,046) (177,724) (15,101,410)
<EPS-BASIC> (0.04) (0.06) 0
<EPS-DILUTED> (0.04) (0.06) 0
</TABLE>
