<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, 1998
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 30, 1998: 3,212,690
Transitional Small Business Disclosure Format (CHECK ONE) : Yes No X
----- -----
<PAGE>
PART I
FINANCIAL INFORMATION
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - SEPTEMBER 30, 1998
<TABLE>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 205
Accounts receivable, net of reserves of $125,614 -
Loan receivable, officer-shareholder 52,320
Software development costs 23,367
Prepaid expenses 81,523
---------------
Total current assets $ 157,415
OTHER ASSETS:
Fixed assets, net of accumulated depreciation of $43,911 98,786
Deposits 32,772
---------------
Total other assets 131,558
--------------
$ 288,973
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,506,835
Current maturities of contracts payable 5,731
Loans payable, related parties 443,049
---------------
Total current liabilities $ 1,955,615
CONTRACTS PAYABLE, less current maturities 12,249
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, 3,220,372 shares issued and outstanding 12,852,267
Deficit accumulated during development stage (14,531,158)
--------------
Total shareholders' deficit (1,678,891)
--------------
$ 288,973
==============
</TABLE>
Page 2
<PAGE>
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, 1998 September 30, 1997 September 30, 1998
(unaudited) (unaudited) (unaudited)
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUE:
SUBSCRIPTIONS $ 3,722 $ 128,232 $ 553,423
EDITORIAL, PRODUCTION AND
DISTRIBUTION COST - 207,662 3,312,446
------------- ------------- -------------
GROSS MARGIN 3,722 (79,430) (2,759,023)
OPERATING EXPENSES 152,711 1,569,968 8,537,214
RESEARCH AND DEVELOPMENT 2,000 282,640 842,375
------------- ------------- -------------
LOSS FROM OPERATIONS (150,989) (1,932,038) (12,138,612)
NONCASH OPTION COMPENSATION AND
CONSULTING FEES - - 2,026,204
LEGAL SETTLEMENT - - 30,000
OTHER EXPENSES, NET 6,946 4,591 64,004
INTEREST EXPENSE 20,843 1,082 334,320
INTEREST INCOME (1,054) (20,335) 66,782
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (177,724) (1,917,376) (14,526,358)
INCOME TAXES - 800 4,800
------------- ------------- -------------
NET LOSS $ (177,724) $ (1,918,176) $ (14,531,158)
============= ============= =============
NET LOSS PER SHARE, basic and diluted $ (0.06) $ (0.69)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 3,220,372 2,785,998
============= =============
</TABLE>
Page 3
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
From inception on
Three months ended Three months ended June 30, 1992 to
September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING
ACTIVITIES:
Net loss $ (177,724) $ (1,918,176) $ (14,531,158)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation 6,946 4,591 43,912
Amortization of debt issuance costs - - 138,168
Amortization of loans payable discount 8,854 - 12,500
Non-cash litigation settlement - - 30,000
Non-cash compensation - 574,612 4,638,481
Non-cash payment for services rendered - - 132,500
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 445 (748,427) -
Prepaid expenses 42,587 (89,548) (81,523)
Software development costs - (6,200) (23,367)
Deposits - (26,293) (32,773)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 51,599 118,477 1,510,837
Deferred revenue - 636,822 -
------------- ------------- ---------------
Net cash used for operating activities (67,293) (1,454,141) (8,162,423)
------------- ------------- ---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES -
acquisition of fixed assets - (45,028) (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 - 4,000 799,276
Proceeds from notes payable - - 1,705,086
Proceeds from contracts payable - 23,471 127,404
Cash paid for debt issuance costs - - (210,757)
Proceeds from exercise of stock options 2,100 - 84,638
Proceeds from exercise of warrants - - 1,074
Proceeds from shareholders 11,446 - 11,446
Repayment of revolving line of credit - - (50,000)
Repayment of loans payable - - (423,400)
Repayment of notes payable - - (11,459)
Repayment of contracts payable (1,202) (18,668) (109,423)
Repayment from shareholders 9,000 7,227 33,186
Loans to shareholders - - (96,952)
Cash paid for offering costs - - (304,528)
Purchase of treasury stock - - (50,000)
------------- ------------- ---------------
Net cash provided by financing activities 21,344 16,030 8,305,325
------------- ------------- ---------------
NET INCREASE (DECREASE) IN CASH (45,949) (1,483,139) 205
CASH, beginning of period 46,154 2,342,849 -
------------- ------------- ---------------
CASH, end of period $ 205 $ 859,710 $ 205
============= ============= ===============
</TABLE>
Page 4
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
From inception on
Year ended Year ended June 30, 1992 to
June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- -----------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Decrease in debt issuance costs recorded in connection
with the issuance of convertible notes payable $ - $ - $ (72,589)
============= ============ ============
Conversion of notes payable to common stock $ - $ - $ 1,532,707
============= ============ ============
Non-cash compensation $ - $ 574,612 $ 2,043,124
============= ============ ============
Issuance of warrants connected to debt conversion $ - $ - $ 18,750
============= ============ ============
</TABLE>
Page 5
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(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, 1998.
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, 1998, the Company is a
development stage enterprise, as defined in Financial
Accounting Standards Board Statement No. 7. The Company is
devoting substantially all of its efforts toward establishing
new business and product.
In June 1996 the Company filed for an initial public offering
("IPO") of its common stock on Form SB-2 with the Securities
and Exchange Commission. That offering was successfully
completed in March 1997.
GOING CONCERN:
For the three months ended September 30, 1998, the Company had
negative cash flows from operations of $67,293 and incurred a
net loss of 177,724. 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 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 operating.
There can, however, be no guarantee that the Company will be
able to obtain such additional long- and short-term funds or
that, if obtained, it will be able to achieve or sustain
significant revenues or profitability in the future.
REVENUE RECOGNITION:
Subscription sales are recorded as deferred revenue at the
time of sale. Revenues from subscriptions are recognized
ratably over the subscription period as newspapers are
delivered. Deferred revenue represents unfulfilled
subscription sales at period-end.
Page 6
<PAGE>
TOMORROW'S MORNING, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1998
(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.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED
BELOW IN "OVERVIEW."
OVERVIEW. For the quarter ended September 30, 1998, revenues were $3,722 and the
Company experienced a net loss of $177,724, as compared to revenues of $128,232
and a net loss of $1,918,232 for the three months ended September 30, 1997. 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, 1998 AND 1997. Revenues for the quarter
ended September 30, 1998 were $3,722, as compared to $128,232 for the three
months ended September 30, 1997. This decrease in revenues was the result of
suspension of Newspaper publication in May 1998. Costs and expenses decreased to
$154,711 during the three months ended September 30, 1998, a 90% change from
$1,485,713 during the quarter ended September 30, 1997.
Total interest expense for the quarter ended September 30, 1998 was $20,482, as
compared to $1,082 for the same three month period in 1997. This over
nineteen-fold increase is attributable to increased borrowings to satisfy
existing obligations.
For the three months ended September 30, 1998, the Company experienced a net
loss of $177,724, a decrease of approximately 90% from the $1,918,232 net loss
incurred in the three months ended September 30, 1997. The change in net loss
was primarily due to the factors described above with respect to costs and
operating expenses, partially offset by increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES. To date, the Company's primary capital needs
have been to fund the development and growth of the Newspaper 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, 1998, the Company had current assets of $157,415. The
Company has been seeking approximately $500,000 to $1,000,000 in outside debt
and/or equity funding in order to be able to complete the development of
SCOOP-TM-. To date, the Company has obtained only $125,000 of that funding. The
Company is also in discussions with several prospective distributors of SCOOP,
which could result in a royalty advance to the Company which would be used to
complete the production of that product. As a result of its lack of working
capital, the Company is currently unable to meet its financial obligations to
its creditors, including the vendor which has printed the Newspaper and its
landlord. In order for the Company to resume publication of the Newspaper and
continue its normal activities, the Company must immediately raise approximately
$500,000 to $1,000,000 through bank borrowings, public or private debt or equity
offerings, or otherwise. In addition to discussions with prospective lenders, as
well as continued solicitation of Newspaper sponsorships through the READING
PARTNERS
Page 8
<PAGE>
PROGRAM, the Company is attempting to raise at least a portion of the needed
short-term funds through the private issuance of convertible debt or convertible
preferred stock. There can be no guarantee that any of such funding will be
available on terms favorable to the Company or its shareholders, if at all.
As to longer-term funding requirements, the Company is continuing to pursue
opportunities for a private equity offering of up to $5 million. In addition,
the Company is also investigating other approaches to obtain long-term operating
funds while also maximizing shareholder value. To date, those approaches
include, but are not limited to, a possible merger with the appropriate entity
or a sale of the Company or its assets. There can be no guarantee that any of
the Company's efforts will be successful or, if successful, that they will
result in a transaction on terms favorable to the Company or its shareholders.
If the short-term funds described above are obtained but long-term funds do not
become available, the Company may be required to curtail its future operations,
which could have a material adverse effect on the Company's business, operating
results and financial condition at that time.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
On June 30, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("FAS 130"). FAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. FAS 130 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented. Management is currently evaluating the
requirements of FAS 130.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company does not anticipate that the adoption of
this statement will have a material effect on its financial statements.
In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is effective
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.
Page 9
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 13, 1998, the Company was subject to a levy of $26,287 by the California
Employment Development Department for back taxes. Such levy satisfied that
agency's claim in full.
On August 17, 1998, the Company received a notice of levy from the Internal
Revenue Service as to $30,761 for back taxes. The Company has contacted that
agency with respect to the levy and an alternative payment plan.
On September 15, 1998, Barrington Plaza Partnership, the Company's landlord,
filed an unlawful detainer action in Los Angeles County Municipal Court seeking
possession of the Company's executive offices and past due rent. Such action
follows a similar action by the landlord in May 1998, which has resulted in a
$7,700 judgment against the Company which has not yet been satisfied.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On July 1, 1998, the Company issued 10,000 shares of Common Stock to Steven
Raft pursuant to his exercise of previously granted options by the payment
of $2,125 in cash. Based on Mr. Raft's access to information as a former
officer of the Company and his level of investment sophistication, the
shares were issued in reliance on the exemption provided in Section 4(2) of
the Securities Act of 1933 because no public offering was involved.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default in its obligations to virtually all of its creditors
and 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. Such defaults will continue until funds are obtained as
described in Part I above.
Page 10
<PAGE>
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, 1998.
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
Page 11
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule
Page 12
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 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> SEP-30-1998 SEP-30-1997 SEP-30-1998
<CASH> 205 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 52,320 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 157,415 0 0
<PP&E> 142,697 0 0
<DEPRECIATION> 43,911 0 0
<TOTAL-ASSETS> 288,973 0 0
<CURRENT-LIABILITIES> 1,955,614 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 12,852,267 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 288,973 0 0
<SALES> 0 0 0
<TOTAL-REVENUES> 3,722 128,232 553,423
<CGS> 0 0 0
<TOTAL-COSTS> 0 207,662 3,312,446
<OTHER-EXPENSES> 160,603 1,836,864 11,433,014
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 20,843 1,082 334,321
<INCOME-PRETAX> (177,724) (1,917,376) (14,526,358)
<INCOME-TAX> 0 800 4,800
<INCOME-CONTINUING> (177,724) (1,918,176) (14,531,158)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (177,724) (1,918,176) (14,531,158)
<EPS-BASIC> (0.06) (0.69) 0
<EPS-DILUTED> (0.06) (0.69) 0
</TABLE>
