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 June 30, 2000
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For
the transition period from ________________ to _______________
000-28173
(Commission file number)
THE ENTERTAINMENT INTERNET, INC.
--------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 95-4730315
--------------------------------- --------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5757 Wilshire Blvd., Suite 124, Los Angeles, CA 90036
-----------------------------------------------------------
(Address of principal executive offices)
(323) 904-4940
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity. As of August 15, 2000 - 47,137,916 shares of Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2000 2
Consolidated Statements of Operations for
the three months ended June 30, 2000 and 1999 3
Consolidated Statements of Operations for
the six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes In Securities 18
Item 5. Other Information 19
SIGNATURES 20
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 99,866
Prepaid expenses 476,776
-----------
Total current assets 576,642
PROPERTY AND EQUIPMENT, net 527,106
OTHER ASSETS 11,228
-----------
TOTAL ASSETS $ 1,114,976
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses 2,287,921
Deferred revenue 209,727
Debentures payable 437,000
Convertible notes payable - stockholders 977,000
Capital lease obligations, current portion 24,404
-----------
Total current liabilities 3,936,052
NOTES PAYABLE - STOCKHOLDERS 500,453
CAPITAL LEASE OBLIGATIONS, less current portion 66,791
-----------
TOTAL LIABILITIES 4,503,296
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, no par value, 1,000,000
shares authorized, 5,400 shares issued and
outstanding 2,032,300
Common Stock, $.001 par value, 75,000,000
shares authorized, 46,937,916 shares issued
and outstanding 46,938
Additional paid-in capital 7,872,303
Shares be issued 700,000
Accumulated deficit (14,039,861)
-----------
Total stockholders' deficiency (3,388,320)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 1,114,976
===========
See the accompanying notes to the consolidated financial statements
2
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ----------
REVENUE $ 138,921 $ 212,457
COST OF REVENUE 115,890 100,908
------------ ----------
GROSS PROFIT 23,031 111,549
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,849,351 707,187
------------ ----------
LOSS FROM OPERATIONS (1,826,320) (595,637)
------------ ----------
OTHER INCOME (EXPENSES)
Cancellation of shares previously
Issued for service rendered 286,700 -
Gain on settlement of payable 16,560 -
Interest expense (318,810) (15,555)
------------- ----------
Total Other Income (Expense) ( 15,550) (15,555)
------------- ----------
LOSS BEFORE INCOME TAXES (1,841,870) (611,192)
INCOME TAXES - -
------------ ----------
NET LOSS $ (1,841,870) $ (611,192)
============ ==========
BASIC AND DILUTED LOSS PER SHARE $ (0.04) $ (0.03)
============ ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 46,272,298 22,818,302
============ ==========
See the accompanying notes to the consolidated financial statements
3
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ----------
REVENUE $ 258,193 $ 397,931
COST OF REVENUE 282,912 294,655
------------ ----------
GROSS PROFIT (LOSS) (24,719) 103,276
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,348,002 979,579
------------ ----------
LOSS FROM OPERATIONS (3,372,721) ( 876,303)
------------ ----------
OTHER INCOME (EXPENSES)
Cancellation of shares previously
Issued for service rendered 286,700 -
Gain on settlement of payable 434,625 -
Interest expense ( 602,390) ( 55,822)
------------- ----------
Total Other Income (Expense) 118,935 ( 55,822)
------------- ----------
LOSS BEFORE INCOME TAXES (3,253,786) (932,125)
INCOME TAXES - -
------------ ----------
NET LOSS $ (3,253,786) $ (932,125)
============ ==========
BASIC AND DILUTED LOSS PER SHARE $ (0.07) $ (0.06)
============ ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 45,496,688 15,868,898
============ ==========
See the accompanying notes to the consolidated financial statements
4
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,253,786) $(932,129)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization expense 55,268 57,589
Gain on settlement of accounts payable ( 434,623) -
Common stock issued for services 791,853 -
Warrants issued for services 692,520 -
Cancelled stock issued for services ( 287,200)
(Increase) decrease in:
Accounts receivable - (739)
Prepaid expenses 482,855 32,540
Other assets -
Increase (decrease) in:
Accounts payable and accrued expenses 871,223) (190,850)
Deferred revenue (46,376) 23,704
----------- -----------
Net cash used in operating activities (1,128,267) (1,009,885)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment ( 180,928) (109,734)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in book overdraft - (19,295)
Advances from affiliated company - 199,888
Proceeds from issuance of notes payable
To shareholder - 1,615,930
Repayment of notes payable ( 4,000) (546,362)
Proceeds from convertible debentures 703,000
Repayment of convertible debentures - (47,500)
Proceeds from stock purchase not yet issued 700,000
Payment on capital lease obligation ( 2,654) ( 14,499)
----------- -----------
Net cash provided by financing
activities 1,396,346 1,188,162
----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 87,151 68,543
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 12,714 7,482
----------- -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 99,866 $ 76,025
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the six months ended June 30, 2000 and 1999, the Company paid no interest
and no income taxes.
See the accompanying notes to the consolidated financial statements
5
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been prepared by
The Entertainment Internet, Inc. (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments), which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The results of the six
months ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2000.
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share exclude any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. As of June 30, 2000 and 1999, the Company had
potentially dilutive securities of 7,371,380 and 4,409,335, respectively.
NOTE 3 - SHARES PURCHASED BUT NOT ISSUED
The Company has an informal agreement with Mr. Michael Zwebner as an investors'
to purchase stock. During the six months ended June 30, 2000, Mr. Zwebner's
investors funded this purchase with $700,000. For accounting purposes, that
amount has been classified as equity for shares not yet issued.
NOTE 4 - INVESTING AND FINANCING TRANSACTIONS
During the six months ended June 30, 2000, the Company issued 2,855,938 shares
of its common stock for services rendered. The shares were valued at an
aggregate amount of $788,997, which was the fair market value of the stock as of
the date of issuance. Also, during the six months ended June 30, 2000, the
Company issued warrants to purchase 2,050,000 shares of the Company's common
stock. The warrants were valued at an aggregate amount of $692,520, at a value
based on the Black-scholes option pricing model. In addition, a certificate for
500,000 shares issued for services rendered was returned and cancelled with no
impact on the income statement.
NOTE 5 - SETTLEMENT
During the six months ended June 30, 2000, the Company settled debts with
Pacific Bell for telephone and internet connections. The amount relieved from
liabilities was $434,623.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS:
This report includes projections of future results and "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Stockholders and investors are cautioned that all forward-looking statements
involve risks and uncertainty, including, without limitation, the ability to
frame and execute the Company's business plan, general market conditions, a
general lack of public interest in either the Company's products or securities,
federal or state laws or regulations having adverse effects on small business
enterprises, market competition and pricing. Although the Company believes the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward looking statements in this Report will
prove to be accurate.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this registration statement as anticipated, estimated or expected.
GENERAL
-------
The Company became fully-reporting by operation of law on January 15, 2000.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related footnotes for the year ended
December 31, 1999, included in its Annual Report on Form 10-KSB, and for the
period ended June 30, 2000 included in this Quarterly Report on Form 10Q-SB, and
amendments thereto. The discussion of results, causes and trends should not be
construed to imply any conclusion that such results or trends will continue in
the future.
OVERVIEW
--------
The Entertainment Internet, Incorporated ("EINI" or "The Company") is a Nevada
corporation which acts as the holding company and parent corporation for Only
Multimedia Network, Inc. ("OMNI"), a California corporation, which is the only
holding of the Company. Through Only Multimedia Network, Incorporated, EINI
intends to establish itself as the leading service provider of resources for the
global entertainment industry. The Company operates a series of Internet-based
services using the Castnet.com(TM) service mark and trade name.
During 1999, the Company assessed its technological infrastructure and the
systems used to operate the Castnet.com(TM) databases and determined that such
infrastructure and systems should be upgraded and redesigned; this determination
was made as new databases were being developed to create revenue streams for the
Company.
7
<PAGE>
The Company's older databases used software which was not Year 2000 compliant or
scalable to meet the objectives of the Company's growth plans. The determination
was made during the second quarter of 1999 to program and design new service
databases using modern languages and software; the Company attempted to meet its
programming objectives in-house but was unable to do so. When the Company
engaged outside vendors, such efforts resulted in a split application of
technology, whereby the Castnet.com(TM) actors databases were not operating in
harmony with the databases developed during the fourth quarter of 1999 and first
quarter of 2000 for CastnetBabies.com, CastnetExtras.com, and
CastnetRealPeople.com. The Company decided that the solution rested with
redesign (of the system architecture), reprogramming and modernization of the
Castnet.com(TM) core database and associated web pages, and concentrated its
first quarter efforts on effecting such redesign, sourcing vendors for
programming, and negotiating for provision of services. The Company determined
that it would not be prudent or otherwise in its best interests to expand the
membership of its Castnet.com(TM)core database during this period and until the
new architectures and programs are operable and ready for introduction; the
Company halted all regional sales efforts. Such action ordinarily causes a
downturn in revenue but the Company believes it must operate in a credible,
responsible manner and refrain from expansion of its Castnet.com(TM) membership
base where such expansion could result in interruption of service or other
problems which could negatively impact upon its good reputation within the
entertainment industries; this conservative approach is expected to result in
the retention of what the Company believes is a favorable perception of and
regard for the Company within the entertainment industries.
To further develop the Company's good standing within the entertainment
industries, the Company approached director Thom Mount, President of the
Producers Guild of America (PGA), in July, 1999, and requested a formal
association with the PGA. Mr. Mount referred the Company to the PGA's Board of
Directors, which undertook a lengthy (8-9 mos.) review process which ultimately
resulted during the quarter in an official "blessing" of Castnet.com(TM)'s
services by the PGA, which is now working in concert with the Company to develop
services tailored to the needs of producers. A PGA committee also works with the
Company to provide feedback regarding its current services and input relating to
development of new services and growth into new markets. While no revenue or
material impact has been realized from this activity, the Company believes its
association with the PGA will allow it to develop a base of producers who use
the Castnet.com(TM)services as part of their daily production activities.
The Company continued to concentrate efforts on elimination of legal claims and
recorded liabilities which stressed operations and threatened its continued
existence.
8
<PAGE>
RESULTS OF OPERATIONS-THREE MONTHS ENDED JUNE 30, 2000 vs. 1999
----------------------------------------------------------------
THE ENTERTAINMENT INTERNET, INC.
--------------------------------
General
During the second quarter, efforts were concentrated on redesign of the
Company's databases from a visual and technological perspective. The Company's
C.E.O. engaged a branding agency; their second quarter initiatives included
redesign of certain Castnet.com(TM) website pages. The branding agency's
deliverables did not include programming services; for this reason, the Company
sourced a mid-tier vendor to provide the programming and technological expertise
needed to deliver completed databases, source and evaluate software, hardware,
and web-service vendors, analyze hosting and co-location solutions, and to
provide generally services which would otherwise be provided by a team of
technology officers. During the quarter, the programming team began construction
of the working model of the new Castnet.com(TM)website; at the close of the
quarter, the first operable website pages were reviewed by the Company. The
Company anticipates the need for additional design work, however, and may choose
to re-evaluate use of its branding agency in the event its vision is not
incorporated into the work produced by such agency.
Secondary efforts included removal of unpaid members from the Castnet.com(TM)
databases. Formerly, it was the Company's practice to "front-load" members
without charge, to create a database of talent which could be used by casting
directors regardless of paid membership status. The Company determined it in its
best interest to remove unpaid subscribers, many of whom had outdated profiles
and lacked routine contact with the Company, to increase the integrity of its
system. In contrast to systems operated by competitors, where talent remains
included despite a lack of participation or payment, and where contact data may
be inaccurate or inappropriate for use by casting directors and other industry
professionals to make contact, the Company believes its system and the deletion
of aged accounts gives it better standing within the entertainment community.
Tertiary efforts focused on sourcing and evaluating businesses suited for
strategic alliances with the Company. Such efforts included identification of a
company believed to be well-suited for integration of technology and marketing
resources and which is receptive to such an arrangement. This type of alliance
would, if framed, potentially reduce the need for expenditures for hardware and
software presently estimated to required in amounts exceeding $1,250,000. The
Company will continue pursue this type of strategic alliance and report as
required through 8-K or other filings or disclosure statements. The Company also
sourced vendors to provide state-of-the-art services for its websites, including
streaming video, voice-over processing, real-time news and live chat. Each of
these vendors is being evaluated for potential integration of services into the
new Castnet.com(TM) program under development.
The Company also continued its efforts to reduce existing liabilities and
aggressively defend claims levied against it; these efforts included resolution
of the claims of the company's single largest creditor, as more fully discussed
in Part II, Item 1, Legal Proceedings.
9
<PAGE>
Revenues
Revenues consist of membership fees for Castnet.com(TM) services and a small
amount of income from advertising where the Company has not yet implemented a
plan to significantly develop its advertising revenue stream. Castnet.com(TM)
members pay a fee in advance for an extended period of time, generally twelve
months. The fees are prorated and recorded as revenue over that period of time.
For the three months ended June 30, 2000, revenues of $138,921 represented a 35%
decrease as compared to revenues of $212,457 for the same period of 1999. This
decrease was expected after management determined that it would be in the
Company's best interests to concentrate its efforts on redesign of the
Castnet.com(TM) database architecture used to support the services offered by
the Company and, while doing so, to reduce sales efforts which could otherwise
result in an overload of the Castnet.com(TM) system and potential interruption
of services. Regional sales efforts, comprised of sales efforts in metropolitan
markets outside greater Los Angeles, were halted during the fourth quarter of
1999; regional sales previously represented approximately 20% of revenues; as a
result, there were no revenues from regional sales to contrast or compare to
same period revenues for the first quarter of 1999. Management expects revenues
to remain substantially the same during the next reporting period, as it is
presently impacted by a strike within the Screen Actors Guild and does not
expect introduction of its new systems until some time during the latter part of
the third or fourth quarter of 2000.
Cost of Revenue
Cost of Revenue for the three month period ending June 30, 2000 was $81,925,
which represents a 19% decrease as compared to same period costs of $100,908 for
1999; this decrease is attributable in part to the use of outside consultants to
maintain technical aspects of the Castnet.com(TM) websites. Costs of revenue did
not decrease in alignment with the percentage decrease in revenues because the
majority of costs were fixed and did not fluctuate with sales activity.
Management expects the costs of revenue to remain stable during the next period,
as it expects to continue its operation in similar fashion during that time.
Gross Profit
Gross Profit is calculated as revenues less the cost of revenues, which consists
primarily of the cost of maintaining the Castnet.com(TM) Internet. These costs
are telephone access, software and hardware maintenance and depreciation of
equipment and the salaries of personnel who maintain the system. For the three
months ending June 30, 2000, gross profit of $56,996 represented a decrease of
49% as compared to a same period profit of $111,549 for 1999. Management expects
the gross profit to increase during the next quarter through a rebuilding of its
sales force, elimination of costs associated with local network "pops" used to
provide clients with dial-up Internet access. The level of the increase cannot
presently be estimated, however, as it will be primarily dependent upon the
impact of a strike within the Screen Actors Guild.
10
<PAGE>
Selling, General and Administrative
Selling, General and Administrative ("SG&A") expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees, commissions and other general corporate expenses. For the
three months ended June 30, 2000, SG&A of 1,596,616 increased by 125% from same
period SG&A of $707,187 for 1999. During the second quarter, $108,333 was
accrued for the salaries of the Company's two chairmen; $327,596 was recorded
for options issued to Mr. Hadid; $264,000 was recorded for issuance of stock to
Mr. Hadid (the options and stock are one-time issuances). Significant
expenditures were made for communications, repairs and use of outside legal
counsel for certain litigation. Management expects SG&A to increase in the
future as a sales force is recruited, but is unable to estimate the percentage
of such increases as it has no definitive plan or associated budget and is in
the process of creating the same.
Interest Expense
For the three months ending June 30, 2000, the Company recorded interest expense
of $318,810; this represented an increase of of 1949% from same period 1999
expenses of $15,555. Interest expenses stemmed from the Company's financing
activities and the conversion of funds taken through a convertible note which
provides for conversion of dollars received to stock through share issuance at a
40% discounted rate (See Liquidity & Capital Resources). The Company expects
similar interest expenditures in the future, as it is presently financing its
business activities through use of convertible debt instruments.
Gain On Settlement/Extinguishing Debt
For the three months ending June 30, 2000, the Company recorded a gain of
$16,560 through settlement/extinguishing of debt; this category was not
applicable to the same period for 1999, when the Company was accruing debt. A
primary gain of $418,065 was realized during the first quarter and stemmed from
the activities of legal counsel and staff in eliminating prior recorded debt for
accrued billings from Pacific Bell; the gain realized during this quarter was a
secondary gain from settlement of additional Pacific Bell accounts.
RESULTS OF OPERATIONS-SIX MONTHS ENDED JUNE 30, 2000 vs. 1999
----------------------------------------------------------------
THE ENTERTAINMENT INTERNET, INC.
Revenues
For the six months ended June 30, 2000, revenues of $258,193 represented a 35%
decrease as compared to revenues of $397,931 for the same period of 1999. This
decrease was expected after management determined that it would be in the
Company's best interests to concentrate its efforts on redesign of the
Castnet.com(TM) database architecture used to support the services offered by
the Company and, while doing so, to reduce sales efforts which could otherwise
result in an overload of the Castnet.com(TM) system and potential interruption
of service complaints. Management expects revenues to remain substantially the
same during the next reporting period, as it is presently impacted by a strike
within the Screen Actors Guild and does not expect introduction of its new
systems until some time during the latter part of the third or fourth quarter of
2000.
11
<PAGE>
Cost of Revenue
The Cost of Revenue for the six month period ending June 30, 2000 was $248,947,
which represents a 16% decrease as compared to same period costs of $294,655 for
1999; this decrease is attributable in part to the use of outside consultants to
maintain technical aspects of the Castnet.com(TM) websites. Management expects
the costs of revenue to remain stable during the next period, although the
Company may realize a a slight decrease in costs of revenue through elimination
of local network "pops" currently used to provide clients with dial-up Internet
access.
Gross Profit
Gross Profit is calculated as revenues less the cost of revenues, which consists
primarily of the cost of maintaining the Castnet.com(TM) Internet service and
sites. These costs are telephone access, software and hardware maintenance,
depreciation of equipment and the salaries of personnel who maintain the system.
For the six months ending June 30, 2000, gross profit of $9,246 represented a
91% decrease as compared to same period gross profit of $103,276 for 1999; this
was attributable to a downturn in sales and the impact of the strike within the
Screen Actors Guild. Management expects the gross profit to increase during the
next quarter through a rebuilding of its sales force, elimination of costs
associated with local network "pops" used to provide clients with dial-up
Internet access. The level of the increase cannot presently be estimated,
however, as it will be primarily dependent upon the impact of a strike within
the Screen Actors Guild.
Selling, General and Administrative
Selling, General and Administrative ("SG&A") expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees, commissions and other general corporate expenses. For the six
months ended June 30, 2000, SG&A of 3,095,265 increased by 214% from same
period SG&A of $984,833 for 1999. During the six months ended June 30, 2000,
$168,145 was accrued for the salaries of the Company's two chairmen; $106,080
was recorded for issuance of stock to Mr. Solomon; $168,933 was recorded for
options issued to Mr. Solomon; $327,596 was recorded for options issued to Mr.
Hadid; $264,000 was recorded for issuance of stock to Mr. Hadid (all of the
aforereferenced options and stock are one-time issuances).
Significant expenditures were made for accountancy services, communications, and
repairs, as well as use of outside consultants for applications and programming
maintenance services and outside legal counsel for litigation of certain claims.
Accountancy expenses of $88,227 increased by 883% from same period 1999
expenditures of $8,975; this was due to audit expense and expenses relating to
preparation of 10-SB/A filings; additionally, in 1999, the Company paid a salary
for a Chief Financial Officer; that expense was not incurred for the six month
period ending June 30, 2000, during which time the same functions were performed
12
<PAGE>
by outside consultants. Legal expenses of $710,045 represented an increase of
363% from same period 1999 expenditures of $195,137 and were attributable to the
mass of litigation claims being defended by the Company; legal expenses included
a retainer to new counsel in a currently pending matter. Directors' and
Officers' (D&O) liablility insurance expense of $25,591; there was no premium
for D&O in the same period of 1999; the inflated level of the policy premiums
are due in part to the financial condition of the corporation. Promotional
expense of $695,220 represented an increase by 4167% from same period 1999
expenditures of $16,290; same period 1999 expenditures did not include any
significant advertising or promotion; same period 2000 expenditures were due in
part to participation in outside events such as Cinco de Mayo and ActorFest and
the advertising expenditures associated therewith. The Company also incurred
$6,115 in expenses relating to EDGARization (coding and formatting) of SEC
filings; this category of expenses was not present in 1999, when the Company was
in development stage only. Other expenses, while individually insignificant,
resulted in the balance of the change. Management expects SG&A to decrease in
the future as legal expenses decrease, but is unable to estimate the percentage
of such increases because it cannot presently estimate the timing for resolution
of claims.
Interest Expense
For the six months ended June 30, 2000, the Company recorded interest expense of
$602,390; this represents a 979% increase from same period 1999 expenses of
$55,822. Interest expenses stemmed from the Company's financing activities and
the conversion of funds taken through a convertible note which provides for
conversion of dollars received to stock through share issuance at a 40%
discounted rate (See Liquidity & Capital Resources). The Company expects similar
interest expenditures in the future, as it is presently financing its business
activities through use of convertible debt instruments.
Gain On Settlement/Extinguishing Debt
For the six months ending June 30, 2000, the Company recorded a gain of $434,625
through settlement/extinguishing of debt; this category was not applicable to
the same period for 1999, when the Company was accruing debt. The primary gain
of $418,065 was realized during the first quarter and stemmed from the
activities of legal counsel and staff in eliminating prior recorded debt for
accrued billings from Pacific Bell. The Company took an aggressive position with
Pacific Bell, asserting that it charged measured rates for services which it
contended were to be billed at flat rates, and was able to obtain a favorable
settlement. The secondary gain of $16,560 was realized through settlement of
additional Pacific Bell accounts.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's business plans have required, and are expected to continue to
require, substantial capital to fund operations, capital expenditures, repayment
of debt, expansion of sales and marketing capabilities. During the quarter, the
Company continued to draw on a line of credit established during 1999; the line
of credit as previously disclosed is in the form of a finance arrangement which
allows the Company to convert any outstanding debt accrued to payment through
share issuance at a 40% discounted rate (40% from the actual trading rate in the
market for Company's common stock). The discounted rate is intended to
compensate for the restricted nature of the stock and for the interest which is
otherwise forgiven through conversion. One half of the discount (20%) is
allocated to compensate for the restricted nature of the stock and the remaining
half (20%) is allocated to compensate for interest which is otherwise forgiven
through conversion.
During the quarter, the Company also continued negotiations for a private
placement which would involve receipt of funds convertible to shares at a 30%
discounted rate; these negotiations have not concluded, but $700,000 of funds
have been received under a general agreement that provides that the conversion
rate shall be no more favorable than that which would allow share issuance at a
30% discounted rate. The agreement is expected to be finalized during the third
quarter.
The Company expects to incur quarterly expenses of approximately 2,500,000
andbelieves that its line of credit and financing available through private
placement will be sufficient to meet its working capital demands for the next
quarter. If funds are raised through the issuance of equity securities, the
Company's existing shareholders will experience significant dilution.
Furthermore, if additional financing is needed, it may not be available or, if
available, may not be on terms favorable to the Company or its shareholders. If
sources of financing are insufficient or unavailable, or if the Company
experiences shortfalls in anticipated revenue or increases in anticipated
expenses, the Company may need to slow down or stop the expansion of its
business or cease operations altogether. Any of these events could harm the
Company's business, financial condition or results of operations.
YEAR 2000 COMPLIANCE
The year 2000 risk is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. As a result, computer systems and/or software used by
many companies and governmental agencies may need to be upgraded to comply with
year 2000 requirements or risk system failure or miscalculations causing
disruptions of normal business activities. As the critical date for Year 2000
risks passed during the first quarter, and there were no Year 2000 problems
experienced by the Company during the second quarter, it does not appear that
the Company will be materially affected by year 2000 risks.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Bakkiam Subbiah v. Only Multimedia Network, Inc., f/k/a (sic) The Entertainment
-------------------------------------------------------------------------------
Internet, Inc.
--------------
Federal District Court for the Central District of California
Filed: November 4, 1999, No. CV 99-11472(SVW)
The Company resolved this matter on July 7, 2000, through entry into a
structured settlement and stipulation, which related to Only Multimedia Network,
Incorporated's failure to pay in accordance with a $100,000 investment agreement
entered into during 1996. The investment agreement included 200,000 cancelable
adjustable warrants (which were exercised), 100,000 Class AA warrants (not yet
exercised), and 10% interest due on a $95,000 promissory note. The stipulation,
entered by the Court on August 9, 2000, provides a payment plan which
effectively extends the obligation by more than one year along with stepped
incentives for reduction of the accrued debt. In the event the Corporation
satisfies its obligations within thirty (30) days of entry by the Court of the
stipulation, the debt shall be reduced by $22,500; if within sixty (60) days,
the debt shall be reduced by $11,250. The Company intends to fully perform its
obligations under the settlement and stipulation and expects the Court to enter
the same as requested.
Capital York, Inc. v. The Entertainment Internet, Inc., Scott MacCaughern, and
--------------------------------------------------------------------------------
MacCaughern Trade Development
-----------------------------
Superior Court of New Jersey, Monmouth County
Filed August 15, 1999, No. L406199
The Company drafted its third version of a settlement agreement requested by
Plaintiff on July 10, 2000, and expects this matter to be resolved (and the
underlying case dismissed) without payment by the Company of consideration of
any kind. The Company is not expected to undertake any responsibilities with
respect to any settlement agreement.
15
<PAGE>
Breakdown Services, Ltd., v. Only Multimedia Network, Inc./Castnet.com
----------------------------------------------------------------------
Federal District Court for the Central District of California
Filed: May 6, 1998, No. CV 98-3500-GHK (BQRx)
The Company is presently engaged in an action involving a third-party claim for
copyright infringement and violation of an earlier settlement agreement that
included a stipulated injunction. The Company is vigorously defending the action
and earlier prevailed through house counsel's opposition to claimant's request
for an Order to Show Cause. The court ruled in EINI's favor that Breakdown
Services improperly applied for ex parte relief without satisfying the Local
Rule mandates for a prior meeting of counsel. Breakdown Services thereafter met
with house counsel and outside counsel (engaged for the continued litigation)
and re-filed its motion. The Company believes the claimant is not entitled to
relief, and asserted misuse of copyright as a defense in the action. Since the
date of the Company's initial filing, the Company was been ordered to show cause
as to why it should not be found in contempt of court; on May 8, 2000, the Court
ruled that Castnet.com(TM) violated an earlier agreed-upon injunction and fined
it $25,000 for each of 9 incidents argued to be violative of the Company's prior
agreement with Plaintiff and may award attorneys' fees and costs, which have
been demanded in the amount of $62,052.50. The Company filed a Notice of Appeal.
While the company doubts the merits of claimant's action, the outcome of the
action is uncertain and may materially and adversely affect the financial
condition and viability of the Company if such outcome proves unfavorable to the
Company.
Wendy Pachter v. Only Multimedia Network and The Entertainment Internet, Inc.
--------------------------------------------------------------------------------
Superior Court for the State of California, County of Los Angeles
Filed July 21, 1999, Case No. BC 213 855
The Company resolved this matter on July 20, 2000, through entry into a
Settlement Agreement related to Only Multimedia Network, Incorporated's (OMNI's)
failure to pay promissory notes entered into or assigned to the Plaintiff in
this action. The notes, ordinarily due in 2006, each contained a clause
providing for acceleration in the event of an "amortization event," which
Plaintiff argued occurred through OMNI's reverse triangular acquisition of
TEI-California, a corporation that was merged into OMNI and disappeared as a
result. The Company defended the action and agreed to provide a reduced
aggregate payment in the amount of $200,000 to the Plaintiff in exchange for a
release of all of Plaintiff's and her husband's (Ken Cronon's) claims, including
those alleged in BC 227511 (Sloatman, infra.), excepting those which are alleged
against the Company's prior counsel, Jeffer Mangels Butler Marmaro, LLP. The
Company fully intends to perform its obligations under the Settlement Agreement,
but provided a statute of limitations/case tolling agreement for BC 227 511, to
allow Plaintiff to renew her claims in BC 227 511 (Sloatman, infra.) in the
event of any uncured breach. No principal or interest was previously paid on the
notes promissory notes, which were previously recorded in the amount of
$275,453. The differential between the accrued interest and principal and the
amount to be paid will be reflected as a gain for the Company. The case will be
dismissed subject to the Court's continuing jurisdiction over performance of the
Settlement Agreement.
16
<PAGE>
John K. Sloatman, III (Sloatman), Kathryn Thyne (Thyne), Wendy Pachter
--------------------------------------------------------------------------------
(Pachter), and Kenneth Cronon (Cronon) v. Only Multimedia Network, Inc. (OMNI);
--------------------------------------------------------------------------------
The Entertainment Internet, Inc. (TEI); Paul Kessler (P. Kessler); Jon Kessler
--------------------------------------------------------------------------------
(J. Kessler); Sandy Kessler (S. Kessler) ; Thom Mount (Mount); Gene Davis
--------------------------------------------------------------------------------
(Davis); Rod Pyle (Pyle); Richard Horgan (Horgan); Rick LaFond (LaFond);
--------------------------------------------------------------------------------
Christian Johnston (Johnston); Phil Gustlin (Gustlin); Bristol Asset Management
--------------------------------------------------------------------------------
IV, LLC (Bristol); Jeffer, Mangels, Butler, Marmaro, LLP (Jeffer, Mangels); John
--------------------------------------------------------------------------------
Neuhauser (Neuhauser); Ambient Capital (Ambient); Jeremy Schuster (Schuster);
--------------------------------------------------------------------------------
and DOES 1-50.
--------------
Los Angeles Superior Court, Central District
Filed March 31, 2000; Case BC 227 511
Defendants Bristol, P. Kessler, TEI, OMNI, Davis, Horgan, Johnson, LaFond, Pyle,
Schuster filed a demurrer and motion to strike in this previously disclosed
action; the demurrer, filed by outside counsel, was heard on June 22, 2000 and
was granted in its entirety, with a strong admonition to Plaintiff and their
counselors to refrain from use of the "shotgun approach" in naming defendants
that have no connection with the allegations made; Plaintiffs were given thirty
(30) days leave to amend their complaint, which the court agreed was a garbled
mess, and were told to refrain from naming persons in the complaint that were
not involved in the Company at the time of the alleged acts or who were not
actively associated with the conduct complained of by Plaintiffs. The Court
refused Plaintiffs' pleas to consolidate and relate this case with another case
filed by Wendy Pachter, which was previously set for trial on August 7, 2000
(the consolidation would have provided Pachter another year to conduct discovery
and prepare her claims).
Plaintiffs Wendy Pachter and Ken Cronon have agreed to dismiss their claims in
this action against all named defendants other than the law firm of Jeffer
Mangels Butler Marmaro, LLP, as part of the Settlement Agreement entered into
for Case BC 213 855 (Pachter, supra). Counsel for the remaining plaintiffs
represented they would dismiss Jeremy Schuster and Christian Johnson from the
action without prejudice.
17
<PAGE>
The Company believes each and every cause of claimants' action is meritless and
intends to continue to vigorously defend the same through outside counsel. While
the Company doubts the merits of claimants' action, the outcome of the action is
uncertain and may materially and adversely affect the financial condition and
viability of the Company if such outcome proves unfavorable to the Company.
Costs associated with defense of the action may also may materially and
adversely affect the financial condition and viability of the Company if the
Company is unable to recover the same.
The Entertainment Internet, Inc. v. Castnet Communications, Inc.
--------------------------------------------------------------------------------
Not filed
The Company resolved this matter on July 17, 2000, through agreement with
Castnet Communications, Inc. and its counsel for the latter to change its name
to M Square Productions, Inc.; the claim was earlier referenced in the Company's
initial filing (10-SB) as trademark infringement. The Company alleged that
Castnet Communications, Inc. improperly and unlawfully made use of the name
"Castnet" and sought to compel it to cease and desist from such activity. This
matter was resolved without litigation, and the Company has confirmed the
offending party's satisfaction of the name-change agreement.
Other legal proceedings are as previously disclosed, with no significant or
material developments to report.
Item 2. CHANGES IN SECURITIES
The Company is presently in the process of filing the Certificate of Designation
necessary to make effective the change in authorized shares of common stock
(from 50,000,000 common to 75,000,000 common) approved by unanimous consent
resolution on December 27, 1999.
On April 24, 2000, Mr. Mohamed Hadid elected to return to the Chairmanship of
the Corporation after a leave of absence which commenced December 1, 1999. One
million shares originally issued to Mr. Hadid for execution of his employment
contract were held in trust by the Corporation during the leave of absence, with
the understanding that these would be tendered back to Mr. Hadid in the event he
returned to his active role within one year. When Mr. Hadid returned, the
Corporation returned his certificates to him.
On June 6, 2000, certificates representing 850,000 shares of the Company's
common stock, restricted under Rule 144, were issued to Michael Solomon as part
of the employment contract he executed during January, 2000.
On June 16, 2000, a certificate representing 500,000 shares of the Company's
common stock, restricted under Rule 144, previously issued to JCVD Productions,
Inc., was canceled; on the same date, a similar certificate representing 500,000
shares, previously issued to Millenium International Trading, Ltd., was
canceled.
18
<PAGE>
On June 30, 2000, certificates representing 2,020,317 shares previously issued
to Jeremy Schuster were canceledthese certificates were previously issued
under a fee agreement provision which allowed conversion of debt to common
stock. After the certificates were issued, the Corporation held the certificates
in trust and asked Mr. Schuster to further discount his services and forego full
exercise of the conversion provisions of his contract, which would have
otherwise provided him with certificates representing 2,819,381 shares; the
Corporation agreed that Mr. Schuster would retain two certificates representing
415,878 shares and additional certificates would be released in the event the
Corporation failed to make timely payment under an agreed plan. The Corporation
did not timely meet all of its payment obligations and tendered certificates
representing 381,876 shares to Mr. Schuster, not as a penalty but as a loss for
the Corporation of a portion of the favorable discount earlier provided by Mr.
Schuster.
On the same date, Mr. Schuster was issued a certificate for 425,000 shares of
the Company's common stock, restricted under Rule 144, in partial satisfaction
of the favored nations clause of his employment contract.
Item 5. OTHER INFORMATION
On June 28, 2000, the Company confirmed election of Mr. Michael J. Zwebner to
its Board of Directors. Mr. Zwebner assumed a position vacated through
resignation of a prior director. Mr. Zwebner serves as Chairman of Talk Visual
Corporation (OTC BB: TVCP) and was recently elected as a member of the Board of
Directors of Sector Communications, Inc. (OTC BB: SECT). The Company detailed
Mr. Zwebner's appointment to its Board of Directors in a press release
disseminated via wire service and posted on the Company's website at
www.eini.net.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ENTERTAINMENT INTERNET, INC.
/s/ Michael Solomon
By: -----------------------
Michael Solomon
Chief Executive Officer &
Chief Financial Officer
Date: August 18, 2000
20
