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, 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 November 14, 2000 - 47,137,916 shares of Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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THE ENTERTAINMENT INTERNET, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2000
(Unaudited) 2
Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 (Unaudited) 3
Consolidated Statements of Operations for the nine
months ended September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes In Securities 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000 (Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $
Prepaid expenses 155,539
-----------
Total current assets 155,539
PROPERTY AND EQUIPMENT, net 812,247
OTHER ASSETS 11,228
-----------
TOTAL ASSETS $ 979,014
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Book over draft 23,535
Accounts payable and accrued expenses 2,757,707
Deferred revenue 205,567
Debentures payable 450,000
Convertible notes payable - stockholders 978,000
Convertible notes payable 1,080,000
Notes payable to stockholders 120,000
Capital lease obligations, current portion 20,705
-----------
Total current liabilities 5,635,514
NOTES PAYABLE - STOCKHOLDERS 225,000
CAPITAL LEASE OBLIGATIONS, less current portion 65,564
-----------
TOTAL LIABILITIES 5,926,078
-----------
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, 47,137,916 shares issued
and outstanding 47,138
Additional paid-in capital 9,115,381
Accumulated deficit (16,141,883)
-----------
Total stockholders' deficiency (4,947,064)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 979,014
===========
See the accompanying notes to the consolidated financial statements
2
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THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ -----------
REVENUE $ 124,714 $ 174,344
COST OF REVENUE 145,295 22,465
------------ -----------
GROSS PROFIT ( 20,581) 151,889
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,069,428 1,379,870
------------ -----------
LOSS FROM OPERATIONS ( 1,090,009) (1,227,981)
------------ -----------
OTHER INCOME (EXPENSES)
Cancellation of shares previously
Issued for service rendered -
Gain on settlement of payable 149,404 -
Interest income - 1
Interest expense ( 246,826) 8,653
------------- -----------
Total Other Income (Expense) ( 97,422) 8,654
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LOSS BEFORE INCOME TAXES (1,187,431) ( 47,168)
INCOME TAXES - -
------------ -----------
NET LOSS $ (1,187,431) $(1,219,337)
============ ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.09) $ (0.05)
============ ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 47,111,829 23,546,136
============ ==========
See the accompanying notes to the consolidated financial statements
3
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THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ -----------
REVENUE $ 382,907 $ 572,275
COST OF REVENUE 394,242 317,120
------------ -----------
GROSS PROFIT (LOSS) (11,335) 255,155
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,087,466 2,359,449
------------ -----------
LOSS FROM OPERATIONS (4,098,801) (2,104,294)
------------ -----------
OTHER INCOME (EXPENSES)
Gain on settlement of payable 584,029 -
Interest income - 1
Interest expense ( 747,734) ( 47,169)
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Total Other Income (Expense) ( 163,705) ( 47,168)
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LOSS BEFORE INCOME TAXES (4,262,506) (2,151,462)
INCOME TAXES - -
------------ -----------
NET LOSS $ (4,262,506) $(2,151,462)
============ ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.10) $ (0.09)
============ ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 45,737,108 23,148,710
============ ===========
See the accompanying notes to the consolidated financial statements
4
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THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,262,506) $(2,151,462)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization expense 87,643 81,022
Gain on settlement of accounts payable ( 434,623) -
Gain on settlement of notes payable ( 149,405) -
Common stock issued for services 835,853 616,681
Warrants issued for services 692,500 -
(Increase) decrease in:
Accounts receivable - 7,308
Prepaid expenses 682,892 29,502
Increase (decrease) in:
Accounts payable and accrued expenses 1,367,957 90,724
Deferred revenue (50,536) ( 14,999)
----------- -----------
Net cash used in operating activities (1,230,225) (1,341,224)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment ( 498,444) (110,632)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase(decrease) in book overdraft 23,535 (19,295)
Advances from affiliated company - 944,887
Proceeds from issuance of notes payable
To shareholder - 1,126,781
Repayment of notes payable to shareholder ( 80,000) ( 25,000)
Repayment of notes payable ( 4,000) (531,626)
Proceeds from convertible debentures 1,784,000 -
Payment on capital lease obligation ( 7,580) ( 35,487)
----------- -----------
Net cash provided by financing activities 1,715,955 1,460,260
----------- -----------
NET INCREASE (DECRESE) IN CASH
AND CASH EQUIVALENTS ( 12,714) 8,404
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 12,714 7,482
----------- -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ - $ 15,866
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the nine months ended September 30, 2000 and 1999, the Company paid no
interest and no income taxes.
See the accompanying notes to the consolidated financial statements
5
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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
nine months ended September 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 September 30, 2000 and 1999, the Company
had potentially dilutive securities of 7,371,380 and 4,409,335, respectively.
NOTE 3 - INVESTING AND FINANCING TRANSACTIONS
During the nine months ended September 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 nine months ended September 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 Blackscholes option pricing model with the following weighted
average assumptions: life of 5.5 years, risk free interest rate of 6.5%,
expected dividend yield of 0% and a volatility of 253%.
Additionally, 200,000 shares were issued in connection with a settlement of
liabilities. These shares have been valued at $44,000, the fair value on the
date of issuance and have been charged to expense.
The Company has received $1,784,000 in advances during the nine months ended
September 30, 2000. These advances are pursuant to a convertible debenture
agreement. The terms of the debentures have not been finalized. These advances
have been included as current liabilities in the financial statements.
6
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SETTLEMENT
During the nine months ended September 30, 2000, the Company settled debts with
Pacific Bell for telephone and internet connections. The amount relieved from
liabilities was $434,623.
During the nine months ended September 30, 2000, the Company settled debts with
Wendy Pachter for unpaid promissory notes. The Company earlier reflected a
principal of $275,452.73 on its books, without admission of liability; the
Company earlier reflected $69,352 of accrued interest. Under the terms of
settlement, the Company is to pay a flat fee of $200,000, payable in five equal
monthly installments. At the time of settlement, the Company adjusted its
recordations by reducing then accrued interest to zero (the interest amount
relieved was $69,352) and reducing the principal obligation by $75,453 to
$200,000.
During the nine months ended September 30, 2000, the Company settled debts with
Bakkiam Subbiah for an unpaid promissory note and unissued shares of common
stock. The promissory note was earlier reflected in the Company's financial
records. The Company agreed to pay $10,000 at closing of the settlement
agreement, to make interest-only payments under the promissory note for one
year, to pay the principal of said note at the expiration of one year, and to
issue 200,000 shares of its common stock in exchange for $2,000 under the terms
of a cancelable adjustable warrant issued in 1996. The $2,000 payment was
credited toward the settlement, which included a charge of $15,000 in legal fees
as an additional liability recorded by the Company.
7
<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, for the period
ended March 31, 1999, included in its Quarterly Reports on Form 10Q-SB, and
amendments thereto, and on its 8-K filings. 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. OMNI's principal
business is development of an electronic community which is of interest to
producers, casting directors, agents, actors and others. OMNI sells access to
the electronic community it operates to subscribers, who are principally actors
and those interested in becoming actors, for an annual fee; presently,
producers, casting directors, and agents are not charged for their access to the
electronic community created or operated by OMNI.
8
<PAGE>
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.
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.
9
<PAGE>
During 1999 and the present year, the Company took significant financing through
a secured line of credit. A portion of the resulting debt was converted to stock
during 1999 and as disclosed in the Company's prior filings; debt continued to
aggregate as the Company routinely drew funds to meet the shortfalls between its
revenues and expenditures. The Company defaulted on payment obligations to its
lender and, at the end of August, 2000, the lender made a foreclosure demand in
accordance with the UCC-1 security interest it filed in California during
October, 1999. The Company agreed to a friendly foreclosure in an effort to
avoid additional litigation and interruption of services. It is presently
working with the lender to negotiate an arrangement whereby the Company would
continue to operate the Castnet.com(TM) services on behalf of Lender, in
exchange for continued funding, in amounts to be negotiated in good faith. To
date, the lender has funded operations, thereby preventing interruption of
services.
RESULTS OF OPERATIONS-THREE MONTHS ENDED SEPTEMBER 30, 2000 vs. 1999
----------------------------------------------------------------
THE ENTERTAINMENT INTERNET, INC.
--------------------------------
General
The third quarter presented difficulties for the Company. During August, the
Company sent a termination notice to its Chief Executive Officer, Michael Jay
Solomon; the Company announced the termination in an 8-K filing made on August
30, 2000. Following transmittal of the letter, Mr. Solomon resigned, leaving the
Company with debts incurred from agreements he executed when the Company did not
have sufficient funds to pay for such obligations. Mr. Solomon requested payment
for his salary and expenses, and either failed or refused to respond after being
requested to work to resolve the problems occasioned by entry into contracts
with Sierra Systems and Pittard-Sullivan (the Company believes Mr. Solomon
serves on the board of Pittard-Sullivan). Secondarily, Pittard-Sullivan demanded
$600,000 for services allegedly performed; the Company disputed the claim and
the value of services provided; it previously rejected much of the work
performed by Pittard-Sullivan and did not receive changes requested to designs
it felt were unusable; additionally, the Company understood the agreement had a
fee cap and that the total contract price would be split, with half to be paid
in stock and half to be paid in dollars over time. Tertiary difficulties arose
when Sierra Systems demanded $260,775 for services performed; the Company did
not receive complete, working web-pages and was not satisfied with the
integration of programming and design efforts, which, in the Company's view,
resulted in creation of web pages with text that was not readily recognizable
and with a navigation system that was difficult to operate. These difficulties
were overlaid with the greater concern of continued operations; the Company's
directors expected the Chief Executive Officer to frame its new business plan
and operate in a financially responsible manner; earlier efforts by the
Company's Chief Operating Officer to reduce and manage debts were essentially
negated by execution by the Chief Executive Officer of contracts the Company did
not have sufficient resources to perform. The Company continued to draw on its
line of credit, thereby becoming increasingly debt-laden. The Company is
currently contemplating an action against Mr. Solomon and the parties with whom
he executed contracts with apparent or other authority for the Company.
10
<PAGE>
During the quarter, the Company conferred with its accountants and commenced
preparation of responses to the second set of comments received to its Form 10
filing. The Company encountered difficulties in obtaining detail of transactions
which are two to three (or more years old), as no members of prior management
(other than Mr. Mount) are presently associated with or readily available to
provide necessary information to the Company; the Company is also presently
litigating a claim by its former Chief Operating Officer (John Sloatman) and
others (Kathryn Thyne et al.) filed against it; such activity interfered, on an
almost-daily basis, with the Company's abilities to conduct operations, as it
caused the Company's management and staff to participate in the litigation and
waste critical financial resources on its defense. Further, the comments
received require amendment of quarterly and other filings made by the Company;
such amendments require extensive effort of the Company's accountants and
attorneys and preparation of new filings which cannot be completed in a short
period of time. The Company is presently continuing to respond to the pending
comments; this ongoing process may effect the Company's ability to continue to
obtaining financing for its operations. The Company may discontinue the reply
process if it is unable to obtain sufficient financing and elects to file Form
15.
Earlier-disclosed efforts to create a strategic alliance with a company believed
to be well-suited for integration of technology and marketing resources were
discontinued when it appeared the target company was experiencing cash
shortfalls and was not current with its payroll obligations. The Company will
continue to seek alliances to strengthen its ability to do business while
lessening its in-house technological burdens.
Revenues
Revenues consists of membership fees for access to Castnet.com's electronic
community. Castnet.com(TM) paid members are persons who subscribe to access the
Company's websites (collectively referred to as an electronic community), and
the casting directors, producers, and others who do not pay for access to such
websites. The subscriber fees cover access to the Company's websites and all
services that are provided thereon, including electronic mail between actors and
industry users, creation of a portfolio complete with photographs, acting
credits, and background, forums for exchange of messages, "sides" (text of
materials for auditions), audio and video of the subscriber's prior work. Paid
members are those who have paid a fee in advance for access to Castnet.com's
electronic community an extended period of time, generally twelve months, and a
small amount of income from advertising where the Company has not yet
implemented a plan to significantly develop its advertising revenue stream. The
fees are prorated and recorded as revenue over that period of time. Second
quarter revenues rose 16% from first quarter results. For the three months ended
September 30, 2000, revenues of $124,714 represented a 24% decrease as compared
to revenues of $174,344 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.
Regional sales, which were halted during the fourth quarter of 1999, 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 believes a portion of the decrease was also
attributable to the strike by members of the Screen Actors Guild, which
continued during the quarter.
11
<PAGE>
As the principal assets of the Company have been foreclosed upon by its secured
lender, Management is presently unable to state or estimate the level or amount
of revenue expected during the upcoming quarter, other than to say it expects to
receive a minimal amount to cover payroll expense incurred during November,
2000.
Cost of Revenue
Cost of Revenue for the three month period ending September 30, 2000 was
$145,295, which represents a 547% increase as compared to same period costs of
$22,465 for 1999; this increase is attributable to in primary part to
corrections in the allocation of costs to ensure inclusion of costs appropriate
in this area. $47,987 was incurred for staff salaries allocated to cost of sales
during the quarter. $7,247 was incurred for management salaries allocated to
cost of sales during the quarter. $64,673 in depreciation expense was included
in costs of sales for the quarter. As the principal assets of the Company have
been foreclosed upon by its secured lender, Management is presently unable to
state or estimate the level or amount of revenue expected during the upcoming
quarter, or the costs associated with obtaining such revenues.
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 September 30, 2000, gross loss of $20,581 represented a decrease
of 114% as compared to a same period profit of $151,889 for 1999. The decrease
resulted from the combined factors of higher sales and lesser costs of revenue
for the third quarter of 1999 as compared to reduced sales and higher costs of
revenue for the third quarter of 2000. As the principal assets of the Company
have been foreclosed upon by its secured lender, Management is presently unable
to state or estimate the level or amount of revenue expected during the upcoming
quarter, the costs associated with obtaining such revenues, or the gross profit
or loss that may result in the upcoming quarter.
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 September 30, 2000, SG&A of $1,069,428 represented a 22%
decrease from same period SG&A of $1,379,870 for 1999. The decrease was
considered to be in principal accord with the 24% decrease in revenues
experienced during the quarter. $20,122 was incurred during the quarter in
expense for directors' and officers' liability insurance premiums. As the
principal assets of the Company have been foreclosed upon by its secured lender,
Management is presently unable to state or estimate the level or amount of
revenue expected during the upcoming quarter, the costs associated with
obtaining such revenues, the gross profit or loss that may result, or the
associated selling, general, or administrative expense in the upcoming quarter.
12
<PAGE>
Interest Expense
For the three months ending September 30, 2000, the Company recorded interest
expense of $246,826 during the quarter; this represented an increase of 2752%
from same period 1999 expenses of $8,653. 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 September 30, 2000, the Company recorded a gain of
$149,404 through settlement/extinguishing of debt; this category was not
applicable to the same period for 1999, when the Company was accruing debt. The
gain was realized through the settlements effected by the Company's Chief
Operating Officer and General Counsel. The Company recognized a gain of $69,351
in interest and $75,452 of principal in settlement of the Pachter liability (See
Part II, Item 1, Legal Proceedings); there was a net gain of $4,600 from
settlement of the Subbiah liability (See Part II, Item 1, Legal Proceedings),
which included offsets of $15,000 in legal fees and $2,000 paid for warrants.
The Company does not expect similar gains in the upcoming quarter.
RESULTS OF OPERATIONS-NINE MONTHS ENDED SEPTEMBER 30, 2000 vs. 1999
-------------------------------------------------------------------
THE ENTERTAINMENT INTERNET, INC.
Revenues
For the nine months ended September 30, 2000, revenues of $382,907 represented a
33% decrease as compared to revenues of $572,275 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. As the principal assets of the Company have been
foreclosed upon by its secured lender, Management is presently unable to state
or estimate the level or amount of revenue expected during the upcoming 9 month
period, other than to say it expects to receive a minimal amount to cover
payroll expense incurred during November, 2000.
13
<PAGE>
Cost of Revenue
The Cost of Revenue for the nine month period ending September 30, 2000 was
$394,202, which represents a 24% increase as compared to same period costs of
$317,120 for 1999; this increase is attributable in part to the use of outside
consultants to develop technical aspects of the Castnet.com(TM) websites. Staff
salary expenses allocated to costs of revenue during the first nine months of
the year were $176,878; management salaries of $20,687 were allocated to costs
of revenue during the same period; consultants and technical labor expense was
$40,615; $92,481 of depreciation expense was incurred; $29,785 of Internet
access expense was incurred; the foregoing were all allocated to costs of
revenue. As the principal assets of the Company have been foreclosed upon by its
secured lender, Management is presently unable to state or estimate the level or
amount of revenue expected during the upcoming nine month period, or the costs
associated with obtaining such revenues.
Gross Profit/Loss
Gross Profit or Loss 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 and depreciation of equipment. For the nine months ending September
30, 2000, the Company incurred a gross loss of $11,335; this did not relatively
compare to same period of 1999, in which a gross profit of $255,155 was
realized. The Company attributes the loss to a downturn in sales and the impact
of the strike within the Screen Actors Guild and the significant increases in
fixed costs and expenses incurred during the first nine months ending September
30, 2000. As the principal assets of the Company have been foreclosed upon by
its secured lender, Management is presently unable to state or estimate the
level or amount of revenue expected during the upcoming nine month period, the
costs associated with obtaining such revenues, or the gross profit or loss that
may result.
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
nine months ended September 30, 2000, SG&A of $4,087,466 increased by 73% from
same period SG&A of $2,359,449 for 1999. SG&A expenses for the nine month period
ending September 30, 2000 included the following notable expenses: $818,105 in
officers' salary expense, $601,324 in officers' salary accrual, $103,661 in
management salaries, $147,528 in staff salaries, $19,162 in vacation pay, $2635
in sick pay, $16,567 in medical insurance, $60,017 in payroll taxes, $123,870 in
accounting expenses, $19,833 in advertising, $24,835 in automobile expense,
$16,152 in commissions, $116,581 for consultants, $61,200 for directors' fees,
$45,160 for directors' and officers' insurance, $11,752 in Internet access for
employees, $760,117 in legal expenses, $613,422 in promotional expense, and
$64,720 in rent.
As the principal assets of the Company have been foreclosed upon by its secured
lender, Management is presently unable to state or estimate the level or amount
of selling, general and administrative expenses expected during the upcoming
nine month period.
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Interest Expense
For the nine months ended September 30, 2000, the Company recorded interest
expense of $747,734; this represents a 1485% increase from same period 1999
expenses of $47,169. 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 nine months ending September 30, 2000, the Company recorded a gain of
$584,029 through settlement/extinguishing of debt; this category was not
applicable to the same period for 1999, when the Company was accruing debt. The
gain was realized through the settlements effected by the Company's Chief
Operating Officer and General Counsel, including the earlier disclosed
settlements with Pacific Bell, and those recorded for Bakkiam Subbiah and Wendy
Pachter. (See Part II, Item 1, Legal Proceedings)
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 concluded negotiations regarding monies received
as a convertible loan; the lender expressed its unwillingness to continue to
fund operations of the Company, principally because of the debt incurred through
execution of contracts by its former Chief Executive Officer, and its doubt
about the Company's ability to recover therefrom without becoming mired in
lawsuits. The lender determined it in its best interests to pair with Packard
Capital, a pre-existing lender for the Company (and the lender extending credit
as previously disclosed), and decided to fund the Company through the agreement
already in place with Packard Capital; the Company was not able to negotiate
more favorable terms, although it earlier expected it would be able to do so.
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The Company believes it has sufficient resources for the upcoming two (2) week
period. Because the principal lender foreclosed during the quarter upon the
assets secured under the UCC1 filing made on October 21, 1999, the Company was
left to operate the Castnet.com(TM) websites for the lender; at present,
operation of the Castnet.com(TM) websites is the Company's only business. The
Company must source additional capital and/or operating funds if it is to
continue operations. The Company is presently working on plans to restructure
its operations.
If the Company draws additional funds through the issuance of equity securities,
the Company's existing shareholders may experience significant dilution.
Additional financing may not be available when needed or, if available, may not
be on terms favorable to the Company or its shareholders. If such 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 cease operations altogether. Any of these events could harm
the Company's business, financial condition and/or results of operations.
Similarly, the Company may elect to file Form 15 to terminate its registration
of securities if it does not obtain sufficient or necessary financing.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Bakkiam Subbiah v. Only Multimedia Network, Inc., f/k/a (sic) The Entertainment
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Internet, Inc.
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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. The Company has performed its
obligations under the settlement agreement arising thus far by issuing
certificates for 200,000 shares of stock and by making interest-only payments on
the principal amount of the note.
Capital York, Inc. v. The Entertainment Internet, Inc., Scott MacCaughern, and
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MacCaughern Trade Development
-----------------------------
Superior Court of New Jersey, Monmouth County
Filed August 15, 1999, No. L406199
The Company was advised on November 3, 2000, that this matter has been settled
and that it is not required to make payment or tender consideration of any kind.
The Company received a stipulation for entry of dismissal signed by Plaintiff's
counsel on November 8, 2000; it countersigned the stipulation, which it expects
to be filed, thereby dismissing this action with prejudice.
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Wendy Pachter v. Only Multimedia Network and The Entertainment Internet, Inc.
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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 performed its obligations under the Settlement Agreement arising on
August 15, 2000 and September 15, 2000, by making or directing to be made the
required $40,000 payment to Plaintiffs; on October 15, 2000, the Company was
unable to make the required payment and has asked Plaintiffs to refrain from
taking further action while the Company attempts to resolve a cash shortfall.
The Motta Company v. The Entertainment Internet, Inc., Only Multimedia Network,
Inc, Castnet, John Does 1-X; ABC Corporations 1-X; XYZ Partnerships and/or
Limited Liability Companies I-X.
--------------------------------------------------------------------------------
Superior Court for the State of Arizona, County of Maricopa
Filed August 24, 2000, Case No. CV2000-015720
The Company is presently a party to this action, which demands an undisclosed
sum for advertising and marketing services allegedly provided by Plaintiff
during the second and third quarter of 1998. The Company contends it was not
served properly and is not subject to jurisdiction or venue in Maricopa County,
Arizona, as any business it allegedly did with the Plaintiff was in Los Angeles,
California. The Company has already reflected a payable in the amount of $21,331
in its financial statements, despite its intent to dispute the claims of
Plaintiff. 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.
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Nonlitigation:
1. The Company received a demand from its former branding agency,
Pittard-Sullivan, for $600,000 for services allegedly rendered. The Company
disputes the validity of the claim and contends (upon information and belief)
that there was an undisclosed conflict of interest, as its former Chief
Executive Officer, Michael Solomon, is a part of the board of Pittard-Sullivan,
incurred significant debt either himself or on behalf of another public company,
Maxx International, Inc., with Pittard-Sullivan, and thereafter executed an
agreement with Pittard-Sullivan on behalf of the Company which he was not then
authorized to execute and/or which did not represent the terms earlier discussed
with the Company. The Company has included the alleged debt to Pittard-Sullivan
in its financial statements but is considering an action against Mr. Solomon and
the parties with whom he executed contracts with apparent or other authority for
the Company. The Company is unable to presently state whether a loss is
probable.
2. The Company received a demand from Sierra Systems, Inc. for $260,775 for
services allegedly performed. The Company disputes the validity of the claim, as
the alleged agreement was executed by its former Chief Executive Officer,
Michael Jay Solomon, when he was not authorized to execute such agreement. The
Company has included the alleged debt to Sierra Systems in its financial
statements but is considering an action against Mr. Solomon and the parties with
whom he executed contracts with apparent or other authority for the Company. The
Company is unable to presently state whether a loss is probable.
3. The Company received a demand from Dan Harary of Asbury Communications for
$1,169.29 for services allegedly performed. The Company disputes the validity of
the claim, as the alleged agreement was executed by its former Chief Executive
Officer, Michael Jay Solomon, when he was not authorized to execute such
agreement. The Company has included the alleged debt to Sierra Systems in its
financial statements but is considering an action against Mr. Solomon and the
parties with whom he executed contracts with apparent or other authority for the
Company. The Company is unable to presently state whether a loss is probable,
but has accrued the alleged indebtedness in its financial statements.
Other legal proceedings are as previously disclosed, with no significant or
material developments to report.
Item 2. CHANGES IN SECURITIES
On September 18, 2000, certificates representing 200,000 shares of the Company's
common stock were issued to Bakkiam Subbiah, in performance of the Company's
earlier-existing obligations under a cancelable adjustable warrant held by Mr.
Subbiah.
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Item 5. OTHER INFORMATION
On August 17, 2000, the Company sent a notice to Michael Jay Solomon terminating
his employment contract with the Company. The Company believes it did not
receive what it expected from the employment arrangement and terminated the
same, effective 35 days from the date of notice or as soon as permitted by law.
Following transmittal of the termination letter, Mr. Solomon resigned, effective
at the end of August.
During the quarter, the Company continued to update its website at www.eini.net;
on October 3, 2000, the Company posted statements indicating that negotiations
for prior contemplated combinations with Cybersapien and Talidan were not
successfully concluded and that such combinations will not be sought by the
Company. The statement was made because present management could not locate an
affirmative statement believed to have been made earlier regarding cancellation
of the contemplated transactions.
On November 6, 2000, Mr. Michael Zwebner resigned from the Board of Directors of
the Company. Mr. Zwebner cited an increased need for his active participation in
Talk Visual Corporation, Inc. (OTC BB: TVCP) as the principal reason for his
resignation.
Disposition of Assets
---------------------
On August 21, 2000, Packard Capital, Ltd., (the "creditor"), made a demand for
foreclosure of assets secured by it under its lending agreement with The
Entertainment Internet, Inc. and Only Multimedia Network, Inc. (collectively
referenced as the "Company").
The assets secured by the agreement are detailed in the Uniform Commercial Code
Financing Statement filed with the California Secretary of State on October 21,
1999, which encumbered the following types or items of property: all services so
be provided or provided by outside vendors and all retainers therefor, all
receivables of every type and kind, all furniture (including but not limited to
desks, chairs, tables); all fixtures, all office equipment (including but not
limited to lamps, calculators, copiers, fax machines, printers, computer
hardware, computer software, computer networks, computer data, computer
peripherals, computer cables, telephones, telephone routers, projectors, video
tape players, video tape recorders, scanners); all business documents; all
Castnet.com programs, databases, data, reports, and advertising materials, all
amounts in all bank accounts, all trademarks, service marks, and intellectual
property, all internet domain names, all cell phones, and all paging equipment.
The Company's indebtedness to or through to the foreclosing party is $2,058,000
(for cash or funds received) where the Company's assets total only $979,014 (as
of September 30, 2000); this causes the Company to believe all assets covered by
the UCC-1 and lending agreement must be transferred to the secured creditor. The
Company agreed to friendly foreclosure to avoid interruption of services and
litigation expense. The creditor also recognized the need to operate without an
interruption of service and expressed its desire to maintain the value of the
foreclosed assets by continuing to operate and/or develop the Castnet.com
databases and electronic communities; for these reasons, the creditor agreed to
foreclose on all assets on October 30, 2000, while continuing to allow the
Company to operate the Castnet.com databases and electronic communities on its
behalf.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 30, 2000 the Company filed a Current Report on Form 8-K to report
that on August 17, 2000, the Company sent a notice to Michael Jay Solomon
terminating his employment contract with the Company.
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/ Mohamed Hadid
By: -----------------------
Mohamed Hadid, Chairman
Date: November 14, 2000
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