<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB-A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1999
ZEROS & ONES, INC.
(Exact Name of Registrant as specified in its Charter)
COMMERCIAL LABOR MANAGEMENT, INC.
(Former Name: Change Effective July 1, 1999)
Nevada 88-241079
------ ---------
(State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification No.)
39 E. Walnut St., Pasadena, California 91103
--------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code: (626) 584-4040
Indicate by check mark whether the Registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (ii) has
been subject to such filing requirements for the past 90 days.
Yes No
X
---------- ------
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock
Common Stock, $.001 par value 5,725,214
- ------------------------------ ---------
Title of Class Number of Shares Outstanding
at September 30, 1999
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
ASSETS (UNAUDITED) DECEMBER 31, 1998
------------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 11,640 $ 120,434
Accounts Receivable - $ 41,441
Prepaid expenses 362 362
------------------- -----------------
Total current assets 12,002 162,237
------------------- -----------------
PROPERTY AND EQUIPMENT, NET OF
accumulated depreciation 801,024 31,087
GOODWILL, net of
accumulated amortization 197,125 -
OTHER ASSETS 14,771 149,200
DUE FROM AFFILIATES 311,935 -
------------------- -----------------
$ 1,336,857 $ 342,524
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 59,782 $ 68,246
Bank line of credit 8,924 5,231
Notes payable, related parties 356,000 -
Current portion of obligations under capital leases 5,087 5,087
------------------- -----------------
Total current liabilities 429,793 78,564
------------------- -----------------
OBLIGATIONS UNDER CAPITALIZED LEASES, less current
maturities 5,066 7,687
STOCKHOLDERS' EQUITY:
Preferred stock - 3,908,008
Common stock 5,212,292 270,010
Paid-in Capital 1,547,574
Less: Accounts receivable from stockholder (292,300) -
Proprietor capital - 52,116
Accumulated deficit (5,565,568) (3,973,861)
------------------- -----------------
Total stockholders' equity 901,998 256,273
------------------- -----------------
$ 1,336,857 $ 342,524
=================== =================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
Revenues $ 188,194 $ 74,081
------------------ ------------------
Operating and administrative 955,963 182,616
------------------ ------------------
Net income (loss) $ (767,769) $ (108,535)
================== ==================
Net earnings per share $ (0.17) $ (0.02)
Average shares outstanding 4,593,904 4,381,937
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
Revenues $ 319,275 $ 303,185
------------------ ------------------
General and administrative 1,839,185 539,758
------------------ ------------------
Net income (loss) $ (1,519,910) $ (236,573)
================== ==================
Net earnings per share $ (0.33) $ (0.05)
Average shares outstanding 4,593,904 4,381,937
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
--------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net (loss) $ (767,769) $ (108,535)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 81,375 800
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Decrease in due from officers (311,935) (10,469)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable & accrued liabilities (14,800) (20,366)
--------------------------------------------
Net cash provided by operating activities (1,013,129) (138,570)
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Purchase of property & equipment (8,860)
Acquisition of goodwill (120,000)
Other assets (8,383) (69,577)
--------------------------------------------
Net cash used for investing (137,243) (69,577)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 337,709
Issuance of preferred stock 650,000 181,500
Notes payable - stockholders 220,000
Payment on notes payable - stockholders (60,000)
--------------------------------------------
Net cash provided by financing 1,147,709 181,500
NET INCREASE (DECREASE) IN CASH (2,663) (26,647)
CASH, AS OF JULY 1, 1999 and 1998 14,303 59,157
--------------------------------------------
CASH, AS OF SEPTEMBER 30, 1999 and 1998 $ 11,640 $ 32,510
============================================
</TABLE>
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
--------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net (loss) $(1,519,910) $ (236,573)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 84,850 -
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 41,441 23,000
Decrease in due from officers (166,513) -
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable & accrued liabilities (69,788) (19,812)
--------------------------------------------
Net cash provided by operating activities (1,629,920) (233,385)
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Purchase of property & equipment (18,385) 9,356
Acquisition of goodwill (120,000) -
Other assets (9,371) (24,828)
--------------------------------------------
Net cash used for investing (147,756) (15,472)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from bank line of credit 3,693 -
Draws by proprietors (75,840) (129,345)
Payments on long-term debt (33,621) -
Proceeds from issuance of common stock 337,709 147,176
Issuance of preferred stock 2,108,995 692,900
Capital distribution (940,554) (430,462)
Notes payable - stockholders 328,500 -
Payment on notes payable - stockholders (60,000)
--------------------------------------------
Net cash provided by financing 1,668,882 280,269
NET INCREASE (DECREASE) IN CASH (108,794) 31,412
CASH, AS OF JANUARY 1, 1999 120,434 1,098
--------------------------------------------
CASH, AS OF SEPTEMBER 30, 1999 $ 11,640 $ 32,510
NON CASH ACTIVITIES IN FINANCING AND INVESTING ACTIVITIES:
Issuance of common stock for equipment $ 829,284 -
Issuance of common stock for accounts receivable 292,300 -
Issuance of common stock for accounts payable (5,459) -
Conversion of debt to equity 80,000 -
Notes payable issuance for goodwill $ 87,500 -
</TABLE>
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-----------------------------------------
Receivable
Number of Number of Additional from Accumulated
Shares Amount Shares Amount Paid in Capital stockholder Deficit Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 8,173,804 $231,813 - $ - $572,506 $ - $(627,868) $ 176,451
===================================================================================================
20-for-1 reverse split
Cancellation of shares (6,539,043) (234,201) (234,201)
New issuances (1,270,020) -
4,200,000 -
---------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998
(UNAUDITED) 4,564,741 231,813 - - 572,506 - (862,069) (57,750)
===================================================================================================
===================================================================================================
Net loss, for the 3 month
ended March 31, 1999
===================================================================================================
BALANCE - MARCH 31, 1999
(UNAUDITED) 4,564,741 231,813 - - 572,506 - (862,069) (57,750)
===================================================================================================
- - -
---------------------------------------------------------------------------------------------------
New Issuances 23,200 23,200 - -
---------------------------------------------------------------------------------------------------
Net loss for the 3 months
ended June 30, 1999 (23,200)
BALANCE - JUNE 30, 1999
(UNAUDITED) 4,587,941 $255,013 - $ - $572,506 - $(885,269) $(57,750)
===================================================================================================
Capital contribution by
stockholder 57,750 57,750
---------------------------------------------------------------------------------------------------
Reverse merger, July 1, 1999
(see note 1): Elimination
of stockholders equity of
acquired company (CLMI) and
cancellation of shares (3,700,000) (255,013) (630,256) 885,269 -
---------------------------------------------------------------------------------------------------
New shares issued to
acquiring companies and
record stockholders equity
of acquiring company 2,566,000 466,660 789,305 4,233,132 1,467,574 (292,300) (4,797,799) 1,077,267
---------------------------------------------------------------------------------------------------
New issuance 51,250 512,500 512,500
---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-----------------------------------------
Receivable
Number of Number of Additional from Accumulated
Shares Amount Shares Amount Paid in Capital stockholder Deficit Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exchange of preferred stock
to common stock at exchange
ratios - August 13, 1999 2,271,273 4,745,632 (840,555) (4,745,632) -
--------------------------------------------------------------------------------------------------
Conversion of debt to equity 80,000 80,000
--------------------------------------------------------------------------------------------------
Net loss for the 3 months
ended September 30, 1999 (767,769) (767,769)
--------------------------------------------------------------------------------------------------
Balance - September
30, 1999 (unaudited) 5,725,214 $5,212,292 - $ - $1,547,574 $(292,300) $(5,565,561) $ 901,998
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes are an Integral Part of This Statement
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL:
Zeros & Ones, Inc. (formerly Commercial Labor Management, Inc.) is
a Nevada corporation (the "Company") organized on October 19, 1988.
It was originally incorporated in Nevada under the name Tokyo
Raiders. In 1990, the Company acquired certain franchise rights and
changed its name to Club USPN, Inc. In June 1993, the Company
acquired Sono International, Inc., but those operations were
discontinued and the shares of Sono were sold to the original
shareholders of Sono. In March 1995 the Board approved the merger
with Commercial Labor Management which was handled as a reverse
merger, and also approved a name change to Commercial Labor
Management, Inc. The merger was rescinded and never completed, but
the Company retained the name Commercial Labor Management, Inc.
until July 1, 1999.
Pursuant to a series of acquisition, exchange and reorganization
agreements as described in the Company's Reports on Form 8-K, dated
July 7, 1999 and November 9, 1999, the Company acquired 100% of the
assets of Zero & Ones, Inc., a Delaware corporation (ZOI-DE), and
100% of the total issued and outstanding stock of (1) Quantum Arts
Inc., (QA), (2) EKO Corporation, (EKO), (3) Polygonal Research
Corporation,(PRC), (4) KidVision, Inc., (KV), and (5) Digital Video
Engineer (DVE), in exchange for the issuance of a total of
2,566,000 new shares of the Company's common stock plus issuance of
notes payable of $300,000 to the stockholder of QA for
reimbursement of expenses. As part of the overall reorganization,
the Company also made an exchange offer to the shareholders of
Pillar West Entertainment, Inc. (PW) to acquire 100% of the total
issued and outstanding capital stock of PW in consideration for the
issuance to the shareholders of PW of (a) approximately 2,380,000
new shares of the the Company's common stock, and (b) approximately
370,000 warrants to purchase approximately 370,000 additional
shares of the the Company's common stock at $3.00 per share. The
original majority stockholders of the Company also surrendered to
the Company for cancellation 3,700,000 shares of stock and received
cash consideration of $207,500, of which $120,000 was paid before
July 1, 1999 and a promissory note in the original principal amount
of $87,500 will be payable by the Company in January, 2000. Under
the plan of reorganization, QA, EKO, PRC, KV, DVE, PW and the
assets acquired from ZOI-DE, referred as "the Group," are merged
into one company and are accounted for in the manner similar to a
pooling of interest as if they are under common control. After the
effective day of the business combination of the Group and the
Company, the original stockholders of the Group own a majority of
the shares of common stock of the Company. The Group is treated as
the acquirer in this business combination under the Accounting
Principal Board Pronouncement Number 16, paragraph 70, referred to
as a reverse merger. The business combination of the Group and the
Company is accounted for under the purchase method in which the
purchase price of $207,500 cash paid and liabilities assumed of the
Company are allocated to fair market value of assets and
liabilities acquired. Excess of purchase price over fair values of
net assets acquired has been recorded as goodwill.
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
The following unaudited pro forma information presents the result of
operations of the Company as if the combination had taken place on
January 1, 1998.
<TABLE>
<CAPTION>
For the nine Year ended
months ended September 30, December 30,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues $ 319,275 $303,185 $ 848,827
Net loss (1,698,035) (503,760) (1,205,077)
Loss per share (0.38) (0.11) (0.20)
</TABLE>
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations which actually would have resulted had the
acquisition occurred on the date indicated, or which may result in
the future.
PRINCIPAL OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries of Quantum Arts, Inc., EKO
Corporation, Polygonal Research Corporation, KidVision, Inc., and
Digital Video Engineer and Pillar West Entertainment, Inc. All
significant intercompany transactions and balances have been
eliminated.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include
all highly liquid debt instruments with original maturies of three
months or less which are not securing any corporate obligations.
PROPERTY AND EQUIPMENT:
Property and equipment, recorded at cost, are depreciated or
amortized using the straight-line and accelerated methods over the
estimated useful lives of the assets, which are generally three to
seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of their estimated lives or the
lease.
GOODWILL:
Goodwill represents the excess of purchase price over the fair value
of the net assets of acquired businesses. Goodwill is stated at cost
and is amortized on a straight-line basis over 5 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments principally consist of accounts
receivable, accounts payable, line of credit, note payable to a bank,
and notes payable to a related party as defined by Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value
of Financial Instruments." The carrying value of accounts receivable
and accounts payable approximate their fair value due to the
short-term nature of these instruments.
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
The carrying value of the line of credit and note payable to a
bank approximates its fair market value since these financial
statements carry a floating interest rate. The fair market value
of the note payable to a related party approximates its carrying
value based on current market rates for such debt.
NET LOSS PER COMMON SHARE:
The Company has adopted Statement of Financial Accounting Standard No.
128, Earnings per Share ("SFAS No. 128"), which is effective for
annual and interim financial statements issued for periods ending
after December 15, 1998. In accordance with SFAS No. 128, prior years
per share amounts have been restated. SFAS No. 128 was issued to
simplify the standards for calculating earnings per share ("EPS")
previously in APB No. 15, Earnings Per Share. SFAS No. 128 replaces
the presentation of primary EPS with a presentation of basic EPS. The
new rules also require dual presentation of basic and diluted EPS on
the face of the statement of operations.
REVENUES RECOGNITION POLICY:
Revenues are recognized in the period services are provided.
COMPREHENSIVE INCOME
Comprehensive income consists of net loss only.
(2) INCOME TAXES:
In December 1992 the Financial Accounting Standards Board issued
Statement of Accounting Standards Number 109, "Accounting for Income
Taxes" (FASB 109). Adoption of FASB 109 is required for fiscal years
beginning after December 15, 1992. The Company follows the
requirements set forth in FASB 109.
(3) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ form those estimates.
(4) INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The accompanying unaudited condensed financial statements for the
interim periods ending September 30, 1999 and 1998 have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Regulation SX. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals (considered necessary for a fair presentation
have been included. Operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
(5) PAID IN CAPITAL:
Paid in capital is made up in part by contributions of office
furniture & equipment, manufacturing equipment, trade receivable, and
accounts payable in exchange for common stock. Common stock was
issued to Shareholder's of record in exchange for these net assets.
(6) CAPITAL STOCK:
PREFERRED STOCK
The authorized capital stock of the Company includes 2,000,000 shares
of Preferred Stock, par value $.001 per share.
COMMON STOCK
The authorized capital stock of the Company includes 50,000,000
shares of common stock, par value $.001 per share. As of September
30, 1999, 5,725,214 shares of the Company's common stock were
outstanding.
In 1997 and 1998, the Company effected two reverse stock splits, a
one for 20 reverse split and a one for five reverse split. On
November 3, 1998, the NASDAQ Stock Market, Inc. issued a Uniform
Practice Advisory (UPC #084-98) advising NASDAQ members that the
effective date of the one for 20 reverse stock split for settlement
purposes would be revised to occur on October 14, 1998 rather than
September 22, 1998, because NASDAQ believes that "a sufficient lack
of information and uncertainty existed in the marketplace to warrant
a revision." Certain members of the NASDAQ disagree with the NASDAQ's
ruling. There is no assurance regarding the final outcome of the
NASDAQ's UPC #084-98, or the effect that the ruling and dispute will
have on the Company. In addition, the Company entered into a Plan of
Reorganization and Stock Exchange Agreement with CNG Communications
and the sole shareholder of CNG Communications, Inc. ("CNG") pursuant
to which the Company planned to issue 4,200,000 shares of its common
stock to the sole shareholder of CNG, and cancel a sufficient number
of outstanding shares to result in the CNG shareholder owning an
agreed upon percentage of the Company on the closing of the
transactions. As a result of the breach of that agreement by CNG and
the CNG shareholder, the Company did not issue any shares of its
common stock to the CNG shareholder. Shares, which were surrendered,
were reissued and were held by the prior majority shareholders of the
Company until July 1, 1999, when a substantial majority of them
were redeemed and cancelled in connection with the Company's
business combination with Z0I-DE, QA, EKO, PRC, KV, DVE and PW.
(7) RELATED PARTY TRANSACTION:
On July 31, 1998 the Company cancelled 6,539,044 shares due to the
reverse split (one for five) and to facilitate the proposed CNG
acquisition. On October 27, 1998, the Company reissued 4,200,000
shares consisting of 2,100,000 shares each to Mark Richardson, a
shareholder who then held more than ten percent of the outstanding
shares of the corporation, and Ed Torres, the then President and
Director, of the Company, pending another business combination.
Effective July 1, 1999, Mark Richardson and Edward Torres tendered
for redemption and cancellation a total of 3,700,000 shares of the
Company's common stock in connection with the Company's business
combination with the Group.
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
(8) LEGAL PROCEEDING:
The Company is the plaintiff in a lawsuit it filed with Mark
Richardson and Edward Torres as co-plaintiffs, against CNG
Communications, Inc. and Paul Bishop, the prior sole shareholder of
CNG Communications, Inc. ("CNG"), pursuant to which the Company,
Mr. Richardson and Mr. Torres are claiming that CNG and Mr. Bishop
committed breach of contract and fraud, causing the Company, Mr.
Richardson and Mr. Torres to incur substantial damages. The lawsuit
and the sharing arrangement among the plaintiffs are described in
greater detail in the Company's Report on Form 8-K, dated July 7,
1999.
(9) DUE FROM AFFILIATES:
Amounts represent unsecured, non-interest bearing short-term advances
from entities affiliated through common ownership and management.
(10) NOTES PAYABLE, RELATED PARTIES:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Notes payable to related parties in connection with the
business combination of the Company with the Group, payable
on January 15, 2000 with interest at 10% per annum. This
note was orginally due and payable in full on July 31,
1999, but has been extended by mutual agreement. $87,500
2. Notes payable to stockholder in connection with the business
combination of the Company with the Group, originally payable
in installments from July 31, 1999 to December 31, 1999.
Pursuant to mutual agreement, an amount equal to $60,000 has
been paid on this note, and the remaining $240,000 is payable
in four monthly installments of $60,000 each, commencing on
December 15, 1999. This note does not bear interest. $240,000
3. Due to related parties, non-interest bearing, due on demand. $ 28,500
--------
$356,000
--------
</TABLE>
(11) ACCOUNTS RECEIVABLE FROM STOCKHOLDER
The Company received $292,300 accounts receivable from stockholder
as part of assets purchased from Z01-DE as described in Note 1 and
accordingly, these accounts receivable from stockholder are
classified as contra account to stockholders' equity.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY STATEMENTS
This Report may contain forward looking statements and estimates regarding the
potential future operating results, financial condition, and business
performance which may be experienced by the Company and its subsidiaries.
Please be advised that there is absolutely no assurance that the Company or
its subsidiaries will actually experience the results, condition or
performance expressed or implied in any statements made in this Report or in
any other Report issued by the Company. The Company and its subsidiaries are
subject to substantial risks which may cause them to fail to achieve their
goals or to perform below expectations, including but not limited to the fact
that the Company may not be able to raise the capital or obtain the financing
needed to implement its business plans, the Company is essentially a
development stage company that has incurred operating losses since inception,
there is no assurance that the Company's planned research and development
projects will result in commercially successful products or services, there is
no assurance that the Company will ever be profitable, the Company's stock
price may decline or be volatile,the Company may not be able to successfully
develop, manage or market its products and services, the Company may not be
able to attract or retain qualified executives and technology personnel, the
Company's products and services may become obsolete, the Company's technology,
Internet and media production businesses are intensely competitive, government
regulation may hinder the Company's business, and other risks inherent in the
Company's businesses.
BACKGROUND
Effective July 1, 1999, the Company, which prior to that date was a public
reporting company with no tangible assets and minimal liabilities, acquired
100% of the assets of Zeros & Ones, Inc., a Delaware corporation ("Z0I-DE"),
and 100% of the issued and outstanding capital stock of Quantum Arts, Inc., a
California corporation ("QA"), Polygonal Research Corporation, a Delaware
corporation ("PRC"), EKO Corporation, a Delaware corporation ("EKO"), Wood
Ranch Technology Group, Inc., dba Digital Video Engineer, a Delaware
corporation ("DVE"), and Kidvision, Inc., a California corporation
("Kidvision"). During the period from July 1, 1999 to November 5, 1999, the
Company also acquired 100% of the issued and outstanding common and preferred
stock of Pillar West Entertainment, Inc., a California corporation ("PWE").
The Company is dissolving PWE and may cause one or more of its other
subsidiaries to merge into it prior to the end of 1999. Accordingly, the
combined financial statements of the Company and its subsidiaries set forth in
this Report represent pro forma operating results and financial condition of
the Company and its newly acquired subsidiaries and assets, except for the
three months ended September 30, 1999, for which the actual operating results
and financial condition are reported. The Company reported 100% ownership of
PWE for the entire third quarter ended September 30, 1999, although it
acquired the outstanding capital stock of PWE gradually over that period of
time. While the Company presently intends to maintain QA as a 100% owned
subsidiary, it may in the future operate the other businesses as divisions
rather than as separate corporations. The Company is seeking to raise capital
to finance its businesses. Until substantial capital is raised, the Company
will essentially be limited to the Internet project work presently being
conducted by QA and the digital video engineering consulting work being
performed by DVE. The research and development projects in three dimensional
television broadcasting software and hardware planned for implementation by
QA, the planned completion and marketing of PRC's digital video compression
software, the planned construction of the digital media production center by
DVE, EKO's planned entertainment industry website, and Kidvision's plan to
complete and market the Kids Educational Network on the Internet, will wait
until the Company has adequate capital to finance them. There is no assurance
that the Company will obtain sufficient capital or adequate financing to
implement all or any portion of its business plans. See ""MANAGEMENT'S
DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION --
Liquidity and Capital Resources."
RESULTS OF OPERATIONS FOR PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE
SAME PERIOD IN 1998.
The Company's subsidiaries are primarily development stage companies with no
revenue, other than QA and DVE which provide consulting services for Internet
and digital video related projects. Total revenue for the three month period
ending September 30, 1999 increased to $188,194 from $74,081 for the three
month period ending September 30, 1998, and to $319,275 during the nine
months ending September 30, 1999 from $303,185 during the nine months ended
September 30, 1998. Operating and administrative expenses increased from
$182,616 during the three months ended September 30, 1998 to $955,963 during
the three months ended September 30, 1998, and from $539,758 during the nine
months ended September 30, 1998 to $1,839,185 during the nine months ended
September 30, 1999. The substantial increase in operating expenses in 1999 as
compared to 1998 primarily reflect the costs of the Company's business
combination with its newly acquired subsidiaries and assets, including the
costs of integrating the subsidiaries with each other and with the Company.
Operating costs are expected to exceed revenue in the foreseeable future as
the Company (1) continues to integrate the businesses of the subsidiaries,
and (2) to the extent additional funding becomes available, conducts
research, development, prototype construction and marketing of its three
dimensional television technology and digital video compression software, as
well as establishes the digital media production center, and further develops
and markets the Kids Educational Network and EKO's entertainment industry
website on the Internet. For the three months ended September 30, 1999, the
Company's combined net loss was $767,769 as compared to a combined net loss
of $108,535 for the three months ended September 30, 1998. The combined net
loss for the nine months ended September 30, 1999 was $1,519,910 as compared
to the combined net loss of $236,573 for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had combined net cash of $11,640 at September 30, 1999 as
compared to net cash of $32,510 as of September 30, 1998. The Company had a
net working capital deficit (i.e. the difference between current assets and
current liabilities) of $477,791 at September 30, 1999 as compared to a
working capital surplus of $83,673 at December 31, 1998. Cash flow utilized
for operating activities increased from $108,535 during the three months
ended September 30, 1998 to $767,769 during the three months ended September
30, 1999, and from $236,573 during the nine months ended September 30, 1998
to $1,519,910 during the nine months ended September 30, 1999. Cash used for
investing activities increased from $69,577 during the three months ended
September 30, 1998 to $137,243 during the three months ended September 30,
1999, and from $15,472 during the nine months ended September 30, 1998 to
$147,756 during the nine months ended September 30, 1999. Cash provided by
financing activities increased from $181,500 during the three months ended
September 30, 1998 to $1,147,709 during the three months ended September 30,
1999, and from $280,269 during the nine months ended September 30, 1998 to
$1,668,882 during the nine months ended September 30, 1999. The substantial
increase in cash flow utilized for operating activities in 1999 as compared
to 1998 primarily reflects the costs incurred by the Company to complete the
business combination with its newly acquired subsidiaries and assets in 1999,
and its continuing efforts to integrate the businesses of those subsidiaries
and assets. The substantial increase in cash provided by financing activities
in 1999 as compared to 1998 primarily reflects capital raised by PWE in 1999
prior to the completion of its acquisition by the Company. PWE has ceased
raising capital and is being wound-up and dissolved. Accordingly, no
additional capital is expected to be available to the Company from PWE. To
date, the Company has been funding its business primarily from the capital
raised by PWE and to a lesser extent from revenue. The Company is currently
incurring operating deficits which are expected to continue until its
Internet project and digital production consulting work grows in volume, if
such growth is achieved. Furthermore, the Company must raise substantial
additional capital in order to (1) cover expected near term operating
deficits, (2) build its planned digital media production center, (3) conduct
planned research, development and marketing of its three dimensional
television broadcasting technology and digital video compression software,
(4) complete development and begin to market the planned EKO website for the
entertainment industry and the Kids Educational Network on the Internet, (5)
expand marketing and fulfillment capabilities of the fine items.com
e-commerce website, and (6) expand the Company's core Internet program
production, consulting and technology businesses. The Company is currently
seeking to raise $20 million of capital for those purposes. There is no
assurance that the Company will raise all or any portion of the additional
capital that it seeks. If the Company does not raise any additional capital,
it will have to operate at minimal levels and request payment extension dates
for its current debt. While its debt is primarily owed to related parties,
the accounts payable and the bank line of credit are owed to unrelated
parties.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
See the Registrant's Reports on Form 8-K, dated July 7, 1999
and November 9, 1999, which are incorporated herein by
reference to the extent necessary to make complete disclosure
pursuant to Part II, Item 2 of this Report on Form 10-QSB.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
1) Report on Form 8K, dated July 7, 1999.
2) Report on Form 8K, dated November 9, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 15, 1999 By: /s/ Steve Schklair
-------------------------------
Steve Schklair
Chief Executive Officer
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