<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2000
ZEROS & ONES, INC.
(Exact Name of Registrant as specified in its Charter)
COMMERCIAL LABOR MANAGEMENT, INC.
(Former Name: Change Effective July 1, 1999)
Nevada 88-0241079
--------- -------------
(State or other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
1714 16th Street, Santa Monica, CA 90404
--------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code: (310) 399-9901
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 23,626,182
------------------------------- ----------
Title of Class Number of Shares Outstanding
at June 30, 2000
<PAGE>
PART 1 - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
Item 1 Financial Statements (unaudited)
The following financial statements are furnished:
Condensed Consolidated Balance Sheet as of June 30, 2000 ................1
Statement of Income and Operations for the six months ended
June 30, 2000 and 1999...................................................2
Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 and 1999.............................................3
Condensed Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 2000...........................................5
Notes to Condensed Consolidated Financial Statements.....................6
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS JUNE 30, 2000
----------------
CURRENT ASSETS:
Cash $4,980,193
Accounts receivable 86,229
Prepaid expenses and other receivables 181,194
-----------
Total current assets 5,247,616
-----------
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 429,614
INTANGIBLE ASSET, net of
accumulated amortization 166,004
OTHER ASSETS:
Software development costs 322,995
Other assets 179,585
-----------
$6,345,814
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 224,973
Current portion of obligations under capital leases 54,160
Total current liabilities -----------
279,133
-----------
OBLIGATIONS UNDER CAPITALIZED LEASES, less current maturities 73,813
-----------
Total liabilities 352,946
-----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value --
2,000,000 shares authorized, 0 shares issued
and outstanding
Common stock, $.001 par value 8,634,390
100,000,000 shares authorized 23,626,182 shares issued
and outstanding
Paid-in capital 8,523,854
Accumulated deficit during development stage (11,165,376)
Total stockholders' equity -----------
5,992,868
-----------
$6,345,814
===========
See accompanying notes to condensed consolidated financial statements.
Page 1
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FROM
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS INCEPTION TO
ENDED ENDED ENDED ENDED JUNE 30, 2000
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 (SEE NOTE 1)
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 86,229 $ 14,358 $ 367,034 $ 61,091 $ 1,190,255
Cost of sales............................. 16,392 - 111,970 23,193 543,018
------------- ------------- ------------- ------------- -------------
Gross profit.............................. 69,837 14,358 255,064 37,898 647,237
------------- ------------- ------------- ------------- -------------
Loss on investment in related party....... - 591,450 - 1,043,221 5,143,351
Bad debt from related party............... 89,800 60,216 89,800 204,016 573,469
General and administrative................ 1,209,195 331,307 1,827,410 420,135 6,047,532
------------- ------------- ------------- ------------- -------------
Total expenses............................ 1,298,995 982,973 1,917,210 1,667,372 11,764,352
------------- ------------- ------------- ------------- -------------
Other Income............................. 193,135 - 193,135 - 193,135
------------- ------------- ------------- ------------- -------------
Net (loss)................................ $ (1,036,023) $ (968,615) $(1,469,011) $(1,629,474) $(10,923,980)
============= ============= ============= ============= =============
Loss per share, basic and diluted......... $ (0.04) $ (0.07) $ (0.07) $ (0.12)
Average shares outstanding, basic
and diluted............................. 23,592,732 13,694,223 21,665,285 13,694,223
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 2
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ZEROS AND ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS FROM INCEPTION
ENDED ENDED TO
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------------- ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net (loss)......................................................... $ (1,469,011) $(1,629,474) $ (10,923,980)
------------------- ------------- ---------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED
BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization expense............................ 69,817 8,438 259,770
Stock issued for services........................................ 119,000 - 310,889
Bad debt......................................................... 89,800 - 89,800
Loss on investment in related party.............................. - 1,043,221 3,564,651
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable.............................................. (61,229) 23,441 (86,229)
Accounts receivable - stockholders............................... 202,500 - 202,500
Due to and from related party.................................... - - 143,800
Prepaid expenses................................................. (181,194) - (202,794)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses........................... 82,192 (56,623) 93,331
Accrued officer salary........................................... (107,500) - -
------------------- ------------- ---------------
TOTAL ADJUSTMENTS.................................................. 213,386 1,018,477 4,475,718
------------------- ------------- ---------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES............... (1,255,625) (610,997) (6,448,262)
------------------- ------------- ---------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Acquisition of property and equipment............................ (276,268) (3,337) (347,835)
Acquisition of goodwill.......................................... - - (120,000)
Investment in related party...................................... - (1,043,221) (3,564,651)
Increase in software development costs........................... (322,993) - (322,993)
Deferred offering costs.......................................... 258,000 - 258,000
Other assets..................................................... (129,999) 142,812 (130,962)
------------------- ------------- ---------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES............... (471,260) (903,746) (4,228,441)
------------------- ------------- ---------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from line of credit..................................... - 3,693 10,919
Proceeds on notes payable - stockholders......................... - - 330,000
Proceeds from issuance of warrants and private placements........ 7,018,456 - 7,291,339
Proceeds from issuance of common stock........................... - 21,568 259,078
Payments on obligations under capitalized leases................. (23,083) (2,621) (42,117)
Payment on notes payable - stockholders.......................... (270,725) - (330,000)
Payment on notes payable - goodwill.............................. (87,500) - (87,500)
Payment on line of credit........................................ (10,919) - (10,919)
Issuance of preferred stock...................................... - 1,738,701 8,573,084
Dividends distributed............................................ - - (232,988)
Draws by proprietor.............................................. - (31,000) (104,000)
------------------- ------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITES........................... 6,626,229 1,730,341 15,656,896
------------------- ------------- ---------------
NET INCREASE (DECREASE) IN CASH.................................... 4,899,344 215,598 4,980,193
CASH, beginning of year............................................ 80,849 120,434 -
------------------- ------------- ---------------
CASH, end of year.................................................. $ 4,980,193 $ 336,032 $ 4,980,193
=================== ============= ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS FROM INCEPTION
ENDED ENDED TO
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------------- ------------- ---------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................... $ 10,468 $ - $ 15,584
=================== ============= ===============
Income taxes paid................................................ $ - $ - $ -
=================== ============= ===============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of fixed assets under capitalized leases............. $ 100,099 $ - $ 167,503
=================== ============= ===============
Stock subscription for services.................................. $ 119,000 $ - $ 310,889
=================== ============= ===============
Stock subscription for deferred offering cost.................... $ - $ - $ 258,000
=================== ============= ===============
Issuance of common stock for equipment........................... $ - $ - $ 144,547
=================== ============= ===============
Issuance of common stock for accounts receivable................. $ - $ - $ 292,300
=================== ============= ===============
Issuance of common stock for accounts payable.................... $ - $ - $ 5,459
=================== ============= ===============
Notes payable issuance for goodwill.............................. $ - $ - $ 87,500
=================== ============= ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4
<PAGE>
ZEROS AND ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock
--------------------------- ---------------------------
NUMBER ADDITIONAL
NUMBER OF PAR VALUE OF PAID IN
SHARES $.001 SHARES AMOUNT CAPITAL
----------- ----------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 17,503,494 $ 8,628,267 - $ - $ 1,392,520
Net proceeds from private placement
and warrants (Unaudited) 5,937,576 5,938 6,969,935
Payments on receivable from
stockholder (Unaudited)
Net loss for the three months ended
March 31, 2000 (Unaudited)
----------- ----------- --------- ------- -----------
Balance at March 31, 2000 (Unaudited) 23,441,070 8,634,205 - - 8,362,455
Write off of receivable from
stockholder (Unaudited)
Shares issued for offering services
related to private placement 148,128 148 118,852
Net proceeds from warrants 36,984 37 42,547
(Unaudited)
Net loss for the three months ended
June 30, 2000 (Unaudited)
----------- ----------- --------- ------- -----------
Balance at June 30, 2000 (Unaudited) 23,626,182 $ 8,634,390 - $ - $ 8,523,854
=========== =========== ========= ======= ===========
<CAPTION>
RECEIVABLE ACCUMULATED
FROM DEFICIT DURING
STOCKHOLDER DEVELOPMENT STAGE TOTAL
------------ ------------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1999 $ (292,300) $ (9,696,365) $ 32,122
Net proceeds from private placement
and warrants (Unaudited) 6,975,873
Payments on receivable from 202,500 202,500
stockholder (Unaudited)
Net loss for the three months ended
March 31, 2000 (Unaudited) (432,988) (432,988)
------------ ------------------ ---------
Balance at March 31, 2000 (Unaudited) (89,800) (10,129,353) 6,777,507
Write off of receivable from 89,800 89,800
stockholder (Unaudited)
Shares issued for offering services
related to private placement 119,000
Net proceeds from warrants - 42,584
(Unaudited)
Net loss for the three months ended
June 30, 2000 (Unaudited) (1,036,023) (1,036,023)
------------ ------------------ ---------
Balance at June 30, 2000 (Unaudited) $ - $ (11,165,376) $5,992,868
============ ================== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(1) INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements
of Zeros and Ones, Inc. and its subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. 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, the financial statements included in this quarterly report
reflect all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair
presentation of its financial position at the dates presented and the
Company's results of operations and cash flows for the periods
presented. The Company's interim results are not necessarily indicative
of the results to be expected for the entire year. The financial
information contained herein should be read in conjunction with the
Company's audited financial statements included in its Annual Report on
Form 10-KSB for the year ended December 31, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
The Company develops content and technology for the Internet, digital
television, and broadband platforms. In addition to fees generated from
development of software, content, and other technology products, the
Company may also, from time to time, receive royalty income from sales
of certain software products developed for others.
DEVELOPMENT STAGE ENTERPRISE:
The Company is a development stage enterprise company as defined in
Statement of Financial Accounting Standards No. 7, "Accounting and
Reporting by Development Stage Enterprises." All losses accumulated
since inception of Zeros & Ones, Inc. have been considered as part of
the Company's development stage activities.
The unaudited cumulative statements of operations and cash flows during
the development stage consist of results from operations from various
entities within the Group. The date of inception of each entity within
the group of companies comprising the parent and its wholly owned
subsidiaries (collectively the "Group"). The date of inception of each
entity within the Group varies with dates of inception ranging from
January 19, 1996 to April 1, 1998. Information from dates of inception
to December 31, 1997 and six months ended June 30, 2000 and 1999 are
unaudited.
REVENUE RECOGNITION:
The Company recognizes revenues at various stages of a project upon
delivery of the completed work product of the respective particular
stage as set forth in the "Work for Hire" agreements.
Page 6
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED June 30, 2000
PRINCIPLES OF CONSOLIDATION:
The condensed consolidated financial statements include the accounts
of its wholly owned subsidiaries of Quantum Arts, Inc., EKO
Corporation, Polygonal Research Corporation, KidVision, Inc. and Wood
Ranch Technology Group, Inc. All significant intercompany transactions
and balances have been eliminated.
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
from those estimates.
SOFTWARE DEVELOPMENT COSTS:
The Company capitalizes software development costs upon the
establishment of technological feasibility, subject to net realizable
value considerations. The Company will start the amortization of the
capitalized software development costs when the product is available
for use or sale.
(3) ACCOUNTS RECEIVABLE FROM STOCKHOLDER:
The Company received $292,300 of accounts receivable from a stockholder
as part of assets purchased in exchange for the Company's stock and
accordingly, these accounts receivable from the stockholder are
classified as contra account to stockholders' equity. As of March 31,
2000, services performed by the stockholder in the amount of $202,500
were used to offset a portion of the balance of the accounts receivable
from the stockholder. As of June 30, 2000, the Company determined that
the balance of the accounts receivable from the stockholder was
uncollectable and, therefore, wrote off the balance.
(4) INVESTMENT IN RELATED PARTY:
During January 1996, Pillar West Entertainment, Inc. ("PWE") entered
into a Production and Licensing Agreement with Randall Overton
Productions, Inc. ("Randall Overton"). The majority common
stockholder of PWE was also a major stockholder of Randall Overton.
Pursuant to this agreement, 60% of gross proceeds raised from the
issuance and sale of PWE convertible preferred stock was contributed to
Randall Overton for the production, marketing, sale, and distribution
of certain products and programs. As of June 30, 2000 and 1999, losses
from this investment in related party were $ 0 and $451,771,
respectively.
Page 7
<PAGE>
ZEROS & ONES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(5) COMMON STOCK:
During February 2000, the Company amended its Articles of Incorporation
to provide for an increase in the number of authorized shares of common
stock to 100,000,000. The Company also declared a three-to-one stock
split. The stock split was effective on February 25, 2000. The
financial statements as of June 30, 2000 reflect the retroactive
adjustment of the stock split.
(6) PRIVATE PLACEMENTS:
During the first quarter of 2000, pursuant to a Confidential Private
Placement Memorandum, the Company sold 5,407,296 post-split shares of
the Company's common stock at a purchase price $1.46 per share and
5,407,296 post-split warrants with an exercise price of $1.83 per
share. The private placement was exempt from the registration
provisions of the Act pursuant to Section 4(2) of the Act, as
transactions by an issuer not involving any public offering. The
securities issued pursuant to the private placement were restricted
securities as defined in Rule 144 of the Act. The offering generated
gross proceeds of approximately $8,100,000 subject to various offering
costs. An additional 150,000 post-split shares of the Company's common
stock were issued for services rendered in connection with this private
placement, which were priced at $1.46 per share. An additional 180,300
post split warrants exercisable until March 31, 2005 at a price of
$1.83 per share, 33,860 post split warrants exercisable until March 31,
2001 at a price of $1.83 per share, and 22,915 post split warrants
exercisable until March 31, 2001 at a price of $5.00 per share, were
issued for services rendered in connection with this private placement.
During the second fiscal quarter ended June 30, 2000 a total of 36,984
warrants to purchase the Company's Common stock with an exercise price
of $1.00 per share were exercised, resulting in gross proceeds of
$42,547 to the Company.
(7) LITIGATION SETTLEMENT:
In June 2000, the Company settled a lawsuit that was initiated when the
Company was named Commercial Labor Management, Inc., ("CLMI"). The
Company will receive $100,546 as its share of the lawsuit settlement
and the amount of the gain in lawsuit settlement has been recorded as
other income in the financial statement for the period ended June 30,
2000. The lawsuit settlement was received in July 2000.
(8) SIGNIFICANT AGREEMENTS:
During January 2000, the Company entered into a Website Development and
License Agreement with National Legal Services, Inc. ("NLS").
Additionally, provided that NLS is current on all payment obligations,
the Company purchased $50,000 worth of NLS Series A Preferred Stock at
the price specified in the current offering of said stock.
In May 2000, the Company signed an agreement with a third party
distributor, for the distribution and syndication of the Company's
Julius & Friends animated webshow. The Company will be paid half of
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the production expenses of the Julius & Friends webshow by the
distributor, up to $390,000. The Company will share with the
distributor all syndication and advertising revenues generated by the
distribution of the show and a certain percentage of revenue generated
from the online sale of merchandise.
(9) SUBSEQUENT EVENTS:
In July 2000, the Company leased a new facility for $20,000 a month.
The lease will expire in July 2005 with an option to renew for an
additional 5 year term.
In July 2000, the Company entered an agreement with an investment firm
to assist the Company to raise additional capital. The Company will
pay the investment firm a success fee based on the amount of equity
raised which includes an option to purchase up to 250,000 shares of
the Company's common stock.
In August 2000, the Company's Board of Directors adopted the Zeros &
Ones, Inc. 2000 Stock Option Plan authorizing a total of 4,500,000
shares of common stock to be issued upon the future grant of stock
options by the Company. The Stock Option Plan is subject to
ratification by the Company's shareholders.
In August, 2000, the Company's Board of Directors approved a resolution
to incorporate its 2D/3D real-time digital television project (LiveCast
3D) as a wholly owned subsidiary of the Company.
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 additional capital or obtain the financing
needed to implement its full 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, or whether
patents will be granted for any of them, 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, the Company does not yet have the services of one
of its executives officers, William Burnsed, and there is no assurance as to if
or when he will be available to provide services to the Company, the Company's
facilities may
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not be adequate to support its business, additional dilution in outstanding
stock ownership may be incurred due to the issuance of more shares, warrants and
stock options, or the exercise of outstanding warrants and stock options, and
other risks inherent in the Company's businesses.
CURRENT OVERVIEW
On February 25, 2000, the Company effected a three-for-one forward stock split
of its outstanding shares and increased its authorized common stock to
100,000,000 shares. In addition to the split, the Company changed its trading
symbol from ZOZO to ZROS and was issued a new CUSIP number. The Company issued a
mandatory recall and exchange of shares to reflect the new symbol and CUSIP
number.
Management believes that the current capitalization of the Company qualifies the
Company to apply for a listing on the NASDAQ Small Cap Market. In order to
comply with NASDAQ regulations, the Company is currently in the process of
adding new independent members to the Board of Directors, and is currently
interviewing and selecting prospective members for the Company's Board of
Directors. There is no assurance that the Company's securities will be accepted
for listing on the NASDAQ Small Cap Market.
The year 1999 was a formation and early stage development year, which set the
stage for execution of the Company's business plan beginning in the year 2000.
With net capital of approximately $7 million (after offering costs and
commissions) raised through its recent private placement of common stock and
warrants, the Company is now capitalized at adequate levels to execute certain
portions of its plan.
The Company is proceeding with development on its 2D/3D real-time digital
television project (LiveCast 3D). LiveCast 3D is a working name for the project.
The project may be renamed due to trademark conflicts. Phase 2 of the LiveCast
3D project has recently been completed. The achievements of Phase 2 included
detailed engineering specifications leading to the ability to file additional
multiple provisional patents, discussions with leading corporations and
individuals important to the continuation, marketing, and sales of the project,
further work on defining the Phase 3 plan for LiveCast 3D, and the hiring of a
well established director for the design and production of the project marketing
video. Keith Melton, the director of multiple 3D films, who most recently
directed the IMAX 3D film starring Cirque du Soleil, has been in production on
sequences of the demonstration film for the LiveCast 3D project. The capital
raised through the recent CPPM enables the Company to commence Phase 3 of the
project. This phase includes developing the lens prototype, writing the software
and algorithms to enable the technology, filing additional patents to protect
the Company's software and intellectual property, and completion of a marketing
video to market the product and technology to the commercial sector. In August
2000, the Company's Board of Directors approved a resolution to incorporate
LiveCast 3D as a wholly owned subsidiary of the Company, because corporate
partners currently in discussions with the Company may desire to make additional
equity investments directly into the project. The Company plans to seek
additional funding targeted specifically for the LiveCast 3D project. There is
no assurance that the Company will obtain additional funding for the LiveCast 3D
project.
The receipt of capital from the recent private placement has also enabled the
Company to secure the rights and a relationship to the popular characters
created by Paul Frank Industries, the well-known clothing company that is the
holder of these rights. The Company holds a four year exclusive right to develop
the Paul Frank characters in all forms of media, and also holds the shared
rights to merchandise licensing and development. An animated show is currently
in production for distribution on the Internet. The Company has
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signed a distribution agreement with Mondo Media, who will syndicate the Julius
& Friends show to multiple web destinations. The Company has offers from and is
currently in negotiation with major television outlets for the production and
distribution of an animated television show based on the same characters. The
Company plans to announce a distribution deal in the near future. The Company is
also currently involved in establishing new merchandise and merchandising
distribution channels for the sale of merchandise related to the Julius &
Friends webshow, and potential television show. Although the Company has entered
discussions with several major television and cable networks, there is no
assurance that the television show will actually go into production.
Earlier this year, the Company began the next phase of its project with National
Legal Services ("NLS"). The Company has created a complete on-line law firm with
a myriad of service offerings for NLS. As compensation for the Company's efforts
and involvement, NLS is paying the Company a production fee which covers all of
the Company's production costs, and is expected to result in a profit to the
Company. Additionally, the Company owns 3% of the outstanding common stock of
NLS. NLS expects to launch its online law firm prior to the end of the third
quarter of 2000. The Company expects to continue to provide consulting services
and may provide ongoing development to NLS over the course of the next calendar
year.
During 1999, the Company developed a design and prototype for a Website and
CD-ROM interactive human physiology educational program. This work was done
under contract with McGraw Hill, Inc. Due to financial limitations placed on the
project by McGraw Hill, the Company has elected not to proceed with Phase 2 of
this development work. This decision was made after a careful analysis of the
budget requirements necessary to design, develop, and deliver to McGraw Hill a
full program which would meet the quality standards expected of all work
produced by the Company, as well as other factors such as competitive releases
and estimated profitability.
During 1999 and continuing into 2000, the Company developed a series of fully
interactive 3-D games under contract with Electronic Arts, Inc., a leading
interactive entertainment software company. Also used on the games developed for
Electronic Arts was the Company's own HuMotion(TM) software processes, which the
Company believes is an industry first in the translation of completely human
motion to a Web page. For this work, the Company received development funding
from Electronic Arts. The Company is currently under contract with Electronic
Arts to develop additional enhancements to the games.
The Company has been engaged by ThinkBox, Inc., to develop a new "child
friendly" web browser to be tightly integrated with ThinkBox's Kindle Park
children's educational and entertainment portal. The expertise and software
tools gained through the 1999 acquisition of KidVision, Inc., has been
instrumental in the development of this project.
In August 2000, the Company signed an agreement with GTH Capital to provide
strategic and financial advisory consulting, and to assist with a second round
of funding. GTH Capital is a subsidiary of Greenberg Traurig, one of the
nation's largest law firms, with nearly 700 attorneys and lobbyists in 18
offices. In its corporate and securities practice, the firm has handled almost
100 public offerings in the past three years. Through the additional round of
funding the Company is seeking to complete the remainder of the previous Private
Placement which the Company terminated in February 2000.
Management believes that the first half of 2000 continued to be a formation
period for the Company, further enabled by the funding received by the
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Company during the latter part of the first quarter which was necessary to begin
project development. The Company put substantial work into these projects,
relocating to a larger space, building its support infrastructure, hiring of
additional key industry talent, and establishing deals for projects which the
Company believes will lead to financial and marketing success in the future.
Some of the projects developed in 2000 will be ready for delivery to the market
during the latter part of 2000. Management believes that these projects will
lead to ongoing revenue streams for the Company. The Company believes that its
revenue streams will grow as the Company releases more of its products into the
market. The Company believes that many of its predictions about the eventual
future course of the industry have come true, lending support and credence to
the Company's growth plans for the future. As a result of its first quarter
capitalization, the Company is now positioned to implement important aspects of
its business plan creating the opportunity for sustained growth. In 2000, the
Company established additional key relationships important to the Company's
vision of the coming of age of broadband distribution in a world driven by
technology, and a future where the lines between what is a television and what
is a computer are blurring. The Company will endeavor to continue to establish
new alliances to enable the Company to become a leading broadband technology and
content provider.
RESULTS OF OPERATIONS FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2000 COMPARED TO
THE SAME PERIOD IN 1999.
Total revenue for the six month period ending June 30, 2000 was $367,034 as
compared to $61,091 for the six month period ending June 30, 1999. Total revenue
for the three month period ending June 30, 2000 was $86,229 as compared to
$14,358 for the three month period ending June 30, 1999. During the three month
period ending June 30, 2000, the Company recorded in its other income of
$100,546 which represented a one time settlement payment to the Company from the
settlement of its lawsuit against CNG Communications Inc. The Company does not
expect any more payments from those claims, and the lawsuit was dismissed in
June 2000. General and administrative expenses increased to $1,827,410 during
the six months ended June 30, 2000 as compared to $420,135 during the six months
ended June 30, 1999. The substantial increase in operating expenses in 2000 as
compared to 1999 primarily reflects the costs of adding more computer
programmers, animators and other staff, as well as the costs of integrating the
Company's new 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, (2) conducts
research, development, prototype construction and marketing of its three
dimensional television technology, and digital video compression software, (3)
continues to develop new properties for sale such as web-based and television
shows, and (4) to the extent additional funding becomes available, establishes
the digital media production center and acquires other companies. For the six
months June 30, 2000, the Company's consolidated net loss was $1,429,011 as
compared to a consolidated net loss of $1,629,474 for the six months ended June
30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had combined net cash of $4,980,193 at June 30, 2000 as compared to
net cash of $80,848 as of December 31, 1999 and $336,032 at June 30, 1999. The
Company had a net working capital surplus (i.e. the difference between current
assets and current liabilities) of $4,899,344 at June 30, 2000 as compared to a
working capital deficit of $533,612 at December 31, 1999 and a net working
capital surplus of $215,598 at June 30, 1999. Cash flow utilized
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for operating activities was $1,255,625 for the six months ended June 30, 2000
as compared to cash utilized for operating activities of $610,997 during the six
months ended June 30, 1999. The cash utilized in operating activities is due to
an increase in staffing needs as products and projects were put into full
development, as well as the added infrastructure necessary to support the
additional staff. Cash utilized for investing activities was $471,260 during the
six months ended June 30, 2000 as compared to cash utilized for investing
activities of $903,746 during the six months ended June 30, 1999. Cash provided
by financing activities was $1,730,341 during the six months ended June 30, 1999
as compared to $6,626,229 during the six months ended June 30, 2000. Since July
1999, the Company's capital needs have primarily been met from the proceeds of
(i) capital realized through the acquisition of PWE, including the exercise of
outstanding PWE warrants at an exercise price of $1.00 per share, (ii) project
based revenue from companies including McGraw Hill, Electronic Arts, National
Legal Services, and The Tech Museum of Innovation, and (iii) a private placement
of common stock and warrants made by the Company in 2000 which has raised gross
proceeds of approximately $8,100,000.
The Company expects to continue to have significant capital requirements in 2000
and 2001 to finance the construction of the Advanced Media Production Center
("AMPC"), which is estimated to be approximately $5 million. The Company will
have additional capital requirements during 2000 and 2001 if the Company
continues with its plan of acquisition and incubation of new companies and
projects. There is no assurance that the Company will have sufficient capital to
finance its growth and business operations or that such capital will be
available on terms that are favorable to the Company or at all. 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
NONE.
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
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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: August 14, 2000 By: /s/ STEVE SCHKLAIR
-------------------------------
Steve Schklair
Chief Executive Officer
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